-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VwDOWFZDjfjonXH9cIIsVvJAR8WPUicrgU6Llt8g/zi1DRp8coNBa8tSBqixXLe/ JVjyzO3x/m74Z1V8ZvqsGA== 0000855108-98-000019.txt : 19981231 0000855108-98-000019.hdr.sgml : 19981231 ACCESSION NUMBER: 0000855108-98-000019 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 35 FILED AS OF DATE: 19981230 EFFECTIVENESS DATE: 19981230 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FEDERATED MUNICIPAL TRUST CENTRAL INDEX KEY: 0000855108 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: MA FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: SEC FILE NUMBER: 033-31259 FILM NUMBER: 98778287 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: SEC FILE NUMBER: 811-05911 FILM NUMBER: 98778288 BUSINESS ADDRESS: STREET 1: FEDERATED INVESTORS TOWER CITY: PITTSBURGH STATE: PA ZIP: 15222 BUSINESS PHONE: 4122887496 485BPOS 1 1933 Act File No. 33-31259 1940 Act File No. 811-5911 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form N-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 x ------- Pre-Effective Amendment No. .......................... Post-Effective Amendment No. 49 ........................ x ----- ------- and/or REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 x Amendment No. 49 ....................................... x ------ ------- FEDERATED MUNICIPAL TRUST (Exact Name of Registrant as Specified in Charter) Federated Investors Funds 5800 Corporate Drive Pittsburgh, Pennsylvania 15237-7000 (412) 288-1900 (Registrant's Telephone Number) John W. McGonigle, Esquire, Federated Investors Tower, 1001 Liberty Avenue Pittsburgh, Pennsylvania 15222-3779 (Name and Address of Agent for Service) It is proposed that this filing will become effective: immediately upon filing pursuant to paragraph (b) x on December 31, 1998, pursuant to paragraph (b) 60 days after filing pursuant to paragraph (a) (i) on _________________ pursuant to paragraph (a) (i). 75 days after filing pursuant to paragraph (a)(ii) on _________________ pursuant to paragraph (a)(ii) of Rule 485. If appropriate, check the following box: This post-effective amendment designates a new effective date for a previously filed post-effective amendment. Copies To: Matthew G. Maloney, Esquire Dickstein Shapiro Morin & Oshinsky LLP 2101 L Street, N.W. Washington, D.C. 20037 PROSPECTUS Alabama Municipal Cash Trust A Portfolio of Federated Municipal Trust A money market mutual fund seeking to provide current income exempt from federal regular income tax and the income tax imposed by the State of Alabama. 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. DECEMBER 31, 1998 CONTENTS Risk/Return Summary 1 What are the Fund's Fees and Expenses? 2 What are the Fund's Investment Strategies? 3 What are the Principal Securities in Which the Fund Invests? 3 What are the Specific Risks of Investing in the Fund? 4 What do Shares Cost? 5 How is the Fund Sold? 5 How to Purchase Shares 5 How to Redeem Shares 7 Account and Share Information 9 Who Manages the Fund? 9 Financial Information 10 Report of Independent Public Accountants 23 Risk/Return Summary WHAT IS THE FUND'S INVESTMENT OBJECTIVE? The Fund is a money market fund which seeks to maintain a stable net asset value of $1.00. The Fund's investment objective is to provide current income exempt from federal regular income tax and the income tax imposed by the State of Alabama consistent with stability of principal. 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 tax-exempt securities so that the Fund's annual interest income is exempt from federal regular income tax and Alabama State income tax. Interest from the Fund's investments may be subject to the federal alternative minimum tax for individuals and corporations. WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND? Because the Fund may invest a significant portion of its assets in securities of a single issuer, an investment in the Fund may involve additional risks compared to a fully diversified money market 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 representation omitted. Please see Appendix B1.] Historically, the Fund has maintained a constant $1.00 net asset value per share. The bar chart shows the variability of the Fund's total returns on a yearly basis. The Fund's Shares are not sold subject to a sales charge (load). The total returns displayed above are based upon net asset value. The Fund's year-to-date total return as of the most recent calendar quarter of September 30, 1998 was 2.38%. Within the period shown in the Chart, the Fund's highest quarterly return was 0.98% (quarter ended June 30, 1995). Its lowest quarterly return was 0.56% (quarter ended March 31, 1994). The Fund's Seven-Day Net Yield as of 12/31/97 was 3.59%. The following table represents the Fund's Average Annual Total Return through 12/31/97. CALENDAR PERIOD FUND 1 Year 3.30% Start of Performance 1 3.20% 1 The Fund's Shares start of performance date was December 3, 1993. Investors may call the Fund at 1-800-341-7400 to acquire the current Seven- Day Net Yield. 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? ALABAMA MUNICIPAL CASH TRUST FEES AND EXPENSES This table describes the fees and expenses that you may pay when you buy, hold and redeem Shares of the Fund.
SHAREHOLDER FEES 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 a percentage of average net assets) Management Fee 2 0.50% Distribution (12b-1) Fee None Shareholder Services Fee 3 0.25% Other Expenses 0.17% Total Annual Fund Operating Expenses 0.92% 1 Although not contractually obligated to do so, the Adviser and shareholder services provider waived certain amounts. These are shown below along with the net expenses the Fund actually paid for the fiscal year ended October 31, 1998. Waiver of Fund Expenses 0.37% Total Actual Annual Fund Operating Expenses (after waivers) 0.55% 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 0.14% for the year ended October 31, 1998. 3 The shareholder services fee for the Fund 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 0.24% for the year ended October 31, 1998.
EXAMPLE The following Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund 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 operating expenses are BEFORE WAIVERS as shown above and remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS Expenses assuming no redemption $94 $293 $509 $1,131
What are the Fund's Investment Strategies? The Fund invests in a portfolio of high-quality tax-exempt securities maturing in 13 months or less. The average maturity of the Fund's portfolio, computed on a dollar-weighted basis, will be 90 days or less. The Fund's Adviser performs a fundamental credit analysis to develop an approved list of issuers and securities that meet the Adviser's minimum credit standards. The Adviser targets an average portfolio maturity based upon its interest rate outlook and the tax-exempt securities available. The Adviser structures the portfolio by combining variable rate demand instruments and municipal notes. Depending on the supply of tax-exempt securities, the Adviser generally shortens the portfolio's maturity when it expects interest rates to rise and extends the maturity when it expects interest rates to fall. TEMPORARY DEFENSIVE INVESTMENTS During adverse market conditions the Fund may temporarily depart from its principal investment strategies by investing in securities subject to federal regular income tax and the income tax imposed by the State of Alabama. Temporary investments will be of comparable quality to other securities in which the Fund invests. It may do this to minimize potential losses and maintain liquidity to meet shareholder redemptions during adverse market conditions. This may cause the Fund to give up greater investment returns to maintain the safety of principal. This also may cause the Fund to receive and distribute taxable income to investors. What are the Principal Securities in Which the Fund Invests? TAX-EXEMPT SECURITIES Tax-exempt securities are fixed income securities that pay interest exempt from regular federal income taxes. States, counties, cities and other political subdivisions and authorities typically issue tax exempt securities. Tax-exempt securities are generally differentiated by their source of repayment. FIXED INCOME SECURITIES Fixed income 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. VARIABLE RATE DEMAND INSTRUMENTS Variable rate demand instruments are tax-exempt securities that require the issuer or a third party, such as a dealer or bank, to repurchase the security for its face value upon demand. The securities also bear interest at a variable rate intended to cause the securities to trade at their face value. The Fund treats demand instruments as short-term securities, even though their stated maturity may extend beyond 13 months. MUNICIPAL NOTES Municipal notes are short-term tax-exempt securities. Many municipalities issue such notes to fund their current operations before collecting taxes or other municipal revenues. Municipalities may also issue notes to fund capital projects prior to issuing long-term bonds. The issuers typically repay the notes at the end of their fiscal year, either with taxes, other revenues or proceeds from newly issued notes or bonds. INVESTMENT 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 rating services or be of comparable quality to securities having such ratings. CREDIT ENHANCEMENT Credit enhancement consists of an arrangement in which a company agrees to pay amounts due on a fixed income security if the issuer defaults. In some cases the company providing credit enhancement makes all payments directly to the security holders and receives reimbursement from the issuer. Normally, the credit enhancer has greater financial resources and liquidity than the issuer. For this reason, the Adviser usually evaluates the credit risk of a fixed income security based solely upon its credit enhancement. What are the Specific Risks of Investing in the Fund? Although there are many factors which may affect an investment in the Fund, the principal risks of investing in a tax-exempt money market fund are described below. CREDIT RISK Credit risk is the possibility that an issuer or a credit enhancer will default (fails to repay interest and principal when due). If an issuer or credit enhancer defaults, the Fund will lose money. Money market funds try to minimize this risk by purchasing higher quality securities. Many fixed income securities receive credit ratings from companies such as Standard & Poor's and Moody's Investor Services. Fixed income securities receive different credit ratings depending on the rating company's assessment of the likelihood of default by the issuer. The lower the credit rating, the greater the credit risk. If the security is unrated, greater reliance is placed on the Adviser's credit assessment. 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. SECTOR RISK Most of the Fund's securities will be invested in issuers located in Alabama. In addition, a substantial part of the Fund's portfolio may be comprised of tax-exempt securities issued or credit enhanced by companies in similar businesses or with other similar characteristics. As a result, the Fund will be more susceptible to any economic, business, political, or other developments which generally affect these issuers. 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 determined net asset value (NAV). The Fund does not charge a sales charge. NAV is determined at 12:00 noon and 1:00 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 $10,000. There is no required minimum subsequent investment amount. An account may be opened with a smaller minimum amount as long as the $10,000 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 institutions acting in an agency or fiduciary capacity or to individuals directly or through investment professionals. The Fund may not be a suitable investment for retirement plans or non-Alabama taxpayers because it invests in Alabama tax-exempt securities. 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 1:00 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 on the day 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 SYSTEMATIC INVESTMENT PROGRAM Once you have opened an account, you may automatically purchase additional Shares on a regular basis by completing the Systematic Investment Program (SIP) section of the New Account Form or by contacting the Fund or your investment professional. The minimum investment amount for SIPs is $50. BY AUTOMATED CLEARINGHOUSE (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 12:00 noon (Eastern time), your redemption will be wired to you the same day. You will not receive that day's dividend. If you call after 12:00 noon (Eastern time), your redemption will be wired to you the following business day. You will receive that day's dividends. Under limited circumstances, arrangements may be made with the Distributor for same-day payment of redemption proceeds, without that day's dividend, for redemption requests received before 2:00 p.m. (Eastern time). BY MAIL You may redeem Shares by mailing a written request to the Fund. You will receive a redemption amount based on the NAV 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 30 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. SYSTEMATIC WITHDRAWAL PROGRAM You may automatically redeem Shares in a minimum amount of $100 on a regular basis. Complete the appropriate section of the New Account Form or an Account Service Options Form or contact your investment professional or the Fund. Your account value must meet the minimum initial investment amount at the time the program is established. This program may reduce, and eventually deplete, your account. Payments should not be considered yield or income. CHECKWRITING You may request checks to redeem your Fund Shares. Your account will continue to receive the daily dividend declared on the Shares being redeemed until a check is presented for payment. DEBIT CARD You may request a debit card account that allows you to redeem Shares. There is an annual fee for this service that the Fund will automatically deduct from your account. 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 CONFIRMATIONS AND ACCOUNT STATEMENTS You will receive confirmation of purchases and redemptions. In addition, you will receive periodic statements reporting all account activity, including systematic transactions, 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, 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. It is anticipated that Fund distributions will be primarily dividends that are exempt from federal income tax, although a portion of the Fund's dividends may not be exempt. Dividends may be subject to state and local taxes, although the Fund's dividends will be exempt from Alabama state income tax to the extent they are derived from interest on obligations exempt from Alabama state income taxes. Capital gains and non-exempt dividends are taxable whether paid in cash or reinvested in the Fund. 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 Management. 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 and/or provide administrative services to more than 300 mutual funds and private accounts, which totaled over $120 billion in assets as of December 31, 1997. Federated was established in 1955 and is one of the largest mutual fund investment managers in the United States with more than 2,000 employees. Over 4,000 investment professionals make Federated Funds available to their customers. ADVISORY FEES The Adviser receives an annual investment advisory fee of 0.50% 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 affect 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 23.
YEAR ENDED OCTOBER 31 1998 1997 1996 1995 1994 1 NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 INCOME FROM INVESTMENT OPERATIONS: Net investment income 0.03 0.03 0.03 0.04 0.02 LESS DISTRIBUTIONS: Distributions from net investment income (0.03) (0.03) (0.03) (0.04) (0.02) NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 TOTAL RETURN 2 3.24% 3.26% 3.22% 3.66% 2.31% RATIOS TO AVERAGE NET ASSETS: Expenses 0.55% 0.55% 0.55% 0.48% 0.36% 3 Net investment income 3.19% 3.21% 3.18% 3.59% 2.67% 3 Expense waiver/reimbursement 4 0.37% 0.36% 0.37% 0.44% 0.62% 3 SUPPLEMENTAL DATA: Net assets, end of period (000 omitted) $189,825 $223,647 $233,720 $209,490 $142,804
1 Reflects operations for the period from December 3, 1993 (date of initial public investment) to October 31, 1994. For the period November 29, 1993 (start of business) to December 3, 1993 the Fund had no investment activity. 2 Based on net asset value, which does not reflect the sales charge or contingent deferred sales charge, if applicable. 3 Computed on an annualized basis. 4 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 October 31, 1998
PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-99.4% 1 ALABAMA-96.3% $ 5,000,000 Alabama HFA, Multifamily Revenue Bonds (Series 1997) Weekly VRDNs (YW Housing Partners, Ltd. Project)/(Amsouth Bank N.A., Birmingham LOC) $ 5,000,000 2,495,000 Alabama HFA, Variable Rate Certificates (Series 1997) Weekly VRDNs (Bank of America NT and SA, San Francisco LIQ) 2,495,000 11,005,000 2 Alabama State Docks Department, PT-208, 3.70% TOBs (MBIA INS)/(Bayerische Vereinsbank AG, Munich LIQ), Optional Tender 6/10/1999 11,005,000 1,320,000 Alabama State IDA Weekly VRDNs (Sunshine Homes Inc.)/ (Amsouth Bank N.A., Birmingham LOC) 1,320,000 4,755,000 Alabama State IDA, IDRB (Series 1994) Weekly VRDNs (Decatur Aluminum Corp.)/(Star Bank, N.A., Cincinnati LOC) 4,755,000 1,200,000 Alabama State IDA, IDRB Weekly VRDNs (Monarch Tile, Inc. Project)/(Nationsbank, N.A., Charlotte LOC) 1,200,000 3,250,000 Alabama State IDA, IDRB's (Series 1996) Weekly VRDNs (IMI Cash Valve Project)/(Regions Bank, Alabama LOC) 3,250,000 3,350,000 Alabama State IDA, Industrial Revenue Bonds Weekly VRDNs (Kappler USA, Inc. Project)/(SouthTrust Bank of Alabama, Birmingham LOC) 3,350,000 4,600,000 Alabama State Public School & College Authority, 4.10% Bonds, 12/1/1998 4,601,525 3,650,000 Arab, AL IDB, (Series 1989) Weekly VRDNs (SCI Manufacturing, Inc.)/(Bank of Tokyo-Mitsubishi Ltd. LOC) 3,650,000 1,100,000 Arab, AL IDB, Revenue Refunding Bonds (Series 1989) Weekly VRDNs (SCI Manufacturing, Inc.)/(Bank of Tokyo-Mitsubishi Ltd. LOC) 1,100,000 1,570,000 Ashland, AL IDB, (Series 1996) Weekly VRDNs (Tru-Wood Cabinets)/(Regions Bank, Alabama LOC) 1,570,000 2,000,000 Birmingham, AL IDA Weekly VRDNs (Altec Industries, Inc.)/ (Wachovia Bank of NC, N.A., Winston-Salem LOC) 2,000,000 1,510,000 Birmingham, AL IDA Weekly VRDNs (Glasforms, Inc.)/(Regions Bank, Alabama LOC) 1,510,000 2,000,000 Birmingham, AL IDA, (Series 1997) Weekly VRDNs (Millcraft, AL Inc.)/(Regions Bank, Alabama LOC) 2,000,000 2,930,000 Birmingham, AL IDA, IDRB's (Series 1997) Weekly VRDNs (J. J. & W, IV, Ltd.)/(Svenska Handelsbanken, Stockholm LOC) 2,930,000 2,335,000 Birmingham, AL IDA, Revenue Bonds (Series 1996) Weekly VRDNs (American FireLog Corp.)/(Comerica Bank, Detroit, MI LOC) 2,335,000 900,000 Birmingham, AL Private Educational Building Authority, Revenue Bonds (Altamont Series 1998) Weekly VRDNs (Altamont School)/ (Amsouth Bank N.A., Birmingham LOC) 900,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 ALABAMA-CONTINUED $ 800,000 Calhoun County, AL Economic Development Council Weekly VRDNs (Food Ingredients Tech. Co.)/(Nationsbank, N.A., Charlotte LOC) $ 800,000 2,925,000 Calhoun County, AL Economic Development Council, Variable/ Fixed Rate IDRBs Weekly VRDNs (Fabarc Steel Co.)/(Regions Bank, Alabama LOC) 2,925,000 600,000 Columbia, AL IDB, CDC Municipal Products, Inc. (Series 1997) Weekly VRDNs (Alabama Power Co.)/(AMBAC INS)/(CDC Municipal Products, Inc. LIQ) 600,000 1,600,000 Cullman, AL IDB, IRB's (Series 1992) Weekly VRDNs (Pressac Holdings PLC)/(NBD Bank, Michigan LOC) 1,600,000 950,000 Cullman, AL IDB, (Series 1989) Weekly VRDNs (Pressac Inc)/ (NBD Bank, Michigan LOC) 950,000 2,795,000 Cullman, AL IDB, Variable Fixed Rate IDRB Weekly VRDNs (National Bedding Co.)/(Bank of America, IL LOC) 2,795,000 1,600,000 Dothan, AL IDB, Adjustable/Fixed Rate IRD's (Series 1997) Weekly VRDNs (Henderson Steel Erectors)/(Regions Bank, Alabama LOC) 1,600,000 3,175,000 Fairfield, AL IDA, Variable Rate Environmental Improvement Revenue Bonds (Series 1995), 3.60% TOBs (USX Corp.)/ (Wachovia Bank of NC, N.A., Winston-Salem LOC), Optional Tender 12/3/1998 3,175,000 1,255,000 Fort Payne, AL IDB, IDRB Weekly VRDNs (Ovalstrapping, Inc.)/ (U.S. Bank, N.A., Minneapolis LOC) 1,255,000 5,500,000 Gadsen, AL IDB, IDRB's (Series 1997) Weekly VRDNs (Chicago Steel, (Alabama), LLC)/(Marshall & Ilsley Bank, Milwaukee LOC) 5,500,000 5,230,000 Geneva County, AL IDB, Adjustable Fixed Rate IDRB's (Series 1996) Weekly VRDNs (Brooks AG Co., Inc.)/(Regions Bank, Alabama LOC) 5,230,000 4,000,000 Guntersville, AL IDB, (Series 1995) Weekly VRDNs (Hercules Rubber Co. Project)/(SouthTrust Bank of Alabama, Birmingham LOC) 4,000,000 3,075,000 Hamilton, AL IDB, Variable/Fixed Rate IDRB's Weekly VRDNs (Tennessee River, Inc.)/(SouthTrust Bank of Alabama, Birmingham LOC) 3,075,000 7,000,000 Hoover, AL Board of Education, Warrant Anticipation Notes (Series 1998-A), 3.80% BANs, 2/1/1999 7,000,000 2,815,000 Hoover, AL IDA Weekly VRDNs (Bud's Best Cookies, Inc.)/ (SouthTrust Bank of Alabama, Birmingham LOC) 2,815,000 2,375,000 Huntsville, AL IDA Weekly VRDNs (Giles & Kendall, Inc.)/ (SouthTrust Bank of Alabama, Birmingham LOC) 2,375,000 240,000 Huntsville, AL IDA Weekly VRDNs (Parkway Project (Huntsville, AL))/(Regions Bank, Alabama LOC) 240,000 1,050,000 Huntsville, AL, Warrants (Series B), 5.00% Bonds, 2/1/1999 1,054,068 8,000,000 Jefferson County, AL, (Series A), 3.45% Bonds (Bayerische Landesbank Girozentrale LOC), 10/1/1999 8,000,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 ALABAMA-CONTINUED $ 3,150,000 Lowndes County, AL IDB, (Series 1996) Weekly VRDNs (Warren Oil Company Project)/(First Union National Bank, Charlotte, NC LOC) $ 3,150,000 2,425,000 Mobile, AL Downtown Redevelopment Authority, (Series 1992) Weekly VRDNs (Mitchell Project)/(SunTrust Bank, Atlanta LOC) 2,425,000 2,000,000 Mobile, AL IDB Weekly VRDNs (American Aero Crane)/(National Bank of Canada, Montreal LOC) 2,000,000 3,000,000 Mobile, AL IDB, (1994 Series A), 3.85% TOBs (International Paper Co.), Optional Tender 12/1/1998 3,000,000 1,000,000 Mobile, AL, G.O. Warrants (Series 1998), 3.70% Bonds (MBIA INS), 2/15/1999 999,610 825,000 Mobile, AL, Warrants, 4.30% TANs, 2/1/1999 826,349 3,000,000 Montgomery - Wynlakes Governmental Utility Services Corp., Bonds (Series 1995-A) Weekly VRDNs (Vaughn Road, L.L.C., Project)/ (Amsouth Bank N.A., Birmingham LOC) 3,000,000 2,435,000 Montgomery, AL IDB, (Series 1990-A) Weekly VRDNs (Industrial Partners)/(Wachovia Bank of NC, N.A., Winston-Salem LOC) 2,435,000 3,000,000 Montgomery, AL IDB, IDRB's (Series 1996) Weekly VRDNs (CSC Fabrication, Inc. Project)/(First Union National Bank, Charlotte, NC LOC) 3,000,000 3,650,000 Montgomery, AL IDB, Industrial Development Revenue Bonds (Series 1996A) Weekly VRDNs (Jobs Co., L.L.C. Project)/ (Columbus Bank and Trust Co., GA LOC) 3,650,000 7,000,000 Phoenix City, AL IDB, (Series 1988), 3.30% CP (Mead Coated Board)/(ABN AMRO Bank N.V., Amsterdam LOC), Mandatory Tender 1/21/1999 7,000,000 805,000 Piedmont, AL IDB Weekly VRDNs (Industrial Partners)/ (Wachovia Bank of NC, N.A., Winston-Salem LOC) 805,000 3,415,000 Prattville, AL IDB, IDR Bonds Weekly VRDNs (Kuhnash Properties/Arkay Plastics Project)/(PNC Bank, N.A. LOC) 3,415,000 2,700,000 Scottsboro, AL IDB, (Series 1994) Weekly VRDNs (Maples Industries, Inc.)/(Amsouth Bank N.A., Birmingham LOC) 2,700,000 1,000,000 Scottsboro, AL IDB, IDRB (Series 1991) Weekly VRDNs (Maples Industries, Inc.)/(Amsouth Bank N.A., Birmingham LOC) 1,000,000 5,000,000 Selma, AL IDB, Annual Tender PCR Refunding Bonds (1993 Series B), 3.95% TOBs (International Paper Co.), Optional Tender 7/15/1999 5,000,000 1,885,000 Shelby County, AL Board of Education, Special Tax Warrants, 4.375% Bonds (AMBAC INS), 2/1/1999 1,888,358 7,575,000 St. Clair County, AL IDB, (Series 1993) Weekly VRDNs (Ebsco Industries, Inc.)/(National Australia Bank, Ltd., Melbourne LOC) 7,575,000 4,700,000 Sumter County, AL IDA, Industrial Revenue Bonds (Series 1995A) Weekly VRDNs (Fulghum Fibres Project (AL))/(Regions Bank, Alabama LOC) 4,700,000 1,000,000 Sumter County, AL IDA, Industrial Revenue Bonds (Series 1995B) Weekly VRDNs (Canal Chip Project)/(Regions Bank, Alabama LOC) 1,000,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 ALABAMA-CONTINUED $ 2,600,000 Tallassee, AL IDB, (Series 1998) Weekly VRDNs (Milstead Farm Group, Inc.)/(Regions Bank, Alabama LOC) $ 2,600,000 500,000 Troy, AL IDB, (Series 1997A) Weekly VRDNs (Hudson Cos.)/ (Amsouth Bank N.A., Birmingham LOC) 500,000 3,000,000 Troy, AL IDB, IRB's (Series 1996A) Weekly VRDNs (Hudson Sauces & Dressings, Inc.)/(Amsouth Bank N.A., Birmingham LOC) 3,000,000 2,000,000 Tuskegee, AL IDB, IDRB (Series 1995) Weekly VRDNs (Concrete Company (The))/(Columbus Bank and Trust Co., GA LOC) 2,000,000 2,080,000 Vincent, AL IDB, (Series 1993) Weekly VRDNs (Ebsco Industries, Inc.)/(National Australia Bank, Ltd., Melbourne LOC) 2,080,000 3,060,000 Wetumpka, AL IDB, (Series 1997) Weekly VRDNs (US Fabtec L.L.C.)/(Bank of Tokyo-Mitsubishi Ltd. LOC) 3,060,000 Total 182,769,910 PUERTO RICO-3.1% 2,000,000 Puerto Rico Industrial, Medical & Environmental PCA, (1983 Series A), 4.00% TOBs (Merck & Co., Inc.), Optional Tender 12/1/1998 2,000,319 1,000,000 Puerto Rico Industrial, Medical & Environmental PCA, (Series 1983A), 3.60% TOBs (Reynolds Metals Co.)/(ABN AMRO Bank N.V., Amsterdam LOC), Optional Tender 9/1/1999 1,000,000 3,000,000 Puerto Rico Industrial, Medical & Environmental PCA, Pollution Control Facilities Financing Authority (Series 1983 A), 3.75% TOBs (Schering Plough Corp.)/(Morgan Guaranty Trust Co., New York LOC), Optional Tender 12/1/1998 3,000,000 Total 6,000,319 Total Investments (at amortized cost) 3 $188,770,229
Securities that are subject to Alternative Minimum Tax represent 68.7% of the portfolio based upon total market value. 1 The Fund may only invest in securities rated in one of the two highest short-term rating categories by nationally recognized statistical rating organizations ('NRSROs') or unrated securities of comparable quality. 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, MIG-1 or MIG-2 by Moody's Investors Service, Inc., or F-1+, F-1, or F-2 by Fitch IBCA, Inc. are all considered rated in one of the two highest short-term rating categories. Securities rated in the highest short-term rating category (and unrated securities of comparable quality) are identified as First Tier securities. Securities rated in the second highest short-term rating category (and unrated securities of comparable quality) are identified as Second Tier securities. The Fund follows applicable regulations in determining whether a security is rated and whether a security rated by multiple NRSROs in different rating categories should be identified as a First or Second Tier security. At October 31, 1998, the portfolio securities were rated as follows: Tier Rating Percentage Based on Total Market Value (Unaudited) FIRST TIER SECOND TIER 95.7% 4.3% 2 Denotes a restricted security which is subject to restrictions on resale under Federal Securities laws. At October 31, 1998, these securities amounted to $11,005,000 which represents 5.8% of net assets. 3 Also represents cost for federal tax purposes. Note: The categories of investments are shown as a percentage of net assets ($189,824,609) at October 31, 1998. The following acronyms are used throughout this portfolio: AMBAC -American Municipal Bond Assurance Corporation BANs -Bond Anticipation Notes CP -Commercial Paper HFA -Housing Finance Authority IDA -Industrial Development Authority IDB -Industrial Development Bond IDR -Industrial Development Revenue IDRB -Industrial Development Revenue Bond INS -Insured LIQ -Liquidity Agreement LLC -Limited Liability Corporation LOC -Letter of Credit MBIA -Municipal Bond Investors Assurance PCA -Pollution Control Authority PCR -Pollution Control Revenue PLC -Public Limited Company SA -Support Agreement TANs -Tax Anticipation Notes TOBs -Tender Option Bonds VRDNs -Variable Rate Demand Notes See Notes which are an integral part of the Financial Statements Statement of Assets and Liabilities October 31, 1998 ASSETS: Total investments in securities, at amortized cost and value $ 188,770,229 Cash 331,604 Income receivable 978,933 Receivable for shares sold 10,000 Deferred organizational costs 1,558 Total assets 190,092,324 LIABILITIES: Income distribution payable $ 223,897 Accrued expenses 43,818 Total liabilities 267,715 Net Assets for 189,824,609 shares outstanding $ 189,824,609 NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE: $189,824,609 / 189,824,609 shares outstanding $1.00
See Notes which are an integral part of the Financial Statements Statement of Operations Year Ended October 31, 1998 INVESTMENT INCOME: Interest $ 7,066,520 EXPENSES: Investment advisory fee $ 944,018 Administrative personnel and services fee 142,377 Custodian fees 8,041 Transfer and dividend disbursing agent fees and expenses 21,382 Directors'/Trustees' fees 2,637 Auditing fees 12,193 Legal fees 15,255 Portfolio accounting fees 48,242 Shareholder services fee 472,009 Share registration costs 25,586 Printing and postage 21,104 Insurance premiums 13,708 Miscellaneous 25,796 Total expenses $ 1,752,348 WAIVERS: Waiver of investment advisory fee $ (686,739) Waiver of shareholder services fee (18,880) Total waivers (705,619) Net expenses 1,046,729 Net investment income $ 6,019,791
See Notes which are an integral part of the Financial Statements Statement of Changes in Net Assets YEAR ENDED OCTOBER 31 1998 1997 INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment income $ 6,019,791 $ 7,075,588 DISTRIBUTIONS TO SHAREHOLDERS: Distributions from net investment income (6,019,791) (7,075,588) SHARE TRANSACTIONS: Proceeds from sale of shares 436,920,174 655,080,120 Net asset value of shares issued to shareholders in payment of distributions declared 3,252,776 4,317,122 Cost of shares redeemed (473,995,552) (669,470,177) Change in net assets resulting from share transactions (33,822,602) (10,072,935) Change in net assets (33,822,602) (10,072,935) NET ASSETS: Beginning of period 223,647,211 233,720,146 End of period $ 189,824,609 $ 223,647,211
See Notes which are an integral part of the Financial Statements Notes to Financial Statements October 31, 1998 ORGANIZATION Federated Municipal Trust (the "Trust") is registered under the Investment Company Act of 1940, as amended (the "Act") as an open-end, management investment company. The Trust consists of 17 portfolios. The financial statements included herein are only those of Alabama Municipal Cash Trust (the "Fund"). The financial statements of the other portfolios are presented separately. The assets of each portfolio are segregated and a shareholder's interest is limited to the portfolio in which shares are held. The investment objective of the Fund is to provide current income exempt from federal regular income tax and the income tax imposed by the State of Alabama consistent with stability of principal. 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. 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. RESTRICTED SECURITIES Restricted securities are securities that may only be resold upon registration under federal securities laws or in transactions exempt from such registration. Many restricted securities may be resold in the secondary market in transactions exempt from registration. In some cases, the restricted securities may be resold without registration upon exercise of a demand feature. Such restricted securities may be determined to be liquid under criteria established by the Board of Trustees. The Fund will not incur any registration costs upon such resales. Restricted securities are valued at amortized cost in accordance with Rule 2a-7 under the Investment Company Act of 1940. Additional information on each restricted security held at October 31, 1998 is as follows: ACQUISITION ACQUISITION SECURITY DATE COST Alabama State Docks Department, PT-208 7/17/1998 $11,005,000 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 October 31, 1998, capital paid-in aggregated $189,824,609. Transactions in shares were as follows:
YEAR ENDED OCTOBER 31 1998 1997 Shares sold 436,920,174 655,080,120 Shares issued to shareholders in payment of distributions declared 3,252,776 4,317,122 Shares redeemed (473,995,552) (669,470,177) Net change resulting from share transactions (33,822,602) (10,072,935)
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES INVESTMENT ADVISORY FEE Federated Management, the Fund's investment adviser (the "Adviser"), receives for its services an annual investment advisory fee equal to 0.50% 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 ("FSS"), the Fund will pay FSS up to 0.25% of average daily net assets of the Fund for the period. The fee paid to FSS is used to finance certain services for shareholders and to maintain shareholder accounts. FSS may voluntarily choose to waive any portion of its fee. FSS can modify or terminate this voluntary waiver at any time at its sole discretion. TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES FServ, through its subsidiary, Federated Shareholder Services Company ("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. ORGANIZATIONAL EXPENSES Organizational expenses of $57,711 were borne initially by the Adviser. The Fund has reimbursed the Adviser for these expenses. These expenses have been deferred and are being amortized over the five-year period following the Fund's effective date. INTERFUND TRANSACTIONS During the period ended October 31, 1998, the Fund engaged in purchase and sale transactions with funds that have a common investment adviser (or affiliated investment advisers), common Directors/Trustees, and/or common Officers. These purchase and sale transactions were made at current market value pursuant to Rule 17a-7 under the Act amounting to $291,070,000 and $301,614,670 respectively. GENERAL Certain of the Officers and Trustees of the Trust are Officers and Directors or Trustees of the above companies. CONCENTRATION OF CREDIT RISK Since the Fund invests a substantial portion of its assets in issuers located in one state, it will be more susceptible to factors adversely affecting issuers of that state than would be a comparable tax-exempt mutual fund that invests nationally. In order to reduce the credit risk associated with such factors, at October 31, 1998, 86.2% of the securities in the portfolio of investments are backed by letters of credit or bond insurance of various financial institutions and financial guaranty assurance agencies. The percentage of investments insured by or supported (backed) by a letter of credit from any one institution or agency did not exceed 13.6% of total investments. YEAR 2000 (UNAUDITED) Similar to other financial organizations, the Trust could be adversely affected if the computer systems used by the Trust's service providers do not properly process and calculate date-related information and data from and after January 1, 2000. The Trust'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 Trust'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 Trust. Report of Independent Public Accountants To the Shareholders and Board of Trustees of Alabama Municipal Cash Trust: We have audited the accompanying statement of assets and liabilities of Alabama Municipal Cash Trust (an investment portfolio of Federated Municipal Trust, a Massachusetts business trust), including the schedule of portfolio investments, as of October 31, 1998, the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for the periods presented. These financial statements and financial highlights are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the 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 October 31, 1998, by correspondence with the custodian. 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 Alabama Municipal Cash Trust (an investment portfolio of Federated Municipal Trust) as of October 31, 1998, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and its financial highlights for the periods presented, in conformity with generally accepted accounting principles. Arthur Andersen LLP Boston, Massachusetts December 23, 1998 [Graphic] PROSPECTUS Alabama Municipal Cash Trust A Portfolio of Federated Municipal Trust December 31, 1998 A Statement of Additional Information (SAI) dated December 31, 1998, is incorporated by reference into this prospectus. To obtain the SAI 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] Alabama Municipal Cash 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. 811-5911 Cusip 314229790 3090802A (12/98) [Graphic] STATEMENT OF ADDITIONAL INFORMATION Alabama Municipal Cash Trust A Portfolio of Federated Municipal Trust This Statement of Additional Information (SAI) is not a prospectus. Read this SAI in conjunction with the prospectus for Alabama Municipal Cash Trust dated December 31, 1998. Obtain the prospectus without charge by calling 1-800-341- 7400. CONTENTS How is the Fund Organized? Securities in Which the Fund Invests How is the Fund Sold? Subaccounting Services Redemption in Kind Massachusetts Partnership Law Account and Share Information Tax Information Who Manages and Provides Services to the Fund? How Does the Fund Measure Performance? Who is Federated Investors, Inc.? Investment Ratings Addresses DECEMBER 31, 1998 [Federated Investors Logo] Federated Securities Corp., Distributor, subsidiary of Federated Investors, Inc. Cusip 3142229790 3090802B (12/98) How is the Fund Organized? The Fund is a diversified portfolio of Federated Municipal Trust (Trust). The Trust is an open-end, management investment company that was established under the laws of the Commonwealth of Massachusetts on September 1, 1989. The Trust may offer separate series of shares representing interests in separate portfolios of securities. The Board of Trustees (the Board) has established one class of shares of the Fund (Shares). Securities in Which the Fund Invests SECURITIES DESCRIPTIONS AND TECHNIQUES In pursuing its investment strategy, the Fund may invest in the following tax- exempt securities for any purpose that is consistent with its investment objective. General Obligation Bonds General obligation bonds are supported by the issuer's full faith and credit. The issuer must levy and collect taxes sufficient to pay principal and interest on the bonds. However, the issuer's authority to levy additional taxes may be limited by its charter or state law. Special Revenue Bonds Special revenue bonds are payable solely from specific revenues received by the issuer. The revenues may consist of specific taxes, assessments, tolls, fees or other types of municipal revenues. For example, a municipality may issue bonds to build a toll road, and pledge the tolls to repay the bonds. Bondholders could not collect from the municipality's general taxes or revenues. Therefore, any shortfall in the tolls normally could result in a default on the bonds. Private Activity Bonds Private activity bonds are special revenue bonds used to finance private entities. For example, a municipality may issue bonds to finance a new factory to improve its local economy. The municipality would lend the proceeds to the company using the factory, and the company would agree make loan payments sufficient to repay the bonds. The bonds would be payable solely from the company's loan payments, not from any other revenues of the municipality. Therefore, any default on the loan normally would result in a default on the bonds. Municipal Leases Municipalities may enter into leases for equipment or facilities. In order to comply with state public financing laws, these leases are typically subject to annual appropriation. In other words, a municipality may end a lease, without penalty, by not providing for the lease payments in its annual budget. After the lease ends, the lessor (the Fund) can resell the equipment or facility but the Fund may lose money on the sale. The Fund may invest in securities supported by pools of municipal leases. The most common type of lease backed securities are certificates of participation (COPs). However, the Fund may also invest directly in individual leases. Credit Enhancement Common types of credit enhancement include guarantees, letters of credit, bond insurance and surety bonds. Credit enhancement also includes arrangements where securities or other liquid assets secure payment of a fixed income security. If a default occurs, these assets may be sold and the proceeds paid to a security's holders. Either form of credit enhancement reduces credit risks by providing another source of payment for a fixed income security. Investment Ratings A nationally recognized rating service'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 (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 IBCA, 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 rating service can be treated as being in one of the two highest short-term rating categories; currently, such securities must be rated by two rating services in one of their two highest rating categories. See "Regulatory Compliance." INVESTMENT RISKS There are many factors which may effect an investment in the Fund. The Fund's principal risks are described in its prospectus. An additional risk factor is outlined below. Tax Risk In order for the interest income from the securities to be exempt from federal regular income tax ("tax-exempt"), tax-exempt securities must meet certain legal requirements. Failure to meet such requirements may cause the interest received and distributed by the Fund to shareholders to be taxable. FUNDAMENTAL INVESTMENT POLICIES The Fund invests so that at least 80% of the Fund's annual interest income is exempt from federal regular income tax and Alabama state income tax or so that at least 80% of its net assets is invested in obligations, the interest income from which is exempt from federal regular and Alabama state income tax. This policy is fundamental and cannot be changed without shareholder approval. 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 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 net 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 its total assets are outstanding. Pledging Assets The Fund will not mortgage, pledge, or hypothecate any assets except 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 its 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 Alabama 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 Real Estate The Fund will not purchase or sell real estate or real estate limited partnerships, 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 unless authorized by the "vote of a majority of its outstanding voting securities," as defined by the Investment Company Act. The following investment 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 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 Board and repurchase agreements providing for settlement in more than seven days notice. 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 a nationally recognized rating service, 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 Board has 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 Board 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 Board 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 Board 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. 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 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. 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. 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 Trust have equal voting rights, except that in matters affecting only a particular Fund or class, only Shares of that Fund or class are entitled to vote. Trustees may be removed by the Board or by shareholders at a special meeting. A special meeting of shareholders will be called by the Board upon the written request of shareholders who own at least 10% of the Trust's outstanding shares of all series entitled to vote. As of December 8, 1998, the following shareholders owned of record, beneficially, or both, 5% or more of the outstanding Shares: Hubco, Regions Financial Corp., Birmingham, Alabama, owned approximately 44,346,909 Shares (22.98%); Lynspen & Co., SouthTrust Bank, N.A., owned approximately 39,024,032 Shares (20.22%); and NBC Securities, Inc., Birmingham, Alabama, owned approximately 14,039,030 Shares (7.28%). Tax Information FEDERAL INCOME TAX The Fund intends to meet the requirements of Subchapter M of the Internal Revenue Code applicable to regulated investment companies. If these requirements are not met, it will not receive the special tax treatment and will pay federal income tax. The Fund will be treated as a single, separate entity for federal income tax purposes so that income earned and capital gains and losses realized by the Trust's other portfolios will be separate from those realized by the Fund. STATE TAXES Under existing Alabama laws, distributions made by the Fund will not be subject to Alabama personal income taxes to the extent that such distributions are attributable to interest earned on obligations that would be exempt from Alabama personal income taxes if held directly by shareholders (such as obligations of Alabama or its political subdivisions, of the United States or of certain territories or possessions of the United States). Conversely, to the extent that distributions made by the Fund are derived from other types of obligations, such distributions will be subject to Alabama personal income taxes. Shareholders may exclude from the share value of the Fund, for purposes of the Alabama personal property tax, that portion of the total share value which is attributable to the value of the obligations of Alabama or its political subdivisions, of the United States or of certain territories or possessions of the United States. Who Manages and Provides Services to the Fund? BOARD OF TRUSTEES The Board is responsible for managing the Trust's business affairs and for exercising all the Trust's powers except those reserved for the shareholders. Information about each Board member is provided below and includes the following data: name, address, birthdate, present position(s) held with the Trust, principal occupations for the past five years and other notable positions held, total compensation received as a Trustee from the Trust for its most recent fiscal year, and the total compensation received from the Federated Fund Complex for the most recent calendar year. The Trust is comprised of 17 Funds and the Federated Fund Complex is comprised of 56 investment companies, whose investment advisers are affiliated with the Fund's Adviser.As of December 8, 1998, 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.
Name Total Birthdate Aggregate Compensation From Address Principal Occupations Compensation Trust and Fund Position With Trust for Past 5 Years From Trust Complex - ----------------------------- ---------------------------------------------------------- ----------------- ------------------- John F. Donahue##* Chief Executive Officer and Director or Trustee of $0 $0 for the Trust Birthdate: July 28, 1924 the Federated Fund Complex. Chairman and Director, and 56 other Federated Investors Tower Federated Investors, Inc.; Chairman and Trustee, investment 1001 Liberty Avenue Federated Advisers, Federated Management, and companies in the Pittsburgh, PA Federated Research; Chairman and Director, Federated Fund Complex CHAIRMAN and TRUSTEE Research Corp., and Federated Global Research Corp.; Chairman, Passport Research, Ltd. Thomas G. Bigley Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: February 3, 1934 Director, Member of Executive Committee, Children's Trust and 15 Old Timber Trail Hospital of Pittsburgh; formerly: Senior Partner, 56 other Pittsburgh, PA Ernst & Young LLP; Director, MED 3000 Group, Inc.; investment TRUSTEE Director, Member of Executive Committee, University companies in the of Pittsburgh. Fund Complex John T. Conroy, Jr. Director or Trustee of the Federated Fund Complex; $4,484.62 $122,362 for the Birthdate: June 23, 1937 President, Investment Properties Corporation; Senior Trust and Wood/IPC Commercial Dept. Vice President, John R. Wood and Associates, Inc., 56 other John R. Wood and Realtors; Partner or Trustee in private real estate investment Associates, Inc. Realtors ventures in Southwest Florida; formerly: President, companies in the 3255 Tamiami Trail North Naples Property Management, Inc. and Northgate Fund Complex Naples, FL Village Development Corporation. TRUSTEE William J. Copeland Director or Trustee of the Federated Fund Complex; $4,484.62 $122,362 for the Birthdate: July 4, 1918 Director and Member of the Executive Committee, Trust and One PNC Plaza-23rd Floor Michael Baker, Inc.; formerly: Vice Chairman and 56 other Pittsburgh, PA Director, PNC Bank, N.A., and PNC Bank Corp.; investment TRUSTEE Director, Ryan Homes, Inc. companies in the Fund Complex Retired: Director, United Refinery; Director, Forbes Fund; Chairman, Pittsburgh Foundation; Chairman, Pittsburgh Civic Light Opera. James E. Dowd, Esq. Director or Trustee of the Federated Fund Complex; $4,484.62 $122,362 for the Birthdate: May 18, 1922 Attorney-at-law; Director, The Emerging Germany Fund, Trust and 571 Hayward Mill Road Inc. 56 other Concord, MA investment TRUSTEE Retired: President, Boston Stock Exchange, Inc.; companies in the Regional Administrator, United States Securities and Fund Complex Exchange Commission. Lawrence D. Ellis, M.D.* Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: October 11, 1932 Professor of Medicine, University of Pittsburgh; Trust and 3471 Fifth Avenue Medical Director, University of Pittsburgh Medical 56 other Suite 1111 Center - Downtown; Hematologist, Oncologist, and investment Pittsburgh, PA Internist, Presbyterian and Montefiore Hospitals; companies in the TRUSTEE Member, National Board of Trustees, Leukemia Society Fund Complex of America. Edward L. Flaherty, Jr., Director or Trustee of the Federated Fund Complex; $4,484.62 $122,362 for the Esq. # Attorney, of Counsel, Miller, Ament, Henny & Kochuba; Trust and Birthdate: June 18, 1924 Director, Eat'N Park Restaurants, Inc.; formerly: 56 other Miller, Ament, Henny & Counsel, Horizon Financial, F.A., Western Region; investment Kochuba Partner, Meyer and Flaherty. companies in the 205 Ross Street Fund Complex Pittsburgh, PA TRUSTEE Peter E. Madden Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: March 16, 1942 formerly: Representative, Commonwealth of Trust and One Royal Palm Way Massachusetts General Court; President, State Street 56 other 100 Royal Palm Way Bank and Trust Company and State Street Corporation. investment Palm Beach, FL companies in the TRUSTEE Retired: Director, VISA USA and VISA International; Fund Complex Chairman and Director, Massachusetts Bankers Association; Director, Depository Trust Corporation. John E. Murray, Jr., J.D., Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the S.J.D. President, Law Professor, Duquesne University; Trust and Birthdate: December 20, 1932 Consulting Partner, Mollica & Murray. 56 other President, Duquesne investment University Retired: Dean and Professor of Law, University of companies in the Pittsburgh, PA Pittsburgh School of Law; Dean and Professor of Law, Fund Complex TRUSTEE Villanova University School of Law. Wesley W. Posvar Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: September 14, President, World Society of Ekistics, Athens; Trust and 1925 Professor, International Politics; Management 56 other 1202 Cathedral of Learning Consultant; Trustee, Carnegie Endowment for investment University of Pittsburgh International Peace, RAND Corporation, Online companies in the Pittsburgh, PA Computer Library Center, Inc., National Defense Fund Complex TRUSTEE University and U.S. Space Foundation; President Emeritus, University of Pittsburgh; Founding Chairman, National Advisory Council for Environmental Policy and Technology, Federal Emergency Management Advisory Board and Czech Management Center, Prague. Retired: Professor, United States Military Academy; Professor, United States Air Force Academy. Marjorie P. Smuts Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: June 21, 1935 Public Relations/Marketing/Conference Planning. Trust and 4905 Bayard Street 56 other Pittsburgh, PA Retired: National Spokesperson, Aluminum Company of investment TRUSTEE America; business owner. companies in the Fund Complex Glen R. Johnson* Trustee, Federated Investors, Inc.; staff member, $0 $0 for the Trust Birthdate: May 2, 1929 Federated Securities Corp. and Federated Investors Tower 8 other investment 1001 Liberty Avenue companies in the Pittsburgh, PA Fund Complex PRESIDENT and TRUSTEE J. Christopher Donahue##* President or Executive Vice President of the $0 $0 for the Trust Birthdate: April 11, 1949 Federated Fund Complex; Director or Trustee of some and Federated Investors Tower of the Funds in the Federated Fund Complex; President 18 other 1001 Liberty Avenue and Director, Federated Investors, Inc.; President investment Pittsburgh, PA and Trustee, Federated Advisers, Federated companies in the EXECUTIVE VICE PRESDIENT Management, and Federated Research; President and Fund Complex Director, Federated Research Corp. and Federated Global Research Corp.; President, Passport Research, Ltd.; Trustee, Federated Shareholder Services Company; Director, Federated Services Company. Edward C. Gonzales* Trustee or Director of some of the Funds in the $0 $0 for the Trust Birthdate: October 22, 1930 Federated Fund Complex; President, Executive Vice and Federated Investors Tower President and Treasurer of some of the Funds in the 1 other investment 1001 Liberty Avenue Federated Fund Complex; Vice Chairman, Federated companies in the Pittsburgh, PA Investors, Inc.; Vice President, Federated Advisers, Fund Complex EXECUTIVE VICE PRESIDENT 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. John W. McGonigle Executive Vice President and Secretary of the $0 $0 for the Trust Birthdate: October 26, 1938 Federated Fund Complex; Executive Vice President, and Federated Investors Tower Secretary, and Director, Federated Investors, Inc.; 56 other 1001 Liberty Avenue Trustee, Federated Advisers, Federated Management, investment Pittsburgh, PA and Federated Research; Director, Federated Research companies in the EXECUTIVE VICE PRESIDENT Corp. and Federated Global Research Corp.; Director, Fund Complex and SECRETARY Federated Services Company; Director, Federated Securities Corp. Richard J. Thomas Treasurer of the Federated Fund Complex; Vice $0 $0 for the Trust Birthdate: June 17, 1954 President - Funds Financial Services Division, and Federated Investors Tower Federated Investors, Inc.; Formerly: various 56 other 1001 Liberty Avenue management positions within Funds Financial Services investment Pittsburgh, PA Division of Federated Investors, Inc. companies in the TREASURER Fund Complex Richard B. Fisher* President or Vice President of some of the Funds in $0 $0 for the Trust Birthdate: May 17, 1923 the Federated Fund Complex; Director or Trustee of and Federated Investors Tower some of the Funds in the Federated Fund Complex; 6 other investment 1001 Liberty Avenue Executive Vice President, Federated Investors, Inc.; companies in the Pittsburgh, PA Chairman and Director, Federated Securities Corp. Fund Complex VICE PRESIDENT William D. Dawson, III Chief Investment Officer of this Fund and various $0 $0 for the Trust Birthdate: March 3, 1949 other Funds in the Federated Fund Complex; Executive and Federated Investors Tower Vice President, Federated Investment Counseling, 41 other 1001 Liberty Avenue Federated Global Research Corp., Federated Advisers, investment Pittsburgh, PA Federated Management, Federated Research, and companies in the CHIEF INVESTMENT OFFICER Passport Research, Ltd.; Registered Representative, Fund Complex 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. Mary Jo Ochson Senior Portfolio Manager and Vice President of eight $0 $0 for the Birthdate: September 12, investment companies in the Federated Fund Complex; Trust and 1953 Senior Vice President, Federated Investment 7 other investment Federated Investors Tower Counseling, Federated Advisers, Federated Global companies 1001 Liberty Avenue Research Corp., Federated Management, Federated in the Fund Complex Pittsburgh, PA Research, Federated Research Corp. and Passport SENIOR PORTFOLIO Research, Ltd.; Formerly: Vice President, Federated MANAGER/VICE PRESIDENT Advisers, Federated Management, Federated Research, Federated Research Corp. , Passport Research, Ltd. and Federated Global Research Corp. Jeff A. Kozemchak Senior Portfolio Manager and Vice President of four $0 $0 for the Birthdate: January 15, 1960 investment companies in the Federated Fund Complex; Trust and Federated Investors Tower Vice President, Federated Investment Counseling, 3 other investment 1001 Liberty Avenue Federated Advisers, Federated Global Research Corp., companies Pittsburgh, PA Federated Management, Federated Research, Federated in the Fund Complex SENIOR PORTFOLIO Research Corp. and Passport Research, Ltd.; MANAGER/VICE PRESIDENT Formerly: Assistant Vice President and Investment Analyst, Federated Research Corp. and Passport Research, Ltd. ; Assistant Vice President, Federated Advisers, Federated Management and Federated Research.
## Mr. Donahue is the father of J. Christopher Donahue, Executive Vice President of the Trust. 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 Trust, 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 Trust. 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: Maximum Average Aggregate Daily Administrative Fee Net Assets of the Federated Funds - --------------------------------------------------------- 0.150 of 1% on the first $250 million 0.125 of 1% on the next $250 million 0.100 of 1% on the next $250 million 0.075 of 1% on assets in excess of $750 million The administrative fee received during any fiscal year shall be at least $125,000 per portfolio and $30,000 per each additional class of shares. Federated Services Company may voluntarily waive a portion of its fee and may reimburse the Fund for expenses. Federated Services Company also provides certain accounting and recordkeeping services with respect to the Fund's portfolio investments for a fee based on Fund assets plus out-of-pocket expenses. CUSTODIAN State Street Bank and Trust Company, Boston, Massachusetts, is custodian for the securities and cash of the Fund. Foreign instruments purchased by the Fund are held by foreign banks participating in a network coordinated by State Street Bank. TRANSFER AGENT AND DIVIDEND DISBURSING AGENT Federated Services Company, through its registered transfer agent subsidiary, Federated Shareholder Services Company, maintains all necessary shareholder records. The Fund pays the transfer agent a fee based on the size, type, and number of accounts and transactions made by shareholders. INDEPENDENT PUBLIC ACCOUNTANTS Arthur Andersen LLP is the independent public accountant for the Fund. FEES PAID BY THE FUND FOR SERVICES For the Year Ended October 31, 1998 1997 1996 - -------------------------------------------------------------- Advisory Fee Earned $944,018 $1,102,550 $1,049,210 - -------------------------------------------------------------- Advisory Fee Reduction 686,739 774,067 692,887 - -------------------------------------------------------------- Brokerage Commissions 0 0 0 - -------------------------------------------------------------- Administrative Fee 142,377 166,497 158,659 - -------------------------------------------------------------- Shareholder Services Fee 453,129 ---- ---- - -------------------------------------------------------------- If the Fund's expenses are capped at a particular level, the cap does not include reimbursement to the Fund of any expenses incurred by shareholders who use the transfer agent's subaccounting facilities. How does the Fund Measure Performance? The Fund may advertise Share performance by using the Securities and Exchange Commission's (SEC) standard method for calculating performance applicable to all mutual funds. The SEC also permits this standard performance information to be accompanied by non-standard performance information. Unless otherwise stated, any quoted Share performance reflects the effect of non-recurring charges, such as maximum sales charges, which, if excluded, would increase the total return and yield. The performance of Shares depends upon such variables as: portfolio quality; average portfolio maturity; type and value of portfolio securities; changes in interest rates; changes or differences in the Fund's or any class of Shares' expenses; and various other factors. Share performance fluctuates on a daily basis largely because net earnings and offering price per Share 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-, and since inception periods ended October 31, 1998. Yield, Effective Yield and Tax-Equivalent Yield given for the 7-day period ended October 31, 1998. Share Class 7-Day Period 1 Year Since Inception on December 3, 1993 - ------------------------------------------------------------------------------ Total Return -- 3.24% 3.20% - ------------------------------------------------------------------------------ Yield 2.91% -- -- Effective Yield 2.95% -- -- Tax-Equivalent Yield 5.32% -- -- - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ 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. The tax-equivalent yield of Shares is calculated similarly to the yield, but is adjusted to reflect the taxable yield that Shares would have had to earn to equal the actual yield, assuming a specific tax rate. 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. TAX EQUIVALENCY TABLE Set forth below is a sample of a tax-equivalency table that may be used in advertising and sales literature. This table is for illustrative purposes only and is not representative of past or future performance of the Fund. The interest earned by the tax-exempt securities owned by the Fund generally remains free from federal regular income tax and is often free from state and local taxes as well. However, some of the Fund's income may be subject to the federal alternative minimum tax and state and/or local taxes.
- ------------------------------------------------------------------------------------------------------------------------------------ TAXABLE YIELD EQUIVALENT FOR 1998 STATE OF ALABAMA - ------------------------------------------------------------------------------------------------------------------------------------ COMBINED FEDERAL AND STATE INCOME TAX BRACKET: 20.00% 33.00% 36.00% 41.00% 44.60% - ------------------------------------------------------------------------------------------------------------------------------------ JOINT $1 - $42,351 - $102,301 - $155,951 OVER RETURN 42,350 102,300 155,950 278,450 $278,450 SINGLE $1 - $25,351 - $61,401 - $128,101 - OVER RETURN 25,350 61,400 128,100 278,450 $278,450 - ------------------------------------------------------------------------------------------------------------------------------------ TAX-EXEMPT YIELD TAXABLE YIELD EQUIVALENT - ------------------------------------------------------------------------------------------------------------------------------------ 2.50% 3.13% 3.73% 3.91% 4.24% 4.51% 3.00% 3.75% 4.48% 4.69% 5.08% 5.42% 3.50% 4.38% 5.22% 5.47% 5.93% 6.32% 4.00% 5.00% 5.97% 6.25% 6.78% 7.22% 4.50% 5.63% 6.72% 7.03% 7.63% 8.12% 5.00% 6.25% 7.46% 7.81% 8.47% 9.03% 5.50% 6.88% 8.21% 8.59% 9.32% 9.93% 6.00% 7.50% 8.96% 9.38% 10.17% 10.83% 6.50% 8.13% 9.70% 10.16% 11.02% 11.73% 7.00% 8.75% 10.45% 10.94% 11.86% 12.64%
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. 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., 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 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, 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, 1997, Federated managed 11 bond funds with approximately $2.1 billion in assets and 22 money market funds with approximately $10.9 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 tax-exempt 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 27 years' experience. As of December 31, 1997, Federated managed 29 equity funds totaling approximately $11.7 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, 1997, Federated managed 11 money market funds and 16 bond funds with assets approximating $17.1 billion and $5.6 billion, respectively. Federated's corporate bond decision making--based on intensive, diligent credit analysis--is backed by over 22 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 $200 billion. Government Funds In the government sector, as of December 31, 1997, Federated manages 9 mortgage- backed, 6 government/ agency and 18 government money market mutual funds, with assets approximating $5.9 billion, $1.5 billion and $35 billion, respectively. Federated trades approximately $400 million in U.S. government and mortgage- backed securities daily and places approximately $23 billion in repurchase agreements each day. Federated introduced the first U.S. government fund to invest in U.S. government bond securities in 1969. Federated has been a major force in the short- and intermediate-term government markets since 1982 and currently manages approximately $36 billion in government funds within these maturity ranges. 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, 1997, Federated managed more than $63.1 billion in assets across 51 money market funds, including 18 government, 11 prime and 22 municipal with assets approximating $35 billion, $17.1 billion and $10.9 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 $4 trillion to the more than 6,700 funds available, according to the Investment Company Institute. Federated distributes mutual funds through its subsidiaries for a variety of investment purposes. Specific markets include: FEDERATED CLIENTS OVERVIEW 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. Investment Ratings APPENDIX STANDARD & POOR'S SHORT-TERM MUNICIPAL OBLIGATION RATINGS A Standard & Poor's 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-1+, AA/A-1+, 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 rated 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. MOODY'S INVESTORS SERVICE, INC., SHORT-TERM MUNICIPAL OBLIGATION RATINGS Moody's Investor Service, Inc. 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 IBCA, 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. Addresses ALABAMA MUNICIPAL CASH 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 Management Federated Investors Tower 1001 Liberty Avenue, Pittsburgh, PA 15222-3779 Custodian State Street Bank and Trust Company P.O. Box 8600 Boston, MA 02266-8600 Transfer Agent and Dividend Disbursing Agent Federated Shareholder Services Company P.O. Box 8600 Boston, MA 02266-8600 Independent Public Accountants Arthur Andersen LLP 225 Franklin Street Boston, MA 02110-2812 PROSPECTUS Arizona Municipal Cash Trust A Portfolio of Federated Municipal Trust INSTITUTIONAL SERVICE SHARES A money market mutual fund seeking current income exempt from federal regular income tax and income tax imposed by the State of Arizona. 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. CONTENTS Risk/Return Summary What are the Fund's Fees and Expenses? What are the Fund's Investment Strategies? What are the Principal Securities in Which the Fund Invests? What are the Specific Risks of Investing in the Fund? What do Shares Cost? How is the Fund Sold? How to Purchase Shares How to Redeem Shares Account and Share Information Who Manages the Fund? Financial Information Report of Independent Public Accountants DECEMBER 31, 1998 Risk/Return Summary WHAT IS THE FUND'S INVESTMENT OBJECTIVE? The Fund is a money market fund which seeks to maintain a stable net asset value of $1.00. The Fund's investment objective is current income exempt from federal regular income tax and Arizona income taxes 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 tax-exempt securities so that the Fund's annual interest income is exempt from federal regular income tax and Arizona income taxes. Interest from the Fund's investments may be subject to the federal alternative minimum tax for individuals and corporations. WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND? Because the Fund may invest a significant portion of its assets in securities of a single issuer, an investment in the Fund may involve additional risks compared to a fully diversified money market 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. What are the Fund's Fees and Expenses? ARIZONA MUNICIPAL CASH TRUST FEES AND EXPENSES This table describes the fees and expenses that you may pay if you buy shares of the Fund.
Shareholder Fees 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 a percentage of average net assets) Management Fee/2/ 0.50% Distribution (12b-1) Fee None Shareholder Services Fee 0.25% 1.78% Other Expenses/3/ Total Annual Fund Operating Expenses 2.53% /1/Although not contractually obligated to do so, the Adviser waived certain amounts. These are shown below along with the net expenses the Fund actually paid for the fiscal year ended October 31, 1998. Waiver of Fund Expenses 2.21% Total Actual Annual Fund Operating Expenses (after waivers) 0.32%
/2/ The Adviser voluntarily waived a portion of the management fee. The Adviser can terminate this voluntary waiver at any time. There was no management fee paid by the Fund (after the voluntary waiver) for the year ended October 31, 1998. /3/ The Adviser has voluntarily waived certain other operating expenses. The Adviser can terminate this voluntary waiver at any time. Other operating expenses paid by the Fund (after the voluntary waiver) were 0.07% for the year ended October 31, 1998. EXAMPLE The following Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund 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 operating expenses are before waivers as shown above and remain the same. Although your actual costs may be higher or lower, based on these assumptions you costs would be:
1 Year 3 Years 5 Years 10 Years Expenses assuming no $256 $788 $1,345 $2,866 redemption
What are the Fund's Investment Strategies? The Fund invests in a portfolio of high-quality tax-exempt securities maturing in 13 months or less. The average maturity of the Fund's portfolio, computed on a dollar- weighted basis, will be 90 days or less. The Fund's Adviser performs a fundamental credit analysis to develop an approved list of issuers and securities that meet the Adviser's minimum credit standards. The Adviser targets an average portfolio maturity based upon its interest rate outlook and the tax-exempt securities available. The Adviser structures the portfolio by combining variable rate demand instruments and municipal notes. Depending on the supply of tax-exempt securities, the Adviser generally shortens the portfolio's maturity when it expects interest rates to rise and extends the maturity when it expects interest rates to fall. Temporary Defensive Investments During adverse market conditions the Fund may temporarily depart from its principal investment strategies by investing in securities subject to federal regular income tax and Arizona income taxes. Temporary investments will be of comparable quality to other securities in which the Fund invests. This may cause the Fund to give up greater investment returns to maintain the safety of principal. This also may cause the Fund to receive and distribute taxable income to investors. What are the Principal Securities in Which the Fund Invests? TAX-EXEMPT SECURITIES Tax-exempt securities are fixed income securities that pay interest exempt from regular federal income taxes. States, counties, cities and other political subdivisions and authorities typically issue tax exempt securities. Tax - -exempt securities are generally differentiated by their source of repayment. FIXED INCOME SECURITIES Fixed income 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. VARIABLE RATE DEMAND INSTRUMENTS Variable rate demand instruments are tax-exempt securities that require the issuer or a third party, such as a dealer or bank, to repurchase the security for its face value upon demand. The securities also bear interest at a variable rate intended to cause the securities to trade at their face value. The Fund treats demand instruments as short-term securities, even though their stated maturity may extend beyond thirteen months. MUNICIPAL NOTES Municipal notes are short-term tax-exempt securities. Many municipalities issue such notes to fund their current operations prior to collecting taxes or other municipal revenues. Municipalities may also issue notes to fund capital projects prior to issuing long-term bonds. The issuers typically repay the notes at the end of their fiscal year, either with taxes, other revenues or proceeds from newly issued notes or bonds. INVESTMENT 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 rating services or be of comparable quality to securities having such ratings. CREDIT ENHANCEMENT Credit enhancement consists of an arrangement in which a company agrees to pay amounts due on a fixed income security if the issuer defaults. In some cases the company providing credit enhancement makes all payments directly to the security holders and receives reimbursement from the issuer. Normally, the credit enhancer has greater financial resources and liquidity than the issuer. For this reason, the Adviser usually evaluates the credit risk of a fixed income security based solely upon its credit enhancement. 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 tax-exempt money market fund are described below. CREDIT RISK Credit risk is the possibility that an issuer or a credit enhancer will default (fails to repay interest and principal when due). If an issuer or credit enhancer defaults, the Fund will lose money. Money market funds try to minimize this risk by purchasing higher quality securities. Many fixed income securities receive credit ratings from companies such as Standard & Poor's and Moody's Investor Services. Fixed income securities receive different credit ratings depending on the rating company's assessment of the likelihood of default by the issuer. The lower the credit rating, the greater the credit risk. If the security is unrated, greater reliance is placed on the Adviser's credit assessment. 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. SECTOR RISK Most of the Fund's securities will be invested in issuers located in Arizona. In addition, a substantial part of the Fund's portfolio may be comprised of tax- exempt securities issued or credit enhanced by companies in similar businesses or with other similar characteristics. As a result, the Fund will be more susceptible to any economic, business, political, or other developments which generally affect these issuers. 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 determined net asset value (NAV). The Fund does not charge a sales charge. NAV is determined at 12:00 noon and 1:00 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 $10,000. There is no required minimum subsequent investment amount. An account may be opened with a smaller minimum amount as long as the $10,000 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. To obtain the Fund's current yield and other information, please call 1-800- 341-7400. How is the Fund Sold? The Fund's distributor markets the Shares described in this prospectus to institutions acting in an agency or fiduciary capacity or to individuals directly or through investment professionals. The Fund may not be a suitable investment for retirement plans or non-Arizona taxpayers because it invests in Arizona tax-exempt securities. 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 1:00 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 on the day 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 SYSTEMATIC INVESTMENT PROGRAM Once you have opened an account, you may automatically purchase additional Shares on a regular basis by completing the Systematic Investment Program (SIP) section of the New Account Form or by contacting the Fund or your investment professional. The minimum investment amount for SIPs is $50. BY AUTOMATED CLEARINGHOUSE (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 12:00 noon (Eastern time) your redemption will be wired to you the same day. You will not receive that day's dividend. If you call after 12:00 noon (Eastern time) your redemption will be wired to you the following business day. You will receive that day's dividends. Under limited circumstances, arrangements may be made with the Distributor for same-day payment of redemption proceeds, without that day's dividend, for redemption requests received before 2:00 p.m. (Eastern time). 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 30 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. SYSTEMATIC WITHDRAWAL PROGRAM You may automatically redeem Shares in a minimum amount of $100 on a regular basis . Complete the appropriate section of the New Account Form or an Account Service Options Form or contact your investment professional or the Fund. Your account value must meet the minimum initial investment amount at the time the program is established. This program may reduce, and eventually deplete, your account. Payments should not be considered yield or income. CHECKWRITING You may request checks to redeem your fund shares. Your account will continue to Receive the daily dividend declared on the shares being redeemed until a check Is presented for payment. DEBIT CARD You may request a debit card account that allows you to redeem Shares for purchases. There is an annual fee for this service that the Fund will automatically deduct from your account. 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 will not issue share certificates. Account and Share Information CONFIRMATIONS AND ACCOUNT STATEMENTS You will receive confirmation of purchases and redemptions. In addition, you will receive periodic statements reporting all account activity, including systematic transactions, 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, 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. It is anticipated that Fund distributions will be primarily dividends that are exempt from federal income tax, although a portion of the Fund's dividends may not be exempt. Dividends may be subject to state and local taxes, although the Fund's dividends will be exempt from Arizona income tax to the extent they are derived from interest on obligations exempt from Arizona income taxes. Capital gains and non- exempt dividends are taxable whether paid in cash or reinvested in the Fund. 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 Management. 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 and/or provide administrative services to more than 300 mutual funds and private accounts, which totaled over $120 billion in assets as of December 31, 1997. Federated was established in 1955 and is one of the largest mutual fund investment managers in the United States with more than2,000 employees. Over 4,000 investment professionals make Federated Funds available to their customers. ADVISORY FEES The Adviser receives an annual investment advisory fee of 0.50% 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 affect 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 THE PERIOD) Reference is made to the Report of Independent Public Accountants on Page 21. Period Ended October 31 1998/1/ Net Asset Value, Beginning of Period $ 1.00 Income from Investment Operations: Net investment income 0.01 Less Distributions: Distributions from net investment income (0.01) Net Asset Value, End of Period $ 1.00 Total Return2 1.28% Ratios to Average Net Assets: Expenses 0.32%/3/ Net investment income 3.24%/3/ Expense waiver/reimbursement4 2.21%/3/ Supplemental Data: Net assets, end of period (000 omitted) $34,728
1 Reflects operations for the period from June 10, 1998 (date of initial public investment) to October 31, 1998. 2 Based on net asset value, which does not reflect the sales charge or contingent deferred sales charge, if applicable. 3 Computed on an annualized basis. 4 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 OCTOBER 31, 1998
Principal Value Amount /1/ SHORT-TERM MUNICIPALS 97.2% Arizona 83.2% $ 2,000,000 Apache County, AZ IDA, 1983 (Series A) Weekly VRDNs (Tucson Electric Power Co.) $ 2,000,000 (Toronto-Dominion Bank LOC) 150,000 Arizona Agricultural Improvement & Power District, 3.45% CP (Salt River Project, AZ 150,000 Agricultural Improvement & Power District), Mandatory Tender 12/17/1998 800,000 Arizona Health Facilities Authority Weekly VRDNs (University Physicians, Inc.)/(Bank One, 800,000 Arizona N.A. LOC) 1,000,000 Arizona Health Facilities Authority, Pooled Loan Program Revenue Bonds (Series 1985B) 1,000,000 Weekly VRDNs (FGIC INS)/(Chase Manhattan Bank N.A., New York LIQ) 150,000 Arizona State Development Authority, (Series 1998), 5.50% Bonds (MBIA INS),8/1/1999 152,352 500,000 Chandler, AZ Unified School District No. 80, (Series E), 3.75% Bonds (FGIC INS),7/1/1999 500,000 500,000 Cochise County, AZ Pollution Control Corp., (Pooled Series 1994A), 3.55% TOBs (Arizona 500,000 Electric Power Cooperative, Inc. Project)/(National Rural Utilities Cooperative Finance Corp. GTD), Optional Tender 3/1/1999 2,450,000 Eloy, AZ IDA, (Series 1996) Weekly VRDNs (The Marley Cooling Tower Co.)/(First Union 2,450,000 National Bank, Charlotte, N.C. LOC) 1,100,000 Glendale, AZ IDA, Variable Rate Senior Living Facilities Revenue Bonds Weekly VRDNs 1,100,000 (Friendship Retirement Corporation)/(Norwest Bank Minnesota, N.A. LOC) 2,300,000 Maricopa County, AZ Pollution Control Corp., (Series 1984) Weekly VRDNs (El Paso Electric 2,300,000 Co.)/(Barclays Bank PLC, London LOC) 500,000 Maricopa County, AZ Pollution Control Corp., (Series 1994F) Daily VRDNs (Arizona Public 500,000 Service Co. - Palo Verde)/(Bank of America NT and SA, San Francisco LOC) 350,000 Maricopa County, AZ School District No. 45, (Series 198B), 5.50% Bonds (FSA INS), 7/1/1999 354,533 500,000 Maricopa County, AZ Unified School District No. 48, 6.00% Bonds, 7/1/1999 507,040 2,740,000 Maricopa County, AZ, IDA (Series 1984) Weekly VRDNs (Gannett Co., Inc.) 2,740,000 170,000 Maricopa County, AZ, IDA, 3.55% CP (Citizens Utilities Co.), Mandatory Tender 2/10/1999 170,000 750,000 Mesa, AZ Municipal Development Corp., (Series 1985), 3.20% CP (Westdeutsche Landesbank 750,000 Girozentrale LOC), Mandatory Tender 12/9/1998 1,600,000 Phoenix, AZ IDA, (Series 1984) Weekly VRDNs (Del Mar Terrace Apartments)/(Bank of America 1,600,000 NT and SA, San Francisco LOC) 450,000 Phoenix, AZ IDA, (Series 1997) Weekly VRDNs (Interface Data Systems, Inc.)/ (Bank One, 450,000 Arizona N.A. LOC) 500,000 Phoenix, AZ IDA, (Series 1998) Weekly VRDNs (Standard Printing Company, Inc.)/(Bank One, 500,000 Arizona N.A. LOC) $ 1,000,000 Phoenix, AZ, (Series B), 6.00% Bonds, 7/1/1999 $ 1,018,855 500,000 Phoenix, AZ, GO UT Bonds Daily VRDNs (Morgan Guaranty Trust Co., New York LIQ) 500,000 1,520,000 Phoenix, AZ, PA-236 Weekly VRDNs (Merrill Lynch Capital Services, Inc. LIQ) 1,520,000 300,000 Pima County, AZ IDA Weekly VRDNs (Tucson Electric Power Co.)/(Toronto-Dominion Bank LOC) 300,000 1,350,000 Pima County, AZ IDA, Single Family Mortgage (PA-159) Weekly VRDNs (GNMA COL)/ (Merrill 1,350,000 Lynch Capital Services, Inc. LIQ) 1,000,000 Pinal County, AZ IDA, PCR Bonds Daily VRDNs (Magma Copper Co.)/(National Westminster 1,000,000 Bank, PLC, London LOC) 1,150,000 Scottsdale, AZ IDA Weekly VRDNs (Scottsdale (Memorial Hospitals))/(AMBAC INS)/ (Credit 1,150,000 Local de France LIQ) 425,000 Sunnyside, AZ Unified School District No.12, 4.50% Bonds (FGIC INS), 7/1/1999 427,187 750,000 Tolleson, AZ Municipal Finance Corporation, Revenue Refunding Bonds (Series of 1998) 750,000 Weekly VRDNs (Citizens Utilities Co.) 1,550,000 Yavapai, AZ IDA, (Series 1997B) Weekly VRDNs (Yavapai Regional Medical Center)/(FSA 1,550,000 INS)/(Credit Local de France LIQ) 800,000 Yuma County, AZ Airport Authority, Inc., (Series 1997A) Weekly VRDNs (Bank One, Arizona 800,000 N.A. LOC) TOTAL 28,889,967 ------------ Puerto Rico 14.0% 2,255,387 Commonwealth of Puerto Rico Municipal Revenues Collection Center, 1997A LeaseTOPS Trust 2,255,387 Weekly VRDNs (ABN AMRO Bank N.V., Amsterdam LIQ)/(State Street Bank and Trust Co. LOC) 1,500,000 Commonwealth of Puerto Rico, Municipal Securities Trust Receipts, (Series 1998-CMC4) 1,500,000 Weekly VRDNs (MBIA INS)/(Chase Manhattan Corp. LIQ) 1,100,000 Government Development Bank for Puerto Rico (GDB) Weekly VRDNs (MBIA INS)/ (Credit Suisse 1,100,000 First Boston LIQ) TOTAL 4,855,387 ------------ /2/ TOTAL INVESTMENTS (AT AMORTIZED COST) $ 33,745,354
Securities that are subject to Alternative Minimum Tax represent 18.4% of the portfolio as calculated based on total portfolio market value. 1 The Fund may only invest in securities rated in one of the two highest short- term rating categories by nationally recognized statistical rating organizations (`NRSROs') or unrated securities of comparable quality. 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 , MIG-1, or MIG-2 by Moody's Investors Service, Inc., F- 1+, F-1 and F-2 by Fitch IBCA, Inc. are all considered rated in one of the two highest short-term rating categories. Securities rated in the highest short-term rating category (and unrated securities of comparable quality) are identified as First Tier securities. Securities rated in the second highest short-term rating category (and unrated securities of comparable quality) are identified as Second Tier securities. The Fund follows applicable regulations in determining whether a security is rated and whether a security rated by multiple NRSROs in different rating categories should be identified as a First or Second Tier security. At October 31, 1998, the portfolio securities were rated as follows: Tier Rating Based on Total Market Value(Unaudited)
First Second Tier Tier 100% 0.00%
2 Also represents cost for federal tax purposes. Note: The categories of investments are shown as a percentage of net assets ($34,727,746) at October 31, 1998. The following acronyms are used throughout this portfolio: AMBAC American Municipal Bond Assurance Corporation COL Collateralized CP Commercial Paper FGIC Financial Guaranty Insurance Company FSA Financial Security Assurance GNMA Government National Mortgage Association GO General Obligation GTD Guaranty IDA Industrial Development Authority INS Insured LIQ Liquidity Agreement LOC Letter of Credit MBIA Municipal Bond Investors Assurance PCR Pollution Control Revenue PLC Public Limited Company SA Support Agreement TOBs Tender Option Bonds UT Unlimited Tax VRDNs Variable Rate Demand Notes See Notes which are an integral part of the Financial Statements Statement of Assets and Liabilities OCTOBER 31, 1998
Assets: Total investments in securities, at amortized cost and value $ 33,745,354 Cash 1,277,300 Income receivable 231,547 Receivable for shares sold 9,800 Deferred organizational costs 9,979 TOTAL ASSETS 35,273,980 Liabilities: Payable for investments purchased $ 514,384 Income distribution payable 25,520 Accrued expenses 6,330 TOTAL LIABILITIES 546,234 Net Assets for 34,727,746 shares outstanding $ 34,727,746 Net Asset Value, Offering Price and Redemption Proceeds Per Share: $34,727,746 / 34,727,746 shares outstanding $1.00
See Notes which are an integral part of the Financial Statements Statement of Operations PERIOD ENDED OCTOBER 31, 19981
Investment Income: Interest $ 171,083 Expenses: Investment advisory fee $ 24,043 Administrative personnel and services fee 48,973 Custodian fees 304 Transfer and dividend disbursing agent fees and expenses 3,920 Directors'/Trustees' fees 250 Legal fees 5,190 Portfolio accounting fees 9,796 Shareholder services fee 12,021 Share registration costs 13,743 Printing and postage 3,321 Miscellaneous 126 TOTAL EXPENSES 121,687 Waivers: Waiver of investment advisory fee $ (24,043) Waiver of other operating expenses (82,140) TOTAL WAIVERS (106,183) Net expenses 15,504 Net investment income $ 155,579
1 Reflects operations for the period from June 10, 1998 (date of initial public investment) to October 31, 1998. See Notes which are an integral part of the Financial Statements Statement of Changes in Net Assets Period Ended October 31 1998/1/ Increase (Decrease) in Net Assets: Operations: Net investment income $ 155,579 Distributions to Shareholders: Distributions from net investment income (155,579) Share Transactions: Proceeds from sale of shares 46,101,572 Net asset value of shares issued to shareholders in payment of distributions declared 98,402 Cost of shares redeemed (11,472,228) Change in net assets resulting from share transactions 34,727,746 Change in net assets 34,727,746 Net Assets: Beginning of period -- End of period $ 34,727,746
1 Reflects operations for the period from June 10, 1998 (date of initial public investment) to October 31, 1998. See Notes which are an integral part of the Financial Statements Notes to Financial Statements OCTOBER 31, 1998 ORGANIZATION Federated Municipal Trust (the "Trust") is registered under the Investment Company Act of 1940, as amended (the "Act") as an open-end, management investment company. The Trust consists of 17 portfolios. The financial statements included herein are only those of Arizona Municipal Cash Trust (the "Fund"). The financial statements of the other portfolios are presented separately. The assets of each portfolio are segregated and a shareholder's interest is limited to the portfolio in which shares are held. The investment objective of the Fund is current income exempt from federal regular income tax and Arizona income taxes 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. 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 October 31, 1998, capital paid-in aggregated $34,727,746. Transactions in shares were as follows: Period Ended October 31 1998/1/ Shares sold 46,101,572 Shares issued to shareholders in payment of distributions declared 98,402 Shares redeemed (11,472,228) NET CHANGE RESULTING FROM SHARE TRANSACTIONS 34,727,746
1 Reflects operations for the period from June 10, 1998 (date of initial public investment) to October 31, 1998. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES Investment Advisory Fee Federated Management, the Fund's investment adviser (the "Adviser"), receives for its services an annual investment advisory fee equal to 0.50% 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 ("FSS"), the Fund will pay FSS up to 0.25% of average daily net assets of the Fund for the period. The fee paid to FSS is used to finance certain services for shareholders and to maintain shareholder accounts. FSS may voluntarily choose to waive any portion of its fee. FSS can modify or terminate this voluntary waiver at any time at its sole discretion. Transfer and Dividend Disbursing Agent Fees and Expenses FServ, through its subsidiary, Federated Shareholder Services Company ("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. Interfund Transactions During the period ended October 31, 1998, the Fund engaged in purchase and sale transactions with funds that have a common investment adviser (or affiliated investment advisers), common Directors/Trustees, and/or common Officers. These purchase and sale transactions were made at current market value pursuant to Rule 17a-7 under the Act amounting to $36,215,387 and $9,800,000, respectively. General Certain of the Officers and Trustees of the Trust are Officers and Directors or Trustees of the above companies. CONCENTRATION OF CREDIT RISK Since the Fund invests a substantial portion of its assets in issuers located in one state, it will be more susceptible to factors adversely affecting issuers of that state than would be a comparable tax-exempt mutual fund that invests nationally. In order to reduce the credit risk associated with such factors, at October 31, 1998, 72.7% of the securities in the portfolio of investments are backed by letters of credit or bond insurance of various financial institutions and financial guaranty assurance agencies. The percentage of investments insured by or supported (backed) by a letter of credit from any one institution or agency did not exceed 8% of total investments. 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 BOARD OF TRUSTEES OF FEDERATED MUNICIPAL TRUST AND SHAREHOLDERS OF ARIZONA MUNICIPAL CASH TRUST: We have audited the accompanying statement of assets and liabilities of Arizona Municipal Cash Trust (an investment portfolio of Federated Municipal Trust, a Massachusetts business trust), including the schedule of portfolio investments, as of October 31, 1998, the related statement of operations for the period then ended, the statement of changes in net assets for the period then ended, and the financial highlights for the period presented. These financial statements and financial highlights are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the 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 October 31, 1998, by correspondence with the custodian and the broker. As to security purchased but not received, we requested the confirmation from the broker and, when the reply was not received, we carried out 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 audit provides 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 Arizona Municipal Cash Trust (an investment portfolio of Federated Municipal Trust) as of October 31, 1998, the results of its operations for the period then ended, the changes in its net assets for the period then ended, and its financial highlights for the period presented, in conformity with generally accepted accounting principles. Arthur Andersen LLP Boston, Massachusetts December 23, 1998 Arizona Municipal Cash Trust A Portfolio of Federated Municipal Trust INSTITUTIONAL SERVICE SHARES DECEMBER 31, 1998 A Statement of Additional Information (SAI) dated December 31, 1998, is incorporated by reference into this prospectus. To obtain the SAI 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. Investment Company Act File No. 811-5911 Cusip 314229696 G02372-01 (12/98) Federated is a registered mark of Federated Investors, Inc. 1998 (C)Federated Investors, Inc. STATEMENT OF ADDITIONAL INFORMATION Arizona Municipal Cash Trust A Portfolio of Federated Municipal Trust INSTITUTIONAL SERVICE SHARES This Statement of Additional Information (SAI) is not a prospectus. Read this SAI in conjunction with the prospectus for Arizona Municipal Cash Trust dated December 31, 1998. Obtain the prospectus without charge by calling 1-800-341- 7400. CONTENTS How is the Fund Organized? Securities in Which the Fund Invests How is the Fund Sold? Subaccounting Services Redemption in Kind Massachusetts Partnership Law Account and Share Information Tax Information Who Manages and Provides Services to the Fund? How Does the Fund Measure Performance? Who is Federated Investors, Inc.? Investment Ratings Addresses DECEMBER 31, 1998 [Federated Investors Logo] Federated Securities Corp., Distributor, subsidiary of Federated Investors, Inc. Cusip 314229626 G02372-02 (12/98) How is the Fund Organized? The Fund is a diversified portfolio of Federated Municipal Trust (Trust). The Trust is an open-end, management investment company that was established under the laws of the Commonwealth of Massachusetts on September 1, 1989. The Trust may offer separate series of shares representing interests in separate portfolios of securities. The Board of Trustees (the Board) has established one class of shares of the Fund, known as Institutional Service Shares (Shares). Securities in Which the Fund Invests SECURITIES DESCRIPTIONS AND TECHNIQUES In pursuing its investment strategy, the Fund may invest in the following tax- exempt securities for any purpose that is consistent with its investment objective. General Obligation Bonds General obligation bonds are supported by the issuer's full faith and credit. The issuer must levy and collect taxes sufficient to pay principal and interest on the bonds. However, the issuer's authority to levy additional taxes may be limited by its charter or state law. Special Revenue Bonds Special revenue bonds are payable solely from specific revenues received by the issuer. The revenues may consist of specific taxes, assessments, tolls, fees or other types of municipal revenues. For example, a municipality may issue bonds to build a toll road, and pledge the tolls to repay the bonds. Bondholders could not collect from the municipality's general taxes or revenues. Therefore, any shortfall in the tolls normally could result in a default on the bonds. Private Activity Bonds Private activity bonds are special revenue bonds used to finance private entities. For example, a municipality may issue bonds to finance a new factory to improve its local economy. The municipality would lend the proceeds to the company using the factory, and the company would agree make loan payments sufficient to repay the bonds. The bonds would be payable solely from the company's loan payments, not from any other revenues of the municipality. Therefore, any default on the loan normally would result in a default on the bonds. Municipal Leases Municipalities may enter into leases for equipment or facilities. In order to comply with state public financing laws, these leases are typically subject to annual appropriation. In other words, a municipality may end a lease, without penalty, by not providing for the lease payments in its annual budget. After the lease ends, the lessor (the Fund) can resell the equipment or facility but the Fund may lose money on the sale. The Fund may invest in securities supported by pools of municipal leases. The most common type of lease backed securities are certificates of participation (COPs). However, the Fund may also invest directly in individual leases. Credit Enhancement Common types of credit enhancement include guarantees, letters of credit, bond insurance and surety bonds. Credit enhancement also includes arrangements where securities or other liquid assets secure payment of a fixed income security. If a default occurs, these assets may be sold and the proceeds paid to a security's holders. Either form of credit enhancement reduces credit risks by providing another source of payment for a fixed income security. Investment Ratings A nationally recognized rating service'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 (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 IBCA, 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 rating service can be treated as being in one of the two highest short-term rating categories; currently, such securities must be rated by two rating services in one of their two highest rating categories. See "Regulatory Compliance." INVESTMENT RISKS There are many factors which may effect an investment in the Fund. The Fund's principal risks are described in its prospectus. An additional risk factor is outlined below. Tax Risk In order for the interest income from the securities to be exempt from federal regular income tax ("tax-exempt"), tax-exempt securities must meet certain legal requirements. Failure to meet such requirements may cause the interest received and distributed by the Fund to shareholders to be taxable. FUNDAMENTAL INVESTMENT POLICIES The Fund invests in tax-exempt securities so that at least 80% of the Fund's annual interest income is exempt from federal regular income tax and Arizona income taxes. This policy is fundamental and cannot be changed without shareholder approval. 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 in amounts up to one-third of the value of its total assets, including the amounts borrowed. The Fund will not borrow money 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. Pledging Assets The Fund will not mortgage, pledge, or hypothecate any assets except as necessary to secure permitted borrowings. Lending Cash or Securities The Fund will not lend any assets, except portfolio securities. This shall not prevent the Fund from engaging in transactions permitted by its investment objective, policies, and limitations or the Trust's Declaration of Trust. 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, 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 invest 25% or more of the value of its total assets 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, except that 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. 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; 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; and securities of other investment companies) 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. Under this limitation, each governmental subdivision, including states and the District of Columbia, territories, possessions of the United States, or their political subdivisions, agencies, authorities, instrumentalities, or similar entities, will be considered a separate issuer if its assets and revenues are separate from those of the governmental body creating it and the security is backed only by its own assets and revenues. Industrial development bonds backed only by the assets and revenues of a nongovernmental user are considered to be issued solely by that user. 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 Restricted and 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 Board, non-negotiable time deposits and repurchase agreements providing for settlement in more than seven days after notice. 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 does not intend to borrow money or pledge securities in excess of 5% of the value of its net assets 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 a nationally recognized rating service, 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 Board has 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 Board 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 Board 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 Board 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. 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 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. 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. 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 Trust have equal voting rights, except that in matters affecting only a particular Fund or class, only Shares of that Fund or class are entitled to vote. Trustees may be removed by the Board or by shareholders at a special meeting. A special meeting of shareholders will be called by the Board upon the written request of shareholders who own at least 10% of the Trust's outstanding shares of all series entitled to vote. As of December 8, 1998, the following shareholders owned of record, beneficially, or both, 5% or more of the outstanding Institutional Service Shares: Norwest Investment Services Inc., Minneapolis, Minnesota, owned approximately 12,393,449 Shares (34.95%); Zions First National Bank, Salt Lake City, Utah, owned approximately 10,082,093 Shares (28.43%); Colonial Trust Co., Personal Division, Phoenix, Arizona, owned approximately 4,981,743 Shares (14.05%); Dain Rauscher Incorporated, Money Market Operations, Minneapolis, Minnesota, owned approximately 3,268,207 Shares (9.22%); and PJH Prime Account, Sundown Equipment LLC, Phoenix, Arizona, owned approximately 2,035,896 Shares (5.74%). Shareholders owning 25% or more of outstanding Shares may be in control and be able to affect the outcome of certain matters presented for a vote of shareholders. Tax Information FEDERAL INCOME TAX The Fund intends to meet the requirements of Subchapter M of the Internal Revenue Code applicable to regulated investment companies. If these requirements are not met, it will not receive the special tax treatment and will pay federal income tax. The Fund will be treated as a single, separate entity for federal income tax purposes so that income earned and capital gains and losses realized by the Trust's other portfolios will be separate from those realized by the Fund. STATE TAXES Under existing Arizona laws, distributions made by the Fund will not be subject to Arizona individual or corporate income taxes to the extent that such distributions qualify as exempt-interest dividends under Internal Revenue Code and represent (I) interest income received on obligations of the United States or its territories or possessions; and (ii) interest income received on obligations of Arizona or its political subdivisions. Conversely, to the extent that distributions made by the Fund are attributable to other types of obligations, such distributions will be subject to Arizona income taxes. Who Manages and Provides Services to the Fund? BOARD OF TRUSTEES The Board is responsible for managing the Trust's business affairs and for exercising all the Trust's powers except those reserved for the shareholders. Information about each Board member is provided below and includes the following data: name, address, birthdate, present position(s) held with the Trust, principal occupations for the past five years and other notable positions held, total compensation received as a Trustee from the Trust for its most recent fiscal year, and the total compensation received from the Federated Fund Complex for the most recent calendar year. The Trust is comprised of 17 Funds and the Federated Fund Complex is comprised of 56 investment companies, whose investment advisers are affiliated with the Fund's Adviser. As of December 8, 1998, 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.
Name Total Birthdate Aggregate Compensation From Address Principal Occupations Compensation Trust and Fund Position With Trust for Past 5 Years From Trust Complex - ------------------------------- ---------------------------------------------------------- ------------------ ------------------- John F. Donahue##* Chief Executive Officer and Director or Trustee of $0 $0 for the Trust Birthdate: July 28, 1924 the Federated Fund Complex. Chairman and Director, and 56 other Federated Investors Tower Federated Investors, Inc.; Chairman and Trustee, investment 1001 Liberty Avenue Federated Advisers, Federated Management, and companies in the Pittsburgh, PA Federated Research; Chairman and Director, Federated Fund Complex CHAIRMAN and TRUSTEE Research Corp., and Federated Global Research Corp.; Chairman, Passport Research, Ltd. Thomas G. Bigley Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: February 3, 1934 Director, Member of Executive Committee, Children's Trust and 15 Old Timber Trail Hospital of Pittsburgh; formerly: Senior Partner, 56 other Pittsburgh, PA Ernst & Young LLP; Director, MED 3000 Group, Inc.; investment TRUSTEE Director, Member of Executive Committee, University companies in the of Pittsburgh. Fund Complex John T. Conroy, Jr. Director or Trustee of the Federated Fund Complex; $4,484.62 $122,362 for the Birthdate: June 23, 1937 President, Investment Properties Corporation; Senior Trust and Wood/IPC Commercial Dept. Vice President, John R. Wood and Associates, Inc., 56 other John R. Wood and Realtors; Partner or Trustee in private real estate investment Associates, Inc. Realtors ventures in Southwest Florida; formerly: President, companies in the 3255 Tamiami Trail North Naples Property Management, Inc. and Northgate Fund Complex Naples, FL Village Development Corporation. TRUSTEE William J. Copeland Director or Trustee of the Federated Fund Complex; $4,484.62 $122,362 for the Birthdate: July 4, 1918 Director and Member of the Executive Committee, Trust and One PNC Plaza-23rd Floor Michael Baker, Inc.; formerly: Vice Chairman and 56 other Pittsburgh, PA Director, PNC Bank, N.A., and PNC Bank Corp.; investment TRUSTEE Director, Ryan Homes, Inc. companies in the Fund Complex Retired: Director, United Refinery; Director, Forbes Fund; Chairman, Pittsburgh Foundation; Chairman, Pittsburgh Civic Light Opera. James E. Dowd, Esq. Director or Trustee of the Federated Fund Complex; $4,484.62 $122,362 for the Birthdate: May 18, 1922 Attorney-at-law; Director, The Emerging Germany Fund, Trust and 571 Hayward Mill Road Inc. 56 other Concord, MA investment TRUSTEE Retired: President, Boston Stock Exchange, Inc.; companies in the Regional Administrator, United States Securities and Fund Complex Exchange Commission. Lawrence D. Ellis, M.D.* Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: October 11, 1932 Professor of Medicine, University of Pittsburgh; Trust and 3471 Fifth Avenue Medical Director, University of Pittsburgh Medical 56 other Suite 1111 Center - Downtown; Hematologist, Oncologist, and investment Pittsburgh, PA Internist, Presbyterian and Montefiore Hospitals; companies in the TRUSTEE Member, National Board of Trustees, Leukemia Society Fund Complex of America. Edward L. Flaherty, Jr., Director or Trustee of the Federated Fund Complex; $4,484.62 $122,362 for the Esq. # Attorney, of Counsel, Miller, Ament, Henny & Kochuba; Trust and Birthdate: June 18, 1924 Director, Eat'N Park Restaurants, Inc.; formerly: 56 other Miller, Ament, Henny & Counsel, Horizon Financial, F.A., Western Region; investment Kochuba Partner, Meyer and Flaherty. companies in the 205 Ross Street Fund Complex Pittsburgh, PA TRUSTEE Peter E. Madden Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: March 16, 1942 formerly: Representative, Commonwealth of Trust and One Royal Palm Way Massachusetts General Court; President, State Street 56 other 100 Royal Palm Way Bank and Trust Company and State Street Corporation. investment Palm Beach, FL companies in the TRUSTEE Retired: Director, VISA USA and VISA International; Fund Complex Chairman and Director, Massachusetts Bankers Association; Director, Depository Trust Corporation. ]ohn E. Murray, Jr., J.D., Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the S.J.D. President, Law Professor, Duquesne University; Trust and Birthdate: December 20, 1932 Consulting Partner, Mollica & Murray. 56 other President, Duquesne investment University Retired: Dean and Professor of Law, University of companies in the Pittsburgh, PA Pittsburgh School of Law; Dean and Professor of Law, Fund Complex TRUSTEE Villanova University School of Law. Wesley W. Posvar Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: September 14, President, World Society of Ekistics, Athens; Trust and 1925 Professor, International Politics; Management 56 other 1202 Cathedral of Learning Consultant; Trustee, Carnegie Endowment for investment University of Pittsburgh International Peace, RAND Corporation, Online companies in the Pittsburgh, PA Computer Library Center, Inc., National Defense Fund Complex TRUSTEE University and U.S. Space Foundation; President Emeritus, University of Pittsburgh; Founding Chairman, National Advisory Council for Environmental Policy and Technology, Federal Emergency Management Advisory Board and Czech Management Center, Prague. Retired: Professor, United States Military Academy; Professor, United States Air Force Academy. Marjorie P. Smuts Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: June 21, 1935 Public Relations/Marketing/Conference Planning. Trust and 4905 Bayard Street 56 other Pittsburgh, PA Retired: National Spokesperson, Aluminum Company of investment TRUSTEE America; business owner. companies in the Fund Complex Glen R. Johnson* Trustee, Federated Investors, Inc.; staff member, $0 $0 for the Trust Birthdate: May 2, 1929 Federated Securities Corp. and Federated Investors Tower 8 other investment 1001 Liberty Avenue companies in the Pittsburgh, PA Fund Complex PRESIDENT and TRUSTEE J. Christopher Donahue##* President or Executive Vice President of the $0 $0 for the Trust Birthdate: April 11, 1949 Federated Fund Complex; Director or Trustee of some and Federated Investors Tower of the Funds in the Federated Fund Complex; President 18 other 1001 Liberty Avenue and Director, Federated Investors, Inc.; President investment Pittsburgh, PA and Trustee, Federated Advisers, Federated companies in the EXECUTIVE VICE PRESDIENT Management, and Federated Research; President and Fund Complex Director, Federated Research Corp. and Federated Global Research Corp.; President, Passport Research, Ltd.; Trustee, Federated Shareholder Services Company; Director, Federated Services Company. Edward C. Gonzales* Trustee or Director of some of the Funds in the $0 $0 for the Trust Birthdate: October 22, 1930 Federated Fund Complex; President, Executive Vice and Federated Investors Tower President and Treasurer of some of the Funds in the 1 other investment 1001 Liberty Avenue Federated Fund Complex; Vice Chairman, Federated companies in the Pittsburgh, PA Investors, Inc.; Vice President, Federated Advisers, Fund Complex EXECUTIVE VICE PRESIDENT 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. John W. McGonigle Executive Vice President and Secretary of the $0 $0 for the Trust Birthdate: October 26, 1938 Federated Fund Complex; Executive Vice President, and Federated Investors Tower Secretary, and Director, Federated Investors, Inc.; 56 other 1001 Liberty Avenue Trustee, Federated Advisers, Federated Management, investment Pittsburgh, PA and Federated Research; Director, Federated Research companies in the EXECUTIVE VICE PRESIDENT Corp. and Federated Global Research Corp.; Director, Fund Complex and SECRETARY Federated Services Company; Director, Federated Securities Corp. Richard J. Thomas Treasurer of the Federated Fund Complex; Vice $0 $0 for the Trust Birthdate: June 17, 1954 President - Funds Financial Services Division, and Federated Investors Tower Federated Investors, Inc.; Formerly: various 56 other 1001 Liberty Avenue management positions within Funds Financial Services investment Pittsburgh, PA Division of Federated Investors, Inc. companies in the TREASURER Fund Complex Richard B. Fisher* President or Vice President of some of the Funds in $0 $0 for the Trust Birthdate: May 17, 1923 the Federated Fund Complex; Director or Trustee of and Federated Investors Tower some of the Funds in the Federated Fund Complex; 6 other investment 1001 Liberty Avenue Executive Vice President, Federated Investors, Inc.; companies in the Pittsburgh, PA Chairman and Director, Federated Securities Corp. Fund Complex VICE PRESIDENT William D. Dawson, III Chief Investment Officer of this Fund and various $0 $0 for the Trust Birthdate: March 3, 1949 other Funds in the Federated Fund Complex; Executive and Federated Investors Tower Vice President, Federated Investment Counseling, 41 other 1001 Liberty Avenue Federated Global Research Corp., Federated Advisers, investment Pittsburgh, PA Federated Management, Federated Research, and companies in the CHIEF INVESTMENT OFFICER Passport Research, Ltd.; Registered Representative, Fund Complex 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. Mary Jo Ochson Senior Portfolio Manager and Vice President of eight $0 $0 for the Birthdate: September 12, investment companies in the Federated Fund Complex; Trust and 1953 Senior Vice President, Federated Investment 7 other investment Federated Investors Tower Counseling, Federated Advisers, Federated Global companies 1001 Liberty Avenue Research Corp., Federated Management, Federated in the Fund Complex Pittsburgh, PA Research, Federated Research Corp. and Passport SENIOR PORTFOLIO Research, Ltd.; Formerly: Vice President, Federated MANAGER/VICE PRESIDENT Advisers, Federated Management, Federated Research, Federated Research Corp. , Passport Research, Ltd. and Federated Global Research Corp. Jeff A. Kozemchak Senior Portfolio Manager and Vice President of four $0 $0 for the Birthdate: January 15, 1960 investment companies in the Federated Fund Complex; Trust and Federated Investors Tower Vice President, Federated Investment Counseling, 3 other investment 1001 Liberty Avenue Federated Advisers, Federated Global Research Corp., companies Pittsburgh, PA Federated Management, Federated Research, Federated in the Fund Complex SENIOR PORTFOLIO Research Corp. and Passport Research, Ltd.; MANAGER/VICE PRESIDENT Formerly: Assistant Vice President and Investment Analyst, Federated Research Corp. and Passport Research, Ltd. ; Assistant Vice President, Federated Advisers, Federated Management and Federated Research.
## Mr. Donahue is the father of J. Christopher Donahue, Executive Vice President of the Trust. 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 Trust, 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 Trust. 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:
Maximum Average Aggregate Daily Administrative Fee Net Assets of the Federated Funds - ------------------------------------------------------------------- 0.150 of 1% on the first $250 million 0.125 of 1% on the next $250 million 0.100 of 1% on the next $250 million 0.075 of 1% on assets in excess of $750 million
The administrative fee received during any fiscal year shall be at least $125,000 per portfolio and $30,000 per each additional class of shares. Federated Services Company may voluntarily waive a portion of its fee and may reimburse the Fund for expenses. Federated Services Company also provides certain accounting and recordkeeping services with respect to the Fund's portfolio investments for a fee based on Fund assets plus out-of-pocket expenses. CUSTODIAN State Street Bank and Trust Company, Boston, Massachusetts, is custodian for the securities and cash of the Fund. Foreign instruments purchased by the Fund are held by foreign banks participating in a network coordinated by State Street Bank. TRANSFER AGENT AND DIVIDEND DISBURSING AGENT Federated Services Company, through its registered transfer agent subsidiary, Federated Shareholder Services Company, maintains all necessary shareholder records. The Fund pays the transfer agent a fee based on the size, type, and number of accounts and transactions made by shareholders. INDEPENDENT PUBLIC ACCOUNTANTS Arthur Andersen LLP is the independent public accountant for the Fund. FEES PAID BY THE FUND FOR SERVICES For the Year Ended October 31, 1998* - ----------------------------------------------- Advisory Fee Earned $24,043 - ----------------------------------------------- Advisory Fee Reduction 24,043 - ----------------------------------------------- Brokerage Commissions 0 - ----------------------------------------------- Administrative Fee 48,973 - ----------------------------------------------- Shareholder Services Fee - ----------------------------------------------- Institutional Service Shares 12,021 - ----------------------------------------------- * From the Fund's inception (June 10, 1998) to October 31, 1998. If the Fund's expenses are capped at a particular level, the cap does not include reimbursement to the Fund of any expenses incurred by shareholders who use the transfer agent's subaccounting facilities. How does the Fund Measure Performance? The Fund may advertise Share performance by using the Securities and Exchange Commission's (SEC) standard method for calculating performance applicable to all mutual funds. The SEC also permits this standard performance information to be accompanied by non-standard performance information. Unless otherwise stated, any quoted Share performance reflects the effect of non-recurring charges, such as maximum sales charges, which, if excluded, would increase the total return and yield. The performance of Shares depends upon such variables as: portfolio quality; average portfolio maturity; type and value of portfolio securities; changes in interest rates; changes or differences in the Fund's or any class of Shares' expenses; and various other factors. Share performance fluctuates on a daily basis largely because net earnings and offering price per Share fluctuate daily. Both net earnings and offering price per Share are factors in the computation of yield and total return. AVERAGE ANNUAL TOTAL RETURN AND YIELD Total returns given for the since inception period ended October 31, 1998. Yield, Effective Yield and Tax-Equivalent Yield given for the 7-day period ended October 31, 1998. Share Class Institutional Service Shares 7-Day Period Since Inception on June 10, 1998 - ------------------------------------------------------------------ Total Return -- 1.28% Yield 2.89% -- Effective Yield 2.93% -- Tax-Equivalent Yield 5.31% -- - ------------------------------------------------------------------ - ------------------------------------------------------------------ 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. When Shares of a Fund are in existence for less than a year, the Fund may advertise cumulative total return for that specific period of time, rather than annualizing the total return. 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. The tax- equivalent yield of Shares is calculated similarly to the yield, but is adjusted to reflect the taxable yield that Shares would have had to earn to equal the actual yield, assuming a specific tax rate. 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. TAX EQUIVALENCY TABLE Set forth below is a sample of a tax-equivalency table that may be used in advertising and sales literature. This table is for illustrative purposes only and is not representative of past or future performance of the Fund. The interest earned by the tax-exempt securities owned by the Fund generally remains free from federal regular income tax and is often free from state and local taxes as well. However, some of the Fund's income may be subject to the federal alternative minimum tax and state and/or local taxes.
TAXABLE YIELD EQUIVALENT FOR 1998 STATE OF ARIZONA - ------------------------------------------------------------------------------------------------------------------------------------ COMBINED FEDERAL AND STATE INCOME TAX BRACKET: 18.30% 32.80% 35.80% 41.17% 44.77% - ------------------------------------------------------------------------------------------------------------------------------------ SINGLE $1 - $25,351 - $61,401 - $128,101 - OVER RETURN 25,350 61,400 128,100 278,450 $278,450 - ------------------------------------------------------------------------------------------------------------------------------------ TAX-EXEMPT YIELD TAXABLE YIELD EQUIVALENT - ------------------------------------------------------------------------------------------------------------------------------------ 1.50% 1.84% 2.23% 2.34% 2.55% 2.72% 2.00% 2.45% 2.98% 3.12% 3.40% 3.62% 2.50% 3.06% 3.72% 3.89% 4.25% 4.53% 3.00% 3.67% 4.46% 4.67% 5.10% 5.43% 3.50% 4.28% 5.21% 5.45% 5.95% 6.34% 4.00% 4.90% 5.95% 6.23% 6.80% 7.24% 4.50% 5.51% 6.70% 7.01% 7.65% 8.15% 5.00% 6.12% 7.44% 7.79% 8.50% 9.05% 5.50% 6.73% 8.18% 8.57% 9.35% 9.96% 6.00% 7.34% 8.93% 9.35% 10.20% 10.86% 6.50% 7.96% 9.67% 10.12% 11.05% 11.77% 7.00% 8.57% 10.42% 10.90% 11.90% 12.67% 7.50% 9.18% 11.16% 11.68% 12.75% 13.58% 8.00% 9.79% 11.90% 12.46% 13.60% 14.48%
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.
- ------------------------------------------------------------------------------------------------------------------------------------ TAXABLE YIELD EQUIVALENT FOR 1998 STATE OF ARIZONA - ------------------------------------------------------------------------------------------------------------------------------------ COMBINED FEDERAL AND STATE INCOME TAX BRACKET: 18.30% 31.90% 35.80% 40.80% 44.77% - ------------------------------------------------------------------------------------------------------------------------------------ SINGLE $1 - $42,351 - $102,301 - $155,951 - OVER RETURN 42,350 102,300 155,950 278,450 $278,450 - ------------------------------------------------------------------------------------------------------------------------------------ TAX-EXEMPT YIELD TAXABLE YIELD EQUIVALENT - ------------------------------------------------------------------------------------------------------------------------------------ 1.50% 1.84% 2.20% 2.34% 2.53% 2.72% 2.00% 2.45% 2.94% 3.12% 3.38% 3.62% 2.50% 3.06% 3.67% 3.89% 4.22% 4.53% 3.00% 3.67% 4.41% 4.67% 5.07% 5.43% 3.50% 4.28% 5.14% 5.45% 5.91% 6.34% 4.00% 4.90% 5.87% 6.23% 6.76% 7.24% 4.50% 5.51% 6.61% 7.01% 7.60% 8.15% 5.00% 6.12% 7.34% 7.79% 8.45% 9.05% 5.50% 6.73% 8.08% 8.57% 9.29% 9.96% 6.00% 7.34% 8.81% 9.35% 10.14% 10.86% 6.50% 7.96% 9.54% 10.12% 10.98% 11.77% 7.00% 8.57% 10.28% 10.90% 11.82% 12.67% 7.50% 9.18% 11.01% 11.68% 12.67% 13.58% 8.00% 9.79% 11.75% 12.46% 13.51% 14.48%
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. 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., 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 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, 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, 1997, Federated managed 11 bond funds with approximately $2.1 billion in assets and 22 money market funds with approximately $10.9 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 tax-exempt 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 27 years' experience. As of December 31, 1997, Federated managed 29 equity funds totaling approximately $11.7 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, 1997, Federated managed 11 money market funds and 16 bond funds with assets approximating $17.1 billion and $5.6 billion, respectively. Federated's corporate bond decision making--based on intensive, diligent credit analysis--is backed by over 22 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 $200 billion. Government Funds In the government sector, as of December 31, 1997, Federated manages 9 mortgage- backed, 6 government/ agency and 18 government money market mutual funds, with assets approximating $5.9 billion, $1.5 billion and $35 billion, respectively. Federated trades approximately $400 million in U.S. government and mortgage- backed securities daily and places approximately $23 billion in repurchase agreements each day. Federated introduced the first U.S. government fund to invest in U.S. government bond securities in 1969. Federated has been a major force in the short- and intermediate-term government markets since 1982 and currently manages approximately $36 billion in government funds within these maturity ranges. 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, 1997, Federated managed more than $63.1 billion in assets across 51 money market funds, including 18 government, 11 prime and 22 municipal with assets approximating $35 billion, $17.1 billion and $10.9 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 $4 trillion to the more than 6,700 funds available, according to the Investment Company Institute. Federated distributes mutual funds through its subsidiaries for a variety of investment purposes. Specific markets include: FEDERATED CLIENTS OVERVIEW 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. Investment Ratings APPENDIX STANDARD & POOR'S SHORT-TERM MUNICIPAL OBLIGATION RATINGS A Standard & Poor's 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-1+, AA/A-1+, 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 rated 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. MOODY'S INVESTORS SERVICE, INC., SHORT-TERM MUNICIPAL OBLIGATION RATINGS Moody's Investor Service, Inc. 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 IBCA, 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. Addresses ARIZONA MUNICIPAL CASH TRUST Institutional Service Shares Federated Investors Funds 5800 Corporate Drive Pittsburgh, PA 15237-7000 Distributor Federated Securities Corp. Federated Investors Tower 1001 Liberty Avenue, Pittsburgh, PA 15222-3779 Investment Adviser Federated Management Federated Investors Tower 1001 Liberty Avenue, Pittsburgh, PA 15222-3779 Custodian State Street Bank and Trust Company P.O. Box 8600 Boston, MA 02266-8600 Transfer Agent and Dividend Disbursing Agent Federated Shareholder Services Company P.O. Box 8600 Boston, MA 02266-8600 Independent Public Accountants Arthur Andersen LLP 225 Franklin Street Boston, MA 02110-2812 California Municipal Cash Trust A Portfolio of Federated Municipal Trust INSTITUTIONAL SHARES A money market mutual fund seeking to provide current income exempt from federal regular income tax and the personal income taxes imposed by the state of California. 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.
Contents Risk/Return Summary 1 What are the Fund's Fees and Expenses? 2 What are the Fund's Investment Strategies? 3 What are the Principal Securities in Which the Fund Invests? 3 What are the Specific Risks of Investing in the Fund? 4 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 9 Report of Independent Public Accountants 23 December 31, 1998
Risk/Return Summary WHAT IS THE FUND'S INVESTMENT OBJECTIVE? The Fund is a money market fund which seeks to maintain a stable net asset value of $1.00. The Fund's investment objective is current income exempt from federal regular income tax and the personal income taxes imposed by the state of California consistent with stability of principal. 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 tax-exempt securities so that the Fund's annual interest income is exempt from federal regular income tax and California state income tax. Interest from the Fund's investments may be subject to the federal alternative minimum tax for individuals and corporations. WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND? Because the Fund may invest a significant portion of its assets in securities of a single issuer, an investment in the Fund may involve additional risks compared to a fully diversified money market 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] - See Appendix C-1 Historically, the Fund has maintained a constant $1.00 net asset value per share. The bar chart shows the variability of the Fund's Institutional Shares total returns on a yearly basis. The Fund's Institutional Shares are not sold subject to a sales charge (load). The total returns displayed above are based upon net asset value. The Fund's Institutional Shares year-to-date total return as of the most recent calendar quarter of September 30, 1998 was 2.42%. Within the period shown in the Chart, the Fund's Institutional Shares highest quarterly return was 0.90% (quarter ended June 30, 1997). Its lowest quarterly return was 0.79% (quarter ended March 31, 1997). The Fund's Institutional Shares Seven-Day Net Yield as of 12/31/97 was 3.70%. The following table represents the Fund's Institutional Shares Average Annual Total Return through 12/31/97. Calendar Period Fund 1 Year 3.47% Start of Performance1 3.45% 1 The Fund's Institutional Shares start of performance date was March 4, 1996. Investors may call the Fund at 1-800-341-7400 to acquire the Seven-Day Net Yield. 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? California MUNICIPAL CASH TRUST Fees and Expenses This table describes the fees and expenses that you may pay if you buy, hold and redeem shares of the Fund's Institutional Shares.
Shareholder Fees 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 a percentage of average net assets) Management Fee/2/............................................................................................... 0.50% Distribution (12b-1) Fee........................................................................................ None Shareholder Services Fee/3/..................................................................................... 0.25% Other Expenses.................................................................................................. 0.17% Total Annual Fund Operating Expenses............................................................................ 0.92%
1 Although not contractually obligated to do so, the adviser and shareholder services provider waived certain amounts. These are shown below along with the net expenses the Fund actually paid for the fiscal year ended October 31, 1998. Waiver of Fund Expenses....................................... 0.67% Total Actual Annual Operating Expenses (after waivers)........ 0.25% 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 0.08% for the year ended October 31, 1998. 3 The shareholder services fee has been voluntarily waived. This voluntary waiver can be terminated at any time. There was no shareholder services fee paid by the Fund (after the voluntary reduction) for the year ended October 31, 1998. Example The following Example is intended to help you compare the cost of investing in the Fund's Institutional Shares with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund's Institutional 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 Institutional Shares operating expenses are before waivers as shown above and remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be: 1 Year 3 Years 5 Years 10 Years Expenses assuming no redemption $94 $293 $509 $1,131 What are the Fund's Investment Strategies? The Fund invests in a portfolio of high-quality tax-exempt securities maturing in 13 months or less. The average maturity of the Fund's portfolio, computed on a dollar-weighted basis, will be 90 days or less. The Fund's Adviser performs a fundamental credit analysis to develop an approved list of issuers and securities that meet the Adviser's minimum credit standards. The Adviser targets an average portfolio maturity based upon its interest rate outlook and the tax-exempt securities available. The Adviser structures the portfolio by combining variable rate demand instruments and municipal notes. Depending on the supply of tax-exempt securities, the Adviser generally shortens the portfolio's maturity when it expects interest rates to rise and extends the maturity when it expects interest rates to fall. Temporary defensive Investments During adverse market conditions the Fund may temporarily depart from its principal investment strategies by investing in securities subject to federal regular income tax and California state income tax. Temporary investments will be of comparable quality to other securities in which the Fund invests. This may cause the Fund to give up greater investment returns to maintain the safety of principal. This also may cause the Fund to receive and distribute taxable income to investors. What are the Principal Securities in Which the Fund Invests? Tax-exempt securities Tax-exempt securities are fixed income securities that pay interest exempt from regular federal income taxes. States, counties, cities and other political subdivisions and authorities typically issue tax-exempt securities. Tax-exempt securities are generally differentiated by their source of repayment. Fixed Income securities Fixed income 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. Variable rate demand instruments Variable rate demand instruments are tax-exempt securities that require the issuer or a third party, such as a dealer or bank, to repurchase the security for its face value upon demand. The securities also bear interest at a variable rate intended to cause the securities to trade at their face value. The Fund treats demand instruments as short-term securities, even though their stated maturity may extend beyond 13 months. Municipal notes Municipal notes are short-term tax-exempt securities. Many municipalities issue such notes to fund their current operations before collecting taxes or other municipal revenues. Municipalities may also issue notes to fund capital projects prior to issuing long-term bonds. The issuers typically repay the notes at the end of their fiscal year, either with taxes, other revenues or proceeds from newly issued notes or bonds. Investment 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 rating services or be of comparable quality to securities having such ratings. Credit Enhancement Credit enhancement consists of an arrangement in which a company agrees to pay amounts due on a fixed income security if the issuer defaults. In some cases the company providing credit enhancement makes all payments directly to the security holders and receives reimbursement from the issuer. Normally, the credit enhancer has greater financial resources and liquidity than the issuer. For this reason, the Adviser usually evaluates the credit risk of a fixed income security based solely upon its credit enhancement. 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 tax-exempt money market fund are described below. Credit Risk Credit risk is the possibility that an issuer or a credit enhancer will default (fails to repay interest and principal when due). If an issuer or credit enhancer defaults, the Fund will lose money. Money market funds try to minimize this risk by purchasing higher quality securities. Many fixed income securities receive credit ratings from companies such as Standard & Poor's and Moody's Investor Services. Fixed income securities receive different credit ratings depending on the rating company's assessment of the likelihood of default by the issuer. The lower the credit rating, the greater the credit risk. If the security is unrated, greater reliance is placed on the Adviser's credit assessment. 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. Sector Risk Most of the Fund's securities will be invested in issuers located in California. In addition, a substantial part of the Fund's portfolio may be comprised of tax- exempt securities issued or credit enhanced by companies in similar businesses or with other similar characteristics. As a result, the Fund will be more susceptible to any economic, business, political, or other developments which generally affect these issuers. 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 determined net asset value (NAV). The Fund does not charge a sales charge. NAV is determined at 9:00 a.m. Pacific time (12:00 noon Eastern time), 10:00 a.m. Pacific time (1:00 p.m. Eastern time), and as of the end of regular trading (normally 1:00 p.m. Pacific time or 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 offers two share classes: Institutional Shares and Institutional Service Shares, each representing interests in a single portfolio of securities. This prospectus relates only to Institutional Shares. Each share class has different expenses, which affect their performance. Contact your investment professional or call 1-800-341-7400 for more information concerning the other class. The Fund's distributor markets the Shares described in this prospectus to institutions acting in an agency or fiduciary capacity or to individuals directly or through investment professionals. The Fund may not be a suitable investment for retirement plans or for non-California taxpayers because it invests in California tax-exempt securities. 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 10:00 a.m. Pacific time (1:00 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 12:00 noon Pacific time (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 on the day 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 CLEARINGHOUSE (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 1:00 p.m. Pacific time or 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 9:00 a.m. Pacific time (12:00 noon Eastern time) your redemption will be wired to you the same day. You will not receive that day's dividend. If you call after 9:00 a.m. Pacific time (12:00 noon 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 30 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 CONFIRMATIONS AND ACCOUNT STATEMENTS You will receive confirmation of purchases and redemptions (except for systematic transactions). In addition, 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 of 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, 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. It is anticipated that Fund distributions will be primarily dividends that are exempt from federal income tax, although a portion of the Fund's dividends may not be exempt. Dividends may be subject to state and local taxes, although the Fund's dividends will be exempt from California state personal income tax to the extent they are derived from interest on obligations exempt from California personal income taxes. Capital gains and non-exempt dividends are taxable whether paid in cash or reinvested in the Fund. 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 Management. 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 and/or provide administrative services to more than 300 mutual funds and private accounts, which totaled over $120 billion in assets as of December 31, 1997. Federated was established in 1955 and is one of the largest mutual fund investment managers in the United States with more than 2,000 employees. Over 4,000 investment professionals make Federated Funds available to their customers. Advisory Fees The Adviser receives an annual investment advisory fee of 0.50% 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 affect 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 the prospectus. Financial Highlights-Institutional Shares (For a share outstanding throughout each period) Reference is made to the Report of Independent Public Accountants on page 23.
Year Ended October 31 d1998 1997 1996/1/ Net Asset Value, Beginning of Period $ 1.00 $1.00 $1.00 Income from Investment Operations: Net investment income 0.03 0.03 0.02 Less Distributions: Distributions from net investment income (0.03) (0.03) (0.02) Net Asset Value, End of Period $ 1.00 $ 1.00 $ 1.00 Total Return2 3.31% 3.44% 2.24% Ratios to Average Net Assets: Expenses 0.25% 0.21% 0.20%/3/ Net investment income 3.25% 3.45% 3.33%/3/ Expense 0.67% 0.74% 0.90%/3/ waiver/reimbursement/4/ Supplemental Data: Net assets, end of period (000 omitted) $41,574 $41,956 $20,089
1 Reflects operations for the period from March 4, 1996 (date of initial public investment) to October 31, 1996. 2 Based on net asset value, which does not reflect the sales charge or contingent deferred sales charge, if applicable. 3 Computed on an annualized basis. 4 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 October 31, 1998
Principal Amount Value /1/ SHORT-TERM MUNICIPALS-99.6% California-95.9% $ 5,600,000 ABAG Finance Authority for Non-Profit Corporations, (Series 1998) Weekly VRDNs (The Harker School Foundation)/(U.S. Bank, NA, Minneapolis LOC) $ 5,600,000 15,705,000 ABN AMRO MuniTOPS Certificates Trust (California Non-AMT) Series 1998-10 Weekly VRDNs (San Diego, CA Water Utility Fund)/(FGIC INS)/(ABN AMRO Bank N.V., Amsterdam LIQ) 15,705,000 8,000,000 /2/California Community College Financing Authority, Trust Receipts (Series 1998 FR/RI-A24), 3.60% TOBs (FSA INS)/(Bank of New York, New York LIQ), Optional Tender 12/9/1998 8,000,000 13,495,000 California Educational Facilities Authority, PA-190 Weekly VRDNs (Stanford University)/(Merrill Lynch Capital Services, Inc. LIQ) 13,495,000 2,055,000 California HFA, Home Mortgage (Series 1989F), 3.55% TOBs (Citibank NA, New York LIQ), Optional Tender 2/1/1999 2,055,000 5,220,000 California HFA, PT-1037 Weekly VRDNs (Merrill Lynch Capital Services, Inc. LIQ) 5,220,000 14,995,000 /2/ California HFA, Variable Rate Certificates (Series 1998E), 3.25% TOBs (Bank of America NT and SA, San Francisco LIQ), Optional Tender 5/6/1999 14,995,000 2,000,000 California Public Capital Improvements Financing Authority, Trust Receipts (Series 1996 FR-3) Weekly VRDNs (MBIA INS)/(Bank of New York, New York LIQ) 2,000,000 4,840,000 California State, CDC Municipal Products, Inc. (Series 1996L) Weekly VRDNs (FGIC INS)/(CDC Municipal Products, Inc. LIQ) 4,840,000 8,000,000 California State, Tender Option Certificates (Series 1998A) Weekly VRDNs (MBIA INS)/(First National Bank of Chicago LIQ) 8,000,000 3,100,000 California Statewide Communities Development Authority, (Series A) Weekly VRDNs (Barton Memorial Hospital)/(Banque Nationale de Paris LOC) 3,100,000 14,000,000 California Transit Finance Authority, VRDB's (Series 1997) Weekly VRDNs (FSA INS)/(Credit Suisse First Boston LIQ) 14,000,000 5,560,000 Central Unified School District, CA, Certificates of Participation (1995 Financing Project) Weekly VRDNs (Union Bank of California LOC) 5,560,000 4,000,000 Clipper, CA Tax-Exempt Trust, (1996 Issue A) Weekly VRDNs (California Rural Home Mortgage Finance Authority)/(MBIA INS)/(State Street Bank and Trust Co. LIQ) 4,000,000 7,330,000 /2/ Clipper, CA Tax-Exempt Trust, 3.60% TOBs (California HFA)/(MBIA INS)/(State Street Bank and Trust Co. LIQ), Mandatory Tender 1/14/1999 7,330,000 8,000,000 /2/ Contra Costa County, CA, Trust Receipts (1998 A-27), 3.60% TOBs (Bank of New York, New York LIQ), Mandatory Tender 12/9/1998 8,000,000 8,000,000 Cupertino, CA Union School District, 3.90% TRANs, 6/30/1999 8,010,170 1,900,000 East Bay Municipal Utility District, CA, 3.15% CP (Westdeutsche Landesbank Girozentrale LIQ), Mandatory Tender 11/12/1998 1,900,000 1,500,000 East Bay Municipal Utility District, CA, 3.25% CP (Westdeutsche Landesbank Girozentrale LIQ), Mandatory Tender 1/14/1999 1,500,000 /1/ SHORT-TERM MUNICIPALS-continued California-continued $ 3,000,000 East Bay Municipal Utility District, CA, 3.25% CP (Westdeutsche Landesbank Girozentrale LIQ), Mandatory Tender 11/12/1998 $ 3,000,000 7,100,000 Glendale, CA, (Series 1984A) Monthly VRDNs (Reliance Development Company, Inc.)/(Barclays Bank PLC, London LOC) 7,100,000 700,000 Golden West Schools, CA Financing Authority, (Series A), 5.55% Bonds (MBIA INS), 2/1/1999 703,346 1,085,000 Golden West Schools, CA Financing Authority, (Series A), 5.55% Bonds (MBIA INS), 8/1/1999 1,099,596 8,500,000 Long Beach, CA, 4.00% TRANs, 10/5/1999 8,564,090 10,000,000 Los Angeles County, CA Metropolitan Transportation Authority, Municipal Securities Trust Receipts (Series 1998-CMC2) Weekly VRDNs (AMBAC INS)/(Chase Manhattan Corp. LIQ) 10,000,000 1,600,000 Los Angeles, CA Department of Water & Power, 9.00% Bonds, 1/15/1999 1,617,028 4,000,000 Los Angeles, CA Department of Water & Power, Electric Plant Short-Term Revenue Certificates, 3.25% CP (Bank of Nova Scotia, Toronto and Toronto-Dominion Bank LOCs), Mandatory Tender 11/10/1998 4,000,000 12,500,000 Los Angeles, CA Department of Water & Power, Trust Receipts (Series 1998 FR/RI-18) Weekly VRDNs (FGIC INS)/(Bank of New York, New York LIQ) 12,500,000 3,100,000 Los Angeles, CA Public Works Financing Authority, Trust Receipts (Series 1998 FR/RI-A47) Daily VRDNs (AMBAC INS)/(National Westminster Bank, PLC, London LIQ) 3,100,000 32,195,000 Monterey Peninsula, CA Water Management District, Trust Receipts (Series 1998 FR/RI-C7) Weekly VRDNs (Wastewater Reclaimation)/(Bank of America NT and SA, San Fransisco SWP) 32,195,000 3,000,000 Moreland, CA Elementary School District, 3.90% TRANs, 6/30/1999 3,003,814 2,100,000 Northern California Transmission Agency, Trust Receipts (Series 1998 FR/RI-16) Weekly VRDNs (California-Oregon Transmission Project)/(MBIA INS)/(Bank of New York, New York LIQ) 2,100,000 6,000,000 Oceanside, CA Community Development Commission, (Series 1985) Weekly VRDNs (Shadow Way Apartments)/(Bank One, Arizona N.A. LOC) 6,000,000 11,900,000 Orange County, CA Housing Authority, (Issue I of 1998) Weekly VRDNs (Oasis Martinique)/(Federal National Mortgage Association LOC) 11,900,000 7,100,000 Orange County, CA IDA, (Series 1991A) Weekly VRDNs (The Lakes)/(Chase Manhattan Bank N.A., New York LOC) 7,100,000 5,900,000 Orange County, CA Local Transportation Authority, Trust Receipts (Series 1998 FR/RI-A15) Weekly VRDNs (MBIA INS)/(Commerzbank AG, Frankfurt LIQ) 5,900,000 10,330,000 Oxnard Harbor District, CA, (Series 1995 II), PT-105, Weekly VRDNs (Asset Guaranty INS)/(Credit Suisse First Boston LIQ) 10,330,000 25,160,276 PBCC LeaseTOPS Trust (California Non-AMT) Series 1998-1 Weekly VRDNs (AMBAC INS)/(Pitney Bowes Credit Corp. LIQ) 25,160,276 4,500,000 Perris, CA Union High School District, 3.50% TRANs, 10/26/1999 4,522,324 /1/ SHORT-TERM MUNICIPALS-continued California-continued $12,266,838 Pitney Bowes Credit Corp. Leasetops Trust, Leasetops Certificates (Series 1996A) Weekly VRDNs (San Diego County, CA, Regional Communications System)/(Pitney Bowes Credit Corp. LIQ)/(Bayerische Landesbank Girozentrale LOC) $12,266,838 1,570,000 Placer County, CA Office of Education, 4.00% TRANs, 9/21/1999 1,578,413 6,000,000 Pleasanton, CA Unified School District, 3.90% TRANs, 6/30/1999 6,007,627 2,400,000 Redding, CA School District, 3.90% TRANs, 6/30/1999 2,403,051 8,000,000 Regents of University of California, (Series A), 3.30% CP (Bank of America NT and SA, San Francisco, Bank of Montreal, Caisse Nationale De Credit Agricole, Paris, Canadian Imperial Bank of Commerce, Toronto and Societe Generale, Paris LIQs), Mandatory Tender 11/10/1998 8,000,000 3,455,000 Riverside, CA, Municipal Securities Trust Receipts (Series 1998-CMC5) Weekly VRDNs (AMBAC INS)/(Chase Manhattan Corp. LIQ) 3,455,000 3,510,000 Roseville, CA Joint Union High School District, 4.00% TRANs, 9/21/1999 3,528,808 850,000 Roseville, CA, Hospital Facilities Authority, (Series 1989A) Weekly VRDNs (Toronto-Dominion Bank LOC) 850,000 19,000,000 San Diego, CA Area Local Governments, Trust Receipts (Series FR/RI-A25) Weekly VRDNs (Bank of New York, New York LIQ) 19,000,000 3,175,000 San Francisco, CA Redevelopment Finance Agency, (PT-125) Weekly VRDNs (Northridge Cooperative Homes)/(MBIA INS)/(Merrill Lynch Capital Services, Inc. LIQ) 3,175,000 16,500,000 San Francisco, CA Redevelopment Finance Agency, (Series B1) Weekly VRDNs (Fillmore Center)/(Bank of Nova Scotia, Toronto LOC) 16,500,000 4,065,000 San Francisco, CA Redevelopment Finance Agency, CDC Municipal Products, Inc. (Series 1997T) Weekly VRDNs (Northridge Cooperative Homes)/(MBIA INS)/(CDC Municipal Products, Inc. LIQ) 4,065,000 2,000,000 San Francisco, CA Unified School District, 4.50% TRANs, 9/22/1999 2,019,060 2,500,000 Sanger, CA Unified School District, 4.00% TRANs, 1/27/1999 2,502,878 400,000 Santa Clara, CA, (Series 1985C) Weekly VRDNs (Santa Clara, CA Electric System)/(National Westminster Bank, PLC, London LOC) 400,000 6,000,000 Stanislaus County, CA Office of Education, 4.50% TRANs, 7/30/1999 6,036,450 325,000 Stockton, CA, (Series 1993) Weekly VRDNs (La Quinta Inns, Inc.)/ (Nationsbank, N.A., Charlotte LOC) 325,000 1,000,000 Vallejo, CA Unified School District, 7.60% Bonds (FGIC INS), 8/1/1999 1,034,426 1,930,000 Western Placer, CA Unified School District, 4.00% TRANs, 9/21/1999 1,940,342 Total 388,293,537 Puerto Rico-3.7% 4,000,000 /2/ Commonwealth of Puerto Rico, (Series 1992A) P-Floats PT-140, 3.65% TOBs (FSA INS)/(Commerzbank AG, Frankfurt LIQ), Mandatory Tender 1/14/1999 4,000,000 9,750,000 Commonwealth of Puerto Rico, Floating Rate Trust Receipts (Series 1997) Weekly VRDNs (Commerzbank AG, Frankfurt LIQ)/(Commerzbank AG, Frankfurt LOC) 9,750,000 /1/ SHORT-TERM MUNICIPALS-continued Puerto Rico-continued $ 1,115,000 Puerto Rico Industrial, Medical & Environmental PCA, (1983 Series A), 4.00% TOBs (Merck & Co., Inc.), Optional Tender 12/1/1998 $ 1,115,178 Total 14,865,178 /3/ Total Investments (at amortized cost) $403,158,715
1 The Fund may only invest in securities rated in one of the two highest short- term rating categories by nationally recognized statistical rating organizations ("NRSROs") or unrated securities of comparable quality. 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, MIG-1, or MIG-2 by Moody's Investors Service, Inc., or F-1+, F-1, or F-2 by Fitch IBCA, Inc. are all considered rated in one of the two highest short- term rating categories. Securities rated in the highest short-term rating category (and unrated securities of comparable quality) are identified as First Tier securities. Securities rated in the second highest short-term rating category (and unrated securities of comparable quality) are identified as Second Tier securities. The Fund follows applicable regulations in determining whether a security is rated and whether a security rated by multiple NRSROs in different rating categories should be identified as a First or Second Tier security. At October 31, 1998, the portfolio securities were rated as follows: Tier Rating Based on Total Market Value (Unaudited) First Tier Second Tier 100.00% 0.00% 2 Denotes a restricted security which is subject to restrictions on resale under Federal Securities laws. At October 31, 1998, these securities amounted to $42,325,000 which represents 10.4% of net assets. 3 Also represents cost for federal tax purposes. Note: The categories of investments are shown as a percentage of net assets ($404,776,382) at October 31, 1998. The following acronyms are used throughout this portfolio: AMBAC -American Municipal Bond Assurance Corporation AMT -Alternative Minimum Tax CP -Commercial Paper FGIC -Financial Guaranty Insurance Company FSA -Financial Security Assurance HFA -Housing Finance Authority IDA -Industrial Development Authority INS -Insured LIQ -Liquidity Agreement LOCs -Letter(s) of Credit LOC -Letter of Credit MBIA -Municipal Bond Investors Assurance PCA -Pollution Control Authority PLC -Public Limited Company SA -Support Agreement TOBs -Tender Option Bonds TRANs -Tax and Revenue Anticipation Notes VRDB -Variable Rate Demand Bond VRDNs -Variable Rate Demand Notes See Notes which are an integral part of the Financial Statements Statement of Assets and Liabilities October 31, 1998 Assets: Total investments in securities, at amortized cost and value $ 403,158,715 Cash 273,872 Income receivable 2,919,735 Receivable for shares sold 2,815 Total assets 406,355,137 Liabilities: Payable for shares redeemed $ 1,023,729 Income distribution payable 411,217 Accrued expenses 143,809 Total liabilities 1,578,755 Net Assets for 404,776,382 shares outstanding $ 404,776,382 Net Asset Value, Offering Price and Redemption Proceeds Per Share: Institutional Service Shares: $363,202,187 / 363,202,187 shares outstanding $1.00 Institutional Shares: $41,574,195 / 41,574,195 shares outstanding $1.00
See Notes which are an integral part of the Financial Statements Statement of Operations Year Ended October 31, 1998 Investment Income: Interest $ 12,277,274 Expenses: Investment advisory fee $ 1,757,809 Administrative personnel and services fee 265,101 Custodian fees 5,993 Transfer and dividend disbursing agent fees and expenses 132,557 Directors'/Trustees' fees 3,032 Auditing fees 12,692 Legal fees 16,004 Portfolio accounting fee 88,219 Shareholder services fee-Institutional Service Shares 774,950 Shareholder services fee-Institutional Shares 103,682 Share registration costs 55,187 Printing and postage 25,298 Insurance premiums 27,166 Miscellaneous 2,094 Total expenses 3,269,784 Waivers: Waiver of investment advisory fee $ (1,496,779) Waiver of shareholder services fee-Institutional Shares (103,682) Total waivers (1,600,461) Net expenses 1,669,323 Net investment income $ 10,607,951
See Notes which are an integral part of the Financial Statements Statement of Changes in Net Assets
Year Ended October 31 1998 1997 Increase (Decrease) in Net Assets: Operations: Net investment income $ 10,607,951 $ 6,655,913 Distributions to Shareholders: Distributions from net investment income: Institutional Service Shares (9,261,806) (5,624,269) Institutional Shares (1,346,145) (1,031,644) Change in net assets resulting from distributions to shareholders (10,607,951) (6,655,913) Share Transactions: Proceeds from sale of shares 1,401,854,420 905,107,252 Net asset value of shares issued to shareholders in payment of distributions declared 5,742,314 3,335,040 Cost of shares redeemed (1,279,540,519) (783,969,559) Change in net assets resulting from share transactions 128,056,215 124,472,733 Change in net assets 128,056,215 124,472,733 Net Assets: Beginning of period 276,720,167 152,247,434 End of period $ 404,776,382 $ 276,720,167
See Notes which are an integral part of the Financial Statements Notes to Financial Statements October 31, 1998 Organization Federated Municipal Trust (the "Trust") is registered under the Investment Company Act of 1940, as amended (the "Act") as an open-end, management investment company. The Trust consists of 17 portfolios. The financial statements included herein are only those of California Municipal Cash Trust (the "Fund"). The financial statements of the other portfolios are presented separately. The assets of each portfolio are segregated and a shareholder's interest is limited to the portfolio in which shares are held. The Fund offers two classes of shares: Institutional Service Shares and Institutional Shares. The investment objective of the Fund is current income exempt from federal income tax and the personal income taxes imposed by the State of California consistent with stability of principal. 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. 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. Restricted Securities Restricted securities are securities that may only be resold upon registration under federal securities laws or in transactions exempt from such registration. Many restricted securities may be resold in the secondary market in transactions exempt from registration. In some cases, the restricted securities may be resold without registration upon exercise of a demand feature. Such restricted securities may be determined to be liquid under criteria established by the Board of Trustees. The Fund will not incur any registration costs upon such resales. Restricted securities are valued at amortized cost in accordance with Rule 2a-7 under the Investment Company Act of 1940. Additional information on each restricted security held at October 31, 1998 is as follows:
Security Acquisition Date Acquisition Cost California Community College Financing 7/8/1998 8,000,000 California HFA, Variable Rate Certificate 9/25/1998 14,995,000 Clipper, CA Tax-Exempt Trust, 3.60% 6/24/1998 7,330,000 Commonwealth of Puerto Rico 2/4/1998-2/12/1998 4,000,000 Contra Costa County, CA Trust Receipts 7/1/1998 8,000,000
Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts of assets, liabilities, expenses and revenues reported in the financial statements. Actual results could differ from those estimated. Other Investment transactions are accounted for on the trade date. Shares of Beneficial Interest The Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest (without par value) for each class of shares.
Transactions in shares were as follows: Year Ended October 31 1998 1997 Institutional Shares: Shares sold 117,311,375 95,368,952 Shares issued to shareholders in payment of distributions declared 11,638 62,298 Shares redeemed (117,704,612) (73,564,054) Net change resulting from Institutional share transactions (381,599) 21,867,196 Year Ended October 31 1998 1997 Institutional Service Shares: Shares sold 1,284,543,045 809,738,300 Shares issued to shareholders in payment of distributions declared 5,730,676 3,272,742 Shares redeemed (1,161,835,907) (710,405,505) Net change resulting from Institutional Service share transactions 128,437,814 102,605,537 Net change resulting from share transactions 128,056,215 124,472,733
At October 31, 1998, capital paid-in aggregated $404,776,382. Investment Advisory Fee and Other Transactions with Affiliates Investment Advisory Fee Federated Management, the Fund's investment adviser (the "Adviser"), receives for its services an annual investment advisory fee equal to 0.50% 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 ("FSS"), the Fund will pay FSS up to 0.25% of average daily net assets of the Fund for the period. The fee paid to FSS is used to finance certain services for shareholders and to maintain shareholder accounts. FSS may voluntarily choose to waive any portion of its fee. FSS can modify or terminate this voluntary waiver at any time at its sole discretion. Transfer and Dividend Disbursing Agent Fees and Expenses FServ, through its subsidiary, Federated Shareholder Services Company ("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. Interfund Transactions During the period ended October 31, 1998, the Fund engaged in purchase and sale transactions with funds that have a common investment adviser (or affiliated investment advisers), common Directors/Trustees, and/or common Officers. These purchases and sale transactions were made at current market value pursuant to Rule 17a-7 under the Act amounting to $550,207,000 and $499,025,000, respectively. General Certain of the Officers and Trustees of the Trust are Officers and Directors or Trustees of the above companies. Concentration of Credit Risk Since the Fund invests a substantial portion of its assets in issuers located in one state, it will be more susceptible to factors adversely affecting issuers of that state than would be a comparable tax-exempt mutual fund that invests nationally. In order to reduce the credit risk associated with such factors, at October 31, 1998, 59% of the securities in the portfolio of investments are backed by letters of credit or bond insurance of various financial institutions and financial guaranty assurance agencies. The percentage of investments insured by or supported (backed) by a letter of credit from any one institution or agency did not exceed 10.3% of total investments. 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 BOARD OF TRUSTEES OF FEDERATED MUNICIPAL TRUST AND SHAREHOLDERS OF CALIFORNIA MUNICIPAL CASH TRUST: We have audited the accompanying statements of assets and liabilities of California Municipal Cash Trust (an investment portfolio of Federated Municipal Trust, a Massachusetts business trust), including the schedule of portfolio investments, as of October 31, 1998, the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for the periods presented. These financial statements and financial highlights are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the 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 October 31, 1998, by correspondence with the custodian. 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 California Municipal Cash Trust (an investment portfolio of Federated Municipal Trust) as of October 31, 1998, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and its financial highlights for the periods presented, in conformity with generally accepted accounting principles. Arthur Andersen LLP Boston, Massachusetts December 23, 1998 [LOGO OF FEDERATED] California Municipal Cash Trust A Portfolio of Federated Municipal Trust INSTITUTIONAL SHARES A Statement of Additional Information (SAI) dated December 31, 1998, is incorporated by reference into this prospectus. To obtain the SAI and 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. [LOGO OF FEDERATED] Investment Company Act File No. 811-5911 Cusip 314229675 G00300-01-IS (12/98) [RECYCLED PAPER LOGO] December 31, 1998 PROSPECTUS CALIFORNIA MUNICIPAL CASH TRUST A Portfolio of Federated Municipal Trust INSTITUTIONAL SERVICE SHARES A money market mutual fund seeking to provide current income exempt from federal regular income tax and the personal income taxes imposed by the state of California. 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. 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? 6 How to Purchase Shares 6 How to Redeem Shares 7 Account and Share Information 9 Who Manages the Fund? 10 Financial Information 11 Report of Independent Public Accountants 24 DECEMBER 31, 1998 Risk/Return Summary WHAT IS THE FUND'S INVESTMENT OBJECTIVE? The Fund is a money market fund which seeks to maintain a stable net asset value of $1.00. The Fund's investment objective is current income exempt from federal regular income tax and the personal income taxes imposed by the state of California consistent with stability of principal. 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 tax-exempt securities so that the Fund's annual interest income is exempt from federal regular income tax and California state income tax. Interest from the Fund's investments may be subject to the federal alternative minimum tax for individuals and corporations. WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND? Because the Fund may invest a significant portion of its assets in securities of a single issuer, an investment in the Fund may involve additional risks compared to a fully diversified money market 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] - See Appendix C-2 Historically, the Fund has maintained a constant $1.00 net asset value per share. The bar chart shows the variability of the Fund's Institutional Service Shares total returns on a yearly basis. The Fund's Institutional Service Shares are not sold subject to a sales charge (load). The total returns displayed above are based upon net asset value. The Fund's Institutional Service Shares year to-date-total return as of the most recent calendar quarter of September 30, 1998 was 2.23%. Within the period shown in the Chart, the Fund's highest quarterly return was 1.35% (quarter ended June 30, 1990). Its lowest quarterly return was 0.44% (quarters ended March 31, 1993 and March 31, 1994). The Fund's Institutional Service Shares Seven-Day Net Yield as of 12/31/97 was 3.45%. The following table represents the Fund's Institutional Service Shares Average Annual Total Return through 12/31/97. Calendar Period Fund 1 Year 3.21% 5 Years 2.82% Start of Performance/1/ 3.44% 1 The Fund's Institutional Service Shares start of performance date was April 3, 1989. Investors may call the Fund at 1-800-341-7400 to acquire the Seven- Day Net Yield. 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? CALIFORNIA MUNICIPAL CASH TRUST FEES AND EXPENSES This table describes the fees and expenses that you may pay if you buy, hold and redeem shares of the Fund's Institutional Service Shares.
Shareholder Fees 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 a percentage of average net assets) Management Fee2 0.50% Distribution (12b-1) Fee None Shareholder Services Fee 0.25% Other Expenses 0.18% Total Annual Fund Operating Expenses 0.93% 1 Although not contractually obligated to do so, the adviser waived certain amounts. This is shown below along with the net expenses the Fund actually paid for the fiscal year ended October 31, 1998. Waiver of Fund Expenses 0.43% Total Actual Annual Fund Operating Expenses (after waivers) 0.50% 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 voluntary waiver) was 0.07% for the year ended October 31, 1998.
EXAMPLE The following Example is intended to help you compare the cost of investing in the Fund's Institutional Service Shares with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund's Institutional Service 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 Institutional Service Shares operating expenses are before waivers as shown above and remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be: 1 Year 3 Years 5 Years 10 Years Expenses assuming no redemption $95 $296 $515 $1,143 What are the Fund's Investment Strategies? The Fund invests in a portfolio of high-quality tax- exempt securities maturing in 13 months or less. The average maturity of the Fund's portfolio, computed on a dollar-weighted basis, will be 90 days or less. The Fund's Adviser performs a fundamental credit analysis to develop an approved list of issuers and securities that meet the Adviser's minimum credit standards. The Adviser targets an average portfolio maturity based upon its interest rate outlook and the tax-exempt securities available. The Adviser structures the portfolio by combining variable rate demand instruments and municipal notes. Depending on the supply of tax-exempt securities, the Adviser generally shortens the portfolio's maturity when it expects interest rates to rise and extends the maturity when it expects interest rates to fall. TEMPORARY DEFENSIVE INVESTMENTS During adverse market conditions the Fund may temporarily depart from its principal investment strategies by investing in securities subject to federal regular income tax and California state income tax. Temporary investments will be of comparable quality to other securities in which the Fund invests. This may cause the Fund to give up greater investment returns to maintain the safety of principal. This also may cause the Fund to receive and distribute taxable income to investors. What are the Principal Securities in Which the Fund Invests? TAX-EXEMPT SECURITIES Tax-exempt securities are fixed income securities that pay interest exempt from regular federal income taxes. States, counties, cities and other political subdivisions and authorities typically issue tax-exempt securities. Tax-exempt securities are generally differentiated by their source of repayment. FIXED INCOME SECURITIES Fixed income 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. VARIABLE RATE DEMAND INSTRUMENTS Variable rate demand instruments are tax-exempt securities that require the issuer or a third party, such as a dealer or bank, to repurchase the security for its face value upon demand. The securities also bear interest at a variable rate intended to cause the securities to trade at their face value. The Fund treats demand instruments as short-term securities, even though their stated maturity may extend beyond 13 months. MUNICIPAL NOTES Municipal notes are short-term tax-exempt securities. Many municipalities issue such notes to fund their current operations before collecting taxes or other municipal revenues. Municipalities may also issue notes to fund capital projects prior to issuing long-term bonds. The issuers typically repay the notes at the end of their fiscal year, either with taxes, other revenues or proceeds from newly issued notes or bonds. INVESTMENT 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 rating services or be of comparable quality to securities having such ratings. CREDIT ENHANCEMENT Credit enhancement consists of an arrangement in which a company agrees to pay amounts due on a fixed income security if the issuer defaults. In some cases the company providing credit enhancement makes all payments directly to the security holders and receives reimbursement from the issuer. Normally, the credit enhancer has greater financial resources and liquidity than the issuer. For this reason, the Adviser usually evaluates the credit risk of a fixed income security based solely upon its credit enhancement. What are the Specific Risks of Investing in the Fund? Although there are many factors which may affect an investment in the Fund, the principal risks of investing in a tax-exempt money market fund are described below. CREDIT RISK Credit risk is the possibility that an issuer or a credit enhancer will default (fails to repay interest and principal when due). If an issuer or credit enhancer defaults, the Fund will lose money. Money market funds try to minimize this risk by purchasing higher quality securities. Many fixed income securities receive credit ratings from companies such as Standard & Poor's and Moody's Investor Services. Fixed income securities receive different credit ratings depending on the rating company's assessment of the likelihood of default by the issuer. The lower the credit rating, the greater the credit risk. If the security is unrated, greater reliance is placed on the Adviser's credit assessment. 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. SECTOR RISK Most of the Fund's securities will be invested in issuers located in California. In addition, a substantial part of the Fund's portfolio may be comprised of tax- exempt securities issued or credit enhanced by companies in similar businesses or with other similar characteristics. As a result, the Fund will be more susceptible to any economic, business, political, or other developments which generally affect these issuers. 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 determined net asset value (NAV). The Fund does not charge a sales charge. NAV is determined at 9:00 a.m. Pacific time (12:00 noon Eastern time), 10:00 a.m. Pacific time (1:00 p.m. Eastern time), and as of the end of regular trading (normally 1:00 p.m. Pacific time or 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 offers two share classes: Institutional Shares and Institutional Service Shares, each representing interests in a single portfolio of securities. This prospectus relates only to Institutional Service Shares. Each share class has different expenses, which affect their performance. Contact your investment professional or call 1-800-341-7400 for more information concerning the other class. The Fund's Distributor markets the Shares described in this prospectus to institutions acting in an agency or fiduciary capacity or to individuals directly or through investment professionals. The Fund may not be a suitable investment for retirement plans or for non-California taxpayers because it invests in California tax-exempt securities. 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 10:00 a.m. Pacific time (1:00 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 12:00 noon Pacific time (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 on the day 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 SYSTEMATIC INVESTMENT PROGRAM Once you have opened an account, you may automatically purchase additional Shares on a regular basis by completing the Systematic Investment Program (SIP) section of the New Account Form or by contacting the Fund or your investment professional. The minimum investment amount for SIPs is $50. BY AUTOMATED CLEARINGHOUSE (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 1:00 p.m. Pacific time or 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 9:00 a.m. Pacific time (12:00 noon Eastern time) your redemption will be wired to you the same day. You will not receive that day's dividend. If you call after 9:00 a.m. Pacific time (12:00 noon Eastern time) your redemption will be wired to you the following business day. You will receive that day's dividend. Under limited circumstances, arrangements may be made with the Distributor for same-day payment of redemption proceeds, without that day's dividend, for redemption requests received before 11:00 a.m. Pacific time (2:00 p.m. Eastern time). 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 30 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. SYSTEMATIC WITHDRAWAL PROGRAM You may automatically redeem Shares in a minimum amount of $100 on a regular basis. Complete the appropriate section of the New Account Form or an Account Service Options Form or contact your investment professional or the Fund. Your account value must meet the minimum initial investment amount at the time the program is established. This program may reduce, and eventually deplete, your account. Payments should not be considered yield or income. CHECKWRITING You may request checks to redeem your Fund Shares. Your account will continue to receive the daily dividend declared on the Shares being redeemed until a check is presented for payment. DEBIT CARD You may request a debit card account that allows you to redeem Shares. There is an annual fee for this service that the Fund will automatically deduct from your account. 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 CONFIRMATIONS AND ACCOUNT STATEMENTS You will receive confirmation of purchases and redemptions (except for systematic transactions). In addition, you will receive periodic statements reporting all account activity, including systematic transactions, 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, 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. It is anticipated that Fund distributions will be primarily dividends that are exempt from federal income tax, although a portion of the Fund's dividends may not be exempt. Dividends may be subject to state and local taxes, although the Fund's dividends will be exempt from California state personal income tax to the extent they are derived from interest on obligations exempt from California personal income taxes. Capital gains and non-exempt dividends are taxable whether paid in cash or reinvested in the Fund. 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 Management. 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 and/or provide administrative services to more than 300 mutual funds and private accounts, which totaled over $120 billion in assets as of December 31, 1997. Federated was established in 1955 and is one of the largest mutual fund investment managers in the United States with more than 2,000 employees. Over 4,000 investment professionals make Federated Funds available to their customers. ADVISORY FEES The Adviser receives an annual investment advisory fee of 0.50% 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 affect 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 had been audited by Arthur Andersen LLP, whose report, along with the Fund's audited financial statements, is included in this prospectus. Financial Highlights--Institutional Service Shares (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD) Reference is made to the Report of Independent Public Accountants on page 24.
Year Ended October 31 1998 1997 1996 1995 19941 Net Asset Value, Beginning of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 Income from Investment Operations: Net investment income 0.03 0.03 0.03 0.03 0.002 Net realized loss on investment -- -- -- (0.01) -- TOTAL FROM INVESTMENT OPERATIONS 0.03 0.03 0.03 0.02 0.002 Capital Contributions -- -- -- 0.01 -- Less Distributions: Distributions from net investment income (0.03) (0.03) (0.03) (0.03) (0.002) Net Asset Value, End of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 Total Return2 3.05% 3.19% 3.22% 3.37% 0.23% Ratios to Average Net Assets: Expenses 0.50% 0.46% 0.49% 0.59% 0.59%3 Net investment income 2.99% 3.13% 3.17% 3.33% 2.71%3 Expense waiver/reimbursement4 0.43% 0.49% 0.62% 0.50% 0.44%3 Supplemental Data: Net assets, end of period (000 omitted) $363,202 $234,764 $132,159 $96,534 $81,563
1 For the one month ended October 31, 1994. The Fund changed its fiscal year- end from September 30, to October 31, beginning September 30, 1994. 2 Based on net asset value, which does not reflect the sales charge or contingent deferred sales charge, if applicable. 3 Computed on an annualized basis. 4 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 OCTOBER 31, 1998
Principal Value Amount - --------------------------------------------------------------------------------------------------------------------- 1SHORT-TERM MUNICIPALS--99.6% - --------------------------------------------------------------------------------------------------------------------- California--95.9% - --------------------------------------------------------------------------------------------------------------------- $ 5,600,000 ABAG Finance Authority for Non-Profit Corporations, (Series 1998) Weekly VRDNs $ 5,600,000 (The Harker School Foundation)/(U.S. Bank, NA, Minneapolis LOC) - --------------------------------------------------------------------------------------------------------------------- 15,705,000 ABN AMRO MuniTOPS Certificates Trust (California Non-AMT) Series 1998-10 15,705,000 Weekly VRDNs (San Diego, CA Water Utility Fund)/(FGIC INS)/(ABN AMRO Bank N.V., Amsterdam LIQ) - --------------------------------------------------------------------------------------------------------------------- 8,000,000 /2/California Community College Financing Authority, Trust Receipts (Series 1998 8,000,000 FR/RI-A24), 3.60% TOBs (FSA INS)/(Bank of New York, New York LIQ), Optional Tender 12/9/1998 - --------------------------------------------------------------------------------------------------------------------- 13,495,000 California Educational Facilities Authority, PA-190 Weekly VRDNs (Stanford 13,495,000 University)/(Merrill Lynch Capital Services, Inc. LIQ) - --------------------------------------------------------------------------------------------------------------------- 2,055,000 California HFA, Home Mortgage (Series 1989F), 3.55% TOBs (Citibank NA, New 2,055,000 York LIQ), Optional Tender 2/1/1999 - --------------------------------------------------------------------------------------------------------------------- 5,220,000 California HFA, PT-1037 Weekly VRDNs (Merrill Lynch Capital Services, Inc. LIQ) 5,220,000 - --------------------------------------------------------------------------------------------------------------------- 14,995,000 /2/California HFA, Variable Rate Certificates (Series 1998E), 3.25% TOBs (Bank 14,995,000 of America NT and SA, San Francisco LIQ), Optional Tender 5/6/1999 - --------------------------------------------------------------------------------------------------------------------- 2,000,000 California Public Capital Improvements Financing Authority, Trust Receipts 2,000,000 (Series 1996 FR-3) Weekly VRDNs (MBIA INS)/(Bank of New York, New York LIQ) - --------------------------------------------------------------------------------------------------------------------- 4,840,000 California State, CDC Municipal Products, Inc. (Series 1996L) Weekly VRDNs 4,840,000 (FGIC INS)/(CDC Municipal Products, Inc. LIQ) - --------------------------------------------------------------------------------------------------------------------- 8,000,000 California State, Tender Option Certificates (Series 1998A) Weekly VRDNs (MBIA 8,000,000 INS)/(First National Bank of Chicago LIQ) - --------------------------------------------------------------------------------------------------------------------- 3,100,000 California Statewide Communities Development Authority, (Series A) Weekly 3,100,000 VRDNs (Barton Memorial Hospital)/(Banque Nationale de Paris LOC) - --------------------------------------------------------------------------------------------------------------------- 14,000,000 California Transit Finance Authority, VRDB's (Series 1997) Weekly VRDNs (FSA 14,000,000 INS)/ (Credit Suisse First Boston LIQ) - --------------------------------------------------------------------------------------------------------------------- 5,560,000 Central Unified School District, CA, Certificates of Participation (1995 5,560,000 Financing Project) Weekly VRDNs (Union Bank of California LOC) - --------------------------------------------------------------------------------------------------------------------- 4,000,000 Clipper, CA Tax-Exempt Trust, (1996 Issue A) Weekly VRDNs (California Rural 4,000,000 Home Mortgage Finance Authority)/(MBIA INS)/(State Street Bank and Trust Co. LIQ) - --------------------------------------------------------------------------------------------------------------------- 7,330,000 /2/Clipper, CA Tax-Exempt Trust, 3.60% TOBs (California HFA)/(MBIA INS)/(State 7,330,000 Street Bank and Trust Co. LIQ), Mandatory Tender 1/14/1999 - --------------------------------------------------------------------------------------------------------------------- 8,000,000 /2/Contra Costa County, CA, Trust Receipts (1998 A-27), 3.60% TOBs (Bank of New 8,000,000 York, New York LIQ), Mandatory Tender 12/9/1998 - --------------------------------------------------------------------------------------------------------------------- 8,000,000 Cupertino, CA Union School District, 3.90% TRANs, 6/30/1999 8,010,170 - --------------------------------------------------------------------------------------------------------------------- 1,900,000 East Bay Municipal Utility District, CA, 3.15% CP (Westdeutsche Landesbank 1,900,000 Girozentrale LIQ), Mandatory Tender 11/12/1998 - --------------------------------------------------------------------------------------------------------------------- 1,500,000 East Bay Municipal Utility District, CA, 3.25% CP (Westdeutsche Landesbank 1,500,000 Girozentrale LIQ), Mandatory Tender 1/14/1999 - --------------------------------------------------------------------------------------------------------------------- $ 3,000,000 East Bay Municipal Utility District, CA, 3.25% CP (Westdeutsche Landesbank $ 3,000,000 Girozentrale LIQ), Mandatory Tender 11/12/1998 - --------------------------------------------------------------------------------------------------------------------- 7,100,000 Glendale, CA, (Series 1984A) Monthly VRDNs (Reliance Development Company, 7,100,000 Inc.)/ (Barclays Bank PLC, London LOC) - --------------------------------------------------------------------------------------------------------------------- 700,000 Golden West Schools, CA Financing Authority, (Series A), 5.55% Bonds (MBIA 703,346 INS), 2/1/1999 - --------------------------------------------------------------------------------------------------------------------- 1,085,000 Golden West Schools, CA Financing Authority, (Series A), 5.55% Bonds (MBIA 1,099,596 INS), 8/1/1999 - --------------------------------------------------------------------------------------------------------------------- 8,500,000 Long Beach, CA, 4.00% TRANs, 10/5/1999 8,564,090 - --------------------------------------------------------------------------------------------------------------------- 10,000,000 Los Angeles County, CA Metropolitan Transportation Authority, Municipal 10,000,000 Securities Trust Receipts (Series 1998-CMC2) Weekly VRDNs (AMBAC INS)/(Chase Manhattan Corp. LIQ) - --------------------------------------------------------------------------------------------------------------------- 1,600,000 Los Angeles, CA Department of Water & Power, 9.00% Bonds, 1/15/1999 1,617,028 - --------------------------------------------------------------------------------------------------------------------- 4,000,000 Los Angeles, CA Department of Water & Power, Electric Plant Short-Term Revenue 4,000,000 Certificates, 3.25% CP (Bank of Nova Scotia, Toronto and Toronto-Dominion Bank LOCs), Mandatory Tender 11/10/1998 - --------------------------------------------------------------------------------------------------------------------- 12,500,000 Los Angeles, CA Department of Water & Power, Trust Receipts (Series 1998 12,500,000 FR/RI-18) Weekly VRDNs (FGIC INS)/(Bank of New York, New York LIQ) - --------------------------------------------------------------------------------------------------------------------- 3,100,000 Los Angeles, CA Public Works Financing Authority, Trust Receipts (Series 1998 3,100,000 FR/RI-A47) Daily VRDNs (AMBAC INS)/(National Westminster Bank, PLC, London LIQ) - --------------------------------------------------------------------------------------------------------------------- 32,195,000 Monterey Peninsula, CA Water Management District, Trust Receipts (Series 1998 32,195,000 FR/RI-C7) Weekly VRDNs (Wastewater Reclaimation)/(Bank of America NT and SA, San Fransisco SWP) - --------------------------------------------------------------------------------------------------------------------- 3,000,000 Moreland, CA Elementary School District, 3.90% TRANs, 6/30/1999 3,003,814 - --------------------------------------------------------------------------------------------------------------------- 2,100,000 Northern California Transmission Agency, Trust Receipts (Series 1998 FR/RI-16) 2,100,000 Weekly VRDNs (California-Oregon Transmission Project)/(MBIA INS)/(Bank of New York, New York LIQ) - --------------------------------------------------------------------------------------------------------------------- 6,000,000 Oceanside, CA Community Development Commission, (Series 1985) Weekly VRDNs 6,000,000 (Shadow Way Apartments)/(Bank One, Arizona N.A. LOC) - --------------------------------------------------------------------------------------------------------------------- 11,900,000 Orange County, CA Housing Authority, (Issue I of 1998) Weekly VRDNs (Oasis 11,900,000 Martinique)/(Federal National Mortgage Association LOC) - --------------------------------------------------------------------------------------------------------------------- 7,100,000 Orange County, CA IDA, (Series 1991A) Weekly VRDNs (The Lakes)/(Chase 7,100,000 Manhattan Bank N.A., New York LOC) - --------------------------------------------------------------------------------------------------------------------- 5,900,000 Orange County, CA Local Transportation Authority, Trust Receipts (Series 1998 5,900,000 FR/RI-A15) Weekly VRDNs (MBIA INS)/(Commerzbank AG, Frankfurt LIQ) - --------------------------------------------------------------------------------------------------------------------- 10,330,000 Oxnard Harbor District, CA, (Series 1995 II), PT-105, Weekly VRDNs (Asset 10,330,000 Guaranty INS)/(Credit Suisse First Boston LIQ) - --------------------------------------------------------------------------------------------------------------------- 25,160,276 PBCC LeaseTOPS Trust (California Non-AMT) Series 1998-1 Weekly VRDNs (AMBAC 25,160,276 INS)/(Pitney Bowes Credit Corp. LIQ) - --------------------------------------------------------------------------------------------------------------------- 4,500,000 Perris, CA Union High School District, 3.50% TRANs, 10/26/1999 4,522,324 - --------------------------------------------------------------------------------------------------------------------- $ 12,266,838 Pitney Bowes Credit Corp. Leasetops Trust, Leasetops Certificates (Series $ 12,266,838 1996A) Weekly VRDNs (San Diego County, CA, Regional Communications System)/(Pitney Bowes Credit Corp. LIQ)/(Bayerische Landesbank Girozentrale LOC) - --------------------------------------------------------------------------------------------------------------------- 1,570,000 Placer County, CA Office of Education, 4.00% TRANs, 9/21/1999 1,578,413 - --------------------------------------------------------------------------------------------------------------------- 6,000,000 Pleasanton, CA Unified School District, 3.90% TRANs, 6/30/1999 6,007,627 - --------------------------------------------------------------------------------------------------------------------- 2,400,000 Redding, CA School District, 3.90% TRANs, 6/30/1999 2,403,051 - --------------------------------------------------------------------------------------------------------------------- 8,000,000 Regents of University of California, (Series A), 3.30% CP (Bank of America NT 8,000,000 and SA, San Francisco, Bank of Montreal, Caisse Nationale De Credit Agricole, Paris, Canadian Imperial Bank of Commerce, Toronto and Societe Generale, Paris LIQs), Mandatory Tender 11/10/1998 - --------------------------------------------------------------------------------------------------------------------- 3,455,000 Riverside, CA, Municipal Securities Trust Receipts (Series 1998-CMC5) Weekly 3,455,000 VRDNs (AMBAC INS)/(Chase Manhattan Corp. LIQ) - --------------------------------------------------------------------------------------------------------------------- 3,510,000 Roseville, CA Joint Union High School District, 4.00% TRANs, 9/21/1999 3,528,808 - --------------------------------------------------------------------------------------------------------------------- 850,000 Roseville, CA, Hospital Facilities Authority, (Series 1989A) Weekly VRDNs 850,000 (Toronto- Dominion Bank LOC) - --------------------------------------------------------------------------------------------------------------------- 19,000,000 San Diego, CA Area Local Governments, Trust Receipts (Series FR/RI-A25) Weekly 19,000,000 VRDNs (Bank of New York, New York LIQ) - --------------------------------------------------------------------------------------------------------------------- 3,175,000 San Francisco, CA Redevelopment Finance Agency, (PT-125) Weekly VRDNs 3,175,000 (Northridge Cooperative Homes)/(MBIA INS)/(Merrill Lynch Capital Services, Inc. LIQ) - --------------------------------------------------------------------------------------------------------------------- 16,500,000 San Francisco, CA Redevelopment Finance Agency, (Series B1) Weekly VRDNs 16,500,000 (Fillmore Center)/(Bank of Nova Scotia, Toronto LOC) - --------------------------------------------------------------------------------------------------------------------- 4,065,000 San Francisco, CA Redevelopment Finance Agency, CDC Municipal Products, Inc. 4,065,000 (Series 1997T) Weekly VRDNs (Northridge Cooperative Homes)/(MBIA INS)/(CDC Municipal Products, Inc. LIQ) - --------------------------------------------------------------------------------------------------------------------- 2,000,000 San Francisco, CA Unified School District, 4.50% TRANs, 9/22/1999 2,019,060 - --------------------------------------------------------------------------------------------------------------------- 2,500,000 Sanger, CA Unified School District, 4.00% TRANs, 1/27/1999 2,502,878 - --------------------------------------------------------------------------------------------------------------------- 400,000 Santa Clara, CA, (Series 1985C) Weekly VRDNs (Santa Clara, CA Electric 400,000 System)/ (National Westminster Bank, PLC, London LOC) - --------------------------------------------------------------------------------------------------------------------- 6,000,000 Stanislaus County, CA Office of Education, 4.50% TRANs, 7/30/1999 6,036,450 - --------------------------------------------------------------------------------------------------------------------- 325,000 Stockton, CA, (Series 1993) Weekly VRDNs (La Quinta Inns, Inc.)/(Nationsbank, 325,000 N.A., Charlotte LOC) - --------------------------------------------------------------------------------------------------------------------- 1,000,000 Vallejo, CA Unified School District, 7.60% Bonds (FGIC INS), 8/1/1999 1,034,426 - --------------------------------------------------------------------------------------------------------------------- 1,930,000 Western Placer, CA Unified School District, 4.00% TRANs, 9/21/1999 1,940,342 - --------------------------------------------------------------------------------------------------------------------- Total 388,293,537 - --------------------------------------------------------------------------------------------------------------------- Puerto Rico--3.7% - --------------------------------------------------------------------------------------------------------------------- 4,000,000 /2/Commonwealth of Puerto Rico, (Series 1992A) P-Floats PT-140, 3.65% TOBs (FSA 4,000,000 INS)/(Commerzbank AG, Frankfurt LIQ), Mandatory Tender 1/14/1999 - --------------------------------------------------------------------------------------------------------------------- 9,750,000 Commonwealth of Puerto Rico, Floating Rate Trust Receipts (Series 1997) Weekly 9,750,000 VRDNs (Commerzbank AG, Frankfurt LIQ)/(Commerzbank AG, Frankfurt LOC) - --------------------------------------------------------------------------------------------------------------------- $ 1,115,000 Puerto Rico Industrial, Medical & Environmental PCA, (1983 Series A), 4.00% $ 1,115,178 TOBs (Merck & Co., Inc.), Optional Tender 12/1/1998 - --------------------------------------------------------------------------------------------------------------------- Total 14,865,178 - --------------------------------------------------------------------------------------------------------------------- /3/Total Investments (at amortized cost) $403,158,715 - ---------------------------------------------------------------------------------------------------------------------
1 The Fund may only invest in securities rated in one of the two highest short- term rating categories by nationally recognized statistical rating organizations ("NRSROs") or unrated securities of comparable quality. 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, MIG-1, or MIG-2 by Moody's Investors Service, Inc. or F-1+, F-1, and F-2 by Fitch IBCA, Inc. are all considered rated in one of the two highest short-term rating categories. Securities rated in the highest short-term rating category (and unrated securities of comparable quality) are identified as First Tier securities. Securities rated in the second highest short-term rating category (and unrated securities of comparable quality) are identified as Second Tier securities. The Fund follows applicable regulations in determining whether a security is rated and whether a security rated by multiple NRSROs in different rating categories should be identified as a First or Second Tier security. At October 31, 1998, the portfolio securities were rated as follows: Tier Rating Based on Total Market Value (Unaudited) First Tier Second Tier 100.00% 0.00% 2 Denotes a restricted security which is subject to restrictions on resale under Federal Securities laws. At October 31, 1998, these securities amounted to $42,325,000 which represents 10.4% of net assets. 3 Also represents cost for federal tax purposes. Note: The categories of investments are shown as a percentage of net assets ($404,776,382) at October 31, 1998. The following acronyms are used throughout this portfolio: AMBAC American Municipal Bond Assurance Corporation AMT Alternative Minimum Tax CP Commercial Paper FGIC Financial Guaranty Insurance Company FSA Financial Security Assurance HFA Housing Finance Authority IDA Industrial Development Authority INS Insured LIQ Liquidity Agreement LOC's Letter(s) of Credit LOC Letter of Credit MBIA Municipal Bond Investors Assurance PCA Pollution Control Authority PLC Public Limited Company SA Support Agreement TOB's Tender Option Bonds TRAN's Tax and Revenue Anticipation Notes VRDB Variable Rate Demand Bond VRDN's Variable Rate Demand Notes See Notes which are an integral part of the Financial Statements Statement of Assets and Liabilities OCTOBER 31, 1998
Assets: Total investments in securities, at amortized cost and value $403,158,715 Cash 273,872 Income receivable 2,919,735 Receivable for shares sold 2,815 TOTAL ASSETS 406,355,137 Liabilities: Payable for shares redeemed $1,023,729 Income distribution payable 411,217 Accrued expenses 143,809 TOTAL LIABILITIES 1,578,755 Net Assets for 404,776,382 shares outstanding $404,776,382 Net Asset Value, Offering Price and Redemption Proceeds Per Share: Institutional Service Shares: $363,202,187 / 363,202,187 shares outstanding $ 1.00 Institutional Shares: $41,574,195 / 41,574,195 shares outstanding $ 1.00
See Notes which are an integral part of the Financial Statements Statement of Operations YEAR ENDED OCTOBER 31, 1998
Investment Income: Interest $12,277,274 Expenses: Investment advisory fee $ 1,757,809 Administrative personnel and services fee 265,101 Custodian fees 5,993 Transfer and dividend disbursing agent fees and expenses 132,557 Directors'/Trustees' fees 3,032 Auditing fees 12,692 Legal fees 16,004 Portfolio accounting fee 88,219 Shareholder services fee--Institutional Service Shares 774,950 Shareholder services fee--Institutional Shares 103,682 Share registration costs 55,187 Printing and postage 25,298 Insurance premiums 27,166 Miscellaneous 2,094 TOTAL EXPENSES 3,269,784 Waivers: Waiver of investment advisory fee $(1,496,779) Waiver of shareholder services fee--Institutional Shares (103,682) TOTAL WAIVERS (1,600,461) Net expenses 1,669,323 Net investment income $10,607,951
See Notes which are an integral part of the Financial Statements Statement of Changes in Net Assets
Year Ended October 31 1998 1997 Increase (Decrease) in Net Assets: Operations: Net investment income $ 10,607,951 $ 6,655,913 Distributions to Shareholders: Distributions From Net Investment Income: Institutional Service Shares (9,261,806) (5,624,269) Institutional Shares (1,346,145) (1,031,644) CHANGE IN NET ASSETS RESULTING FROM DISTRIBUTIONS TO SHAREHOLDERS (10,607,951) (6,655,913) Share Transactions: Proceeds from sale of shares 1,401,854,420 905,107,252 Net asset value of shares issued to shareholders in payment of distributions 5,742,314 3,335,040 declared Cost of shares redeemed (1,279,540,519) (783,969,559) Change in net assets resulting from share transactions 128,056,215 124,472,733 Change in net assets 128,056,215 124,472,733 Net Assets: Beginning of period 276,720,167 152,247,434 End of period $ 404,776,382 $ 276,720,167
See Notes which are an integral part of the Financial Statements Notes to Financial Statements OCTOBER 31, 1998 Federated Municipal Trust (the "Trust") is registered under the Investment Company Act of 1940, as amended (the "Act") as an open-end, management investment company. The Trust consists of 17 portfolios. The financial statements included herein are only those of California Municipal Cash Trust (the "Fund"). The financial statements of the other portfolios are presented separately. The assets of each portfolio are segregated and a shareholder's interest is limited to the portfolio in which shares are held. The Fund offers two classes of shares: Institutional Service Shares and Institutional Shares. The investment objective of the Fund is current income exempt from federal income tax and the personal income taxes imposed by the State of California consistent with stability of principal. 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. 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. Restricted Securities Restricted securities are securities that may only be resold upon registration under federal securities laws or in transactions exempt from such registration. Many restricted securities may be resold in the secondary market in transactions exempt from registration. In some cases, the restricted securities may be resold without registration upon exercise of a demand feature. Such restricted securities may be determined to be liquid under criteria established by the Board of Trustees. The Fund will not incur any registration costs upon such resales. Restricted securities are valued at amortized cost in accordance with Rule 2a-7 under the Investment Company Act of 1940. Additional information on each restricted security held at October 31, 1998 is as follows:
Security Acquisition Date Acquisition Cost California Community College Financing 7/8/1998 8,000,000 California HFA, Variable Rate Certificate 9/25/1998 14,995,000 Clipper, CA Tax-Exempt Trust, 3.60% 6/24/1998 7,330,000 Commonwealth of Puerto Rico 2/4/1998-2/12/1998 4,000,000 Contra Costa County, CA Trust Receipts 7/1/1998 8,000,000
Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts of assets, liabilities, expenses and revenues reported in the financial statements. Actual results could differ from those estimated. Other Investment transactions are accounted for on the trade date. SHARES OF BENEFICIAL INTEREST The Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest (without par value) for each class of shares. Transactions in shares were as follows:
Year Ended October 31 1998 1997 Institutional Service Shares: Shares sold 1,284,543,045 809,738,300 Shares issued to shareholders in payment of distributions declared 5,730,676 3,272,742 Shares redeemed (1,161,835,907) (710,405,505) NET CHANGE RESULTING FROM INSTITUTIONAL SERVICE SHARE TRANSACTIONS 128,437,814 102,605,537 Year Ended October 31 1998 1997 Institutional Shares: Shares sold 117,311,375 95,368,952 Shares issued to shareholders in payment of distributions declared 11,638 62,298 Shares redeemed (117,704,612) (73,564,054) NET CHANGE RESULTING FROM INSTITUTIONAL SHARE TRANSACTIONS (381,599) 21,867,196 NET CHANGE RESULTING FROM SHARE TRANSACTIONS 128,056,215 124,472,733
At October 31, 1998, capital paid-in aggregated $404,776,382. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES Investment Advisory Fee Federated Management, the Fund's investment adviser (the "Adviser"), receives for its services an annual investment advisory fee equal to 0.50% 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 ("FSS"), the Fund will pay FSS up to 0.25% of average daily net assets of the Fund for the period. The fee paid to FSS is used to finance certain services for shareholders and to maintain shareholder accounts. FSS may voluntarily choose to waive any portion of its fee. FSS can modify or terminate this voluntary waiver at any time at its sole discretion. Transfer and Dividend Disbursing Agent Fees and Expenses FServ, through its subsidiary, Federated Shareholder Services Company ("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. Interfund Transactions During the period ended October 31, 1998, the Fund engaged in purchase and sales transactions with funds that have a common investment adviser (or affiliated investment advisers), common Directors/Trustees, and/or common Officers. These purchase and sale transactions were made at current market value pursuant to Rule 17a-7 under the Act amounting to $550,207,000 and $499,025,000, respectively. General Certain of the Officers and Trustees of the Trust are Officers and Directors or Trustees of the above companies. CONCENTRATION OF CREDIT RISK Since the Fund invests a substantial portion of its assets in issuers located in one state, it will be more susceptible to factors adversely affecting issuers of that state than would be a comparable tax-exempt mutual fund that invests nationally. In order to reduce the credit risk associated with such factors, at October 31, 1998, 59% of the securities in the portfolio of investments are backed by letters of credit or bond insurance of various financial institutions and financial guaranty assurance agencies. The percentage of investments insured by or supported (backed) by a letter of credit from any one institution or agency did not exceed 10.3% of total investments. 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 BOARD OF TRUSTEES OF FEDERATED MUNICIPAL TRUST AND SHAREHOLDERS OF CALIFORNIA MUNICIPAL CASH TRUST: We have audited the accompanying statement of assets and liabilities of California Municipal Cash Trust (an investment portfolio of Federated Municipal Trust, a Massachusetts business trust), including the schedule of portfolio investments, as of October 31, 1998, the related statement of operations for the year ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for the periods presented. These financial statements and financial highlights are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the 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 include confirmation of securities owned as of October 31, 1998, by correspondence with the custodian. 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 California Municipal Cash Trust (an investment portfolio of Federated Municipal Trust) as of October 31, 1998, the results of its operations for the year then ended, the changes in its nets assets for each of the two years in the period then ended, and its financial highlights for the periods presented, in conformity with generally accepted accounting principles. Arthur Andersen LLP Boston, Massachusetts December 23, 1998 [FEDERATED LOGO] World-Class Investment Manager California Municipal Cash Trust A Portfolio of Federated Municipal Trust INSTITUTIONAL SERVICE SHARES DECEMBER 31, 1998 A Statement of Additional Information (SAI) dated December 31, 1998, is incorporated by reference into this prospectus. To obtain the SAI and 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. [FEDERATED LOGO] California Municipal Cash Trust Federated Investors Inc. Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 1-800-341-7400 www.federatedinvestors.com Federated Securities Corp. Investment Company Act File No. 811-5911 Cusip 314229766 G00329-01-SS (12/98) Federated is a registered mark of federated Investors, Inc. 1998 (C)Federated Investors, Inc. [RECYCLED PAPER LOGO] STATEMENT OF ADDITIONAL INFORMATION California Municipal Cash Trust A Portfolio of Federated Municipal Trust INSTITUTIONAL SHARES INSTITUTIONAL SERVICE SHARES This Statement of Additional Information (SAI) is not a prospectus. Read this SAI in conjunction with the prospectuses for California Municipal Cash Trust dated December 31, 1998. Obtain the prospectuses without charge by calling 1- 800-341-7400. CONTENTS How is the Fund Organized? Securities in Which the Fund Invests How is the Fund Sold? Subaccounting Services Redemption in Kind Massachusetts Partnership Law Account and Share Information Tax Information Who Manages and Provides Services to the Fund? How Does the Fund Measure Performance? Who is Federated Investors, Inc.? Investment Ratings Addresses STATEMENT DATED DECEMBER 31, 1998 [Federated Investors Logo] Federated Securities Corp., Distributor, subsidiary of Federated Investors, Inc. Cusip 314229675 Cusip 314229766 G00329-02 (12/98) How is the Fund Organized? The Fund is a diversified portfolio of Federated Municipal Trust (Trust). The Trust is an open-end, management investment company that was established under the laws of the Commonwealth of Massachusetts on September 1, 1989. The Trust may offer separate series of shares representing interests in separate portfolios of securities. The Board of Trustees (the Board) has established two classes of shares of the Fund, known as Institutional Shares and Institutional Service Shares (Shares). This SAI relates to all of the classes of the above-mentioned Shares. Securities in Which the Fund Invests SECURITIES DESCRIPTIONS AND TECHNIQUES In pursuing its investment strategy, the Fund may invest in the following tax- exempt securities for any purpose that is consistent with its investment objective. GENERAL OBLIGATION BONDS General obligation bonds are supported by the issuer's full faith and credit. The issuer must levy and collect taxes sufficient to pay principal and interest on the bonds. However, the issuer's authority to levy additional taxes may be limited by its charter or state law. SPECIAL REVENUE BONDS Special revenue bonds are payable solely from specific revenues received by the issuer. The revenues may consist of specific taxes, assessments, tolls, fees or other types of municipal revenues. For example, a municipality may issue bonds to build a toll road, and pledge the tolls to repay the bonds. Bondholders could not collect from the municipality's general taxes or revenues. Therefore, any shortfall in the tolls could result in a default on the bonds. PRIVATE ACTIVITY BONDS Private activity bonds are special revenue bonds used to finance private entities. For example, a municipality may issue bonds to finance a new factory to improve its local economy. The municipality would lend the proceeds to the company using the factory, and the company would agree make loan payments sufficient to repay the bonds. The bonds would be payable solely from the company's loan payments, not from any other revenues of the municipality. Therefore, any default on the loan normally would result in a default on the bonds. MUNICIPAL LEASES Municipalities may enter into leases for equipment or facilities. In order to comply with state public financing laws, these leases are typically subject to annual appropriation. In other words, a municipality may end a lease, without penalty, by not providing for the lease payments in its annual budget. After the lease ends, the lessor (the Fund) can resell the equipment or facility but the Fund may lose money on the sale. The Fund may invest in securities supported by pools of municipal leases. The most common type of lease backed securities are certificates of participation (COPs). However, the Fund may also invest directly in individual leases. CREDIT ENHANCEMENT Common types of credit enhancement include guarantees, letters of credit, bond insurance and surety bonds. Credit enhancement also includes arrangements where securities or other liquid assets secure payment of a fixed income security. If a default occurs, these assets may be sold and the proceeds paid to a security's holders. Either form of credit enhancement reduces credit risks by providing another source of payment for a fixed income security. Investment Ratings A nationally recognized rating service'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 ("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 IBCA, 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 rating service can be treated as being in one of the two highest short-term rating categories; currently, such securities must be rated by two rating services in one of their two highest rating categories. See "Regulatory Compliance." INVESTMENT RISKS There are many factors which may effect an investment in the Fund. The Fund's principal risks are described in its prospectus. An additional risk factor is outlined below. TAX RISK In order for the interest income from the securities to be exempt from federal regular income tax ("tax-exempt"), tax-exempt securities must meet certain legal requirements. Failure to meet such requirements may cause the interest received and distributed by the Fund to shareholders to be taxable. FUNDAMENTAL INVESTMENT POLICIES The Fund invests in tax-exempt securities so that at least 80% of the Fund's annual interest income is exempt from federal regular income tax and California state income tax or so that at least 80% of its net assets is invested in obligations, the interest income from which is exempt from federal regular income and California state income tax. This policy is fundamental and cannot be changed without shareholder approval. 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 in amounts up to one-third of the value of its total assets, including the amounts borrowed. The Fund will not borrow money 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. 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 non-publicly issued California tax-exempt securities or temporary investments or enter into repurchase agreements, in accordance with its investment objective, policies, limitations and the Trust's Declaration of Trust. 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, 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 certain money market instruments, 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. Investments in Any One Issuer With respect to securities comprising 75% of its assets, the Fund will not invest more than 10% of its total assets in the securities of any one issuer (except cash and cash items, repurchase agreements collateralized by U.S. government securities, and U.S. government obligations.) Under this limitation, each governmental subdivision, including states, territories, possessions of the United States, or their political subdivisions, agencies, authorities, instrumentalities, or similar entities, will be considered a separate issuer if its assets and revenues are separate from those of the government body creating it and the security is backed only by its own assets and revenues. Industrial development bonds backed only by the assets and revenues of a non- governmental user are considered to be issued solely by that user. If in the case of an industrial development bond or government-issued security, a governmental or other entity guarantees the security, such guarantee would be considered a separate security issued by the guarantor, as well as the other issuer, subject to limited exclusions allowed by the Investment Company Act of 1940. The above limitations cannot be changed unless authorized be 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 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 Board and repurchase agreements providing for settlement in more than seven days after notice. 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 prospectuses 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 nationally recognized rating services, 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 Board has 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 Board 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 Board 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 Board 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. 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 professionals 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 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. 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. 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 Trust have equal voting rights, except that in matters affecting only a particular Fund or class, only Shares of that Fund or class are entitled to vote. Trustees may be removed by the Board or by shareholders at a special meeting. A special meeting of shareholders will be called by the Board upon the written request of shareholders who own at least 10% of the Trust's outstanding shares of all series entitled to vote. As of December 8, 1998, the following shareholders owned of record, beneficially, or both, 5% or more of the outstanding Institutional Shares: Repub & Co., Imperial Trust Company, Los Angeles, California, owned approximately 13,133,200 shares (28.38%); Cupertino National Bank & Trust Co., Palo Alto, California, owned approximately 8,712,521 shares (18.82%); Santa Monica Bank, Santa Monica, California, owned approximately 6,166,381 shares (13.32%); Union Safe Deposit Bank, Stockton, California, owned approximately 5,908,694 shares (12.77%), Palsan Company, California Bank and Trust, San Francisco, California, owned approximately 4,393,034 shares (9.49%) and Bank of Stockton, Stockton, California, owned approximately 4,231,542 shares (9.14%). As of December 8, 1998, the following shareholders owned of record, beneficially, or both, 5% or more of the outstanding Institutional Service Shares: Piper Jaffray Inc., for the exclusive benefit of its customers, Minneapolis, Minnesota, owned approximately 58,841,320 shares (16.38%); Capital Network Services, Inc., San Francisco, California, owned approximately 34,465,220 shares (9.59%) and UBS AG, Omnibus Reinvest Account, New York, New York, owned approximately 26,239,348 shares (7.30%). Shareholders owning 25% or more of outstanding Shares may be in control and be able to affect the outcome of certain matters presented for a vote of shareholders. Tax Information FEDERAL INCOME TAX The Fund intends to meet the requirements of Subchapter M of the Internal Revenue Code applicable to regulated investment companies. If these requirements are not met, it will not receive the special tax treatment and will pay federal income tax. The Fund will be treated as a single, separate entity for federal income tax purposes so that income earned and capital gains and losses realized by the Trust's other portfolios will be separate from those realized by the Fund. STATE TAXES Under existing California laws, distributions made by the Fund will not be subject to California individual income taxes to the extent that such distributions qualify as exempt-interest dividends under the California Revenue and Taxation Code, and provided further that at the close of each quarter, at least 50 percent of the value of the total assets of the Fund consists of obligations the interest on which is exempt from California taxation under either the Constitution or laws of California or the Constitution or laws of the United States. The Fund will furnish its shareholders with a written note designating exempt- interest dividends within 60 days after the close of its taxable year. Conversely, to the extent that distributions made by the Fund are derived from other types of obligations, such distributions will be subject to California individual income taxes. Dividends of the Fund are not exempt from the California taxes payable by corporations. Who Manages and Provides Services to the Fund? BOARD OF TRUSTEES The Board is responsible for managing the Trust's business affairs and for exercising all the Trust's powers except those reserved for the shareholders. Information about each Board member is provided below and includes the following data: name, address, birthdate, present position(s) held with the Trust, principal occupations for the past five years and other notable positions held, total compensation received as a Trustee from the Trust for its most recent fiscal year, and the total compensation received from the Federated Fund Complex for the most recent calendar year. The Trust is comprised of 17 Funds and the Federated Fund Complex is comprised of 56 investment companies, whose investment advisers are affiliated with the Fund's Adviser. As of December 8, 1998, 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.
Name Total Birthdate Aggregate Compensation From Address Principal Occupations Compensation Trust and Fund Position With Trust for Past 5 Years From Trust Complex - ------------------------------- ---------------------------------------------------------- ------------------ ------------------- John F. Donahue##* Chief Executive Officer and Director or Trustee of $0 $0 for the Trust Birthdate: July 28, 1924 the Federated Fund Complex. Chairman and Director, and 56 other Federated Investors Tower Federated Investors, Inc.; Chairman and Trustee, investment 1001 Liberty Avenue Federated Advisers, Federated Management, and companies in the Pittsburgh, PA Federated Research; Chairman and Director, Federated Fund Complex CHAIRMAN and TRUSTEE Research Corp., and Federated Global Research Corp.; Chairman, Passport Research, Ltd. Thomas G. Bigley Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: February 3, 1934 Director, Member of Executive Committee, Children's Trust and 15 Old Timber Trail Hospital of Pittsburgh; formerly: Senior Partner, 56 other Pittsburgh, PA Ernst & Young LLP; Director, MED 3000 Group, Inc.; investment TRUSTEE Director, Member of Executive Committee, University companies in the of Pittsburgh. Fund Complex John T. Conroy, Jr. Director or Trustee of the Federated Fund Complex; $4,484.62 $122,362 for the Birthdate: June 23, 1937 President, Investment Properties Corporation; Senior Trust and Wood/IPC Commercial Dept. Vice President, John R. Wood and Associates, Inc., 56 other John R. Wood and Realtors; Partner or Trustee in private real estate investment Associates, Inc. Realtors ventures in Southwest Florida; formerly: President, companies in the 3255 Tamiami Trail North Naples Property Management, Inc. and Northgate Fund Complex Naples, FL Village Development Corporation. TRUSTEE William J. Copeland Director or Trustee of the Federated Fund Complex; $4,484.62 $122,362 for the Birthdate: July 4, 1918 Director and Member of the Executive Committee, Trust and One PNC Plaza-23rd Floor Michael Baker, Inc.; formerly: Vice Chairman and 56 other Pittsburgh, PA Director, PNC Bank, N.A., and PNC Bank Corp.; investment TRUSTEE Director, Ryan Homes, Inc. companies in the Fund Complex Retired: Director, United Refinery; Director, Forbes Fund; Chairman, Pittsburgh Foundation; Chairman, Pittsburgh Civic Light Opera. James E. Dowd, Esq. Director or Trustee of the Federated Fund Complex; $4,484.62 $122,362 for the Birthdate: May 18, 1922 Attorney-at-law; Director, The Emerging Germany Fund, Trust and 571 Hayward Mill Road Inc. 56 other Concord, MA investment TRUSTEE Retired: President, Boston Stock Exchange, Inc.; companies in the Regional Administrator, United States Securities and Fund Complex Exchange Commission. Lawrence D. Ellis, M.D.* Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: October 11, 1932 Professor of Medicine, University of Pittsburgh; Trust and 3471 Fifth Avenue Medical Director, University of Pittsburgh Medical 56 other Suite 1111 Center - Downtown; Hematologist, Oncologist, and investment Pittsburgh, PA Internist, Presbyterian and Montefiore Hospitals; companies in the TRUSTEE Member, National Board of Trustees, Leukemia Society Fund Complex of America. Edward L. Flaherty, Jr., Director or Trustee of the Federated Fund Complex; $4,484.62 $122,362 for the Esq. # Attorney, of Counsel, Miller, Ament, Henny & Kochuba; Trust and Birthdate: June 18, 1924 Director, Eat'N Park Restaurants, Inc.; formerly: 56 other Miller, Ament, Henny & Counsel, Horizon Financial, F.A., Western Region; investment Kochuba Partner, Meyer and Flaherty. companies in the 205 Ross Street Fund Complex Pittsburgh, PA TRUSTEE Peter E. Madden Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: March 16, 1942 formerly: Representative, Commonwealth of Trust and One Royal Palm Way Massachusetts General Court; President, State Street 56 other 100 Royal Palm Way Bank and Trust Company and State Street Corporation. investment Palm Beach, FL companies in the TRUSTEE Retired: Director, VISA USA and VISA International; Fund Complex Chairman and Director, Massachusetts Bankers Association; Director, Depository Trust Corporation. John E. Murray, Jr., J.D., Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the S.J.D. President, Law Professor, Duquesne University; Trust and Birthdate: December 20, 1932 Consulting Partner, Mollica & Murray. 56 other President, Duquesne investment University Retired: Dean and Professor of Law, University of companies in the Pittsburgh, PA Pittsburgh School of Law; Dean and Professor of Law, Fund Complex TRUSTEE Villanova University School of Law. Wesley W. Posvar Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: September 14, President, World Society of Ekistics, Athens; Trust and 1925 Professor, International Politics; Management 56 other 1202 Cathedral of Learning Consultant; Trustee, Carnegie Endowment for investment University of Pittsburgh International Peace, RAND Corporation, Online companies in the Pittsburgh, PA Computer Library Center, Inc., National Defense Fund Complex TRUSTEE University and U.S. Space Foundation; President Emeritus, University of Pittsburgh; Founding Chairman, National Advisory Council for Environmental Policy and Technology, Federal Emergency Management Advisory Board and Czech Management Center, Prague. Retired: Professor, United States Military Academy; Professor, United States Air Force Academy. Marjorie P. Smuts Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: June 21, 1935 Public Relations/Marketing/Conference Planning. Trust and 4905 Bayard Street 56 other Pittsburgh, PA Retired: National Spokesperson, Aluminum Company of investment TRUSTEE America; business owner. companies in the Fund Complex Glen R. Johnson* Trustee, Federated Investors, Inc.; staff member, $0 $0 for the Trust Birthdate: May 2, 1929 Federated Securities Corp. and Federated Investors Tower 8 other investment 1001 Liberty Avenue companies in the Pittsburgh, PA Fund Complex PRESIDENT and TRUSTEE J. Christopher Donahue##* President or Executive Vice President of the $0 $0 for the Trust Birthdate: April 11, 1949 Federated Fund Complex; Director or Trustee of some and Federated Investors Tower of the Funds in the Federated Fund Complex; President 18 other 1001 Liberty Avenue and Director, Federated Investors, Inc.; President investment Pittsburgh, PA and Trustee, Federated Advisers, Federated companies in the EXECUTIVE VICE PRESDIENT Management, and Federated Research; President and Fund Complex Director, Federated Research Corp. and Federated Global Research Corp.; President, Passport Research, Ltd.; Trustee, Federated Shareholder Services Company; Director, Federated Services Company. Edward C. Gonzales* Trustee or Director of some of the Funds in the $0 $0 for the Trust Birthdate: October 22, 1930 Federated Fund Complex; President, Executive Vice and Federated Investors Tower President and Treasurer of some of the Funds in the 1 other investment 1001 Liberty Avenue Federated Fund Complex; Vice Chairman, Federated companies in the Pittsburgh, PA Investors, Inc.; Vice President, Federated Advisers, Fund Complex EXECUTIVE VICE PRESIDENT 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. John W. McGonigle Executive Vice President and Secretary of the $0 $0 for the Trust Birthdate: October 26, 1938 Federated Fund Complex; Executive Vice President, and Federated Investors Tower Secretary, and Director, Federated Investors, Inc.; 56 other 1001 Liberty Avenue Trustee, Federated Advisers, Federated Management, investment Pittsburgh, PA and Federated Research; Director, Federated Research companies in the EXECUTIVE VICE PRESIDENT Corp. and Federated Global Research Corp.; Director, Fund Complex and SECRETARY Federated Services Company; Director, Federated Securities Corp. Richard J. Thomas Treasurer of the Federated Fund Complex; Vice $0 $0 for the Trust Birthdate: June 17, 1954 President - Funds Financial Services Division, and Federated Investors Tower Federated Investors, Inc.; Formerly: various 56 other 1001 Liberty Avenue management positions within Funds Financial Services investment Pittsburgh, PA Division of Federated Investors, Inc. companies in the TREASURER Fund Complex Richard B. Fisher* President or Vice President of some of the Funds in $0 $0 for the Trust Birthdate: May 17, 1923 the Federated Fund Complex; Director or Trustee of and Federated Investors Tower some of the Funds in the Federated Fund Complex; 6 other investment 1001 Liberty Avenue Executive Vice President, Federated Investors, Inc.; companies in the Pittsburgh, PA Chairman and Director, Federated Securities Corp. Fund Complex VICE PRESIDENT William D. Dawson, III Chief Investment Officer of this Fund and various $0 $0 for the Trust Birthdate: March 3, 1949 other Funds in the Federated Fund Complex; Executive and Federated Investors Tower Vice President, Federated Investment Counseling, 41 other 1001 Liberty Avenue Federated Global Research Corp., Federated Advisers, investment Pittsburgh, PA Federated Management, Federated Research, and companies in the CHIEF INVESTMENT OFFICER Passport Research, Ltd.; Registered Representative, Fund Complex 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. Mary Jo Ochson Senior Portfolio Manager and Vice President of eight $0 $0 for the Birthdate: September 12, investment companies in the Federated Fund Complex; Trust and 1953 Senior Vice President, Federated Investment 7 other investment Federated Investors Tower Counseling, Federated Advisers, Federated Global companies 1001 Liberty Avenue Research Corp., Federated Management, Federated in the Fund Complex Pittsburgh, PA Research, Federated Research Corp. and Passport SENIOR PORTFOLIO Research, Ltd.; Formerly: Vice President, Federated MANAGER/VICE PRESIDENT Advisers, Federated Management, Federated Research, Federated Research Corp. , Passport Research, Ltd. and Federated Global Research Corp. Jeff A. Kozemchak Senior Portfolio Manager and Vice President of four $0 $0 for the Birthdate: January 15, 1960 investment companies in the Federated Fund Complex; Trust and Federated Investors Tower Vice President, Federated Investment Counseling, 3 other investment 1001 Liberty Avenue Federated Advisers, Federated Global Research Corp., companies Pittsburgh, PA Federated Management, Federated Research, Federated in the Fund Complex SENIOR PORTFOLIO Research Corp. and Passport Research, Ltd.; MANAGER/VICE PRESIDENT Formerly: Assistant Vice President and Investment Analyst, Federated Research Corp. and Passport Research, Ltd. ; Assistant Vice President, Federated Advisers, Federated Management and Federated Research.
## Mr. Donahue is the father of J. Christopher Donahue, Executive Vice President of the Trust. 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 Trust, 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 Trust. 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:
Maximum Average Aggregate Daily Administrative Fee Net Assets of the Federated Funds - ----------------------------------------------------------- 0.150 of 1% on the first $250 million 0.125 of 1% on the next $250 million 0.100 of 1% on the next $250 million 0.075 of 1% on assets in excess of $750 million
The administrative fee received during any fiscal year shall be at least $125,000 per portfolio and $30,000 per each additional class of shares. Federated Services Company may voluntarily waive a portion of its fee and may reimburse the Fund for expenses. Federated Services Company also provides certain accounting and recordkeeping services with respect to the Fund's portfolio investments for a fee based on Fund assets plus out-of-pocket expenses. CUSTODIAN State Street Bank and Trust Company, Boston, Massachusetts, is custodian for the securities and cash of the Fund. Foreign instruments purchased by the Fund are held by foreign banks participating in a network coordinated by State Street Bank. TRANSFER AGENT AND DIVIDEND DISBURSING AGENT Federated Services Company, through its registered transfer agent subsidiary, Federated Shareholder Services Company, maintains all necessary shareholder records. The Fund pays the transfer agent a fee based on the size, type, and number of accounts and transactions made by shareholders. INDEPENDENT PUBLIC ACCOUNTANTS Arthur Andersen LLP is the independent public accountant for the Fund. FEES PAID BY THE FUND FOR SERVICES
For the Year Ended October 31, 1998 1997 1996 - ------------------------------------------------------------------------------------- Advisory Fee Earned $1,757,809 $1,047,530 $501,955 Advisory Fee Reduction $1,496,779 $1,026,075 $501,955 Brokerage Commissions $ 0 $ 0 $ 0 Administrative Fee $ 265,101 $ 167,256 $145,082 Shareholder Services Fee Institutional Shares $ 0 --- --- Institutional Service $ 774,950 --- --- Shares
Fees are allocated among Classes based on their pro rata share of Fund assets, except for marketing fees and shareholder services fees, which are borne only by the applicable Class of Shares. If the Fund's expenses are capped at a particular level, the cap does not include reimbursement to the Fund of any expenses incurred by shareholders who use the transfer agent's subaccounting facilities. How Does the Fund Measure Performance? The Fund may advertise Share performance by using the Securities and Exchange Commission's (SEC) standard method for calculating performance applicable to all mutual funds. The SEC also permits this standard performance information to be accompanied by non-standard performance information. Unless otherwise stated, any quoted Share performance reflects the effect of non-recurring charges, such as maximum sales charges, which, if excluded, would increase the total return and yield. The performance of Shares depends upon such variables as: portfolio quality; average portfolio maturity; type and value of portfolio securities; changes in interest rates; changes or differences in the Fund's or any class of Shares' expenses; and various other factors. Share performance fluctuates on a daily basis largely because net earnings and offering price per Share 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 since inception periods ended October 31, 1998. Yield, Effective Yield and Tax-Equivalent Yield given for the seven-day period ended October 31, 1998.
Share Class Seven-Day Period 1 Year 5 Years Since Inception on March 4, 1996 Institutional Shares - ------------------------------------------------------------------------------------------------------------------------------------ Total Return -- 3.31% -- 3.38% Yield 3.02% -- -- -- Effective Yield 3.06% -- -- -- Tax-Equivalent Yield 5.99% -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Share Class Seven-Day Period 1 Year 5 Years Since Inception on March 03, 1989 Institutional Service Shares - ------------------------------------------------------------------------------------------------------------------------------------ Total Return -- 3.05% 2.99% 3.40% Yield 2.77% -- -- -- Effective Yield 2.81% -- -- -- Tax-Equivalent Yield 5.50% -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------
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. The tax- equivalent yield of Shares is calculated similarly to the yield, but is adjusted to reflect the taxable yield that Shares would have had to earn to equal the actual yield, assuming a specific tax rate. 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. TAX EQUIVALENCY TABLE Set forth below is a sample of a tax-equivalency table that may be used in advertising and sales literature. This table is for illustrative purposes only and is not representative of past or future performance of the Fund. The interest earned by the tax-exempt securities owned by the Fund generally remains free from federal regular income tax and is often free from state and local taxes as well. However, some of the Fund's income may be subject to the federal alternative minimum tax and state and/or local taxes.
- ----------------------------------------------------------------------------------------------------------------------------------- TAXABLE YIELD EQUIVALENT FOR 1998 STATE OF CALIFORNIA - ----------------------------------------------------------------------------------------------------------------------------------- COMBINED FEDERAL AND STATE INCOME TAX BRACKET: 23.00% 37.30% 40.30% 45.30% 48.90% - ----------------------------------------------------------------------------------------------------------------------------------- SINGLE $1 - $25,351 - $61,401 - $128,101 - OVER RETURN 25,350 61,400 128,100 278,450 $278,450 - ----------------------------------------------------------------------------------------------------------------------------------- TAX-EXEMPT YIELD TAXABLE YIELD EQUIVALENT - ----------------------------------------------------------------------------------------------------------------------------------- 1.50% 1.95% 2.39% 2.51% 2.74% 2.94% 2.00% 2.60% 3.19% 3.35% 3.66% 3.91% 2.50% 3.25% 3.99% 4.19% 4.57% 4.89% 3.00% 3.90% 4.78% 5.03% 5.48% 5.87% 3.50% 4.55% 5.58% 5.86% 6.40% 6.85% 4.00% 5.19% 6.38% 6.70% 7.31% 7.83% 4.50% 5.84% 7.18% 7.54% 8.23% 8.81% 5.00% 6.49% 7.97% 8.38% 9.14% 9.78% 5.50% 7.14% 8.77% 9.21% 10.05% 10.76%
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.
TAXABLE YIELD EQUIVALENT FOR 1998 - ----------------------------------------------------------------------------------------------------------------------------------- STATE OF CALIFORNIA COMBINED FEDERAL AND STATE INCOME TAX BRACKET: 21.00% 37.30% 40.30% 45.30% 48.90% - ----------------------------------------------------------------------------------------------------------------------------------- JOINT $1 - $42,351 - $102,301 - $155,951 - OVER RETURN 42,350 102,300 155,950 278,450 278,450 - ----------------------------------------------------------------------------------------------------------------------------------- TAX-EXEMPT YIELD TAXABLE YIELD EQUIVALENT - ----------------------------------------------------------------------------------------------------------------------------------- 1.50% 1.90% 2.39% 2.51% 2.74% 2.94% 2.00% 2.53% 3.19% 3.35% 3.66% 3.91% 2.50% 3.16% 3.99% 4.19% 4.57% 4.89% 3.00% 3.80% 4.78% 5.03% 5.48% 5.87% 3.50% 4.43% 5.58% 5.86% 6.40% 6.85% 4.00% 5.06% 6.38% 6.70% 7.31% 7.83% 4.50% 5.70% 7.18% 7.54% 8.23% 8.81% 5.00% 6.33% 7.97% 8.38% 9.14% 9.78% 5.50% 6.96% 8.77% 9.21% 10.05% 10.76%
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. 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., 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 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, 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, 1997, Federated managed 11 bond funds with approximately $2.1 billion in assets and 22 money market funds with approximately $10.9 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 tax-exempt 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 27 years' experience. As of December 31, 1997, Federated managed 29 equity funds totaling approximately $11.7 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, 1997, Federated managed 11 money market funds and 16 bond funds with assets approximating $17.1 billion and $5.6 billion, respectively. Federated's corporate bond decision making--based on intensive, diligent credit analysis--is backed by over 22 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 $200 billion. GOVERNMENT FUNDS In the government sector, as of December 31, 1997, Federated manages 9 mortgage- backed, 6 government/agency and 18 government money market mutual funds, with assets approximating $5.9 billion, $1.5 billion and $35 billion, respectively. Federated trades approximately $400 million in U.S. government and mortgage- backed securities daily and places approximately $23 billion in repurchase agreements each day. Federated introduced the first U.S. government fund to invest in U.S. government bond securities in 1969. Federated has been a major force in the short- and intermediate-term government markets since 1982 and currently manages approximately $36 billion in government funds within these maturity ranges. 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, 1997, Federated managed more than $63.1 billion in assets across 51 money market funds, including 18 government, 11 prime and 22 municipal with assets approximating $35 billion, $17.1 billion and $10.9 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 $4 trillion to the more than 6,700 funds available, according to the Investment Company Institute. Federated distributes mutual funds through its subsidiaries for a variety of investment purposes. Specific markets include: FEDERATED CLIENTS OVERVIEW 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. Investment Ratings APPENDIX STANDARD & POOR'S SHORT-TERM MUNICIPAL OBLIGATION RATINGS A Standard & Poor's (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-1+, 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 rated 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. MOODY'S 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 SERVICE, L.P. 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. Addresses CALIFORNIA MUNICIPAL CASH TRUST Institutional Shares Institutional Service Shares Federated Investors Funds 5800 Corporate Drive Pittsburgh, PA 15237-7000 Distributor Federated Securities Corp. Federated Investors Tower 1001 Liberty Avenue, Pittsburgh, PA 15222-3779 Investment Adviser Federated Management Federated Investors Tower 1001 Liberty Avenue, Pittsburgh, PA 15222-3779 Custodian State Street Bank and Trust Company P.O. Box 8600 Boston, MA 02266-8600 Transfer Agent and Dividend Disbursing Agent Federated Shareholder Services Company P.O. Box 8600 Boston, MA 02266-8600 Independent Public Accountants Arthur Andersen LLP 225 Franklin Street Boston, MA 02110-2812 PROSPECTUS Connecticut Municipal Cash Trust A Portfolio of Federated Municipal Trust INSTITUTIONAL SERVICE SHARES A money market mutual fund seeking to provide current income exempt from federal regular income tax and Connecticut dividend and interest income tax. 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. December 31, 1998 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? 6 How is the Fund Sold? 6 How to Purchase Shares 7 How to Redeem Shares 8 Account and Share Information 10 Who Manages the Fund? 11 Financial Information 12 Report of Independent Public Accountants 26 Risk/Return Summary WHAT IS THE FUND'S INVESTMENT OBJECTIVE? The Fund is a money market fund which seeks to maintain a stable net asset value of $1.00. The Fund's investment objective is current income exempt from federal regular income tax and Connecticut dividend and interest income tax consistent with the stability of principal. 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 tax-exempt securities so that the Fund's annual interest income is exempt from federal regular income tax and Connecticut dividend and interest income tax. Interest from the Fund's investments may be subject to the federal alternative minimum tax for individuals and corporations. WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND? Because the Fund may invest a significant portion of its assets in securities of a single issuer, an investment in the Fund may involve additional risks compared to a fully diversified money market 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] - See Appendix C-3 Historically, the Fund has maintained a constant $1.00 net asset value per share. The bar chart shows the variability of the Fund's Institutional Service Shares total returns on a yearly basis. The Fund's Institutional Service Shares are not sold subject to a sales charge (load). The total returns displayed above are based upon the net asset value. The Fund's Institutional Service Shares year-to-date total return as of the most recent calendar quarter of September 30, 1998, was 2.20%. Within the period shown in the Chart, the Fund's Institutional Service Shares highest quarterly return was 1.34% (quarter ended December 31, 1990). Its lowest quarterly return was 0.44% (quarter ended March 31, 1994). The Fund's Institutional Service Shares Seven-Day Net Yield as of 12/31/97 was 3.28%. The following table represents the Fund's Institutional Service Shares Average Annual Total Return through 12/31/97. CALENDAR PERIOD FUND 1 Year 3.05% 5 Years 2.71% Start of Performance 1 3.20% 1 The Fund's Institutional Service Shares start of performance date was November 1, 1989. Investors may call the Fund at 1-800-341-7400 to acquire the Seven-Day Net Yield. 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? CONNECTICUT MUNICIPAL CASH TRUST FEES AND EXPENSES This table describes the fees and expenses that you may pay if you buy, hold and redeem shares of the Fund.
SHAREHOLDER FEES Fees Paid Directly From Your Investment Maximum Sales Charge Imposed on Purchases (as a percentage of offering price) None Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of original purchase price) None Contingent Deferred Sales Charge (as a percentage of original purchase price or redemption proceeds, as applicable) None Redemption Fee (as a percentage of amount redeemed, if applicable) None Exchange Fee None ANNUAL FUND OPERATING EXPENSES (Before Waivers) 1 Expenses That are Deducted From Fund Assets (as a percentage of average net assets) Management Fee 2 0.50% Distribution (12b-1) Fee None Shareholder Services Fee 3 0.25% Other Expenses 0.14% Total Annual Fund Operating Expenses 0.89% 1 Although not contractually obligated to do so, the adviser ahd shareholder services provider waived certain amounts. These are shown below along with the net expenses the Fund actually paid for the fiscal year ended October 31, 1998. Waiver of Fund Expenses 0.29% Total Actual Annual Operating Expenses (after waivers) 0.60% 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 0.32% for the year ended October 31, 1998. 3 The shareholder services fee for the Fund has been voluntarily reduced. This voluntary reduction can be terminated at any time. The shareholder service fee paid by the Fund (after the voluntary reduction) was 0.14% for the year ended October 31, 1998
EXAMPLE The following Example is intended to help you compare the cost of investing in the Connecticut Municipal Cash Trust with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Connecticut Municipal Cash Trust 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 Connecticut Municipal Cash Trust operating expenses are BEFORE WAIVERS as estimated above and remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be: 1 YEAR 3 YEARS 5 YEARS 10 YEARS Expenses assuming no redemption $91 $284 $493 $1,096 What are the Fund's Investment Strategies? The Fund invests in a portfolio of high-quality tax-exempt securities maturing in 13 months or less. The average maturity of the Fund's portfolio, computed on a dollar-weighted basis, will be 90 days or less. The Fund's Adviser performs a fundamental credit analysis to develop an approved list of issuers and securities that meet the Adviser's minimum credit standards. The Adviser targets an average portfolio maturity based upon its interest rate outlook and the tax-exempt securities available. The Adviser structures the portfolio by combining variable rate demand instruments and municipal notes. Depending on the supply of tax-exempt securities, the Adviser generally shortens the portfolio's maturity when it expects interest rates to rise and extends the maturity when it expects interest rates to fall. TEMPORARY DEFENSIVE INVESTMENTS During adverse market conditions the Fund may temporarily depart from its principal investment strategies by investing in securities subject to federal regular income tax and Connecticut dividend and interest income tax. Temporary investments will be of comparable quality to other securities in which the Fund invests. This may cause the Fund to give up greater investment returns to maintain the safety of principal. This also may cause the Fund to receive and distribute taxable income to investors. What are the Principal Securities in Which the Fund Invests? TAX-EXEMPT SECURITIES Tax-exempt securities are fixed income securities that pay interest exempt from regular federal income taxes. States, counties, cities and other political subdivisions and authorities typically issue tax-exempt securities. Tax-exempt securities are generally differentiated by their source of repayment. FIXED INCOME SECURITIES Fixed income 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. VARIABLE RATE DEMAND INSTRUMENTS Variable rate demand instruments are tax-exempt securities that require the issuer or a third party, such as a dealer or bank, to repurchase the security for its face value upon demand. The securities also bear interest at a variable rate intended to cause the securities to trade at their face value. The Fund treats demand instruments as short-term securities, even though their stated maturity may extend beyond 13 months. MUNICIPAL NOTES Municipal notes are short-term tax-exempt securities. Many municipalities issue such notes to fund their current operations before collecting taxes or other municipal revenues. Municipalities may also issue notes to fund capital projects prior to issuing long-term bonds. The issuers typically repay the notes at the end of their fiscal year, either with taxes, other revenues or proceeds from newly issued notes or bonds. INVESTMENT 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 rating services or be of comparable quality to securities having such ratings. CREDIT ENHANCEMENT Credit enhancement consists of an arrangement in which a company agrees to pay amounts due on a fixed income security if the issuer defaults. In some cases the company providing credit enhancement makes all payments directly to the security holders and receives reimbursement from the issuer. Normally, the credit enhancer has greater financial resources and liquidity than the issuer. For this reason, the Adviser usually evaluates the credit risk of a fixed income security based solely upon its credit enhancement. What are the Specific Risks of Investing in the Fund? Although there are many factors which may affect an investment in the Fund, the principal risks of investing in a tax-exempt money market fund are described below. CREDIT RISK Credit risk is the possibility that an issuer or a credit enhancer will default (fails to repay interest and principal when due). If an issuer or credit enhancer defaults, the Fund will lose money. Money market funds try to minimize this risk by purchasing higher quality securities. Many fixed income securities receive credit ratings from companies such as Standard & Poor's and Moody's Investor Services. Fixed income securities receive different credit ratings depending on the rating company's assessment of the likelihood of default by the issuer. The lower the credit rating, the greater the credit risk. If the security is unrated, greater reliance is placed on the Adviser's credit assessment. 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. SECTOR RISK Most of the Fund's securities will be invested in issuers located in Connecticut. In addition, a substantial part of the Fund's portfolio may be comprised of tax-exempt securities issued or credit enhanced by companies in similar businesses or with other similar characteristics. As a result, the Fund will be more susceptible to any economic, business, political, or other developments which generally affect these issuers. 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 determined net asset value (NAV). The Fund does not charge a sales charge. NAV is determined at 12:00 noon and 1:00 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 institutions acting in an agency or fiduciary capacity or to individuals directly or through investment professionals. The Fund may not be a suitable investment for retirement plans or for non-Connecticut taxpayers because it invests in Connecticut tax-exempt securities. 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 1:00 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 on the day 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 SYSTEMATIC INVESTMENT PROGRAM Once you have opened an account, you may automatically purchase additional Shares on a regular basis by completing the Systematic Investment Program (SIP) section of the New Account Form or by contacting the Fund or your investment professional. The minimum investment amount for SIPs is $50. BY AUTOMATED CLEARINGHOUSE (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 12:00 noon (Eastern time), your redemption will be wired to you the same day. You will not receive that day's dividend. If you call after 12:00 noon (Eastern time), your redemption will be wired to you the following business day. You will receive that day's dividend. Under limited circumstances, arrangements may be made with the Distributor for same-day payment of redemption proceeds, without that day's dividend, for redemption requests received before 2:00 p.m. (Eastern time). 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 30 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. SYSTEMATIC WITHDRAWAL PROGRAM You may automatically redeem Shares in a minimum amount of $100 on a regular basis. Complete the appropriate section of the New Account Form or an Account Service Options Form or contact your investment professional or the Fund. Your account value must meet the minimum initial investment amount at the time the program is established. This program may reduce, and eventually deplete, your account. Payments should not be considered yield or income. CHECKWRITING You may request checks to redeem your Fund Shares. Your account will continue to receive the daily dividend declared on the Shares being redeemed until a check is presented for payment. DEBIT CARD You may request a debit card account that allows you to redeem Shares. There is an annual fee for this service that the Fund will automatically deduct from your account. 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 CONFIRMATIONS AND ACCOUNT STATEMENTS You will receive confirmation of purchases and redemptions (except for systematic transactions). In addition, you will receive periodic statements reporting all account activity, including systematic transactions, 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, 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. It is anticipated that Fund distributions will be primarily dividends that are exempt from federal income tax, although a portion of the Fund's dividends may not be exempt. Dividends may be subject to state and local taxes, although the Fund's dividends will be exempt from Connecticut state personal income tax to the extent they are derived from interest on obligations exempt from Connecticut personal income taxes. Capital gains and non-exempt dividends are taxable whether paid in cash or reinvested in the Fund. 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 Management. 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 and/or provide administrative services to more than 300 mutual funds and private accounts, which totaled over $120 billion in assets as of December 31, 1997. Federated was established in 1955 and is one of the largest mutual fund investment managers in the United States with more than 2,000 employees. Over 4,000 investment professionals make Federated Funds available to their customers. ADVISORY FEES The Adviser receives an annual investment advisory fee of 0.50% 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 affect 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-Institutional Service Shares (For a share outstanding throughout each period) Reference is made to the Report of Independent Public Accountants on page 26.
YEAR ENDED OCTOBER 31 1998 1997 1996 1995 1994 NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 INCOME FROM INVESTMENT OPERATIONS: Net investment income 0.03 0.03 0.03 0.03 0.02 LESS DISTRIBUTIONS: Distributions from net investment income (0.03) (0.03) (0.03) (0.03) (0.02) NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 TOTAL RETURN 1 2.98% 3.01% 3.02% 3.31% 2.12% RATIOS TO AVERAGE NET ASSETS: Expenses 0.60% 0.60% 0.60% 0.60% 0.59% Net investment income 2.93% 2.97% 2.97% 3.26% 2.11% Expense waiver/reimbursement 2 0.29% 0.31% 0.32% 0.30% 0.18% SUPPLEMENTAL DATA: Net assets, end of period (000 omitted) $339,567 $271,316 $227,089 $184,718 $190,423
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 October 31, 1998
PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-99.8% 1 CONNECTICUT-91.5% $ 10,000,000 Bridgeport, CT, UT GO, 4.25% BANs, 3/18/1999 $ 10,016,440 1,155,000 Bridgeport, CT, UT GO, 5.25% Bonds (AMBAC INS), 9/1/1999 1,175,347 10,928,041 Clipper Connecticut Tax Exempt Trust, (Series 1994-1) Weekly VRDNs (State Street Bank and Trust Co. LIQ) 10,928,041 1,920,000 Connecticut Development Authority Weekly VRDNs (Banta Associates)/(Marine Midland Bank N.A., Buffalo, NY LOC) 1,920,000 1,025,600 Connecticut Development Authority Weekly VRDNs (RSA Corp.)/ (Barclays Bank PLC, London LOC) 1,025,600 2,200,000 Connecticut Development Authority, (Series 1986) Weekly VRDNs (United Illuminating Co.)/(Union Bank of Switzerland, Zurich LOC) 2,200,000 2,300,000 Connecticut Development Authority, (Series 1993) Weekly VRDNs (Rand-Whitney Containerboard Limited Parntership)/ (Chase Manhattan Bank N.A., New York LOC) 2,300,000 10,500,000 Connecticut Development Authority, (Series 1996A) Weekly VRDNs (Connecticut Light & Power Co.)/(AMBAC INS)/(Societe Generale, Paris LIQ) 10,500,000 2,555,000 Connecticut Development Authority, (Series 1997) Weekly VRDNs (Porcelen Ltd., CT LLC)/(Star Bank, N.A., Cincinnati LOC) 2,555,000 7,600,000 Connecticut Development Authority, (Series 1997A) Weekly VRDNs (Bradley Airport Hotel Project)/(Kredietbank N.V., Brussels LOC) 7,600,000 4,000,000 Connecticut Development Authority, (Series 1998) Weekly VRDNs (Capital District Energy Center)/(Fleet National Bank, Springfield, MA LOC) 4,000,000 26,594,000 Connecticut Development Authority, Trust Receipts (Series 1998 FR/RI-C6) Weekly VRDNs (Exeter Energy)/(Bank of America NT and SA, San Francisco SWP) 26,594,000 30,000 Connecticut Development Health Care Facilities Weekly VRDNs (Independence Living)/(Chase Manhattan Bank N.A., New York LOC) 30,000 7,900,000 Connecticut Development Health Care Facilities Weekly VRDNs (Independence Living)/(Credit Local de France LOC) 7,900,000 9,000,000 Connecticut Municipal Electric Energy Cooperative, Power Supply System Revenue Bonds (1995 Series A), 3.35% CP (Fleet National Bank, Springfield, MA LOC), Mandatory Tender 11/6/1998 9,000,000 3,200,000 Connecticut State HEFA, (Series A) Weekly VRDNs (Forman School Issue)/(National Westminster Bank, PLC, London LOC) 3,200,000 20,300,000 Connecticut State HEFA, (Series B) Weekly VRDNs (Edgehill)/ (Banque Paribas, Paris LOC) 20,300,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 CONNECTICUT-CONTINUED $ 1,800,000 Connecticut State HEFA, (Series C) Weekly VRDNs (Charlotte Hungerfield Hospital)/(Bank of Boston, Connecticut LOC) $ 1,800,000 11,500,000 Connecticut State HEFA, (Series J) Weekly VRDNs (Hospital of Saint Raphael)/(Kredietbank N.V., Brussels LOC) 11,500,000 1,900,000 Connecticut State HEFA, (Series K) Weekly VRDNs (Hospital of Saint Raphael)/(Kredietbank N.V., Brussels LOC) 1,900,000 6,500,000 Connecticut State HEFA, (Series T-2) Weekly VRDNs (Yale University) 6,500,000 1,000,000 Connecticut State HEFA, Revenue Bonds (Series A) Weekly VRDNs (Pomfret School Issue)/(Credit Local de France LOC) 1,000,000 1,000,000 Connecticut State HEFA, Series A Weekly VRDNs (Sharon Hospital)/(BankBoston, N.A. LOC) 1,000,000 8,600,000 Connecticut State HEFA, Series S, 2.95% CP (Yale University), Mandatory Tender 1/22/1999 8,600,000 5,000,000 Connecticut State HEFA, Series S, 3.35% CP (Yale University), Mandatory Tender 11/6/1998 5,000,000 3,930,000 Connecticut State HFA, (PT-81) Weekly VRDNs (Rabobank Nederland, Utrecht LIQ) 3,930,000 7,025,000 Connecticut State HFA, (Series 1990C), 3.05% CP (Morgan Guaranty Trust Co., New York LIQ), Mandatory Tender 3/11/1999 7,025,000 3,245,000 Connecticut State HFA, (Series 1990D), 3.05% CP (Morgan Guaranty Trust Co., New York LIQ), Mandatory Tender 3/11/1999 3,245,000 12,260,000 2 Connecticut State HFA, PT-1003 Weekly VRDNs (Merrill Lynch Capital Services, Inc. LIQ) 12,260,000 2,100,000 Connecticut State HFA, Trust Receipts (Series 1998 FR/RI-A4) Weekly VRDNs (Bayerische Hypotheken-Und Wechsel-Bank AG LIQ) 2,100,000 9,745,000 Connecticut State HFA, Variable Rate Certificates (Series 1998S), 3.50% TOBs (Bank of America NT and SA, San Francisco LIQ), Optional Tender 8/20/1999 9,745,000 6,930,000 Connecticut State Transportation Infrastructure Authority Weekly VRDNs (Connecticut State)/(Commerzbank AG, Frankfurt LOC) 6,930,000 7,100,000 Connecticut State, (1997 Series B) Weekly VRDNs (Bayerische Landesbank Girozentrale LIQ) 7,100,000 2,000,000 Connecticut State, (Series A), 6.00% Bonds, 3/1/1999 2,015,380 11,700,000 Connecticut State, Special Assessment Second Injury Fund, 3.15% CP (Caisse Nationale De Credit Agricole, Paris and Credit Communal de Belgique, Brussles LIQs), Mandatory Tender 11/23/1998 11,700,000 11,000,000 Connecticut State, Special Assessment Unemployment Compensation Advance Fund, Revenue Bonds (Series 1993C), 3.60% TOBs (FGIC INS)/(FGIC Securities Purchase, Inc. LIQ), Mandatory Tender 7/1/1999 11,000,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 CONNECTICUT-CONTINUED $ 3,605,000 Connecticut State, Trust Receipts (Series 1998 FR/RI-A60), 3.45% TOBs (Bradley International Airport)/(FGIC INS)/(Bank of New York, New York LIQ), Optional Tender 2/1/1999 $ 3,605,000 4,400,000 Connecticut State, UT GO, 4.00% Bonds, 3/15/1999 4,404,678 2,330,000 East Granby, CT, 3.75% BANs, 8/12/1999 2,332,618 7,900,000 East Haven, CT, 3.65% BANs, 7/15/1999 7,906,372 1,080,000 Fairfield, CT, 6.00% Bonds, 1/1/1999 1,083,947 11,900,000 Hartford, CT Redevelopment Authority Weekly VRDNs (Underwood Towers)/(FSA INS)/(Barclays Bank PLC, London LIQ) 11,900,000 700,000 Hartford, CT, 4.00% BANs, 1/28/1999 700,487 8,500,000 New Britain, CT, 3.70% BANs, 4/13/1999 8,504,514 1,500,000 New Haven, CT Weekly VRDNs (Starter Sportswear)/(Fleet Bank N.A. LOC) 1,500,000 10,000,000 New Haven, CT, 3.90% BANs, 2/1/1999 10,004,891 3,335,000 Plymouth, CT, 3.75% BANs, 8/5/1999 3,338,655 1,500,000 Rocky Hill, CT, 3.50% BANs, 6/15/1999 1,502,698 1,800,000 Shelton, CT Housing Authority, (Series 1998) Weekly VRDNs (Crosby Commons)/(First Union National Bank, Charlotte, N.C. LOC) 1,800,000 8,000,000 South Central CT Regional Water Authority, 4.00% BANs, 7/28/1999 8,023,648 798,000 Southeastern CT Water Authority, 3.70% BANs (Connecticut State GTD), 3/18/1999 798,144 7,500,000 Stamford, CT Housing Authority, Multi-Modal Interchangeable Rate Revenue Bonds (Series 1994) Weekly VRDNs (Morgan Street Project)/(Deutsche Bank, AG LOC) 7,500,000 Total 310,500,460 PUERTO RICO-8.3% 16,291,598 Commonwealth of Puerto Rico Municipal Revenues Collection Center, 1997A LeaseTOPS Trust Weekly VRDNs (ABN AMRO Bank N.V., Amsterdam LIQ)/(State Street Bank and Trust Co. LOC) 16,291,598 3,000,000 2 Commonwealth of Puerto Rico, (Series 1992A) P-Floats PT-140, 3.65% TOBs (FSA INS)/(Commerzbank AG, Frankfurt LIQ), Mandatory Tender 1/14/1999 3,000,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 PUERTO RICO-CONTINUED 6,000,000 Commonwealth of Puerto Rico, Municipal Securities Trust Receipts, (Series 1998-CMC4) Weekly VRDNs (MBIA INS)/(Chase Manhattan Corp. LIQ) 6,000,000 3,000,000 Puerto Rico Highway and Transportation Authority, PA-284 Weekly VRDNs (AMBAC INS)/(Merrill Lynch Capital Services, Inc. LIQ) 3,000,000 Total 28,291,598 Total Investments (at amortized cost) 3 $ 338,792,058
Securities that are subject to Alternative Minimum Tax represent 24.9% of the portfolio as calculated based upon total portfolio market value. 1 The Fund may only invest in securities rated in one of the two highest short-term rating categories by nationally recognized statistical rating organizations ("NRSROs") or unrated securities of comparable quality. 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, MIG-1 or MIG-2 by Moody's Investors Service, Inc., or F-1+, F-1, or F-2 by Fitch IBCA, Inc. are all considered rated in one of the two highest short-term rating categories. Securities rated in the highest short-term rating category (and unrated securities of comparable quality) are identified as First Tier securities. Securities rated in the second highest short-term rating category (and unrated securities of comparable quality) are identified as Second Tier securities. The Fund follows applicable regulations in determining whether a security is rated and whether a security rated by multiple NRSROs in different rating categories should be identified as a First or Second Tier security. At October 31, 1998, the portfolio securities were rated as follows: Tier Rating Percentage Based on Total Market Value (Unaudited). FIRST TIER SECOND TIER 100% 0% 2 Denotes a restricted security which is subject to restriction on resales under federal securities laws. At October 31, 1998, these securities amounted to $15,260,000 which represents 4.5% of net assets. 3 Also represents cost for federal tax purposes. Note: The categories of investments are shown as a percentage of net assets ($339,566,645) at October 31, 1998. The following acronyms are used throughout this portfolio: AMBAC -American Municipal Bond Assurance Corporation BANs -Bond Anticipation Notes CP -Commercial Paper FGIC -Financial Guaranty Insurance Company FSA -Financial Security Assurance GO -General Obligation GTD -Guaranty HEFA -Health and Education Facilities Authority HFA -Housing Finance Authority INS -Insured LIQ -Liquidity Agreement LLC -Limited Liability Corporation LOC -Letter of Credit MBIA -Municipal Bond Investors Assurance PLC -Public Limited Company SA -Support Agreement TOBs -Tender Option Bonds UT -Unlimited Tax VRDNs -Variable Rate Demand Notes Statement of Assets and Liabilities October 31, 1998 ASSETS: Total investments in securities, at amortized cost and value $ 338,792,058 Cash 588,660 Income receivable 805,231 Prepaid expenses 6,866 Total assets 340,192,815 LIABILITIES: Income distribution payable 564,055 Accrued expenses 62,115 Total liabilities 626,170 NET ASSETS for 339,566,645 shares outstanding $ 339,566,645 NET ASSET VALUE, OFFERING PRICE, AND REDEMPTION PROCEEDS PER SHARE: $339,566,645 / 339,566,645 shares outstanding $1.00
See Notes which are an integral part of the Financial Statements Statement of Operations Year Ended October 31, 1998 INVESTMENT INCOME: Interest $ 11,490,107 EXPENSES: Investment advisory fee $ 1,625,027 Administrative personnel and services fee 245,077 Custodian fees 13,117 Transfer and dividend disbursing agent fees and expenses 50,748 Directors'/Trustees' fees 2,338 Auditing fees 12,000 Legal fees 18,603 Portfolio accounting fees 73,525 Shareholder services fee 812,514 Share registration costs 21,367 Printing and postage 20,507 Insurance premiums 17,946 Miscellaneous 4,448 Total expenses 2,917,217 WAIVERS: Waiver of investment advisory fee $ (595,412) Waiver of shareholder services fee (357,506) Total waivers (952,918) Net expenses 1,964,299 Net investment income $ 9,525,808
See Notes which are an integral part of the Financial Statements Statement of Changes in Net Assets
YEAR ENDED OCTOBER 31 1998 1997 INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income $ 9,525,808 $ 7,830,678 DISTRIBUTIONS TO SHAREHOLDERS: Distributions from net investment income (9,525,808) (7,830,678) SHARE TRANSACTIONS: Proceeds from sale of shares 1,057,554,443 889,231,384 Net asset value of shares issued to shareholders in payment of distributions declared 3,189,470 2,819,845 Cost of shares redeemed (992,493,610) (847,823,630) Change in net assets resulting from share transactions 68,250,303 44,227,599 Change in net assets 68,250,303 44,227,599 NET ASSETS: Beginning of period 271,316,342 227,088,743 End of period $ 339,566,645 $ 271,316,342
See Notes which are an integral part of the Financial Statements Notes to Financial Statements October 31, 1998 ORGANIZATION Federated Municipal Trust (the "Trust") is registered under the Investment Company Act of 1940, as amended (the "Act") as an open-end, management investment company. The Trust consists of 17 portfolios. The financial statements included herein are only those of Connecticut Municipal Cash Trust (the "Fund"). The financial statements of the other portfolios are presented separately. The assets of each portfolio are segregated and a shareholder's interest is limited to the portfolio in which shares are held. The investment objective of the Fund is current income exempt from federal regular income tax and Connecticut dividend and interest income tax consistent with stability of principal. 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. 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. RESTRICTED SECURITIES Restricted securities are securities that may only be resold upon registration under federal securities laws or in transactions exempt from such registration. Many restricted securities may be resold in the secondary market in transactions exempt from registration. In some cases, the restricted securities may be resold without registration upon exercise of a demand feature. Such restricted securities may be determined to be liquid under criteria established by the Board of Trustees ("Trustees"). The Fund will not incur any registration costs upon such resales. Restricted securities are valued at amortized cost in accordance with Rule 2a-7 under the Investment Company Act of 1940. Additional information on each restricted security held at October 31, 1998, is as follows: ACQUISITION ACQUISITION SECURITY DATE COST Connecticut State HFA PT-1003 11/14/1997 - 7/27/1998 $12,260,000 Commonwealth of Puerto Rico (Series 1992A) P-Floats PT-140 2/12/1998 3,000,000 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 October 31, 1998, capital paid-in aggregated $339,566,645. Transactions in shares were as follows:
YEAR ENDED OCTOBER 31 1998 1997 Shares sold 1,057,554,443 889,231,384 Shares issued to shareholders in payment of distributions declared 3,189,470 2,819,845 Shares redeemed (992,493,610) (847,823,630) Net change resulting from share transactions 68,250,303 44,227,599
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES INVESTMENT ADVISORY FEE Federated Management, the Fund's investment adviser (the "Adviser"), receives for its services an annual investment advisory fee equal to 0.50% 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 ("FSS"), the Fund will pay FSS up to 0.25% of average daily net assets of the Fund for the period. The fee paid to FSS is used to finance certain services for shareholders and to maintain shareholder accounts. FSS may voluntarily choose to waive any portion of its fee. FSS can modify or terminate this voluntary waiver at any time at its sole discretion. TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES FServ, through its subsidiary, Federated Shareholder Services Company ("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. INTERFUND TRANSACTIONS During the period ended October 31, 1998, the Fund engaged in purchase and sale transactions with funds that have a common investment adviser (or affiliated investment advisors), common Directors/Trustees, and/or common Officers. These purchase and sale transactions were made at current market value pursuant to Rule 17a-7 under the Act amounting to $491,040,000 and $428,445,000, respectively. GENERAL Certain of the Officers and Trustees of the Trust are Officers and Directors or Trustees of the above companies. CONCENTRATION OF CREDIT RISK Since the Fund invests a substantial portion of its assets in issuers located in one state, it will be more susceptible to factors adversely affecting issuers of that state than would be a comparable tax-exempt mutual fund that invests nationally. In order to reduce the credit risk associated with such factors, at October 31, 1998, 48.2% of the securities in the portfolio of investments are backed by letters of credit or bond insurance of various financial institutions and financial guaranty assurance agencies. The percentage of investments insured by or supported (backed) by a letter of credit from any one institution or agency did not exceed 6.0% of total investments. 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 BOARD OF TRUSTEES OF FEDERATED MUNICIPAL TRUST AND SHAREHOLDERS OF CONNECTICUT MUNICIPAL CASH TRUST: We have audited the accompanying statement of assets and liabilities of Connecticut Municipal Cash Trust (an investment portfolio of Federated Municipal Trust, a Massachusetts business trust), including the schedule of portfolio investments, as of October 31, 1998, the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for the periods presented. These financial statements and financial highlights are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the 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 October 31, 1998, by correspondence with the custodian. 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 Connecticut Municipal Cash Trust (an investment portfolio of Federated Municipal Trust) as of October 31, 1998, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and its financial highlights for the periods presented, in conformity with generally accepted accounting principles. Arthur Andersen LLP Boston, Massachusetts December 23, 1998 [Graphic] PROSPECTUS Connecticut Municipal Cash Trust PROSPECTUS A Portfolio of Federated Municipal Trust INSTITUTIONAL SERVICE SHARES December 31, 1998 A Statement of Additional Information (SAI) dated December 31, 1998, is incorporated by reference into this prospectus. To obtain the SAI 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] Connecticut Municipal Cash 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. 811-5911 Cusip 314229105 9101004A-SS (12/98) [Graphic] Statement of Additional Information December 31, 1998 Connecticut Municipal Cash Trust A Portfolio of Federated Municipal Trust Institutional Service Shares This Statement of Additional Information (SAI) is not a prospectus. Read this SAI in conjunction with the prospectus for Connecticut Municipal Cash Trust dated December 31, 1998. Obtain the prospectus without charge by calling 1-800-341-7400. ----------------------------------------------------------------------------- Table of Contents ----------------------------------------------------------------------------- How is the Fund Organized? Securities in Which the Fund Invests How is the Fund Sold? Subaccounting Services Redemption in Kind Massachusetts Partnership Law Account and Share Information Tax Information Who Manages and Provides Services to the Fund? How Does the Fund Measure Performance? Who is Federated Investors, Inc.? Investment Ratings [Federated Investors Logo] Federated Securities Corp., Distributor, subsidiary of Federated Investors, Inc. CUSIP 314229105 9101004B-SS (12/98) HOW IS THE FUND ORGANIZED? ================================================================================ The Fund is a diversified portfolio of Federated Municipal Trust (Trust). The Trust is an open-end, management investment company that was established under the laws of the Commonwealth of Massachusetts on September 1, 1989. The Trust may offer separate series of shares representing interests in separate portfolios of securities. The Board of Trustees (the Board) has established one class of shares of the Fund, known as Institutional Service Shares (Shares). SECURITIES IN WHICH THE FUND INVESTS ================================================================================ SECURITIES DESCRIPTIONS AND TECHNIQUES In pursuing its investment strategy, the Fund may invest in the following tax- exempt securities for any purpose that is consistent with its investment objective. General Obligation Bonds General obligation bonds are supported by the issuer's full faith and credit. The issuer must levy and collect taxes sufficient to pay principal and interest on the bonds. However, the issuer's authority to levy additional taxes may be limited by its charter or state law. Special Revenue Bonds Special revenue bonds are payable solely from specific revenues received by the issuer. The revenues may consist of specific taxes, assessments, tolls, fees or other types of municipal revenues. For example, a municipality may issue bonds to build a toll road, and pledge the tolls to repay the bonds. Bondholders could not collect from the municipality's general taxes or revenues. Therefore, any shortfall in the tolls could result in a default on the bonds. Private Activity Bonds Private activity bonds are special revenue bonds used to finance private entities. For example, a municipality may issue bonds to finance a new factory to improve its local economy. The municipality would lend the proceeds to the company using the factory, and the company would agree make loan payments sufficient to repay the bonds. The bonds would be payable solely from the company's loan payments, not from any other revenues of the municipality. Therefore, any default on the loan normally would result in a default on the bonds. Municipal Leases Municipalities may enter into leases for equipment or facilities. In order to comply with state public financing laws, these leases are typically subject to annual appropriation. In other words, a municipality may end a lease, without penalty, by not providing for the lease payments in its annual budget. After the lease ends, the lessor (the Fund) can resell the equipment or facility but the Fund may lose money on the sale. The Fund may invest in securities supported by pools of municipal leases. The most common type of lease backed securities are certificates of participation (COPs). However, the Fund may also invest directly in individual leases. Credit Enhancement Common types of credit enhancement include guarantees, letters of credit, bond insurance and surety bonds. Credit enhancement also includes arrangements where securities or other liquid assets secure payment of a fixed income security. If a default occurs, these assets may be sold and the proceeds paid to a security's holders. Either form of credit enhancement reduces credit risks by providing another source of payment for a fixed income security. Investment Ratings A nationally recognized rating service'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 ("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 IBCA, 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 rating service can be treated as being in one of the two highest short-term rating categories; currently, such securities must be rated by two rating services in one of their two highest rating categories. See "Regulatory Compliance." INVESTMENT RISKS There are many factors which may effect an investment in the Fund. The Fund's principal risks are described in its prospectus. An additional risk factor is outlined below. TAX RISK In order for the interest income from the securities to be exempt from federal regular income tax ("tax-exempt"), tax-exempt securities must meet certain legal requirements. Failure to meet such requirements may cause the interest received and distributed by the Fund to shareholders to be taxable. FUNDAMENTAL INVESTMENT POLICIES The Fund invests in tax-exempt securities so that at least 80% of the Fund's annual interest income is exempt from federal regular income tax and Connecticut dividend and interest income tax. This policy is fundamental and cannot be changed without shareholder approval. 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 the clearance of transactions. Issuing Senior Securities and Borrowing Money The Fund will not issue senior securities except that the Fund may borrow money in amounts up to one-third of the value of its total assets, including the amounts borrowed. The Fund will not borrow money 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 its total assets are outstanding. Pledging Assets The Fund will not mortgage, pledge, or hypothecate any assets except 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 its 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 Connecticut tax-exempt securities or temporary investments or enter into repurchase agreements, in accordance with its investment objective, policies, and limitations. 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, 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 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 Restricted and Illiquid Securities The Fund may invest in restricted securities. Restricted securities are any securities in which the Fund may invest pursuant to its investment objective and policies but which are subject to restrictions on resale under federal securities law. Under criteria established by the Board, certain restricted securities are determined to be liquid. To the extent that restricted securities are not determined to be liquid the Fund will limit their purchase, together with other illiquid securities, to 10% of its net assets. 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 nationally recognized rating services, 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 Board has 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 Board 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 Board 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 Board 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. 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 professionals 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 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. 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. 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 Trust have equal voting rights, except that in matters affecting only a particular Fund or class, only Shares of that Fund or class are entitled to vote. Trustees may be removed by the Board or by shareholders at a special meeting. A special meeting of shareholders will be called by the Board upon the written request of shareholders who own at least 10% of the Trust's outstanding shares of all series entitled to vote. As of December 8, 1998, the following shareholders owned of record, beneficially, or both, 5% or more of the outstanding Institutional Service Shares: Fleet Securities Corp., Rochester, New York, owned approximately 86,541,323 shares (23.56%) and First Union National Bank (trust accounts), Charlotte, North Carolina, owned approximately 55,983,095 shares (15.24%). TAX INFORMATION ================================================================================ FEDERAL INCOME TAX The Fund intends to meet the requirements of Subchapter M of the Internal Revenue Code applicable to regulated investment companies. If these requirements are not met, it will not receive the special tax treatment and will pay federal income tax. The Fund will be treated as a single, separate entity for federal income tax purposes so that income earned and capital gains and losses realized by the Trust's other portfolios will be separate from those realized by the Fund. CONNECTICUT TAXES Under existing Connecticut laws, distributions made by the Fund will not be subject to Connecticut individual income taxes to the extent that such distributions qualify as exempt interest dividends under the Internal Revenue Code, and represent (i) interest on obligations issued by the district, or similar public entity created under the laws of the State of Connecticut, and (ii) interest on obligations the income of which may not, by federal law, be taxed by a state, such as bonds issued by the government of Puerto Rico. Conversely, to the extent that the distributions made by the Fund are derived from other types of obligations, such dividends will be subject to Connecticut individual income taxes. Distributions from the Fund to a shareholder subject to the Connecticut corporation business tax are not eligible for the dividends received deduction under the Connecticut corporation business tax and therefore are included in the taxable income of a taxpayer to the extent such distributions are treated as either exempt-interest dividends or capital gains dividends for federal income tax purposes. All other distributions from the Fund are eligible for the Connecticut corporation business tax dividends received deduction. WHO MANAGES AND PROVIDES SERVICES TO THE FUND? ================================================================================ BOARD OF TRUSTEES The Board is responsible for managing the Trust's business affairs and for exercising all the Trust's powers except those reserved for the shareholders. Information about each Board member is provided below and includes the following data: name, address, birthdate, present position(s) held with the Trust, principal occupations for the past five years and other notable positions held, total compensation received as a Trustee from the Trust for its most recent fiscal year, and the total compensation received from the Federated Fund Complex for the most recent calendar year. The Trust is comprised of 17 Funds and the Federated Fund Complex is comprised of 56 investment companies, whose investment advisers are affiliated with the Fund's Adviser. As of December 8, 1998, the Fund's Board and Officers as a group owned less than 1% of the Fund's outstanding Institutional Service Shares. An asterisk (*) denotes a Trustee who is deemed to be an interested person as defined in the Investment Company Act of 1940. The following symbol (#) denotes a Member of the Board's Executive Committee, which handles the Board's responsibilities between its meetings.
Name Total Birthdate Aggregate Compensation From Address Principal Occupations Compensation Trust and Fund Position With Trust for Past 5 Years From Trust Complex - ------------------------------- ---------------------------------------------------------- ------------------ ------------------- John F. Donahue##* Chief Executive Officer and Director or Trustee of $0 $0 for the Trust Birthdate: July 28, 1924 the Federated Fund Complex. Chairman and Director, and 56 other Federated Investors Tower Federated Investors, Inc.; Chairman and Trustee, investment 1001 Liberty Avenue Federated Advisers, Federated Management, and companies in the Pittsburgh, PA Federated Research; Chairman and Director, Federated Fund Complex CHAIRMAN and TRUSTEE Research Corp., and Federated Global Research Corp.; Chairman, Passport Research, Ltd. Thomas G. Bigley Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: February 3, 1934 Director, Member of Executive Committee, Children's Trust and 15 Old Timber Trail Hospital of Pittsburgh; formerly: Senior Partner, 56 other Pittsburgh, PA Ernst & Young LLP; Director, MED 3000 Group, Inc.; investment TRUSTEE Director, Member of Executive Committee, University companies in the of Pittsburgh. Fund Complex John T. Conroy, Jr. Director or Trustee of the Federated Fund Complex; $4,484.62 $122,362 for the Birthdate: June 23, 1937 President, Investment Properties Corporation; Senior Trust and Wood/IPC Commercial Dept. Vice President, John R. Wood and Associates, Inc., 56 other John R. Wood and Realtors; Partner or Trustee in private real estate investment Associates, Inc. Realtors ventures in Southwest Florida; formerly: President, companies in the 3255 Tamiami Trail North Naples Property Management, Inc. and Northgate Fund Complex Naples, FL Village Development Corporation. TRUSTEE William J. Copeland Director or Trustee of the Federated Fund Complex; $4,484.62 $122,362 for the Birthdate: July 4, 1918 Director and Member of the Executive Committee, Trust and One PNC Plaza-23rd Floor Michael Baker, Inc.; formerly: Vice Chairman and 56 other Pittsburgh, PA Director, PNC Bank, N.A., and PNC Bank Corp.; investment TRUSTEE Director, Ryan Homes, Inc. companies in the Fund Complex Retired: Director, United Refinery; Director, Forbes Fund; Chairman, Pittsburgh Foundation; Chairman, Pittsburgh Civic Light Opera. James E. Dowd, Esq. Director or Trustee of the Federated Fund Complex; $4,484.62 $122,362 for the Birthdate: May 18, 1922 Attorney-at-law; Director, The Emerging Germany Fund, Trust and 571 Hayward Mill Road Inc. 56 other Concord, MA investment TRUSTEE Retired: President, Boston Stock Exchange, Inc.; companies in the Regional Administrator, United States Securities and Fund Complex Exchange Commission. Lawrence D. Ellis, M.D.* Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: October 11, 1932 Professor of Medicine, University of Pittsburgh; Trust and 3471 Fifth Avenue Medical Director, University of Pittsburgh Medical 56 other Suite 1111 Center - Downtown; Hematologist, Oncologist, and investment Pittsburgh, PA Internist, Presbyterian and Montefiore Hospitals; companies in the TRUSTEE Member, National Board of Trustees, Leukemia Society Fund Complex of America. Edward L. Flaherty, Jr., Director or Trustee of the Federated Fund Complex; $4,484.62 $122,362 for the Esq. # Attorney, of Counsel, Miller, Ament, Henny & Kochuba; Trust and Birthdate: June 18, 1924 Director, Eat'N Park Restaurants, Inc.; formerly: 56 other Miller, Ament, Henny & Counsel, Horizon Financial, F.A., Western Region; investment Kochuba Partner, Meyer and Flaherty. companies in the 205 Ross Street Fund Complex Pittsburgh, PA TRUSTEE Peter E. Madden Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: March 16, 1942 formerly: Representative, Commonwealth of Trust and One Royal Palm Way Massachusetts General Court; President, State Street 56 other 100 Royal Palm Way Bank and Trust Company and State Street Corporation. investment Palm Beach, FL companies in the TRUSTEE Retired: Director, VISA USA and VISA International; Fund Complex Chairman and Director, Massachusetts Bankers Association; Director, Depository Trust Corporation. John E. Murray, Jr., J.D., Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the S.J.D. President, Law Professor, Duquesne University; Trust and Birthdate: December 20, 1932 Consulting Partner, Mollica & Murray. 56 other President, Duquesne investment University Retired: Dean and Professor of Law, University of companies in the Pittsburgh, PA Pittsburgh School of Law; Dean and Professor of Law, Fund Complex TRUSTEE Villanova University School of Law. Wesley W. Posvar Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: September 14, President, World Society of Ekistics, Athens; Trust and 1925 Professor, International Politics; Management 56 other 1202 Cathedral of Learning Consultant; Trustee, Carnegie Endowment for investment University of Pittsburgh International Peace, RAND Corporation, Online companies in the Pittsburgh, PA Computer Library Center, Inc., National Defense Fund Complex TRUSTEE University and U.S. Space Foundation; President Emeritus, University of Pittsburgh; Founding Chairman, National Advisory Council for Environmental Policy and Technology, Federal Emergency Management Advisory Board and Czech Management Center, Prague. Retired: Professor, United States Military Academy; Professor, United States Air Force Academy. Marjorie P. Smuts Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: June 21, 1935 Public Relations/Marketing/Conference Planning. Trust and 4905 Bayard Street 56 other Pittsburgh, PA Retired: National Spokesperson, Aluminum Company of investment TRUSTEE America; business owner. companies in the Fund Complex Glen R. Johnson* Trustee, Federated Investors, Inc.; staff member, $0 $0 for the Trust Birthdate: May 2, 1929 Federated Securities Corp. and Federated Investors Tower 8 other investment 1001 Liberty Avenue companies in the Pittsburgh, PA Fund Complex PRESIDENT and TRUSTEE J. Christopher Donahue##* President or Executive Vice President of the $0 $0 for the Trust Birthdate: April 11, 1949 Federated Fund Complex; Director or Trustee of some and Federated Investors Tower of the Funds in the Federated Fund Complex; President 18 other 1001 Liberty Avenue and Director, Federated Investors, Inc.; President investment Pittsburgh, PA and Trustee, Federated Advisers, Federated companies in the EXECUTIVE VICE PRESDIENT Management, and Federated Research; President and Fund Complex Director, Federated Research Corp. and Federated Global Research Corp.; President, Passport Research, Ltd.; Trustee, Federated Shareholder Services Company; Director, Federated Services Company. Edward C. Gonzales* Trustee or Director of some of the Funds in the $0 $0 for the Trust Birthdate: October 22, 1930 Federated Fund Complex; President, Executive Vice and Federated Investors Tower President and Treasurer of some of the Funds in the 1 other investment 1001 Liberty Avenue Federated Fund Complex; Vice Chairman, Federated companies in the Pittsburgh, PA Investors, Inc.; Vice President, Federated Advisers, Fund Complex EXECUTIVE VICE PRESIDENT 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. John W. McGonigle Executive Vice President and Secretary of the $0 $0 for the Trust Birthdate: October 26, 1938 Federated Fund Complex; Executive Vice President, and Federated Investors Tower Secretary, and Director, Federated Investors, Inc.; 56 other 1001 Liberty Avenue Trustee, Federated Advisers, Federated Management, investment Pittsburgh, PA and Federated Research; Director, Federated Research companies in the EXECUTIVE VICE PRESIDENT Corp. and Federated Global Research Corp.; Director, Fund Complex and SECRETARY Federated Services Company; Director, Federated Securities Corp. Richard J. Thomas Treasurer of the Federated Fund Complex; Vice $0 $0 for the Trust Birthdate: June 17, 1954 President - Funds Financial Services Division, and Federated Investors Tower Federated Investors, Inc.; Formerly: various 56 other 1001 Liberty Avenue management positions within Funds Financial Services investment Pittsburgh, PA Division of Federated Investors, Inc. companies in the TREASURER Fund Complex Richard B. Fisher* President or Vice President of some of the Funds in $0 $0 for the Trust Birthdate: May 17, 1923 the Federated Fund Complex; Director or Trustee of and Federated Investors Tower some of the Funds in the Federated Fund Complex; 6 other investment 1001 Liberty Avenue Executive Vice President, Federated Investors, Inc.; companies in the Pittsburgh, PA Chairman and Director, Federated Securities Corp. Fund Complex VICE PRESIDENT William D. Dawson, III Chief Investment Officer of this Fund and various $0 $0 for the Trust Birthdate: March 3, 1949 other Funds in the Federated Fund Complex; Executive and Federated Investors Tower Vice President, Federated Investment Counseling, 41 other 1001 Liberty Avenue Federated Global Research Corp., Federated Advisers, investment Pittsburgh, PA Federated Management, Federated Research, and companies in the CHIEF INVESTMENT OFFICER Passport Research, Ltd.; Registered Representative, Fund Complex 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. Mary Jo Ochson Senior Portfolio Manager and Vice President of eight $0 $0 for the Birthdate: September 12, investment companies in the Federated Fund Complex; Trust and 1953 Senior Vice President, Federated Investment 7 other investment Federated Investors Tower Counseling, Federated Advisers, Federated Global companies 1001 Liberty Avenue Research Corp., Federated Management, Federated in the Fund Complex Pittsburgh, PA Research, Federated Research Corp. and Passport SENIOR PORTFOLIO Research, Ltd.; Formerly: Vice President, Federated MANAGER/VICE PRESIDENT Advisers, Federated Management, Federated Research, Federated Research Corp. , Passport Research, Ltd. and Federated Global Research Corp. Jeff A. Kozemchak Senior Portfolio Manager and Vice President of four $0 $0 for the Birthdate: January 15, 1960 investment companies in the Federated Fund Complex; Trust and Federated Investors Tower Vice President, Federated Investment Counseling, 3 other investment 1001 Liberty Avenue Federated Advisers, Federated Global Research Corp., companies Pittsburgh, PA Federated Management, Federated Research, Federated in the Fund Complex SENIOR PORTFOLIO Research Corp. and Passport Research, Ltd.; MANAGER/VICE PRESIDENT Formerly: Assistant Vice President and Investment Analyst, Federated Research Corp. and Passport Research, Ltd. ; Assistant Vice President, Federated Advisers, Federated Management and Federated Research.
## Mr. Donahue is the father of J. Christopher Donahue, Executive Vice President of the Trust. 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 Trust, 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 Trust. 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: Maximum Average Aggregate Daily Net Administrative Fee Assets of the Federated Funds ------------------ ----------------------------- .150 of 1% on the first $250 million .125 of 1% on the next $250 million .100 of 1% on the next $250 million .075 of 1% on assets in excess of $750 million The administrative fee received during any fiscal year shall be at least $125,000 per portfolio and $30,000 per each additional class of Shares. Federated Services Company may voluntarily waive a portion of its fee and may reimburse the Fund for expenses. Federated Services Company also provides certain accounting and recordkeeping services with respect to the Fund's portfolio investments for a fee based on Fund assets plus out-of-pocket expenses. CUSTODIAN State Street Bank and Trust Company, Boston, Massachusetts, is custodian for the securities and cash of the Fund. Foreign instruments purchased by the Fund are held by foreign banks participating in a network coordinated by State Street Bank. TRANSFER AGENT AND DIVIDEND DISBURSING AGENT Federated Services Company, through its registered transfer agent subsidiary, Federated Shareholder Services Company, maintains all necessary shareholder records. The Funds pays the transfer agent a fee based on the size, type, and number of accounts and transactions made by shareholders. INDEPENDENT PUBLIC ACCOUNTANTS Arthur Andersen LLP is the independent public accountant for the Fund. FEES PAID BY THE FUND FOR SERVICES For the Year ended October 31, 1998 1997 1996 Advisory Fee Earned....... $1,625,027 $1,319,478 $1,125,360 Advisory Fee Reduction.... $ 595,412 $ 518,584 $ 468,496 Brokerage Commissions..... $ 0 $ 0 $ 0 Administrative Fee........ $ 245,077 $ 199,252 $ 170,171 Shareholder Services Fee.. $ 455,008 --- --- If the Fund's expenses are capped at a particular level, the cap does not include reimbursement to the Fund of any expenses incurred by shareholders who use the transfer agent's subaccounting facilities. HOW DOES THE FUND MEASURE PERFORMANCE? ================================================================================ The Fund may advertise Share performance by using the Securities and Exchange Commission's (SEC) standard method for calculating performance applicable to all mutual funds. The SEC also permits this standard performance information to be accompanied by non-standard performance information. Unless otherwise stated, any quoted Share performance reflects the effect of non-recurring charges, such as maximum sales charges, which, if excluded, would increase the total return and yield. The performance of Shares depends upon such variables as: portfolio quality; average portfolio maturity; type and value of portfolio securities; changes in interest rates; changes or differences in the Fund's or any class of Shares' expenses; and various other factors. Share performance fluctuates on a daily basis largely because net earnings and offering price per Share 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 since inception periods ended October 31, 1998. Yield, Effective Yield and Tax-Equivalent Yield given for the seven-day period ended October 31, 1998.
Share Class Seven-Day Period 1 Year 5 Years Since Inception on November 1, 1989 Institutional Service Shares - ------------------------------------------------------------------------------------------------------------------- Total Return -- 2.98% 2.89% 3.18% Yield 2.63% -- -- -- Effective Yield 2.67% -- -- -- Tax-Equivalent Yield 4.78% -- -- -- - -------------------------------------------------------------------------------------------------------------------
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. The tax- equivalent yield of Shares is calculated similarly to the yield, but is adjusted to reflect the taxable yield that Shares would have had to earn to equal the actual yield, assuming a specific tax rate. 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. 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. TAX EQUIVALENCY TABLE Set forth below is a sample of a tax-equivalency table that may be used in advertising and sales literature. This table is for illustrative purposes only and is not representative of past or future performance of the Fund. The interest earned by the tax-exempt securities owned by the Fund generally remains free from federal regular income tax and is often free from state and local taxes as well. However, some of the Fund's income may be subject to the federal alternative minimum tax and state and/or local taxes.
- ------------------------------------------------------------------------------------------------------------------- TAXABLE YIELD EQUIVALENT FOR 1998 STATE OF CONNECTICUT - ------------------------------------------------------------------------------------------------------------------- TAX BRACKET: FEDERAL15.00% 28.00% 31.00% 36.00% 39.60% COMBINED FEDERAL AND STATE:19.50% 32.50% 35.50% 40.50% 44.10% - ------------------------------------------------------------------------------------------------------------------- JOINT $1- $42,351- $102,301- $155,951 OVER RETURN: 42,350 102,300 155,950 278,450 $278,450 SINGLE $1- $25,351- $61,401- $128,101- OVER RETURN: 25,350 61,400 128,100 278,450 $278,450 - ------------------------------------------------------------------------------------------------------------------- TAX-EXEMPT YIELD TAXABLE YIELD EQUIVALENT - ------------------------------------------------------------------------------------------------------------------- 1.50% 1.86% 2.22% 2.33% 2.52% 2.68% 2.00% 2.48% 2.96% 3.10% 3.36% 3.58% 2.50% 3.11% 3.70% 3.88% 4.20% 4.47% 3.00% 3.73% 4.44% 4.65% 5.04% 5.37% 3.50% 4.35% 5.19% 5.43% 5.88% 6.26% 4.00% 4.97% 5.93% 6.20% 6.72% 7.16% 4.50% 5.59% 6.67% 6.98% 7.56% 8.05% 5.00% 6.21% 7.41% 7.75% 8.40% 8.94% 5.50% 6.83% 8.15% 8.53% 9.24% 9.84% 6.00% 7.45% 8.89% 9.30% 10.08% 10.73%
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. 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., 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 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, 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, 1997, Federated managed 11 bond funds with approximately $2.1 billion in assets and 22 money market funds with approximately $10.9 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 tax-exempt 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 27 years' experience. As of December 31, 1997, Federated managed 29 equity funds totaling approximately $11.7 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, 1997, Federated managed 11 money market funds and 16 bond funds with assets approximating $17.1 billion and $5.6 billion, respectively. Federated's corporate bond decision making--based on intensive, diligent credit analysis-- is backed by over 22 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 $200 billion. Government Funds In the government sector, as of December 31, 1997, Federated manages 9 mortgage-backed, 6 government/agency and 18 government money market mutual funds, with assets approximating $5.9 billion, $1.5 billion and $35 billion, respectively. Federated trades approximately $400 million in U.S. government and mortgage-backed securities daily and places approximately $23 billion in repurchase agreements each day. Federated introduced the first U.S. government fund to invest in U.S. government bond securities in 1969. Federated has been a major force in the short- and intermediate-term government markets since 1982 and currently manages approximately $36 billion in government funds within these maturity ranges. 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, 1997, Federated managed more than $63.1 billion in assets across 51 money market funds, including 18 government, 11 prime and 22 municipal with assets approximating $35 billion, $17.1 billion and $10.9 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 $4 trillion to the more than 6,700 funds available, according to the Investment Company Institute. Federated distributes mutual funds through its subsidiaries for a variety of investment purposes. Specific markets include: FEDERATED CLIENTS OVERVIEW 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. INVESTMENT RATINGS ================================================================================ APPENDIX Standard & Poor's Short-Term Municipal Obligation Ratings A Standard & Poor's (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-1+, 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 rated 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. Moody's 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 Service, L.P. 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. ADDRESSES ================================================================================ Connecticut Municipal Cash Trust Institutional Service Shares Federated Investors Funds 5800 Corporate Drive Pittsburgh, PA 15237-7000 - -------------------------------------------------------------------------------- Distributor Federated Securities Corp. Federated Investors Tower 1001 Liberty Avenue, Pittsburgh, PA 15222-3779 - -------------------------------------------------------------------------------- Investment Adviser Federated Management Federated Investors Tower 1001 Liberty Avenue, Pittsburgh, PA 15222-3779 - -------------------------------------------------------------------------------- Custodian State Street Bank and Trust Company P.O. Box 8600 Boston, MA 02266-8600 - -------------------------------------------------------------------------------- Transfer Agent and Dividend Disbursing Agent Federated Shareholder Services Company P.O. Box 8600 Boston, MA 02266-8600 - -------------------------------------------------------------------------------- Independent Auditors Arthur Andersen LLP 225 Franklin Street Boston, MA 02110-2812 - -------------------------------------------------------------------------------- PROSPECTUS Florida Municipal Cash Trust A Portfolio of Federated Municipal Trust CASH II SHARES A money market mutual fund seeking current income exempt from federal regular income tax and the Florida intangibles tax. 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. December 31, 1998 CONTENTS Risk/Return Summary 1 What are the Fund's Fees and Expenses? 2 What are the Fund's Investment Strategies? 3 What are the Principal Securities in Which the Fund Invests? 3 What are the Specific Risks of Investing in the Fund? 4 What do Shares Cost? 5 How is the Fund Sold? 5 How to Purchase Shares 5 How to Redeem Shares 7 Account and Share Information 9 Who Manages the Fund? 9 Financial Information 10 Report of Independent Public Accountants 24 Risk/Return Summary WHAT IS THE FUND'S INVESTMENT OBJECTIVE? The Fund is a money market fund which seeks to maintain a stable net asset value of $1.00. The Fund's investment objective is to provide current income exempt from federal regular income tax consistent with stability of principal and liquidity and to maintain an investment portfolio that will cause its Shares to be exempt from the Florida state intangibles tax. 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 tax-exempt securities so that the Fund's annual interest income is exempt from federal regular income tax and the Florida intangibles tax. Interest from the Fund's investments may be subject to the federal alternative minimum tax for individuals and corporations. WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND? Because the Fund may invest a significant portion of its assets in securities of a single issuer, an investment in the Fund may involve additional risks compared to a fully diversified money market 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] - See Appendix C-4 Historically, the Fund has maintained a constant $1.00 net asset value per share. The bar chart shows the variability of the Fund's Cash II Shares total returns on a yearly basis. The Fund's Cash II Shares are not sold subject to a sales charge (load). The total returns displayed above are based upon net asset value. The Fund's Cash II Shares year-to-date total return as of the most recent calendar quarter of September 30, 1998, was 2.08%. Within the period shown in the Chart, the Fund's Cash II Shares highest quarterly return was 0.77% (quarter ended June 30, 1997 and December 31, 1997). Its lowest quarterly return was 0.66% (quarter ended March 31, 1997). The Fund's Cash II Shares Seven-Day Net Yield as of 12/31/97 was 3.19%. The following table represents the Fund's Cash II Shares Average Annual Total Return through 12/31/97.
CALENDAR PERIOD FUND 1 Year 2.97% Start of Performance 1 2.99%
1 The Fund's Cash II Shares start of performance date was November 27, 1995. Investors may call the Fund at 1-800-341-7400 to acquire the current Seven- Day Net Yield. 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? FLORIDA MUNICIPAL CASH TRUST FEES AND EXPENSES This table describes the fees and expenses that you may pay if you buy, hold and redeem shares of the Fund's Cash II Shares. SHAREHOLDER FEES 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 a percentage of average net assets) Management Fee 2 0.40% Distribution (12b-1) Fee 3 0.25% Shareholder Services Fee 0.25% Other Expenses 0.14% Total Annual Fund Operating Expenses 1.04%
1 Although not contractually obligated to do so, the adviser and distributor waived certain amounts. These are shown below along with the net expenses the Fund actually paid for the fiscal year ended October 31, 1998. Waiver of Fund Expenses 0.19% Total Actual Annual Fund Operating Expenses (after waivers) 0.85%
2 The adviser voluntary 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 0.26% for the year ended October 31, 1998. 3 The distribution (12b-1) fee for the Fund has been voluntarily reduced. This voluntary reduction can be terminated at any time. The distribution (12b-1) fee paid by the Fund (after the voluntary reduction) was 0.20% for the fiscal year ended October 31, 1998. EXAMPLE The following Example is intended to help you compare the cost of investing in the Florida Municipal Cash Trust's Cash II Shares with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund's Cash II 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 Florida Municipal Cash Trust's Cash II Shares operating expenses are BEFORE WAIVERS as shown above and remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS Expenses assuming no redemption $106 $331 $574 $1,271
What are the Fund's Investment Strategies? The Fund invests in a portfolio of high-quality tax-exempt securities maturing in 13 months or less. The average maturity of the Fund's portfolio, computed on a dollar-weighted basis, will be 90 days or less. The Fund's Adviser performs a fundamental credit analysis to develop an approved list of issuers and securities that meet the Adviser's minimum credit standards. The Adviser targets an average portfolio maturity based upon its interest rate outlook and the tax-exempt securities available. The Adviser structures the portfolio by combining variable rate demand instruments and municipal notes. Depending on the supply of tax-exempt securities, the Adviser generally shortens the portfolio's maturity when it expects interest rates to rise and extends the maturity when it expects interest rates to fall. TEMPORARY DEFENSIVE INVESTMENTS During adverse market conditions the Fund may temporarily depart from its principal investment strategies by investing in securities subject to federal regular income tax and the Florida intangibles tax. Temporary investments will be of comparable quality to other securities in which the Fund invests. This may cause the Fund to give up greater investment returns to maintain the safety of principal. This also may cause the Fund to receive and distribute taxable income to investors. What are the Principal Securities in Which the Fund Invests? TAX-EXEMPT SECURITIES Tax-exempt securities are fixed income securities that pay interest exempt from regular federal income taxes. States, counties, cities and other political subdivisions and authorities typically issue tax-exempt securities. Tax-exempt securities are generally differentiated by their source of repayment. FIXED INCOME SECURITIES Fixed income 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. VARIABLE RATE DEMAND INSTRUMENTS Variable rate demand instruments are tax-exempt securities that require the issuer or a third party, such as a dealer or bank, to repurchase the security for its face value upon demand. The securities also bear interest at a variable rate intended to cause the securities to trade at their face value. The Fund treats demand instruments as short-term securities, even though their stated maturity may extend beyond 13 months. MUNICIPAL NOTES Municipal notes are short-term tax-exempt securities. Many municipalities issue such notes to fund their current operations before collecting taxes or other municipal revenues. Municipalities may also issue notes to fund capital projects prior to issuing long-term bonds. The issuers typically repay the notes at the end of their fiscal year, either with taxes, other revenues or proceeds from newly issued notes or bonds. INVESTMENT 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 rating services or be of comparable quality to securities having such ratings. CREDIT ENHANCEMENT Credit enhancement consists of an arrangement in which a company agrees to pay amounts due on a fixed income security if the issuer defaults. In some cases the company providing credit enhancement makes all payments directly to the security holders and receives reimbursement from the issuer. Normally, the credit enhancer has greater financial resources and liquidity than the issuer. For this reason, the Adviser usually evaluates the credit risk of a fixed income security based solely upon its credit enhancement. What are the Specific Risks of Investing in the Fund? Although there are many factors which may affect an investment in the Fund, the principal risks of investing in a tax-exempt money market fund are described below. CREDIT RISK Credit risk is the possibility that an issuer or a credit enhancer will default (fails to repay interest and principal when due). If an issuer or credit enhancer defaults, the Fund will lose money. Money market funds try to minimize this risk by purchasing higher quality securities. Many fixed income securities receive credit ratings from companies such as Standard & Poor's and Moody's Investor Services. Fixed income securities receive different credit ratings depending on the rating company's assessment of the likelihood of default by the issuer. The lower the credit rating, the greater the credit risk. If the security is unrated, greater reliance is placed on the Adviser's credit assessment. 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. SECTOR RISK Most of the Fund's securities will be invested in issuers located in Florida. In addition, a substantial part of the Fund's portfolio may be comprised of tax-exempt securities issued or credit enhanced by companies in similar businesses or with other similar characteristics. As a result, the Fund will be more susceptible to any economic, business, political, or other developments which generally affect these issuers. 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 determined net asset value (NAV). The Fund does not charge a sales charge. NAV is determined at 12:00 noon and 1:00 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 $10,000. There is no required minimum subsequent investment amount. An account may be opened with a smaller amount as long as the $10,000 minimum is reached within 90 days. 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 offers two share classes: Institutional Shares and Cash II Shares each representing interests in a single portfolio of securities. This prospectus relates only to Cash II Shares. Each share class has different expenses, which affect their performance. Contact your investment professional or call 1-800-341-7400 for more information concerning the other class. The Fund's distributor markets the Shares described in this prospectus to institutions or to individuals directly or through investment professionals. The Fund may not be a suitable investment for retirement plans or for non-Florida taxpayers because it invests in Florida tax-exempt securities. When the Distributor receives marketing fees, it may pay some or all of them to 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). RULE 12B-1 PLAN The Fund has adopted a Rule 12b-1 Plan, which allows it to pay marketing fees to the Distributor and investment professionals for the sale, distribution and customer servicing of the Fund's Cash II Shares. Because these Shares pay marketing fees on an ongoing basis, your investment cost may be higher over time than other shares with different sales charges and marketing fees. 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 1:00 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 on the day 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 SYSTEMATIC INVESTMENT PROGRAM Once you have opened an account, you may automatically purchase additional Shares on a regular basis by completing the Systematic Investment Program (SIP) section of the New Account Form or by contacting the Fund or your investment professional. The minimum investment amount for SIPs is $50. BY AUTOMATED CLEARINGHOUSE (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 12:00 noon (Eastern time), your redemption will be wired to you the same day. You will not receive that day's dividend. If you call after 12:00 noon (Eastern time), your redemption will be wired to you the following business day. You will receive that day's dividend. Under limited circumstances, arrangements may be made with the Distributor for same-day payment of redemption proceeds, without that day's dividend, for redemption requests received before 2:00 p.m. (Eastern time). 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 30 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. 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. SYSTEMATIC WITHDRAWAL PROGRAM You may automatically redeem Shares in a minimum amount of $100 on a regular basis. Complete the appropriate section of the New Account Form or an Account Service Options Form or contact your investment professional or the Fund. Your account value must meet the minimum initial investment amount at the time the program is established. This program may reduce, and eventually deplete, your account. Payments should not be considered yield or income. CHECKWRITING You may request checks to redeem your Fund Shares. Your account will continue to receive the daily dividend declared on the Shares being redeemed until a check is presented for payment. DEBIT CARD You may request a debit card account that allows you to redeem Shares. There is an annual fee for this service that the Fund will automatically deduct from your account. 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 CONFIRMATIONS AND ACCOUNT STATEMENTS You will receive confirmation of purchases and redemptions (except for systematic transactions). In addition, you will receive periodic statements reporting all account activity, including systematic transactions, 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 distributions 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, 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. It is anticipated that Fund distributions will be primarily dividends that are exempt from federal income tax, although a portion of the Fund's dividends may not be exempt. Dividends may be subject to state and local taxes, although the Fund's dividends will be exempt from the Florida intangibles tax to the extent they are derived from interest on obligations exempt from the Florida intangibles tax. Capital gains and non-exempt dividends are taxable whether paid in cash or reinvested in the Fund. 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 Management. 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 and/or provide administrative services to more than 300 mutual funds and private accounts, which totaled over $120 billion in assets as of December 31, 1997. Federated was established in 1955 and is one of the largest mutual fund investment managers in the United States with more than 2,000 employees. Over 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 affect 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-Cash II Shares (For a share outstanding throughout each period) Reference is made to the Report of Independent Public Accountants on page 24.
YEAR ENDED OCTOBER 31 1998 1997 1996 1 NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 INCOME FROM INVESTMENT OPERATIONS: Net investment income 0.03 0.03 0.03 LESS DISTRIBUTIONS: Distributions from net investment income (0.03) (0.03) (0.03) NET ASSET VALUE, END OF PERIOD: $ 1.00 $ 1.00 $ 1.00 TOTAL RETURN 2 2.83% 2.94% 2.80% RATIOS TO AVERAGE NET ASSETS: Expenses 0.85% 0.80% 0.65% 3 Net investment income 2.83% 2.88% 3.07% 3 Expense waiver/reimbursement 4 0.19% 0.24% 0.43% 3 SUPPLEMENTAL DATA: Net assets, end of period (000 omitted) $71,839 $62,756 $31,824
1 Reflects operations for the period from November 27, 1995 (date of initial public investment) to October 31, 1996. 2 Based on net asset value, which does not reflect the sales charge or contingent deferred sales charge, if applicable. 3 Computed on an annualized basis. 4 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 October 31, 1998
PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-99.5% 1 ALABAMA-1.7% $ 2,000,000 Birmingham, AL IDA, (Series 1997) Weekly VRDNs (Millcraft, AL Inc.)/(Regions Bank, Alabama LOC) $ 2,000,000 1,900,000 Gadsen, AL IDB, IDRB's (Series 1997) Weekly VRDNs (Chicago Steel, (Alabama), LLC)/(Marshall & Ilsley Bank, Milwaukee LOC) 1,900,000 Total 3,900,000 CALIFORNIA-2.6% 6,000,000 Los Angeles County, CA Unified School District, Trust Receipts FR/RI-A26, 3.60% TOBs (Bank of New York, New York LIQ), Mandatory Tender 12/9/1998 6,000,000 COLORADO-1.5% 3,380,000 Colorado HFA, MERLOTS (Series C), 3.40% TOBs (Corestates Bank N.A., Philadelphia, PA LIQ), Optional Tender 11/1/1998 3,380,000 FLORIDA-82.2% 550,000 Brevard County, FL, Greywater Investments II, Ltd 1997 Weekly VRDNs (Greywater Investments)/(Huntington National Bank, Columbus, OH LOC) 550,000 2,755,000 Broward County, FL HFA, (CR-5), 3.85% TOBs (GNMA COL)/ (Citibank NA, New York LIQ), Optional Tender 11/1/1998 2,755,000 700,000 Broward County, FL HFA, (Series 1997) Weekly VRDNs (Jacaranda Village Apartments)/(Marine Midland Bank N.A., Buffalo, NY LOC) 700,000 1,130,000 Broward County, FL, IDRB (Series 1993) Weekly VRDNs (American Whirlpool Products Corp. Project)/(Nationsbank, N.A., Charlotte LOC) 1,130,000 1,000,000 Broward County, FL, IDRB's (Series 1997) Weekly VRDNs (Fast Real Estate Partners, Ltd.)/(SunTrust Bank, Central Florida LOC) 1,000,000 7,665,000 Clipper, FL Tax-Exempt Trust, Class A Certificates of Participation, Series 1996-3B Weekly VRDNs (Escambia County, FL HFA)/(State Street Bank and Trust Co. LOC) 7,665,000 9,635,000 Dade County, FL, PT-1083 Weekly VRDNs (Miami International Airport)/(FSA INS)/(Merrill Lynch Capital Services, Inc. LOC) 9,635,000 1,710,000 Escambia County, FL HFA, P-Floats PA-129 Weekly VRDNs (GNMA COL)/(Merrill Lynch Capital Services, Inc. LIQ) 1,710,000 8,675,000 2 Escambia County, FL HFA, PT-121, 3.75% TOBs (GNMA COL)/ (Banco Santander LIQ), Mandatory Tender 3/11/1999 8,675,000 5,220,000 Florida HFA, Homeowner Mortgage Revenue Bonds PT-88 (Series 1996-3) Weekly VRDNs (GNMA COL)/(Banco Santander LIQ) 5,220,000 4,570,000 Florida HFA, Multifamily Housing Revenue Bonds (1995 Series M) Weekly VRDNs (Bainbridge Club Apartments Project)/(PNC Bank, N.A. LOC) 4,570,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 FLORIDA-CONTINUED $ 4,000,000 Florida HFA, Series OO, Oaks at Mill Creek Project, 3.85% TOBs (Oaks at Mills Creek)/(Chase Manhattan Bank N.A., New York LOC), Mandatory Tender 11/1/1998 $ 4,000,000 4,465,000 Florida HFA, Trust Receipts, Series 1998 FR/RI-12 Weekly VRDNs (MBIA INS)/(Bank of New York, New York LIQ) 4,465,000 19,550,000 2 Florida State Board of Education Administration, Trust Receipts (Series 1998 A-64), 3.45% TOBs (FGIC INS)/(Bank of New York, New York LIQ), Optional Tender 2/1/1999 19,550,000 1,000,000 Florida State Department of Environmental Protection, Trust Receipts FR/RI-A18 (Series 1998) Weekly VRDNs (FGIC INS)/(National Westminster Bank, PLC, London LIQ) 1,000,000 1,375,000 Greater Orlando (FL) Aviation Authority, Adjustable Rate (Series 1997), 3.90% TOBs (Signature Flight Support Corp.)/ (Bayerische Landesbank Girozentrale LOC), Optional Tender 12/1/1998 1,375,000 7,000,000 Greater Orlando (FL) Aviation Authority, Airport Facilities Subordinated CP Notes (Series B), 3.15% CP, Mandatory Tender 1/25/1999 7,000,000 10,312,000 Greater Orlando (FL) Aviation Authority, Airport Facilities Subordinated CP Notes (Series B), 3.50% CP, Mandatory Tender 12/28/1998 10,311,897 4,500,000 Hillsborough County, FL Aviation Authority, Bond Anticipation Comercial Paper Notes, 3.25% CP (Tampa International Airport)/(National Westminster Bank, PLC, London LOC), Mandatory Tender 2/10/1999 4,500,000 2,000,000 Hillsborough County, FL IDA Weekly VRDNs (Ringhager Equipment Co.)/(Mellon Bank NA, Pittsburgh LOC) 2,000,000 1,390,000 Hillsborough County, FL IDA, IDRB's (Series 1996) Weekly VRDNs (VIGO Importing Company Project)/(Barnett Bank, N.A. LOC) 1,390,000 1,115,000 Hillsborough County, FL IDA, Variable Rate Demand IRDB's (Series 1996) Weekly VRDNs (Trident Yacht Building Partnership Project)/(First Union National Bank, Charlotte, N.C. LOC) 1,115,000 4,100,000 Hillsborough County, FL IDA, Variable Rate IDRB's (Series 1998) Weekly VRDNs (SIFCO Industries, Inc.)/(National City Bank, Ohio LOC) 4,100,000 4,080,000 Indian River County, FL, IDRB's (Series 1997) Weekly VRDNs (Ocean Spray Cranberries, Inc.)/(Wachovia Bank of NC, NA, Winston-Salem LOC) 4,080,000 6,500,000 Jacksonville, FL IDA, IDRBs (series 1996) Weekly VRDNs (Portion Pac, Inc.)/(Heinz (H.J.) Co. GTD) 6,500,000 600,000 Jacksonville, FL Weekly VRDNs (Metal Sales)/(National City Bank, Kentucky LOC) 600,000 3,200,000 Lee County, FL IDA, IDRB (Series 1994) Weekly VRDNs (Baader North America Corp.)/(Deutsche Bank, AG LOC) 3,200,000 1,500,000 Lynn Haven, FL, (Series 1998A) Weekly VRDNs (Merrick Industries, Inc.)/(Bank One, Ohio, N.A. LOC) 1,500,000 5,500,000 Manatee County, FL, IDR Improvement Bonds (Series 1998 B) Weekly VRDNs (CFI Manufacturing, Inc. Project)/(Huntington National Bank, Columbus, OH LOC) 5,500,000 2,700,000 Manatee County, FL, Variable/Fixed Rate IDRB's (Series 1998) Weekly VRDNs (Mader Electric, Inc.)/(SouthTrust Bank of Alabama, Birmingham LOC) 2,700,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 FLORIDA-CONTINUED $ 2,400,000 Martin County, FL IDA, Tender Industrial Revenue Bonds (Series 1986) Weekly VRDNs (Tampa Farm Service, Inc. Project)/(SunTrust Banks, Inc. LOC) $ 2,400,000 2,100,000 Okeechobee County, FL, (Series 1992) Weekly VRDNs (Morgan Guaranty Trust Co., New York LOC) 2,100,000 5,893,000 Orange County, FL HFA, (Series 1997A) Weekly VRDNs (Regal Pointe Apartments Project)/(Nationsbank, N.A., Charlotte LOC) 5,893,000 5,000,000 Orange County, FL HFA, (Series 1998 D) Weekly VRDNs (Falcon Trace Apartments)/(Amsouth Bank N.A., Birmingham LOC) 5,000,000 12,500,000 Orange County, FL School District, (Series 1998), 3.10% TANs, 9/15/1999 12,520,059 6,200,000 Orlando, FL (City of), Capital Improvement Commerial Paper Notes, (1994 Series-A), 3.10% CP, Mandatory Tender 2/11/1999 6,200,000 6,000,000 Osceola County, FL HFA, Multifamily Housing Revenue Bonds (Series 1998A) Weekly VRDNs (Arrow Ridge Apartments)/ (Amsouth Bank N.A., Birmingham LOC) 6,000,000 3,500,000 Pinellas County Industry Council, FL, IDRB (Series 1994) Weekly VRDNs (Genca Corporation Project)/(PNC Bank, N.A. LOC) 3,500,000 2,453,000 Pinellas County Industry Council, FL, IDRB (Series 1995) Weekly VRDNs (ATR International Inc., Project)/(First Union National Bank, Charlotte, N.C. LOC) 2,453,000 65,000 Pinellas County Industry Council, FL, Variable/Fixed Rate Development Revenue Bonds (Series 1997) Weekly VRDNs (Boyd Industries, Inc.)/(SouthTrust Bank of Alabama, Birmingham LOC) 65,000 3,300,000 Pinellas County, FL HFA, Single Family Housing Revenue Bonds (1998 Series B), 3.70% TOBs (Trinity Funding Co.), Mandatory Tender 2/1/1999 3,300,000 1,740,000 Pinellas County, FL Health Facility Authority, SFM Revenue Bonds (Series PA-92) Weekly VRDNs (GNMA COL)/(Merrill Lynch Capital Services, Inc. LIQ) 1,740,000 1,520,000 Sarasota County, FL IDRB, IDRB (Series 1994) Monthly VRDNs (Resource Recovery Systems of Sarasota Project)/(Fleet National Bank, Springfield, MA LOC) 1,520,000 1,100,000 Sumter County, FL IDA Weekly VRDNs (Great Southern Wood Preserving Co.)/(SouthTrust Bank of Alabama, Birmingham LOC) 1,100,000 3,300,000 Tamarac, FL, IDRB (Series 1995) Weekly VRDNs (Arch Aluminum & Glass Co., Inc. Project)/(Mellon Bank NA, Pittsburgh LOC) 3,300,000 2,600,000 Wakulla County, FL IDA Weekly VRDNs (Winco Utilities, Inc. Project)/(Barnett Bank, N.A. LOC) 2,600,000 Total 188,187,956 LOUISIANA-4.1% 9,420,000 Louisiana HFA, MERLOTS (Series 1988A), 3.90% TOBs (GNMA COL)/(Corestates Bank N.A., Philadelphia, PA LIQ), Optional Tender 11/1/1998 9,420,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 MINNESOTA-1.9% $ 4,420,000 Dakota County & Washington County MN Housing & Redevelopment Authority, MERLOTs (Series J), 3.80% TOBs (United States Treasury COL)/(Corestates Bank N.A., Philadelphia, PA LIQ), Optional Tender 12/1/1998 $ 4,420,000 TEXAS-5.5% 2,400,000 Angelina and Neches River Authority, Texas, Solid Waste Disposal Revenue Bonds (Series 1993), 3.90% CP (Temple-Eastex Inc.)/(Temple-Inland, Inc. GTD), Mandatory Tender 11/9/1998 2,400,000 2,600,000 Angelina and Neches River Authority, Texas, Waste Disposal Revenue Bonds (Series 1998), 3.80% CP (Temple-Inland Forest Products Corp.)/(Temple-Inland, Inc. GTD), Mandatory Tender 11/6/1998 2,600,000 7,500,000 Harris County, TX HFDC, Revenue Refunding Bonds (Series 1986), 4.50% CP (Young Men's Christian Association of the Greater Houston Area)/(Bank of Tokyo-Mitsubishi Ltd. LOC), Mandatory Tender 11/12/1998 7,500,000 Total 12,500,000 Total Investments (at amortized cost) 3 $ 227,807,956
Securities that are subject to Alternative Minimum Tax represent 74.5% of the portfolio as calculated upon total portfolio market value. 1 The Fund may only invest in securities rated in one of the two highest short-term rating categories by nationally recognized statistical rating organizations ("NRSROs") or unrated securities of comparable quality. 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, MIG-1 or MIG-2 by Moody's Investors Service, Inc., or F-1+, F-1, or F-2 by Fitch IBCA, Inc. are all considered rated in one of the two highest short-term rating categories. Securities rated in the highest short-term rating category (and unrated securities of comparable quality) are identified as First Tier securities. Securities rated in the second highest short-term rating category (and unrated securities of comparable quality) are identified as Second Tier securities. The Fund follows applicable regulations in determining whether a security is rated and whether a security rated by multiple NRSROs in different rating categories should be identified as a First or Second Tier security. At October 31, 1998, the portfolio securities were rated as follows: Tier Rating Percentage Based on Total Market Value (Unaudited) FIRST TIER SECOND TIER 100.00% 0.00% 2 Denotes a restricted security which is subject to restrictions on resale under Federal Securities laws. At October 31, 1998, these securities amounted to $28,225,000 which represents 12.3% of net assets. 3 Also represents cost for federal tax purposes. Note: The categories of investments are shown as a percentage of net assets ($229,032,990) at October 31, 1998. The following acronyms are used throughout this portfolio: COL -Collateralized CP -Commercial Paper FGIC -Financial Guaranty Insurance Company FSA -Financial Security Assurance GNMA -Government National Mortgage Association GTD -Guaranty HFA -Housing Finance Authority HFDC -Health Facility Development Corporation IDA -Industrial Development Authority IDB -Industrial Development Bond IDRB -Industrial Development Revenue Bond INS -Insured LIQ -Liquidity Agreement LLC -Limited Liability Corporation LOC -Letter of Credit MBIA -Municipal Bond Investors Assurance MERLOTS -Municipal Exempt Receipts-Liquidity Optional Tender Series PAC -Planned Amortization Class SA -Support Agreement SFM -Single Family Mortgage TANs -Tax Anticipation Notes TOBs -Tender Option Bonds VRDNs -Variable Rate Demand Notes See Notes which are an integral part of the Financial Statements Statement of Assets and Liabilities October 31, 1998 ASSETS: Total investments in securities, at amortized cost and value $ 227,807,956 Cash 502,337 Income receivable 1,258,999 Receivable for shares sold 6,544 Prepaid expenses 16,981 Deferred organizational costs 4,163 Other assets 7,539 Total assets 229,604,519 LIABILITIES: Payable for shares redeemed $ 45,172 Income distribution payable 461,424 Accrued expenses 64,933 Total liabilities 571,529 Net Assets for 229,032,990 shares outstanding $ 229,032,990 NET ASSET VALUE, OFFERING PRICE, AND REDEMPTION PROCEEDS PER SHARE: INSTITUTIONAL SHARES: $157,193,583 / 157,193,583 shares outstanding $1.00 CASH II SHARES: $71,839,407/71,839,407 shares outstanding $1.00
See Notes which are an integral part of the Financial Statements Statement of Operations Year Ended October 31, 1998 INVESTMENT INCOME: Interest $ 18,486,082 EXPENSES: Investment advisory fee $ 2,032,071 Administrative personnel and services fee 383,094 Custodian fees 6,855 Transfer and dividend disbursing agent fees and expenses 67,532 Directors'/Trustees' fees 4,449 Auditing fees 12,500 Legal fees 15,686 Portfolio accounting fees 102,872 Distribution services fee-Cash II Shares 297,018 Shareholder services fee-Institutional Shares 973,027 Shareholder services fee-Cash II Shares 297,018 Share registration costs 25,571 Printing and postage 29,087 Insurance premiums 50,385 Miscellaneous 10,902 Total expenses 4,308,067 WAIVERS: Waiver of investment advisory fee $ (686,562) Waiver of distribution services fee-Cash II Shares (59,404) Waiver of shareholder services fee-Institutional Shares (233,527) Total waivers (979,493) Net expenses 3,328,574 Net investment income $ 15,157,508
See Notes which are an integral part of the Financial Statements Statement of Changes in Net Assets
YEAR ENDED OCTOBER 31 1998 1997 INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income $ 15,157,508 $ 18,019,018 DISTRIBUTIONS TO SHAREHOLDERS: Distributions from net investment income Institutional Shares (11,792,073) (15,508,497) Cash II Shares (3,365,435) (2,510,521) Change in net assets resulting from distributions to shareholders (15,157,508) (18,019,018) SHARE TRANSACTIONS: Proceeds from sale of shares 2,197,187,196 1,742,878,407 Net asset value of shares issued to shareholders in payment of distributions declared 7,838,269 11,374,153 Cost of shares redeemed (2,518,608,888) (1,744,452,792) Change in net assets resulting from share transactions (313,583,423) 9,799,768 Change in net assets (313,583,423) 9,799,768 NET ASSETS: Beginning of period 542,616,413 532,816,645 End of period $ 229,032,990 $ 542,616,413
See Notes which are an integral part of the Financial Statements Notes to Financial Statements October 31, 1998 ORGANIZATION Federated Municipal Trust (the "Trust") is registered under the Investment Company Act of 1940, as amended (the "Act") as an open-end, management investment company. The Trust consists of 17 portfolios. The financial statements included herein are only those of Florida Municipal Cash Trust (the "Fund"). The financial statements of the other portfolios are presented separately. The assets of each portfolio are segregated and a shareholder's interest is limited to the portfolio in which shares are held. The Fund offers two classes of shares: Institutional Shares and Cash II Shares. The investment objective of the Fund is current income exempt from federal regular income tax consistent with stability of principal and liquidity and to maintain an investment portfolio that will cause its shares to be exempt from the Florida intangibles tax. 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. 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. RESTRICTED SECURITIES Restricted securities are securities that may only be resold upon registration under federal securities laws or in transactions exempt from such registration. Many restricted securities may be resold in the secondary market in transactions exempt from registration. In some cases, the restricted securities may be resold without registration upon exercise of a demand feature. Such restricted securities may be determined to be liquid under criteria established by the Board of Trustees. The Fund will not incur any registration costs upon such resales. Restricted securities are valued at amortized cost in accordance with Rule 2a-7 under the Investment Company Act of 1940. Additional information on each restricted security held at October 31, 1998, is as follows:
ACQUISITION ACQUISITION SECURITY DATE COST Escambia County, FL HFA, PT-121, 3.75% 8/19/1997- 9/18/1998 $ 8,675,000 Florida State Board of Education 9/30/1998 19,550,000
USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts of assets, liabilities, expenses and revenues reported in the financial statements. Actual results could differ from those estimated. OTHER Investment transactions are accounted for on the trade date. SHARES OF BENEFICIAL INTEREST The Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest (without par value) for each class of shares. Transactions in shares were as follows:
YEAR ENDED OCTOBER 31 1998 1997 CASH II SHARES Shares sold 645,934,032 334,505,856 Shares issued to shareholders in payment of distributions declared 147,766 4,443 Shares redeemed (636,998,304) (303,578,126) Net change resulting from Cash II share transactions 9,083,494 30,932,173 YEAR ENDED OCTOBER 31 1998 1997 INSTITUTIONAL SHARES Shares sold 1,551,253,164 1,408,372,551 Shares issued to shareholders in payment of distributions declared 7,690,503 11,369,710 Shares redeemed (1,881,610,584) (1,440,874,666) Net change resulting from Institutional share transactions (322,666,917) (21,132,405) Net change resulting from share transactions (313,583,423) 9,799,768
At October 31, 1998, capital paid-in aggregated $229,032,990. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES INVESTMENT ADVISORY FEE Federated Management, 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. DISTRIBUTION SERVICES FEE The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b- 1 under the Act. Under the terms of the Plan, the Fund will compensate Federated Securities Corp. ("FSC"), the principal distributor, from the net assets of the Fund to finance activities intended to result in the sale of the Fund's Institutional Shares and Class II Shares. The Plan provides that the Fund may incur distribution expenses according to the following schedule annually, to compensate Federated Securities Corp.
PERCENTAGE OF AVERAGE DAILY SHARE CLASS NET ASSETS OF CLASS Institutional Shares 0.25% Class II Shares 0.25%
The distributor may voluntarily choose to waive any portion of its fee. The distributor can modify or terminate this voluntary waiver at any time at its sole discretion. SHAREHOLDER SERVICES FEE Under the terms of a Shareholder Services Agreement with Federated Shareholder Services ("FSS"), the Fund will pay FSS up to 0.25% of average daily net assets of the Fund for the period. The fee paid to FSS is used to finance certain services for shareholders and to maintain shareholder accounts. FSS may voluntarily choose to waive any portion of its fee. FSS can modify or terminate this voluntary waiver at any time at its sole discretion. TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES FServ, through its subsidiary, Federated Shareholder Services Company ("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. ORGANIZATIONAL EXPENSES Organizational expenses of $15,374 were borne initially by the Adviser. The Fund has reimbursed the Adviser for these expenses. These expenses have been deferred and are being amortized over the five-year period following effective date. INTERFUND TRANSACTIONS During the period ended October 31, 1998, the Fund engaged in purchase and sale transactions with funds that have a common investment adviser (or affiliated investment advisers), common Directors/Trustees, and/or common Officers. These purchase and sale transactions were made at current market value pursuant to Rule 17a-7 under the Act amounting to $1,568,341,160 and $1,877,477,340, respectively. GENERAL Certain of the Officers and Trustees of the Trust are Officers and Directors or Trustees of the above companies. CONCENTRATION OF CREDIT RISK Since the Fund invests a substantial portion of its assets in issuers located in one state, it will be more susceptible to factors adversely affecting issuers of that state than would be a comparable tax-exempt mutual fund that invests nationally. In order to reduce the credit risk associated with such factors, at October 31, 1998, 58% of the securities in the portfolio of investments are backed by letters of credit or bond insurance of various financial institutions and financial guaranty assurance agencies. The percentage of investments insured by or supported (backed) by a letter of credit from any one institution or agency did not exceed 9% of total investments. YEAR 2000 (UNAUDITED) Similar to other financial organizations, the Trust could be adversely affected if the computer systems used by the Trust's service providers do not properly process and calculate date-related information and data from and after January 1, 2000. The Trust'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 Trust'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 Trust. Report of Independent Public Accountants TO THE BOARD OF TRUSTEES OF FEDERATED MUNICIPAL TRUST AND SHAREHOLDERS OF FLORIDA MUNICIPAL CASH TRUST: We have audited the accompanying statement of assets and liabilities of Florida Municipal Cash Trust (an investment portfolio of Federated Municipal Trust, a Massachusetts business trust), including the schedule of portfolio investments, as of October 31, 1998, the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for the periods presented. These financial statements and financial highlights are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the 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 October 31, 1998, by correspondence with the custodian. 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 Florida Municipal Cash Trust (an investment portfolio of Federated Municipal Trust) as of October 31, 1998, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and its financial highlights for the periods presented, in conformity with generally accepted accounting principles. Arthur Andersen LLP Boston, Massachusetts December 23, 1998 [Graphic] PROSPECTUS Florida Municipal Cash Trust A Portfolio of Federated Municipal Trust CASH II SHARES December 31, 1998 A Statement of Additional Information (SAI) dated December 31, 1998, is incorporated by reference into this prospectus. To obtain the SAI and 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] Florida Municipal Cash 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. 811-5911 Cusip 314229683 G00537-02-CII (12/98) [Graphic] [Graphic] PROSPECTUS Florida Municipal Cash Trust A Portfolio of Federated Municipal Trust INSTITUTIONAL SHARES A money market mutual fund seeking to provide current income exempt from federal regular income tax and the Florida intangibles tax. 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. December 31, 1998 Contents Risk/Return Summary 1 What are the Fund's Fees and Expenses? 2 What are the Fund's Investment Strategies? 3 What are the Principal Securities in Which the Fund Invests? 3 What are the Specific Risks of Investing in the Fund? 4 What do Shares Cost? 5 How is the Fund Sold? 5 How to Purchase Shares 5 How to Redeem Shares 7 Account and Share Information 9 Who Manages the Fund? 9 Financial Information 10 Report of Independent Public Accountants 24 Risk/Return Summary WHAT IS THE FUND'S INVESTMENT OBJECTIVE? The Fund is a money market fund which seeks to maintain a stable net asset value of $1.00. The Fund's investment objective is to provide current income exempt from federal regular income tax consistent with stability of principal and liquidity and to maintain an investment portfolio that will cause its shares to be exempt from the Florida state intangibles tax. 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 tax-exempt securities so that the Fund's annual interest income is exempt from federal regular income tax and the Florida intangibles tax. Interest from the Fund's investments may be subject to the federal alternative minimum tax for individuals and corporations. WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND? Because the Fund may invest a significant portion of its assets in securities of a single issuer, an investment in the Fund may involve additional risks compared to a fully diversified money market 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] - See Appendix C-5 Historically, the Fund has maintained a constant $1.00 net asset value per share. The bar chart shows the variability of the Fund's Institutional Shares total returns on a yearly basis. The Fund's Institutional Shares are not sold subject to a sales charge (load). The total returns displayed above are based upon net asset value. The Fund's Institutional Shares year-to-date total return as of the most recent calendar quarter of September 30, 1998, was 2.28%. Within the period shown in the Chart, the Fund's Institutional Shares highest quarterly return was 0.93% (quarter ended June 30, 1995). Its lowest quarterly return was 0.72% (quarter ended March 31, 1997). The Fund's Institutional Shares Seven-Day Net Yield as of 12/31/97 was 3.45%. The following table represents the Fund's Institutional Shares Average Annual Total Return through 12/31/97. CALENDAR PERIOD FUND 1 Year 3.23% Start of Performance 1 3.33% 1 The Fund's Institutional Shares start of performance date was September 21, 1994. Investors may call the Fund at 1-800-341-7400 to acquire the current Seven- Day Net Yield. 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? FLORIDA MUNICIPAL CASH TRUST FEES AND EXPENSES This table describes the fees and expenses that you may pay if you buy, hold and redeem shares of the Fund's Institutional Shares.
SHAREHOLDER FEES 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 a percentage of average net assets) Management Fee 2 0.40% Distribution (12b-1) Fee 3 0.25% Shareholder Services Fee 4 0.25% Other Expenses 0.12% Total Annual Fund Operating Expenses 1.02% 1 Although not contractually obligated to do so, the adviser, distributor, and shareholder services provider waived certain amounts. These are shown below along with the net expenses the Fund actually paid for the fiscal year ended October 31, 1998. Waiver of Fund Expenses 0.44% Total Actual Annual Fund Operating Expenses (after waivers) 0.58% 2 The adviser voluntary 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 October 31, 1998. 3 The Fund did not pay or accrue the distribution (12b-1) fee during the fiscal year ended October 31, 1998. The Fund has no present intention of paying or accruing the distribution (12b-1) fee during the fiscal year ending October 31, 1999. 4 The shareholder services fee for the Fund has been voluntarily reduced. This voluntary reduction can be terminated at any time. The shareholder services fee paid by the Fund (afte the voluntary reduction) was 0.19% for the fiscal year ended October 31, 1998.
EXAMPLE The following Example is intended to help you compare the cost of investing in the Florida Municipal Cash Trust's Institutional Shares with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund's Institutional 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 Florida Municipal Cash Trust's Institutional Shares' operating expenses are BEFORE WAIVERS as shown above and remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS Expenses assuming no redemption $104 $325 $563 $1,248
What are the Fund's Investment Strategies? The Fund invests in a portfolio of high-quality, tax-exempt securities maturing in 13 months or less. The average maturity of the Fund's portfolio, computed on a dollar-weighted basis, will be 90 days or less. The Fund's Adviser performs a fundamental credit analysis to develop an approved list of issuers and securities that meet the Adviser's minimum credit standards. The Adviser targets an average portfolio maturity based upon its interest rate outlook and the tax-exempt securities available. The Adviser structures the portfolio by combining variable rate demand instruments and municipal notes. Depending on the supply of tax-exempt securities, the Adviser generally shortens the portfolio's maturity when it expects interest rates to rise and extends the maturity when it expects interest rates to fall. TEMPORARY DEFENSIVE INVESTMENTS During adverse market conditions the Fund may temporarily depart from its principal investment strategies by investing in securities subject to federal regular income tax and the Florida intangibles tax. Temporary investments will be of comparable quality to other securities in which the Fund invests. This may cause the Fund to give up greater investment returns to maintain the safety of principal. This also may cause the Fund to receive and distribute taxable income to investors. What are the Principal Securities in Which the Fund Invests? TAX-EXEMPT SECURITIES Tax-exempt securities are fixed-income securities that pay interest exempt from regular federal income taxes. States, counties, cities and other political subdivisions and authorities typically issue tax-exempt securities. Tax-exempt securities are generally differentiated by their source of repayment. FIXED INCOME SECURITIES Fixed income 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. VARIABLE RATE DEMAND INSTRUMENTS Variable rate demand instruments are tax-exempt securities that require the issuer or a third party, such as a dealer or bank, to repurchase the security for its face value upon demand. The securities also bear interest at a variable rate intended to cause the securities to trade at their face value. The Fund treats demand instruments as short-term securities, even though their stated maturity may extend beyond 13 months. MUNICIPAL NOTES Municipal notes are short-term tax-exempt securities. Many municipalities issue such notes to fund their current operations before collecting taxes or other municipal revenues. Municipalities may also issue notes to fund capital projects prior to issuing long-term bonds. The issuers typically repay the notes at the end of their fiscal year, either with taxes, other revenues or proceeds from newly issued notes or bonds. INVESTMENT 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 rating services or be of comparable quality to securities having such ratings. CREDIT ENHANCEMENT Credit enhancement consists of an arrangement in which a company agrees to pay amounts due on a fixed income security if the issuer defaults. In some cases the company providing credit enhancement makes all payments directly to the security holders and receives reimbursement from the issuer. Normally, the credit enhancer has greater financial resources and liquidity than the issuer. For this reason, the Adviser usually evaluates the credit risk of a fixed income security based solely upon its credit enhancement. What are the Specific Risks of Investing in the Fund? Although there are many factors which may affect an investment in the Fund, the principal risks of investing in a tax-exempt money market fund are described below. CREDIT RISK Credit risk is the possibility that an issuer or a credit enhancer will default (fails to repay interest and principal when due). If an issuer or credit enhancer defaults, the Fund will lose money. Money market funds try to minimize this risk by purchasing higher quality securities. Many fixed income securities receive credit ratings from companies such as Standard & Poor's and Moody's Investor Services. Fixed income securities receive different credit ratings depending on the rating company's assessment of the likelihood of default by the issuer. The lower the credit rating, the greater the credit risk. If the security is unrated, greater reliance is placed on the Adviser's credit assessment. 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. SECTOR RISK Most of the Fund's securities will be invested in issuers located in Florida. In addition, a substantial part of the Fund's portfolio may be comprised of tax-exempt securities issued or credit enhanced by companies in similar businesses or with other similar characteristics. As a result, the Fund will be more susceptible to any economic, business, political, or other developments which generally affect these issuers. 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 determined net asset value (NAV). The Fund does not charge a sales charge. NAV is determined at 12:00 noon and 1:00 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 $10,000. There is no required minimum subsequent investment amount. An account may be opened with a smaller amount as long as the $10,000 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 offers two share classes: Institutional Shares and Cash II Shares each representing interests in a single portfolio of securities. This prospectus relates only to Institutional Shares. Each share class has different expenses, which affect their performance. Contact your investment professional or call 1-800-341-7400 for more information concerning the other class. The Fund's Distributor markets the Shares described in this prospectus to institutions acting in an agency or fiduciary capacity or to individuals directly or through investment professionals. The Fund may not be a suitable investment for retirement plans or for non-Florida taxpayers because it invests in Florida tax-exempt securities. When the Distributor receives marketing fees, it may pay some or all of them to 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). RULE 12B-1 PLAN The Fund has adopted a Rule 12b-1 Plan, which allows it to pay marketing fees to the Distributor and investment professionals for the sale, distribution, and customer servicing of the Fund's Institutional Shares. Because these Shares pay marketing fees on an ongoing basis, your investment cost may be higher over time than other shares with different sales charges and marketing fees. 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 1:00 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 on the day 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 SYSTEMATIC INVESTMENT PROGRAM Once you have opened an account, you may automatically purchase additional Shares on a regular basis by completing the Systematic Investment Program (SIP) section of the New Account Form or by contacting the Fund or your investment professional. The minimum investment for SIPs is $50. BY AUTOMATED CLEARINGHOUSE (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 promtply 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 12:00 noon (Eastern time), your redemption will be wired to you the same day. You will not receive that day's dividend. If you call after 12:00 noon (Eastern time), your redemption will be wired to you the following business day. You will receive that day's dividend. Under limited circumstances, arrangements may be made with the Distributor for same-day payment of redemption proceeds, without that day's dividend, for redemption requests received before 2:00 p.m. (Eastern time). 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 30 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. 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. SYSTEMATIC WITHDRAWAL PROGRAM You may automatically redeem Shares in a minimum amount of $100 on a regular basis. Complete the appropriate section of the New Account Form or an Account Service Options Form or contact your investment professional or the Fund. Your account value must meet the minimum initial investment amount at the time the program is established. This program may reduce, and eventually deplete, your account. Payments should not be considered yield or income. CHECKWRITING You may request checks to redeem your Fund Shares. Your account will continue to receive the daily dividend declared on the Shares being redeemed until a check is presented for payment. DEBIT CARD You may request a debit card account that allows you to redeem Shares. There is an annual fee for this service that the Fund will automatically deduct from your account. 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 CONFIRMATIONS AND ACCOUNT STATEMENTS You will receive confirmation of purchases and redemptions (except for systematic transactions). In addition, 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, 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. It is anticipated that Fund distributions will be primarily dividends that are exempt from federal income tax, although a portion of the Fund's dividends may not be exempt. Dividends may be subject to state and local taxes, although the Fund's dividends will be exempt from the Florida intangibles tax to the extent they are derived from interest on obligations exempt from the Florida intangibles tax. Capital gains and non-exempt dividends are taxable whether paid in cash or reinvested in the Fund. 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 Management. 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 and/or provide administrative services to more than 300 mutual funds and private accounts, which totaled over $120 billion in assets as of December 31, 1997. Federated was established in 1955 and is one of the largest mutual fund investment managers in the United States with more than 2,000 employees. Over 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 affect 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-Institutional Shares (For a share outstanding throughout each period) Reference is made to the Report of Independent Public Accountants on page 24.
YEAR ENDED OCTOBER 31 1998 1997 1996 1995 1994 1 NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 INCOME FROM INVESTMENT OPERATIONS: Net investment income 0.03 0.03 0.03 0.04 0.004 LESS DISTRIBUTIONS: Distributions from net investment income (0.03) (0.03) (0.03) (0.04) (0.004) NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 TOTAL RETURN 2 3.09% 3.20% 3.20% 3.60% 0.35% RATIOS TO AVERAGE NET ASSETS: Expenses 0.58% 0.54% 0.49% 0.45% 0.28% 3 Net investment income 2.96% 3.15% 3.17% 3.58% 3.28% 3 Expense waiver/reimbursement 4 0.19% 0.25% 0.34% 0.42% 1.03% 3 SUPPLEMENTAL DATA: Net assets, end of period (000 omitted) $157,194 $479,860 $500,993 $153,347 $53,966
1 Reflects operations for the period from September 21, 1994 (date of initial public investment) to October 31, 1994. For the period from September 12, 1994 (start of business) to September 21, 1994, the fund had no investment activity. 2 Based on net asset value, which does not reflect the sales charge or contingent deferred sales charge, if applicable. 3 Computed on an annualized basis. 4 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 October 31, 1998
PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-99.5% 1 ALABAMA-1.7% $ 2,000,000 Birmingham, AL IDA, (Series 1997) Weekly VRDNs (Millcraft, AL Inc.)/(Regions Bank, Alabama LOC) $ 2,000,000 1,900,000 Gadsen, AL IDB, IDRB's (Series 1997) Weekly VRDNs (Chicago Steel, (Alabama), LLC)/(Marshall & Ilsley Bank, Milwaukee LOC) 1,900,000 Total 3,900,000 CALIFORNIA-2.6% 6,000,000 Los Angeles County, CA Unified School District, Trust Receipts FR/RI-A26, 3.60% TOBs (Bank of New York, New York LIQ), Mandatory Tender 12/9/1998 6,000,000 COLORADO-1.5% 3,380,000 Colorado HFA, MERLOTS (Series C), 3.40% TOBs (Corestates Bank N.A., Philadelphia, PA LIQ), Optional Tender 11/1/1998 3,380,000 FLORIDA-82.2% 550,000 Brevard County, FL, Greywater Investments II, Ltd 1997 Weekly VRDNs (Greywater Investments)/(Huntington National Bank, Columbus, OH LOC) 550,000 2,755,000 Broward County, FL HFA, (CR-5), 3.85% TOBs (GNMA COL)/ (Citibank NA, New York LIQ), Optional Tender 11/1/1998 2,755,000 700,000 Broward County, FL HFA, (Series 1997) Weekly VRDNs (Jacaranda Village Apartments)/(Marine Midland Bank N.A., Buffalo, NY LOC) 700,000 1,130,000 Broward County, FL, IDRB (Series 1993) Weekly VRDNs (American Whirlpool Products Corp. Project)/(Nationsbank, N.A., Charlotte LOC) 1,130,000 1,000,000 Broward County, FL, IDRB's (Series 1997) Weekly VRDNs (Fast Real Estate Partners, Ltd.)/(SunTrust Bank, Central Florida LOC) 1,000,000 7,665,000 Clipper, FL Tax-Exempt Trust, Class A Certificates of Participation, Series 1996-3B Weekly VRDNs (Escambia County, FL HFA)/(State Street Bank and Trust Co. LOC) 7,665,000 9,635,000 Dade County, FL, PT-1083 Weekly VRDNs (Miami International Airport)/(FSA INS)/(Merrill Lynch Capital Services, Inc. LOC) 9,635,000 1,710,000 Escambia County, FL HFA, P-Floats PA-129 Weekly VRDNs (GNMA COL)/(Merrill Lynch Capital Services, Inc. LIQ) 1,710,000 8,675,000 2 Escambia County, FL HFA, PT-121, 3.75% TOBs (GNMA COL)/ (Banco Santander LIQ), Mandatory Tender 3/11/1999 8,675,000 5,220,000 Florida HFA, Homeowner Mortgage Revenue Bonds PT-88 (Series 1996-3) Weekly VRDNs (GNMA COL)/(Banco Santander LIQ) 5,220,000 4,570,000 Florida HFA, Multifamily Housing Revenue Bonds (1995 Series M) Weekly VRDNs (Bainbridge Club Apartments Project)/(PNC Bank, N.A. LOC) 4,570,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 FLORIDA-CONTINUED $ 4,000,000 Florida HFA, Series OO, Oaks at Mill Creek Project, 3.85% TOBs (Oaks at Mills Creek)/(Chase Manhattan Bank N.A., New York LOC), Mandatory Tender 11/1/1998 $ 4,000,000 4,465,000 Florida HFA, Trust Receipts, Series 1998 FR/RI-12 Weekly VRDNs (MBIA INS)/(Bank of New York, New York LIQ) 4,465,000 19,550,000 2 Florida State Board of Education Administration, Trust Receipts (Series 1998 A-64), 3.45% TOBs (FGIC INS)/(Bank of New York, New York LIQ), Optional Tender 2/1/1999 19,550,000 1,000,000 Florida State Department of Environmental Protection, Trust Receipts FR/RI-A18 (Series 1998) Weekly VRDNs (FGIC INS)/(National Westminster Bank, PLC, London LIQ) 1,000,000 1,375,000 Greater Orlando (FL) Aviation Authority, Adjustable Rate (Series 1997), 3.90% TOBs (Signature Flight Support Corp.)/ (Bayerische Landesbank Girozentrale LOC), Optional Tender 12/1/1998 1,375,000 7,000,000 Greater Orlando (FL) Aviation Authority, Airport Facilities Subordinated CP Notes (Series B), 3.15% CP, Mandatory Tender 1/25/1999 7,000,000 10,312,000 Greater Orlando (FL) Aviation Authority, Airport Facilities Subordinated CP Notes (Series B), 3.50% CP, Mandatory Tender 12/28/1998 10,311,897 4,500,000 Hillsborough County, FL Aviation Authority, Bond Anticipation Comercial Paper Notes, 3.25% CP (Tampa International Airport)/(National Westminster Bank, PLC, London LOC), Mandatory Tender 2/10/1999 4,500,000 2,000,000 Hillsborough County, FL IDA Weekly VRDNs (Ringhager Equipment Co.)/(Mellon Bank NA, Pittsburgh LOC) 2,000,000 1,390,000 Hillsborough County, FL IDA, IDRB's (Series 1996) Weekly VRDNs (VIGO Importing Company Project)/(Barnett Bank, N.A. LOC) 1,390,000 1,115,000 Hillsborough County, FL IDA, Variable Rate Demand IRDB's (Series 1996) Weekly VRDNs (Trident Yacht Building Partnership Project)/(First Union National Bank, Charlotte, N.C. LOC) 1,115,000 4,100,000 Hillsborough County, FL IDA, Variable Rate IDRB's (Series 1998) Weekly VRDNs (SIFCO Industries, Inc.)/(National City Bank, Ohio LOC) 4,100,000 4,080,000 Indian River County, FL, IDRB's (Series 1997) Weekly VRDNs (Ocean Spray Cranberries, Inc.)/(Wachovia Bank of NC, NA, Winston-Salem LOC) 4,080,000 6,500,000 Jacksonville, FL IDA, IDRBs (series 1996) Weekly VRDNs (Portion Pac, Inc.)/(Heinz (H.J.) Co. GTD) 6,500,000 600,000 Jacksonville, FL Weekly VRDNs (Metal Sales)/(National City Bank, Kentucky LOC) 600,000 3,200,000 Lee County, FL IDA, IDRB (Series 1994) Weekly VRDNs (Baader North America Corp.)/(Deutsche Bank, AG LOC) 3,200,000 1,500,000 Lynn Haven, FL, (Series 1998A) Weekly VRDNs (Merrick Industries, Inc.)/(Bank One, Ohio, N.A. LOC) 1,500,000 5,500,000 Manatee County, FL, IDR Improvement Bonds (Series 1998 B) Weekly VRDNs (CFI Manufacturing, Inc. Project)/(Huntington National Bank, Columbus, OH LOC) 5,500,000 2,700,000 Manatee County, FL, Variable/Fixed Rate IDRB's (Series 1998) Weekly VRDNs (Mader Electric, Inc.)/(SouthTrust Bank of Alabama, Birmingham LOC) 2,700,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 FLORIDA-CONTINUED $ 2,400,000 Martin County, FL IDA, Tender Industrial Revenue Bonds (Series 1986) Weekly VRDNs (Tampa Farm Service, Inc. Project)/(SunTrust Banks, Inc. LOC) $ 2,400,000 2,100,000 Okeechobee County, FL, (Series 1992) Weekly VRDNs (Morgan Guaranty Trust Co., New York LOC) 2,100,000 5,893,000 Orange County, FL HFA, (Series 1997A) Weekly VRDNs (Regal Pointe Apartments Project)/(Nationsbank, N.A., Charlotte LOC) 5,893,000 5,000,000 Orange County, FL HFA, (Series 1998 D) Weekly VRDNs (Falcon Trace Apartments)/(Amsouth Bank N.A., Birmingham LOC) 5,000,000 12,500,000 Orange County, FL School District, (Series 1998), 3.10% TANs, 9/15/1999 12,520,059 6,200,000 Orlando, FL (City of), Capital Improvement Commerial Paper Notes, (1994 Series-A), 3.10% CP, Mandatory Tender 2/11/1999 6,200,000 6,000,000 Osceola County, FL HFA, Multifamily Housing Revenue Bonds (Series 1998A) Weekly VRDNs (Arrow Ridge Apartments)/ (Amsouth Bank N.A., Birmingham LOC) 6,000,000 3,500,000 Pinellas County Industry Council, FL, IDRB (Series 1994) Weekly VRDNs (Genca Corporation Project)/(PNC Bank, N.A. LOC) 3,500,000 2,453,000 Pinellas County Industry Council, FL, IDRB (Series 1995) Weekly VRDNs (ATR International Inc., Project)/(First Union National Bank, Charlotte, N.C. LOC) 2,453,000 65,000 Pinellas County Industry Council, FL, Variable/Fixed Rate Development Revenue Bonds (Series 1997) Weekly VRDNs (Boyd Industries, Inc.)/(SouthTrust Bank of Alabama, Birmingham LOC) 65,000 3,300,000 Pinellas County, FL HFA, Single Family Housing Revenue Bonds (1998 Series B), 3.70% TOBs (Trinity Funding Co.), Mandatory Tender 2/1/1999 3,300,000 1,740,000 Pinellas County, FL Health Facility Authority, SFM Revenue Bonds (Series PA-92) Weekly VRDNs (GNMA COL)/(Merrill Lynch Capital Services, Inc. LIQ) 1,740,000 1,520,000 Sarasota County, FL IDRB, IDRB (Series 1994) Monthly VRDNs (Resource Recovery Systems of Sarasota Project)/(Fleet National Bank, Springfield, MA LOC) 1,520,000 1,100,000 Sumter County, FL IDA Weekly VRDNs (Great Southern Wood Preserving Co.)/(SouthTrust Bank of Alabama, Birmingham LOC) 1,100,000 3,300,000 Tamarac, FL, IDRB (Series 1995) Weekly VRDNs (Arch Aluminum & Glass Co., Inc. Project)/(Mellon Bank NA, Pittsburgh LOC) 3,300,000 2,600,000 Wakulla County, FL IDA Weekly VRDNs (Winco Utilities, Inc. Project)/(Barnett Bank, N.A. LOC) 2,600,000 Total 188,187,956 LOUISIANA-4.1% 9,420,000 Louisiana HFA, MERLOTS (Series 1988A), 3.90% TOBs (GNMA COL)/(Corestates Bank N.A., Philadelphia, PA LIQ), Optional Tender 11/1/1998 9,420,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 MINNESOTA-1.9% $ 4,420,000 Dakota County & Washington County MN Housing & Redevelopment Authority, MERLOTs (Series J), 3.80% TOBs (United States Treasury COL)/(Corestates Bank N.A., Philadelphia, PA LIQ), Optional Tender 12/1/1998 $ 4,420,000 TEXAS-5.5% 2,400,000 Angelina and Neches River Authority, Texas, Solid Waste Disposal Revenue Bonds (Series 1993), 3.90% CP (Temple-Eastex Inc.)/(Temple-Inland, Inc. GTD), Mandatory Tender 11/9/1998 2,400,000 2,600,000 Angelina and Neches River Authority, Texas, Waste Disposal Revenue Bonds (Series 1998), 3.80% CP (Temple-Inland Forest Products Corp.)/(Temple-Inland, Inc. GTD), Mandatory Tender 11/6/1998 2,600,000 7,500,000 Harris County, TX HFDC, Revenue Refunding Bonds (Series 1986), 4.50% CP (Young Men's Christian Association of the Greater Houston Area)/(Bank of Tokyo-Mitsubishi Ltd. LOC), Mandatory Tender 11/12/1998 7,500,000 Total 12,500,000 Total Investments (at amortized cost) 3 $ 227,807,956
Securities that are subject to Alternative Minimum Tax represent 74.5% of the portfolio as calculated upon total portfolio market value. 1 The Fund may only invest in securities rated in one of the two highest short-term rating categories by nationally recognized statistical rating organizations ("NRSROs") or unrated securities of comparable quality. 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, MIG-1 or MIG-2 by Moody's Investors Service, Inc., or F-1+, F-1, or F-2 by Fitch IBCA, Inc. are all considered rated in one of the two highest short-term rating categories. Securities rated in the highest short-term rating category (and unrated securities of comparable quality) are identified as First Tier securities. Securities rated in the second highest short-term rating category (and unrated securities of comparable quality) are identified as Second Tier securities. The Fund follows applicable regulations in determining whether a security is rated and whether a security rated by multiple NRSROs in different rating categories should be identified as a First or Second Tier security. At October 31, 1998, the portfolio securities were rated as follows: Tier Rating Percentage Based on Total Market Value (Unaudited) FIRST TIER SECOND TIER 100.00% 0.00% 2 Denotes a restricted security which is subject to restrictions on resale under Federal Securities laws. At October 31, 1998, these securities amounted to $28,225,000 which represents 12.3% of net assets. 3 Also represents cost for federal tax purposes. Note: The categories of investments are shown as a percentage of net assets ($229,032,990) at October 31, 1998. The following acronyms are used throughout this portfolio: COL -Collateralized CP -Commercial Paper FGIC -Financial Guaranty Insurance Company FSA -Financial Security Assurance GNMA -Government National Mortgage Association GTD -Guaranty HFA -Housing Finance Authority HFDC -Health Facility Development Corporation IDA -Industrial Development Authority IDB -Industrial Development Bond IDRB -Industrial Development Revenue Bond INS -Insured LIQ -Liquidity Agreement LLC -Limited Liability Corporation LOC -Letter of Credit MBIA -Municipal Bond Investors Assurance MERLOTS -Municipal Exempt Receipts-Liquidity Optional Tender Series PAC -Planned Amortization Class SA -Support Agreement SFM -Single Family Mortgage TANs -Tax Anticipation Notes TOBs -Tender Option Bonds VRDNs -Variable Rate Demand Notes See Notes which are an integral part of the Financial Statements Statement of Assets and Liabilities October 31, 1998 ASSETS: Total investments in securities, at amortized cost and value $ 227,807,956 Cash 502,337 Income receivable 1,258,999 Receivable for shares sold 6,544 Prepaid expenses 16,981 Deferred organizational costs 4,163 Other assets 7,539 Total assets 229,604,519 LIABILITIES: Payable for shares redeemed $ 45,172 Income distribution payable 461,424 Accrued expenses 64,933 Total liabilities 571,529 Net Assets for 229,032,990 shares outstanding $ 229,032,990 NET ASSET VALUE, OFFERING PRICE, AND REDEMPTION PROCEEDS PER SHARE: INSTITUTIONAL SHARES: $157,193,583 / 157,193,583 shares outstanding $1.00 CASH II SHARES: $71,839,407/71,839,407 shares outstanding $1.00
See Notes which are an integral part of the Financial Statements Statement of Operations Year Ended October 31, 1998 INVESTMENT INCOME: Interest $ 18,486,082 EXPENSES: Investment advisory fee $ 2,032,071 Administrative personnel and services fee 383,094 Custodian fees 6,855 Transfer and dividend disbursing agent fees and expenses 67,532 Directors'/Trustees' fees 4,449 Auditing fees 12,500 Legal fees 15,686 Portfolio accounting fees 102,872 Distribution services fee-Cash II Shares 297,018 Shareholder services fee-Institutional Shares 973,027 Shareholder services fee-Cash II Shares 297,018 Share registration costs 25,571 Printing and postage 29,087 Insurance premiums 50,385 Miscellaneous 10,902 Total expenses 4,308,067 WAIVERS: Waiver of investment advisory fee $ (686,562) Waiver of distribution services fee-Cash II Shares (59,404) Waiver of shareholder services fee-Institutional Shares (233,527) Total waivers (979,493) Net expenses 3,328,574 Net investment income $ 15,157,508
See Notes which are an integral part of the Financial Statements Statement of Changes in Net Assets
YEAR ENDED OCTOBER 31 1998 1997 INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income $ 15,157,508 $ 18,019,018 DISTRIBUTIONS TO SHAREHOLDERS: Distributions from net investment income Institutional Shares (11,792,073) (15,508,497) Cash II Shares (3,365,435) (2,510,521) Change in net assets resulting from distributions to shareholders (15,157,508) (18,019,018) SHARE TRANSACTIONS: Proceeds from sale of shares 2,197,187,196 1,742,878,407 Net asset value of shares issued to shareholders in payment of distributions declared 7,838,269 11,374,153 Cost of shares redeemed (2,518,608,888) (1,744,452,792) Change in net assets resulting from share transactions (313,583,423) 9,799,768 Change in net assets (313,583,423) 9,799,768 NET ASSETS: Beginning of period 542,616,413 532,816,645 End of period $ 229,032,990 $ 542,616,413
See Notes which are an integral part of the Financial Statements Notes to Financial Statements October 31, 1998 ORGANIZATION Federated Municipal Trust (the "Trust") is registered under the Investment Company Act of 1940, as amended (the "Act") as an open-end, management investment company. The Trust consists of 17 portfolios. The financial statements included herein are only those of Florida Municipal Cash Trust (the "Fund"). The financial statements of the other portfolios are presented separately. The assets of each portfolio are segregated and a shareholder's interest is limited to the portfolio in which shares are held. The Fund offers two classes of shares: Institutional Shares and Cash II Shares. The investment objective of the Fund is current income exempt from federal regular income tax consistent with stability of principal and liquidity and to maintain an investment portfolio that will cause its shares to be exempt from the Florida intangibles tax. 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. 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. RESTRICTED SECURITIES Restricted securities are securities that may only be resold upon registration under federal securities laws or in transactions exempt from such registration. Many restricted securities may be resold in the secondary market in transactions exempt from registration. In some cases, the restricted securities may be resold without registration upon exercise of a demand feature. Such restricted securities may be determined to be liquid under criteria established by the Board of Trustees. The Fund will not incur any registration costs upon such resales. Restricted securities are valued at amortized cost in accordance with Rule 2a-7 under the Investment Company Act of 1940. Additional information on each restricted security held at October 31, 1998, is as follows:
ACQUISITION ACQUISITION SECURITY DATE COST Escambia County, FL HFA, PT-121, 3.75% 8/19/1997- 9/18/1998 $ 8,675,000 Florida State Board of Education 9/30/1998 19,550,000
USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts of assets, liabilities, expenses and revenues reported in the financial statements. Actual results could differ from those estimated. OTHER Investment transactions are accounted for on the trade date. SHARES OF BENEFICIAL INTEREST The Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest (without par value) for each class of shares. Transactions in shares were as follows:
YEAR ENDED OCTOBER 31 1998 1997 INSTITUTIONAL SHARES Shares sold 1,551,253,164 1,408,372,551 Shares issued to shareholders in payment of distributions declared 7,690,503 11,369,710 Shares redeemed (1,881,610,584) (1,440,874,666) Net change resulting from Institutional share transactions (322,666,917) (21,132,405) YEAR ENDED OCTOBER 31 1998 1997 CASH II SHARES Shares sold 645,934,032 334,505,856 Shares issued to shareholders in payment of distributions declared 147,766 4,443 Shares redeemed (636,998,304) (303,578,126) Net change resulting from Cash II share transactions 9,083,494 30,932,173 Net change resulting from share transactions (313,583,423) 9,799,768
At October 31, 1998, capital paid-in aggregated $229,032,990. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES INVESTMENT ADVISORY FEE Federated Management, 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. DISTRIBUTION SERVICES FEE The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b- 1 under the Act. Under the terms of the Plan, the Fund will compensate Federated Securities Corp. ("FSC"), the principal distributor, from the net assets of the Fund to finance activities intended to result in the sale of the Fund's Institutional Shares and Class II Shares. The Plan provides that the Fund may incur distribution expenses according to the following schedule annually, to compensate Federated Securities Corp.
PERCENTAGE OF AVERAGE DAILY SHARE CLASS NET ASSETS OF CLASS Institutional Shares 0.25% Class II Shares 0.25%
The distributor may voluntarily choose to waive any portion of its fee. The distributor can modify or terminate this voluntary waiver at any time at its sole discretion. SHAREHOLDER SERVICES FEE Under the terms of a Shareholder Services Agreement with Federated Shareholder Services ("FSS"), the Fund will pay FSS up to 0.25% of average daily net assets of the Fund for the period. The fee paid to FSS is used to finance certain services for shareholders and to maintain shareholder accounts. FSS may voluntarily choose to waive any portion of its fee. FSS can modify or terminate this voluntary waiver at any time at its sole discretion. TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES FServ, through its subsidiary, Federated Shareholder Services Company ("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. ORGANIZATIONAL EXPENSES Organizational expenses of $15,374 were borne initially by the Adviser. The Fund has reimbursed the Adviser for these expenses. These expenses have been deferred and are being amortized over the five-year period following effective date. INTERFUND TRANSACTIONS During the period ended October 31, 1998, the Fund engaged in purchase and sale transactions with funds that have a common investment adviser (or affiliated investment advisers), common Directors/Trustees, and/or common Officers. These purchase and sale transactions were made at current market value pursuant to Rule 17a-7 under the Act amounting to $1,568,341,160 and $1,877,477,340, respectively. GENERAL Certain of the Officers and Trustees of the Trust are Officers and Directors or Trustees of the above companies. CONCENTRATION OF CREDIT RISK Since the Fund invests a substantial portion of its assets in issuers located in one state, it will be more susceptible to factors adversely affecting issuers of that state than would be a comparable tax-exempt mutual fund that invests nationally. In order to reduce the credit risk associated with such factors, at October 31, 1998, 58% of the securities in the portfolio of investments are backed by letters of credit or bond insurance of various financial institutions and financial guaranty assurance agencies. The percentage of investments insured by or supported (backed) by a letter of credit from any one institution or agency did not exceed 9% of total investments. YEAR 2000 (UNAUDITED) Similar to other financial organizations, the Trust could be adversely affected if the computer systems used by the Trust's service providers do not properly process and calculate date-related information and data from and after January 1, 2000. The Trust'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 Trust'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 Trust. Report of Independent Public Accountants To the Board of Trustees of Federated Municipal Trust and Shareholders of Florida Municipal Cash Trust: We have audited the accompanying statement of assets and liabilities of Florida Municipal Cash Trust (an investment portfolio of Federated Municipal Trust, a Massachusetts business trust), including the schedule of portfolio investments, as of October 31, 1998, the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for the periods presented. These financial statements and financial highlights are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the 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 October 31, 1998, by correspondence with the custodian. 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 Florida Municipal Cash Trust (an investment portfolio of Federated Municipal Trust) as of October 31, 1998, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and its financial highlights for the periods presented, in conformity with generally accepted accounting principles. Arthur Andersen LLP Boston, Massachusetts December 23, 1998 [Graphic] PROSPECTUS Florida Municipal Cash Trust A Portfolio of Federated Municipal Trust INSTITUTIONAL SHARES December 31, 1998 A Statement of Additional Information (SAI) dated December 31, 1998, is incorporated by reference into this prospectus. To obtain the SAI 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] Florida Municipal Cash 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. 811-5911 Cusip 314229758 005392 (12/98) [Graphic] STATEMENT OF ADDITIONAL INFORMATION Florida Municipal Cash Trust A Portfolio of Federated Municipal Trust INSTITUTIONAL SHARES CASH II SHARES This Statement of Additional Information (SAI) is not a prospectus. Read this SAI in conjunction with the prospectuses for Florida Municipal Cash Trust dated December 31, 1998. Obtain the prospectuses without charge by calling 1-800-341-7400. CONTENTS How is the Fund Organized? Securities in Which the Fund Invests How is the Fund Sold? Subaccounting Services Redemption in Kind Massachusetts Partnership Law Account and Share Information Tax Information Who Manages and Provides Services to the Fund? How Does the Fund Measure Performance? Who is Federated Investors, Inc.? Investment Ratings Addresses STATEMENT DATED DECEMBER 31, 1998 [Federated Investors Logo] Federated Securities Corp., Distributor, subsidiary of Federated Investors, Inc. Cusip 314229758 Cusip 314229683 G00537-01 (12/98) How is the Fund Organized? The Fund is a diversified portfolio of Federated Municipal Trust (Trust). The Trust is an open-end, management investment company that was established under the laws of the Commonwealth of Massachusetts on September 1, 1989. The Trust may offer separate series of shares representing interests in separate portfolios of securities. The Board of Trustees (the Board) has established two classes of shares of the Fund, known as Institutional Shares and Cash II Shares (Shares). This SAI relates to both of the classes of the above-mentioned Shares. Securities in Which the Fund Invests SECURITIES DESCRIPTIONS AND TECHNIQUES In pursuing its investment strategy, the Fund may invest in the following tax- exempt securities for any purpose that is consistent with its investment objective. General Obligation Bonds General obligation bonds are supported by the issuer's full faith and credit. The issuer must levy and collect taxes sufficient to pay principal and interest on the bonds. However, the issuer's authority to levy additional taxes may be limited by its charter or state law. Special Revenue Bonds Special revenue bonds are payable solely from specific revenues received by the issuer. The revenues may consist of specific taxes, assessments, tolls, fees or other types of municipal revenues. For example, a municipality may issue bonds to build a toll road, and pledge the tolls to repay the bonds. Bondholders could not collect from the municipality's general taxes or revenues. Therefore, any shortfall in the tolls could result in a default on the bonds. Private Activity Bonds Private activity bonds are special revenue bonds used to finance private entities. For example, a municipality may issue bonds to finance a new factory to improve its local economy. The municipality would lend the proceeds to the company using the factory, and the company would agree make loan payments sufficient to repay the bonds. The bonds would be payable solely from the company's loan payments, not from any other revenues of the municipality. Therefore, any default on the loan normally would result in a default on the bonds. Municipal Leases Municipalities may enter into leases for equipment or facilities. In order to comply with state public financing laws, these leases are typically subject to annual appropriation. In other words, a municipality may end a lease, without penalty, by not providing for the lease payments in its annual budget. After the lease ends, the lessor (the Fund) can resell the equipment or facility but the Fund may lose money on the sale. The Fund may invest in securities supported by pools of municipal leases. The most common type of lease backed securities are certificates of participation (COPs). However, the Fund may also invest directly in individual leases. Credit Enhancement Common types of credit enhancement include guarantees, letters of credit, bond insurance and surety bonds. Credit enhancement also includes arrangements where securities or other liquid assets secure payment of a fixed income security. If a default occurs, these assets may be sold and the proceeds paid to a security's holders. Either form of credit enhancement reduces credit risks by providing another source of payment for a fixed income security. Investment 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 rating service or be of comparable quality to securities having such ratings. A rating service'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 (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 IBCA, 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 rating service can be treated as being in one of the two highest short- term rating categories; currently, such securities must be rated by two rating services in one of their two highest rating categories. See "Regulatory Compliance." INVESTMENT RISKS There are many factors which may effect an investment in the Fund. The Fund's principal risks are described in its prospectus. An additional risk factor is outlined below. Tax Risk In order for the interest income from the securities to be exempt from federal regular income tax ("tax-exempt"), tax-exempt securities must meet certain legal requirements. Failure to meet such requirements may cause the interest received and distributed by the Fund to shareholders to be taxable. FUNDAMENTAL INVESTMENT POLICIES The Fund invests in tax-exempt securities so that at least 80% of the Fund's annual interest income is exempt from federal regular income tax. This policy is fundamental and cannot be changed without shareholder approval. 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 in amounts up to one-third of the value of its total assets, including the amounts borrowed. The Fund will not borrow money 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. Pledging Assets The Fund will not mortgage, pledge, or hypothecate any assets except as necessary to secure permitted borrowings. Lending Cash or Securities The Fund will not lend any of its assets, except that it may purchase or hold portfolio securities permitted by its investment objective, policies, and limitations or the Trust's Declaration of Trust. 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, 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 invest 25% or more of the value of its total assets 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, except that 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 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 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 Board, non-negotiable time deposits and repurchase agreements providing for settlement in more than seven days after notice. 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 nationally recognized rating services, 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 Board has 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 Board 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 Board 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 Board 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. 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. RULE 12B-1 PLAN As a compensation-type plan, the Rule 12b-1 Plan is designed to pay the Distributor (who may then pay investment professionals such as banks, broker/dealers, trust departments of banks, and registered investment advisers) for marketing activities (such as advertising, printing and distributing prospectuses, and providing incentives to investment professionals) to promote sales of Shares so that overall Fund assets are maintained or increased. This helps the Fund achieve economies of scale, reduce per Share expenses, and provide cash for orderly portfolio management and Share redemptions. Also, the Fund's service providers that receive asset-based fees also benefit from stable or increasing Fund assets. The Fund may compensate the Distributor more or less than its actual marketing expenses. In no event will the Fund pay for any expenses of the Distributor that exceed the maximum Rule 12b-1 Plan fee. The maximum Rule 12b-1 Plan fee that can be paid in any one year may not be sufficient to cover the marketing related expenses the Distributor has incurred. therefore, it may take the Distributor a number of years to recoup these expenses. SHAREHOLDER SERVICES The Fund may pay Federated Shareholder Services Company, a subsidiary of Federated Investors, Inc. (Federated), for providing shareholder services and maintaining shareholder accounts. Federated Shareholder Services Company may select others to perform these services for their customers and may pay them fees. SUPPLEMENTAL PAYMENTS Investment professionals may be paid fees out of the assets of the Distributor and/or Federated Shareholder Services Company (but not out of Fund assets). The Distributor and/or Federated Shareholder Services Company may be reimbursed by the Adviser or its affiliates. Investment professionals receive such fees for providing distribution-related or shareholder services such as sponsoring sales, providing sales literature, conducting training seminars for employees, and engineering sales-related computer software programs and systems. Also, investment professionals may be paid cash or promotional incentives, such as reimbursement of certain expenses relating to attendance at informational meetings about the Fund or other special events at recreational-type facilities, or items of material value. These payments will be based upon the amount of Shares the investment professional sells or may sell and/or upon the type and nature of sales or marketing support furnished by the investment professional. 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 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. 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. 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 Trust have equal voting rights, except that in matters affecting only a particular Fund or class, only Shares of that Fund or class are entitled to vote. Trustees may be removed by the Board or by shareholders at a special meeting. A special meeting of shareholders will be called by the Board upon the written request of shareholders who own at least 10% of the Trust's outstanding shares of all series entitled to vote. As of December 9, 1998, the following shareholders owned of record, beneficially, or both, 5% or more of the outstanding Institutional Shares: Calhoun & Co., Detroit, Michigan, owned approximately 22,647,323 shares (13.69%); MIFLA & Co., Milwaukee, Wisconsin, owned approximately 10,060,785 shares (6.08%); and Saxon & Co., Lester, Pennsylvania, owned approximately 8,386,826 shares (5.07%). As of December 9, 1998, the following shareholder owned of record, beneficially, or both, 5% or more of the outstanding Cash II Shares: Trustman, Atlanta, Georgia, owned approximately 324,002,510 Shares (97.86%). Shareholders owning 25% or more of outstanding Shares may be in control and be able to affect the outcome of certain matters presented for a vote of shareholders. Tax Information FEDERAL INCOME TAX The Fund intends to meet the requirements of Subchapter M of the Internal Revenue Code applicable to regulated investment companies. If these requirements are not met, it will not receive the special tax treatment and will pay federal income tax. The Fund will be treated as a single, separate entity for federal income tax purposes so that income earned and capital gains and losses realized by the Trust's other portfolios will be separate from those realized by the Fund. STATE TAXES Florida Intangibles Tax Shareholders of the Fund that are subject to the Florida intangibles tax will not be required to include the value of their Fund shares in their taxable intangible property if all of the Fund's investments on the annual assessment date are obligations that would be exempt from such tax if held directly by such shareholders, such as Florida and U.S. government obligations. As described earlier, the Fund will normally attempt to invest substantially all of its assets in securities which are exempt from the Florida intangibles tax. Accordingly, the value of the Fund shares held by a shareholder should under normal circumstances be exempt from the Florida intangibles tax. However, if the portfolio consists of any assets which are not so exempt on the annual assessment date, only the portion of the shares of the Fund which relate to securities issued by the United States and its possessions and territories will be exempt from the Florida intangibles tax, even if they partly relate to Florida tax-exempt securities. Florida State Municipal Taxation In a majority of states that have an income tax, dividends paid by a mutual fund attributable to investments in a particular state's municipal obligations are exempt from both federal and such state's income tax. If Florida were to adopt an income tax in the future, and assuming that its income tax policy with respect to mutual funds investing in Florida state and local municipal obligations would be similar to the general tax policy of other states, dividends paid by the Fund would be exempt from Florida state income tax. A constitutional amendment approved by referendum would be required before an individual tax could be imposed. Who Manages and Provides Services to the Fund? BOARD OF TRUSTEES The Board is responsible for managing the Trust's business affairs and for exercising all the Trust's powers except those reserved for the shareholders. Information about each Board member is provided below and includes the following data: name, address, birthdate, present position(s) held with the Trust, principal occupations for the past five years and other notable positions held, total compensation received as a Trustee from the Trust for its most recent fiscal year, and the total compensation received from the Federated Fund Complex for the most recent calendar year. The Trust is comprised of 17 Funds and the Federated Fund Complex is comprised of 56 investment companies, whose investment advisers are affiliated with the Fund's Adviser. As of December 9, 1998, 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.
Name Total Birthdate Aggregate Compensation Address Principal Occupations Compensation From Trust and Position With Trust for Past 5 Years From Trust Fund Complex - ------------------------------ --------------------------------------------------------- - --------------- ------------------- John F. Donahue##* Chief Executive Officer and Director or Trustee of $0 $0 for the Trust Birthdate: July 28, 1924 the Federated Fund Complex. Chairman and Director, and 56 other Federated Investors Tower Federated Investors, Inc.; Chairman and Trustee, investment 1001 Liberty Avenue Federated Advisers, Federated Management, and companies in the Pittsburgh, PA Federated Research; Chairman and Director, Federated Fund Complex CHAIRMAN and TRUSTEE Research Corp., and Federated Global Research Corp.; Chairman, Passport Research, Ltd. Thomas G. Bigley Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: February 3, 1934 Director, Member of Executive Committee, Children's Trust and 15 Old Timber Trail Hospital of Pittsburgh; formerly: Senior Partner, 56 other Pittsburgh, PA Ernst & Young LLP; Director, MED 3000 Group, Inc.; investment TRUSTEE Director, Member of Executive Committee, University companies in the of Pittsburgh. Fund Complex John T. Conroy, Jr. Director or Trustee of the Federated Fund Complex; $4,484.62 $122,362 for the Birthdate: June 23, 1937 President, Investment Properties Corporation; Senior Trust and Wood/IPC Commercial Dept. Vice President, John R. Wood and Associates, Inc., 56 other John R. Wood and Realtors; Partner or Trustee in private real estate investment Associates, Inc. Realtors ventures in Southwest Florida; formerly: President, companies in the 3255 Tamiami Trail North Naples Property Management, Inc. and Northgate Fund Complex Naples, FL Village Development Corporation. TRUSTEE William J. Copeland Director or Trustee of the Federated Fund Complex; $4,484.62 $122,362 for the Birthdate: July 4, 1918 Director and Member of the Executive Committee, Trust and One PNC Plaza-23rd Floor Michael Baker, Inc.; formerly: Vice Chairman and 56 other Pittsburgh, PA Director, PNC Bank, N.A., and PNC Bank Corp.; investment TRUSTEE Director, Ryan Homes, Inc. companies in the Fund Complex Retired: Director, United Refinery; Director, Forbes Fund; Chairman, Pittsburgh Foundation; Chairman, Pittsburgh Civic Light Opera. James E. Dowd, Esq. Director or Trustee of the Federated Fund Complex; $4,484.62 $122,362 for the Birthdate: May 18, 1922 Attorney-at-law; Director, The Emerging Germany Fund, Trust and 571 Hayward Mill Road Inc. 56 other Concord, MA investment TRUSTEE Retired: President, Boston Stock Exchange, Inc.; companies in the Regional Administrator, United States Securities and Fund Complex Exchange Commission. Lawrence D. Ellis, M.D.* Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: October 11, 1932 Professor of Medicine, University of Pittsburgh; Trust and 3471 Fifth Avenue Medical Director, University of Pittsburgh Medical 56 other Suite 1111 Center - Downtown; Hematologist, Oncologist, and investment Pittsburgh, PA Internist, Presbyterian and Montefiore Hospitals; companies in the TRUSTEE Member, National Board of Trustees, Leukemia Society Fund Complex of America. Edward L. Flaherty, Jr., Director or Trustee of the Federated Fund Complex; $4,484.62 $122,362 for the Esq. # Attorney, of Counsel, Miller, Ament, Henny & Kochuba; Trust and Birthdate: June 18, 1924 Director, Eat'N Park Restaurants, Inc.; formerly: 56 other Miller, Ament, Henny & Counsel, Horizon Financial, F.A., Western Region; investment Kochuba Partner, Meyer and Flaherty. companies in the 205 Ross Street Fund Complex Pittsburgh, PA TRUSTEE Peter E. Madden Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: March 16, 1942 formerly: Representative, Commonwealth of Trust and One Royal Palm Way Massachusetts General Court; President, State Street 56 other 100 Royal Palm Way Bank and Trust Company and State Street Corporation. investment Palm Beach, FL companies in the TRUSTEE Retired: Director, VISA USA and VISA International; Fund Complex Chairman and Director, Massachusetts Bankers Association; Director, Depository Trust Corporation. John E. Murray, Jr., J.D., Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the S.J.D. President, Law Professor, Duquesne University; Trust and Birthdate: December 20, 1932 Consulting Partner, Mollica & Murray. 56 other President, Duquesne investment University Retired: Dean and Professor of Law, University of companies in the Pittsburgh, PA Pittsburgh School of Law; Dean and Professor of Law, Fund Complex TRUSTEE Villanova University School of Law. Wesley W. Posvar Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: September 14, President, World Society of Ekistics, Athens; Trust and 1925 Professor, International Politics; Management 56 other 1202 Cathedral of Learning Consultant; Trustee, Carnegie Endowment for investment University of Pittsburgh International Peace, RAND Corporation, Online companies in the Pittsburgh, PA Computer Library Center, Inc., National Defense Fund Complex TRUSTEE University and U.S. Space Foundation; President Emeritus, University of Pittsburgh; Founding Chairman, National Advisory Council for Environmental Policy and Technology, Federal Emergency Management Advisory Board and Czech Management Center, Prague. Retired: Professor, United States Military Academy; Professor, United States Air Force Academy. Marjorie P. Smuts Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: June 21, 1935 Public Relations/Marketing/Conference Planning. Trust and 4905 Bayard Street 56 other Pittsburgh, PA Retired: National Spokesperson, Aluminum Company of investment TRUSTEE America; business owner. companies in the Fund Complex Glen R. Johnson* Trustee, Federated Investors, Inc.; staff member, $0 $0 for the Trust Birthdate: May 2, 1929 Federated Securities Corp. and Federated Investors Tower 8 other investment 1001 Liberty Avenue companies in the Pittsburgh, PA Fund Complex PRESIDENT and TRUSTEE J. Christopher Donahue##* President or Executive Vice President of the $0 $0 for the Trust Birthdate: April 11, 1949 Federated Fund Complex; Director or Trustee of some and Federated Investors Tower of the Funds in the Federated Fund Complex; President 18 other 1001 Liberty Avenue and Director, Federated Investors, Inc.; President investment Pittsburgh, PA and Trustee, Federated Advisers, Federated companies in the EXECUTIVE VICE PRESIDENT Management, and Federated Research; President and Fund Complex Director, Federated Research Corp. and Federated Global Research Corp.; President, Passport Research, Ltd.; Trustee, Federated Shareholder Services Company; Director, Federated Services Company. Edward C. Gonzales* Trustee or Director of some of the Funds in the $0 $0 for the Trust Birthdate: October 22, 1930 Federated Fund Complex; President, Executive Vice and Federated Investors Tower President and Treasurer of some of the Funds in the 1 other investment 1001 Liberty Avenue Federated Fund Complex; Vice Chairman, Federated companies in the Pittsburgh, PA Investors, Inc.; Vice President, Federated Advisers, Fund Complex EXECUTIVE VICE PRESIDENT 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. John W. McGonigle Executive Vice President and Secretary of the $0 $0 for the Trust Birthdate: October 26, 1938 Federated Fund Complex; Executive Vice President, and Federated Investors Tower Secretary, and Director, Federated Investors, Inc.; 56 other 1001 Liberty Avenue Trustee, Federated Advisers, Federated Management, investment Pittsburgh, PA and Federated Research; Director, Federated Research companies in the EXECUTIVE VICE PRESIDENT Corp. and Federated Global Research Corp.; Director, Fund Complex and SECRETARY Federated Services Company; Director, Federated Securities Corp. Richard J. Thomas Treasurer of the Federated Fund Complex; Vice $0 $0 for the Trust Birthdate: June 17, 1954 President - Funds Financial Services Division, and Federated Investors Tower Federated Investors, Inc.; Formerly: various 56 other 1001 Liberty Avenue management positions within Funds Financial Services investment Pittsburgh, PA Division of Federated Investors, Inc. companies in the TREASURER Fund Complex Richard B. Fisher* President or Vice President of some of the Funds in $0 $0 for the Trust Birthdate: May 17, 1923 the Federated Fund Complex; Director or Trustee of and Federated Investors Tower some of the Funds in the Federated Fund Complex; 6 other investment 1001 Liberty Avenue Executive Vice President, Federated Investors, Inc.; companies in the Pittsburgh, PA Chairman and Director, Federated Securities Corp. Fund Complex VICE PRESIDENT William D. Dawson, III Chief Investment Officer of this Fund and various $0 $0 for the Trust Birthdate: March 3, 1949 other Funds in the Federated Fund Complex; Executive and Federated Investors Tower Vice President, Federated Investment Counseling, 41 other 1001 Liberty Avenue Federated Global Research Corp., Federated Advisers, investment Pittsburgh, PA Federated Management, Federated Research, and companies in the CHIEF INVESTMENT OFFICER Passport Research, Ltd.; Registered Representative, Fund Complex 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. Mary Jo Ochson Senior Portfolio Manager and Vice President of eight $0 $0 for the Birthdate: September 12, investment companies in the Federated Fund Complex; Trust and 1953 Senior Vice President, Federated Investment 7 other investment Federated Investors Tower Counseling, Federated Advisers, Federated Global companies 1001 Liberty Avenue Research Corp., Federated Management, Federated in the Fund Complex Pittsburgh, PA Research, Federated Research Corp. and Passport SENIOR PORTFOLIO Research, Ltd.; Formerly: Vice President, Federated MANAGER/VICE PRESIDENT Advisers, Federated Management, Federated Research, Federated Research Corp. , Passport Research, Ltd. and Federated Global Research Corp. Jeff A. Kozemchak Senior Portfolio Manager and Vice President of four $0 $0 for the Birthdate: January 15, 1960 investment companies in the Federated Fund Complex; Trust and Federated Investors Tower Vice President, Federated Investment Counseling, 3 other investment 1001 Liberty Avenue Federated Advisers, Federated Global Research Corp., companies Pittsburgh, PA Federated Management, Federated Research, Federated in the Fund Complex SENIOR PORTFOLIO Research Corp. and Passport Research, Ltd.; MANAGER/VICE PRESIDENT Formerly: Assistant Vice President and Investment Analyst, Federated Research Corp. and Passport Research, Ltd. ; Assistant Vice President, Federated Advisers, Federated Management and Federated Research.
## Mr. Donahue is the father of J. Christopher Donahue, Executive Vice President of the Trust. 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 Trust, 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 Trust. 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:
Maximum Average Aggregate Daily Administrative Fee Net Assets of the Federated Funds - -------------------------------------------------------------------- 0.150 of 1% on the first $250 million 0.125 of 1% on the next $250 million 0.100 of 1% on the next $250 million 0.075 of 1% on assets in excess of $750 million
The administrative fee received during any fiscal year shall be at least $125,000 per portfolio and $30,000 per each additional class of shares. Federated Services Company may voluntarily waive a portion of its fee and may reimburse the Fund for expenses. Federated Services Company also provides certain accounting and recordkeeping services with respect to the Fund's portfolio investments for a fee based on Fund assets plus out-of-pocket expenses. CUSTODIAN State Street Bank and Trust Company, Boston, Massachusetts, is custodian for the securities and cash of the Fund. Foreign instruments purchased by the Fund are held by foreign banks participating in a network coordinated by State Street Bank. TRANSFER AGENT AND DIVIDEND DISBURSING AGENT Federated Services Company, through its registered transfer agent subsidiary, Federated Shareholder Services Company, maintains all necessary shareholder records. The Fund pays the transfer agent a fee based on the size, type, and number of accounts and transactions made by shareholders. INDEPENDENT PUBLIC ACCOUNTANTS Arthur Andersen LLP is the independent public accountant for the Fund. FEES PAID BY THE FUND FOR SERVICES
For the Year Ended October 31, 1998 1997 1996 - ------------------------------------------------------------------------------------- Advisory Fee Earned $2,032,071 $2,318,654 $1,558,498 - ------------------------------------------------------------------------------------- Advisory Fee Reduction $ 686,562 $1,092,531 $1,071,607 - ------------------------------------------------------------------------------------- Brokerage Commissions $ 0 $ 0 $ 0 - ------------------------------------------------------------------------------------- Administrative Fee $ 383,094 $ 437,669 $ 294,886 - ------------------------------------------------------------------------------------- 12b-1 Fee - ------------------------------------------------------------------------------------- Institutional Shares $ 0 --- --- ------------------------------------------------------------------------------------ Cash II Shares $ 237,614 --- ------------------------------------------------------------------------------------ Shareholder Services Fee - ------------------------------------------------------------------------------------- Institutional Shares $ 739,500 --- --- ------------------------------------------------------------------------------------ Cash Series Shares $ 297,018 --- --- ------------------------------------------------------------------------------------
Fees are allocated among Classes based on their pro rata share of Fund assets, except for marketing (Rule 12b-1) fees and shareholder services fees, which are borne only by the applicable Class of Shares. If the Fund's expenses are capped at a particular level, the cap does not include reimbursement to the Fund of any expenses incurred by shareholders who use the transfer agent's subaccounting facilities. How Does the Fund Measure Performance? The Fund may advertise Share performance by using the Securities and Exchange Commission's (SEC) standard method for calculating performance applicable to all mutual funds. The SEC also permits this standard performance information to be accompanied by non-standard performance information. Unless otherwise stated, any quoted Share performance reflects the effect of non-recurring charges, such as maximum sales charges, which, if excluded, would increase the total return and yield. The performance of Shares depends upon such variables as: portfolio quality; average portfolio maturity; type and value of portfolio securities; changes in interest rates; changes or differences in the Fund's or any class of Shares' expenses; and various other factors. Share performance fluctuates on a daily basis largely because net earnings and offering price per Share 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 and since inception periods ended October 31, 1998. Yield, Effective Yield and Tax-Equivalent Yield given for the seven-day period ended October 31, 1998.
Share Class Seven-Day Period 1 Year Since Inception on September 21, 1994 Institutional Shares - ------------------------------------------------------------------------------------------------------------------------------------ Total Return -- 3.09% 3.27% Yield 2.77% -- -- Effective Yield 2.81% -- -- Tax-Equivalent Yield 4.65% -- -- - ------------------------------------------------------------------------------------------------------------------------------------
Share Class Seven-Day Period 1 Year Since Inception on November 27, 1995 Cash II Shares - ------------------------------------------------------------------------------------------------------------------------------------ Total Return -- 2.83% 2.92% Yield 2.51% -- -- Effective Yield 2.55% -- -- Tax-Equivalent Yield 4.22% -- -- - ------------------------------------------------------------------------------------------------------------------------------------
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. The tax- equivalent yield of Shares is calculated similarly to the yield, but is adjusted to reflect the taxable yield that Shares would have had to earn to equal the actual yield, assuming a specific tax rate. 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. TAX EQUIVALENCY TABLE Set forth below is a sample of a tax-equivalency table that may be used in advertising and sales literature. This table is for illustrative purposes only and is not representative of past or future performance of the Fund. The interest earned by the tax-exempt securities owned by the Fund generally remains free from federal regular income tax and is often free from state and local taxes as well. However, some of the Fund's income may be subject to-the federal alternative minimum tax and state and/or local taxes.
TAXABLE YIELD EQUIVALENT FOR 1998 MULTISTATE MUNICIPAL FUND - ------------------------------------------------------------------------------------------------------------------------------------ FEDERAL INCOME TAX BRACKET: 15.00% 28.00% 31.00% 36.00% 39.60% - ------------------------------------------------------------------------------------------------------------------------------------ JOINT $1- $42,351- $102,301- $155,951- OVER RETURN 42,350 102,300 155,950 278,450 $278,450 SINGLE $1- $25,351- $61,401- $128,101- OVER RETURN 25,350 61,400 128,100 278,450 $278,450 - ------------------------------------------------------------------------------------------------------------------------------------
Tax-Exempt Yield Taxable Yield Equivalent - ------------------------------------------------------------------------------------------------------------------------------------ 1.00% 1.18% 1.39% 1.45% 1.56% 1.66% 1.50% 1.76% 2.08% 2.17% 2.34% 2.48% 2.00% 2.35% 2.78% 2.90% 3.13% 3.31% 2.50% 2.94% 3.47% 3.62% 3.91% 4.14% 3.00% 3.53% 4.17% 4.35% 4.69% 4.97% 3.50% 4.12% 4.86% 5.07% 5.47% 5.79% 4.00% 4.71% 5.56% 5.80% 6.25% 6.62% 4.50% 5.29% 6.25% 6.52% 7.03% 7.45% 5.00% 5.88% 6.94% 7.25% 7.81% 8.28% 5.50% 6.47% 7.64% 7.97% 8.59% 9.11% 6.00% 7.06% 8.33% 8.70% 9.38% 9.93% 6.50% 7.65% 9.03% 9.42% 10.16% 10.76% 7.00% 8.24% 9.72% 10.14% 10.94% 11.59% 7.50% 8.82% 10.42% 10.87% 11.72% 12.42% 8.00% 9.41% 11.11% 11.59% 12.50% 13.25%
Note: The maximum marginal tax rate for each bracket was used in calculating the taxable yield equivalent.
TAXABLE YIELD EQUIVALENT FOR 1998 State of Florida - ------------------------------------------------------------------------------------------------------------------------------------ FEDERAL INCOME TAX BRACKET: 15.00% 28.00% 31.00% 36.00% 39.60% - ------------------------------------------------------------------------------------------------------------------------------------ JOINT $1 $42,351 $102,301 $155,951 OVER RETURN 42,350 102,300 155,950 278,450 278,450 SINGLE $1 $25,351 $61,401 $128,101 OVER RETURN 25,350 61,400 128,100 278,450 278,450 - ------------------------------------------------------------------------------------------------------------------------------------
Tax-Exempt Yield Taxable Yield Equivalent - ------------------------------------------------------------------------------------------------------------------------------------ 1.00% 1.38% 1.59% 1.65% 1.76% 1.86% 1.50% 1.96% 2.28% 2.37% 2.54% 2.68% 2.00% 2.55% 2.98% 3.10% 3.33% 3.51% 2.50% 3.14% 3.67% 3.82% 4.11% 4.34% 3.00% 3.73% 4.37% 4.55% 4.89% 5.17% 3.50% 4.32% 5.06% 5.27% 5.67% 5.99% 4.00% 4.91% 5.76% 6.00% 6.45% 6.82% 4.50% 5.49% 6.45% 6.72% 7.23% 7.65% 5.00% 6.08% 7.14% 7.45% 8.01% 8.48% 5.50% 6.67% 7.84% 8.17% 8.79% 9.31% 6.00% 7.26% 8.53% 8.90% 9.58% 10.13% 6.50% 7.85% 9.23% 9.62% 10.36% 10.96% 7.00% 8.44% 9.92% 10.34% 11.14% 11.79% 7.50% 9.02% 10.62% 11.07% 11.92% 12.62% 8.00% 9.61% 11.31% 11.79% 12.70% 13.45%
Note: The State of Florida levies a tax on intangible personal property, such as stocks, bonds and other evidences of indebtedness, at the rate of $2.00 per $1,000 of the properties' market value as of January 1st. Because this is a tax on the value of an investment as opposed to the income generated therefrom, it becomes more difficult to include its effect in an income-derived equivalent yield table. In an effort to simplify your analysis, this table has been prepared assuming an across-the-board 20 basis point incremental benefit resulting from the avoidance of this tax. 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., 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 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, 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, 1997, Federated managed 11 bond funds with approximately $2.1 billion in assets and 22 money market funds with approximately $10.9 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 tax-exempt 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 27 years' experience. As of December 31, 1997, Federated managed 29 equity funds totaling approximately $11.7 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, 1997, Federated managed 11 money market funds and 16 bond funds with assets approximating $17.1 billion and $5.6 billion, respectively. Federated's corporate bond decision making--based on intensive, diligent credit analysis--is backed by over 22 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 $200 billion. GOVERNMENT FUNDS In the government sector, as of December 31, 1997, Federated manages 9 mortgage- backed, 6 government/ agency and 18 government money market mutual funds, with assets approximating $5.9 billion, $1.5 billion and $35 billion, respectively. Federated trades approximately $400 million in U.S. government and mortgage- backed securities daily and places approximately $23 billion in repurchase agreements each day. Federated introduced the first U.S. government fund to invest in U.S. government bond securities in 1969. Federated has been a major force in the short- and intermediate-term government markets since 1982 and currently manages approximately $36 billion in government funds within these maturity ranges. 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, 1997, Federated managed more than $63.1 billion in assets across 51 money market funds, including 18 government, 11 prime and 22 municipal with assets approximating $35 billion, $17.1 billion and $10.9 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 $4 trillion to the more than 6,700 funds available, according to the Investment Company Institute. Federated distributes mutual funds through its subsidiaries for a variety of investment purposes. Specific markets include: FEDERATED CLIENTS OVERVIEW 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. Investment Ratings APPENDIX STANDARD & POOR'S SHORT-TERM MUNICIPAL OBLIGATION RATINGS A Standard & Poor's (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 the demand characteristics. Several examples are AAA/A-l+, AA/A-1+, 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 rated 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. MOODY'S 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 INVESTOR SERVICES, L.L.P. 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. Addresses FLORIDA MUNICIPAL CASH TRUST Institutional Shares Cash II Shares Federated Investors Funds 5800 Corporate Drive Pittsburgh, PA 15237-7000 Distributor Federated Securities Corp. Federated Investors Tower 1001 Liberty Avenue, Pittsburgh, PA 15222-3779 Investment Adviser Federated Management Federated Investors Tower 1001 Liberty Avenue, Pittsburgh, PA 15222-3779 Custodian State Street Bank and Trust Company P.O. Box 8600 Boston, MA 02266-8600 Transfer Agent and Dividend Disbursing Agent Federated Shareholder Services Company P.O. Box 8600 Boston, MA 02266-8600 Independent Public Accountants Arthur Andersen LLP 225 Franklin Street Boston, MA 02110-2812 PROSPECTUS Georgia Municipal Cash Trust A Portfolio of Federated Municipal Trust A money market mutual fund seeking to provide current income exempt from federal regular income tax and the income tax imposed by the State of Georgia. 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. December 31, 1998 CONTENTS Risk/Return Summary 1 What are the Fund's Fees and Expenses? 2 What are the Fund's Investment Strategies? 3 What are the Principal Securities in Which the Fund Invests? 3 What are the Specific Risks of Investing in the Fund? 4 What do Shares Cost? 5 How is the Fund Sold? 5 How to Purchase Shares 5 How to Redeem Shares 7 Account and Share Information 9 Who Manages the Fund? 10 Financial Information 11 Report of Independent Public Accountants 24 Risk/Return Summary WHAT IS THE FUND'S INVESTMENT OBJECTIVE? The Fund is a money market fund which seeks to maintain a stable net asset value of $1.00. The Fund's investment objective is to provide current income exempt from federal regular income tax and the income tax imposed by the State of Georgia consistent with stability of principal and liquidity. While there is not 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 tax-exempt securities so that the Fund's annual interest income is exempt from federal regular income tax and Georgia state income tax. Interest from the Fund's investments may be subject to the federal alternative minimum tax for individuals and corporations. WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND? Because the Fund may invest a significant portion of its assets in securities of a single issuer, an investment in the Fund may involve additional risks compared to a fully diversified money market 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 representation omitted. Please see Appendix B2.] Historically, the Fund has maintained a constant $1.00 net asset value per share. The bar chart shows the variability of the Fund's total returns on a yearly basis. The Fund's Shares are not sold subject to a sales charge (load). The total returns displayed above are based upon net asset value. The Fund's Shares year-to-date total return as of the most recent calendar quarter of September 30, 1998 was 2.45%. Within the period shown in the Chart, the Fund's highest quarterly return was 0.89% (quarter ended June 30, 1997). Its lowest quarterly return was 0.77% (quarter ended March 31, 1997). The Fund's Seven-Day Net Yield as of 12/31/97 was 3.69%. The following table represents the Fund's Average Annual Total Return through 12/31/97. CALENDAR PERIOD FUND 1 Year 3.42% Start of Performance 1 3.43% 1 The Fund's start of performance date was August 22, 1995. Investors may call the Fund at 1-800-341-7400 to acquire the Seven-Day Net Yield. 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? GEORGIA MUNICIPAL CASH TRUST FEES AND EXPENSES This table describes the fees and expenses that you may pay if you buy, hold and redeem shares of the Fund.
SHAREHOLDER FEES 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 a percentage of average net assets) Management Fee 2 0.50% Distribution (12b-1) Fee None Shareholder Services Fee 3 0.25% Other Expenses 0.18% Total Annual Fund Operating Expenses 0.93% 1 Although not contractually obligated to do so, the adviser and shareholder services provider waived certain amounts. These are shown below along with the net expenses the Fund actually paid for the fiscal year ended October 31, 1998. Waiver of Fund Expenses 0.44% Total Actual Annual Fund Operating Expenses (after waivers) 0.49% 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 0.12% for the year ended October 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 0.19% for the fiscal year ended October 31, 1998.
EXAMPLE The following Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund 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 operating expenses are BEFORE WAIVERS as shown above and remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be: 1 YEAR 3 YEARS 5 YEARS 10 YEARS Expenses assuming no redemption $95 $296 $515 $1,143 What are the Fund's Investment Strategies? The Fund invests in a portfolio of high-quality tax-exempt securities maturing in 13 months or less. The average maturity of the Fund's portfolio, computed on a dollar-weighted basis, will be 90 days or less. The Fund's Adviser performs a fundamental credit analysis to develop an approved list of issuers and securities that meet the Adviser's minimum credit standards. The Adviser targets an average portfolio maturity based upon its interest rate outlook and the tax-exempt securities available. The Adviser structures the portfolio by combining variable rate demand instruments and municipal notes. Depending on the supply of tax-exempt securities, the Adviser generally shortens the portfolio's maturity when it expects interest rates to rise and extends the maturity when it expects interest rates to fall. TEMPORARY DEFENSIVE INVESTMENTS During adverse market conditions the Fund may temporarily depart from its principal investment strategies by investing in securities subject to federal regular income tax and Georgia state income tax. Temporary investments will be of comparable quality to other securities in which the Fund invests. This may cause the Fund to give up greater investment returns to maintain the safety of principal. This also may cause the Fund to receive and distribute taxable income to investors. What are the Principal Securities in Which the Fund Invests? TAX-EXEMPT SECURITIES Tax-exempt securities are fixed income securities that pay interest exempt from regular federal income taxes. States, counties, cities and other political subdivisions and authorities typically issue tax exempt securities. Tax-exempt securities are generally differentiated by their source of repayment. FIXED INCOME SECURITIES Fixed income 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. VARIABLE RATE DEMAND INSTRUMENTS Variable rate demand instruments are tax-exempt securities that require the issuer or a third party, such as a dealer or bank, to repurchase the security for its face value upon demand. The securities also bear interest at a variable rate intended to cause the securities to trade at their face value. The Fund treats demand instruments as short-term securities, even though their stated maturity may extend beyond 13 months. MUNICIPAL NOTES Municipal notes are short-term tax-exempt securities. Many municipalities issue such notes to fund their current operations before collecting taxes or other municipal revenues. Municipalities may also issue notes to fund capital projects prior to issuing long-term bonds. The issuers typically repay the notes at the end of their fiscal year, either with taxes, other revenues or proceeds from newly issued notes or bonds. INVESTMENT 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 rating services or be of comparable quality to securities having such ratings. CREDIT ENHANCEMENT Credit enhancement consists of an arrangement in which a company agrees to pay amounts due on a fixed income security if the issuer defaults. In some cases the company providing credit enhancement makes all payments directly to the security holders and receives reimbursement from the issuer. Normally, the credit enhancer has greater financial resources and liquidity than the issuer. For this reason, the Adviser usually evaluates the credit risk of a fixed income security based solely upon its credit enhancement. What are the Specific Risks of Investing in the Fund? Although there are many factors which may affect an investment in the Fund, the principal risks of investing in a tax-exempt money market fund are described below. CREDIT RISK Credit risk is the possibility that an issuer or a credit enhancer will default (fails to repay interest and principal when due). If an issuer or credit enhancer defaults, the Fund will lose money. Money market funds try to minimize this risk by purchasing higher quality securities. Many fixed income securities receive credit ratings from companies such as Standard & Poor's and Moody's Investor Services. Fixed income securities receive different credit ratings depending on the rating company's assessment of the likelihood of default by the issuer. The lower the credit rating, the greater the credit risk. If the security is unrated, greater reliance is placed on the Adviser's credit assessment. 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. SECTOR RISK Most of the Fund's securities will be invested in issuers located in Georgia. In addition, a substantial part of the Fund's portfolio may be comprised of tax-exempt securities issued or credit enhanced by companies in similar businesses or with other similar characteristics. As a result, the Fund will be more susceptible to any economic, business, political, or other developments which generally affect these issuers. 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 determined net asset value (NAV). The Fund does not charge a sales charge. NAV is determined at 12:00 noon and 1:00 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 $10,000. There is no required minimum subsequent investment amount. An account may be opened with a smaller minimum amount as long as the $10,000 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 institutions acting in an agency or fiduciary capacity or to individuals directly or through investment professionals. The Fund may not be a suitable investment for retirement plans or non-Georgia taxpayers because it invests in Georgia tax-exempt securities. 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 1:00 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 on the day 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 SYSTEMATIC INVESTMENT PROGRAM Once you have opened an account, you may automatically purchase additional Shares on a regular basis by completing the Systematic Investment Program (SIP) section of the New Account Form or by contacting the Fund or your investment professional. The minimum investment amount for SIPs is $50. BY AUTOMATED CLEARINGHOUSE (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 12:00 noon (Eastern time), your redemption will be wired to you the same day. You will not receive that day's dividend. If you call after 12:00 noon (Eastern time), your redemption will be wired to you the following business day. You will receive that day's dividends. Under limited circumstances, arrangements may be made with the Distributor for same-day payment of redemption proceeds, without that day's dividend, for redemption requests received before 2:00 p.m. (Eastern time). BY MAIL You may redeem Shares by mailing a written request to the Fund. You will receive a redemption amount based on the NAV 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 30 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. SYSTEMATIC WITHDRAWAL PROGRAM You may automatically redeem Shares in a minimum amount of $100 on a regular basis. Complete the appropriate section of the New Account Form or an Account Service Options Form or contact your investment professional or the Fund. Your account value must meet the minimum initial investment amount at the time the program is established. This program may reduce, and eventually deplete, your account. Payments should not be considered yield or income. CHECKWRITING You may request checks to redeem your Fund Shares. Your account will continue to receive the daily dividend declared on the Shares being redeemed until a check is presented for payment. DEBIT CARD You may request a debit card account that allows you to redeem Shares. There is an annual fee for this service that the Fund will automatically deduct from your account. 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 CONFIRMATIONS AND ACCOUNT STATEMENTS You will receive confirmation of purchases and redemptions. In addition, you will receive periodic statements reporting all account activity, including systematic transactions, 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, 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. It is anticipated that Fund distributions will be primarily dividends that are exempt from federal income tax, although a portion of the Fund's dividends may not be exempt. Dividends may be subject to state and local taxes, although the Fund's dividends will be exempt from Georgia state income tax to the extent they are derived from interest on obligations exempt from Georgia state income taxes. Capital gains and non-exempt dividends are taxable whether paid in cash or reinvested in the Fund. 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 Management. 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 and/or provide administrative services to more than 300 mutual funds and private accounts, which totaled over $120 billion in assets as of December 31, 1997. Federated was established in 1955 and is one of the largest mutual fund investment managers in the United States with more than 2,000 employees. Over 4,000 investment professionals make Federated Funds available to their customers. ADVISORY FEES The Adviser receives an annual investment advisory fee of 0.50% 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 affect 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 Independent Auditors' Report on page 24.
YEAR ENDED OCTOBER 31 1998 1997 1996 1995 1 NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 INCOME FROM INVESTMENT OPERATIONS: Net investment income 0.03 0.03 0.03 0.01 LESS DISTRIBUTIONS: Distributions from net investment income (0.03) (0.03) (0.03) (0.01) NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 TOTAL RETURN 2 3.33% 3.38% 3.37% 0.73% RATIOS TO AVERAGE NET ASSETS Expenses 0.49% 0.49% 0.46% 0.25% 3 Net investment income 3.28% 3.33% 3.31% 3.81% 3 Expense waiver/reimbursement 4 0.44% 0.43% 0.52% 0.75% 3 SUPPLEMENTAL DATA Net assets, end of period (000 omitted) $168,098 $121,858 $122,940 $111,278
1 Reflects operations for the period from August 22, 1995 (date of initial public investment) to October 31, 1995. 2 Based on net asset value, which does not reflect the sales charge or contingent deferred sales charge, if applicable. 3 Computed on an annualized basis. 4 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 October 31, 1998
PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-99.1% 1 GEORGIA-99.1% $ 5,100,000 Athens-Clarke County, GA IDA, (Series 1988), 3.15% CP (Rhone Merieux, Inc. Project)/(Societe Generale, Paris LOC), Mandatory Tender 2/23/1999 $ 5,100,000 1,500,000 Athens-Clarke County, GA IDA, (Series 1997) Weekly VRDNs (Armagh Capital Resource, LLC)/(Wachovia Bank of NC, N.A., Winston-Salem LOC) 1,500,000 2,000,000 Atlanta, GA, Airport Facilities Revenue Refunding Bonds (Series 1996), 5.25% Bonds (Hartsford Atlanta International Airport)/(AMBAC INS), 1/1/1999 2,004,589 1,600,000 Atlanta, GA, Urban Residential Finance Authority, Multifamily Housing Revenue Bonds (Series 1995) Weekly VRDNs (West End Housing Development Project)/(First Union National Bank, Charlotte, NC LOC) 1,600,000 4,760,000 Augusta, GA HFA, (Series 1998) Weekly VRDNs (Sterling Ridge Apartments)/(Amsouth Bank N.A., Birmingham LOC) 4,760,000 2,000,000 2 Bibb County, GA, PT-199, 3.70% TOBs (Georgia State GTD)/ (Bayerische Vereinsbank AG, Munich LIQ), Optional Tender 5/ 20/1999 2,000,000 2,000,000 Brunswick and Glynn County, GA Development Authority, Multi- Mode Variable Rate IDRB's (Series 1996) Weekly VRDNs (Daewoo Equipment Corp.)/(KeyBank, N.A. LOC) 2,000,000 3,800,000 Brunswick, GA, Housing Authority, (Series S93) Weekly VRDNs (Island Square Apartments)/(Columbus Bank and Trust Co., GA LOC) 3,800,000 1,090,000 Carrollton, GA, (Series 1998), 3.60% Bonds, 2/1/1999 1,090,000 1,345,000 Cherokee County, GA Development Authority, IDRB Weekly VRDNs (Morrison Products, GA)/(KeyBank, N.A. LOC) 1,345,000 2,000,000 Cherokee County, GA School System, 3.875% TANs, 12/31/1998 2,000,396 2,500,000 Clayton County, GA Development Authority, (Series 1994) Weekly VRDNs (Lear Seating Corp.)/(Chase Manhattan Bank N.A., New York LOC) 2,500,000 550,000 Clayton County, GA Housing Authority, Revenue Refunding Bonds (Series 1992) Weekly VRDNs (Oxford Townhomes Project)/ (Amsouth Bank N.A., Birmingham LOC) 550,000 1,965,000 Cobb County, GA IDA Weekly VRDNs (Atlanta RDC Co.)/(First Union National Bank, Charlotte, NC LOC) 1,965,000 1,600,000 Cobb County, GA IDA, IDRB (Series 1995) Weekly VRDNs (Consolidated Engineering Company, Inc. Project)/ (Nationsbank, N.A., Charlotte LOC) 1,600,000 870,000 Columbia County, GA Development Authority, (Series 1991) Weekly VRDNs (Augusta Sportswear, Inc.)/(Wachovia Bank of Georgia, N.A., Atlanta LOC 870,000 735,000 Columbus, GA IDA, (Series 90B) Weekly VRDNs (R. P. Real Estate, Inc.)/(Columbus Bank and Trust Co., GA LOC) 735,000 4,200,000 Conyers-Rockdale-Big Haynes, GA Impoundment Authority, (Series 1997), 4.00% BANs, 12/1/1998 4,200,499 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 GEORGIA-CONTINUED $ 3,000,000 Coweta County, GA IDA, (Series 1995) Weekly VRDNs (Lanelco L.L.C. Project)/(NBD Bank, Michigan LOC) $ 3,000,000 6,000,000 Crisp County, GA Development Authority, (Series B), 4.20% TOBs (Masonite Corporation)/(International Paper Co. GTD), Optional Tender 9/1/1999 6,000,000 5,000,000 Dalton, GA, 4.05% TANs, 12/31/1998 5,001,603 1,275,000 De Kalb County, GA Development Authority, (Series 1992) Weekly VRDNs (House of Cheatham, Inc. Project)/(Nationsbank, N.A., Charlotte LOC) 1,275,000 600,000 De Kalb County, GA Development Authority, (Series 1993) Weekly VRDNs (Pet, Inc.)/(PNC Bank, N.A. LOC) 600,000 2,000,000 De Kalb County, GA Development Authority, (Series 1995) Weekly VRDNs (Rock-Tenn Converting Co.)/(SunTrust Bank, Atlanta LOC) 2,000,000 1,215,000 De Kalb County, GA Development Authority, (Series 1996) Weekly VRDNs (DeKalb Steel, Inc.)/(SouthTrust Bank of Georgia, Atlanta LOC) 1,215,000 4,000,000 De Kalb County, GA Multi Family Housing Authority, Multifamily Housing Revenue Bonds (Series 1996) Weekly VRDNs (Bryton Hill Apartments)/(PNC Bank, Kentucky LOC) 4,000,000 3,000,000 Douglas County, GA Development Authority, (Series 1997) Weekly VRDNs (Austral Insulated Products, Inc.)/(Regions Bank, Alabama LOC) 3,000,000 740,000 Douglas County, GA Development Authority, (Series 1997) Weekly VRDNs (Paul B. Goble)/(Wachovia Bank of Georgia, N.A., Atlanta LOC) 740,000 3,500,000 Douglas County, GA, 3.80% TANs, 12/30/1998 3,500,499 3,000,000 Forsyth County, GA School District, 5.50% Bonds, 2/1/1999 3,013,941 1,000,000 Forsythe County, GA Development Authority, IDRB (Series 1995) Weekly VRDNs (American BOA, Inc. Project)/(Dresdner Bank AG, Frankfurt LOC) 1,000,000 2,000,000 Franklin County, GA Industrial Building Authority, (Series 1995) Weekly VRDNs (Bosal Industries, Inc.)/(Bank of New York, NY LOC) 2,000,000 3,400,000 Fulton County, GA Development Authority, (Series 1998) Weekly VRDNs (Morehouse School of Medicine)/(SunTrust Bank, Atlanta LOC) 3,400,000 2,200,000 Fulton County, GA IDA Weekly VRDNs (Automatic Data Processing, Inc.) 2,200,000 2,930,000 Fulton County, GA IDA Weekly VRDNs (C.K.S. Packaging, Inc.)/ (SouthTrust Bank of Georgia, Atlanta LOC) 2,930,000 2,000,000 Fulton County, GA IDA, (Series 1997) Weekly VRDNs (In-Store Media Corp.)/(SunTrust Bank, Atlanta LOC) 2,000,000 2,815,000 Gainesville, GA Redevelopment Authority, Downtown Developments, Ltd (Series 1987) Weekly VRDNs (Downtown Developments, Ltd.)/(Regions Bank, Alabama LOC) 2,815,000 300,000 Gainesville, GA Redevelopment Authority, IDRB (Series 1986) Weekly VRDNs (Hotel of Gainesville Associates Project)/ (Regions Bank, Alabama LOC) 300,000 2,000,000 Georgia Municipal Electric Authority, Series S, 7.25% Bonds (United States Treasury PRF), 1/1/1999 (@102) 2,051,637 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 GEORGIA-CONTINUED $ 1,800,000 Georgia Ports Authority, (Series 1996A) Weekly VRDNs (Colonel's Island Terminal)/(SunTrust Bank, Atlanta LOC) $ 1,800,000 3,200,000 Georgia State HFA, (Series 1990C), 3.80% TOBs (First National Bank of Chicago LIQ), Optional Tender 12/1/1998 3,200,000 4,690,000 Georgia State, UT GO, 5.25% Bonds, 10/1/1999 4,780,873 4,800,000 Glynn County, GA, 4.00% TANs, 12/31/1998 4,802,316 3,135,000 Gwinnett County, GA IDA, (Series 1996) Weekly VRDNs (Sidel, Inc. Project)/(Nationsbank, N.A., Charlotte LOC) 3,135,000 630,000 Gwinnett County, GA IDA, (Series 1997) Weekly VRDNs (Virgil R. Williams, Jr.)/(Wachovia Bank of Georgia, N.A., Atlanta LOC) 630,000 2,200,000 Gwinnett County, GA IDA, (Series 1998) Weekly VRDNs (Pace Manufacturing, Inc.)/(Amsouth Bank N.A., Birmingham LOC) 2,200,000 1,500,000 Hart County, GA IDA, Revenue Bonds (Series 1996) Weekly VRDNs (Rock-Tenn Converting Co. Project)/(SunTrust Bank, Atlanta LOC) 1,500,000 2,750,000 Jackson County, GA IDA, (Series 1996) Weekly VRDNs (Buhler Quality Yarns Corp. Project)/Union Bank of Switzerland of Zurich 2,750,000 1,250,000 Jackson County, GA IDA, (Series 1997) Weekly VRDNs (Mullett Co.)/(Wachovia Bank of NC, N.A., Winston-Salem LOC) 1,250,000 1,300,000 Jefferson, GA Development Authority, (Series 1997) Weekly VRDNs (Ringwood Containers, L.P.)/(Wachovia Bank of NC, N.A., Winston-Salem LOC) 1,300,000 3,145,000 La Grange, GA, Multifamily Housing Authority, Revenue Bonds, 4.40% TOBs (Lee's Crossing Project Phase II)/(Columbus Bank and Trust Co., GA LOC), Optional Tender 11/1/1998 3,145,000 2,965,000 La Grange, GA, Multifamily Housing Authority, Revenue Bonds, 4.40% TOBs (Lee's Crossing Project Phase I)/(Columbus Bank and Trust Co., GA LOC), Optional Tender 11/1/1998 2,965,000 2,750,000 Lowndes County Schools, GA, 4.15% TANs, 12/31/1998 2,750,874 500,000 Macon-Bibb County, GA Industrial Authority, IDRB (Series 1990) Weekly VRDNs (Diamond Plastics Corp. Project)/ (Nationsbank, N.A., Charlotte LOC) 500,000 4,470,000 Marietta, GA Housing Authority, Multifamily Housing Revenue Bonds (Series 1995)\ Weekly VRDNs (Chalet Apartments Project)/(General Electric Capital Corp. LOC) 4,470,000 565,000 Milledgeville & Baldwin County, GA Development Authority, (Series 1997) Weekly VRDNs (Oconee Area Properties, Inc.)/ (Wachovia Bank of Georgia, N.A., Atlanta LOC) 565,000 5,330,000 Monroe County, GA Development Authority IDRB, (Series 1997A), 3.80% TOBs (Oglethorpe Power Corp.), Optional Tender 11/28/1998 5,330,000 5,435,000 Municipal Electric Authority of Georgia, (Series 1985A), 3.15% CP (Morgan Guaranty Trust Co., New York LOC), Mandatory Tender 2/11/1999 5,435,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 GEORGIA-CONTINUED $ 2,000,000 Richmond County, GA Development Authority, (Series 1998) Weekly VRDNs (Evergreen Nylon Recycling, LLC)/(Banque Nationale de Paris LOC) $ 2,000,000 3,000,000 Rockdale County, GA Development Authority, (Series 1995) Weekly VRDNs (Great Southern Wood Preserving Co.)/(SunTrust Bank, Central Florida LOC) 3,000,000 600,000 Rockdale County, GA Hospital Authority, Revenue Anticipation Certificates (Series 1994) Weekly VRDNs (Rockdale Hospital)/ (SunTrust Bank, Atlanta LOC) 600,000 5,280,000 Rockdale County, GA, 4.125% TANs, 12/31/1998 5,283,515 3,490,000 Rome, GA, 4.00% TANs, 12/31/1998 3,491,110 1,410,000 Walker County, GA, (Series 1998), 4.00% Bonds, 8/1/1999 1,412,530 1,000,000 Wayne County, GA, IDA, Revenue Bonds, (Series 1995) Weekly VRDNs (Harsco Corp.)/(Nationsbank, N.A., Charlotte LOC) 1,000,000 3,665,000 Whitfield County, GA Development Authority Weekly VRDNs (Franklin Industries Inc., Project)/(Nationsbank, N.A., Charlotte LOC) 3,665,000 1,880,000 Whitfield County, GA Development Authority, (Series 1996) Weekly VRDNs (AMC International, Inc. Project)/(SouthTrust Bank of Alabama, Birmingham LOC) 1,880,000 Total Investments (at amortized cost) 3 $ 166,504,382
Securities that are subject to Alternative Minimum Tax represent 53.3% of the portfolio as calculated based upon total portfolio market value. 1 The Fund may only invest in securities rated in one of the two highest short-term rating categories by nationally recognized statistical rating organizations ('NRSROs') or unrated securities of comparable quality. 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, MIG-1, or MIG-2 by Moody's Investors Service, Inc., or F-1+, F-1, or F-2 by Fitch IBCA, Inc. are all considered rated in one of the two highest short-term rating categories. Securities rated in the highest short-term rating category (and unrated securities of comparable quality) are identified as First Tier securities. Securities rated in the second highest short-term rating category (and unrated securities of comparable quality) are identified as Second Tier securities. The Fund follows applicable regulations in determining whether a security is rated and whether a security rated by multiple NRSROs in different rating categories should be identified as a First or Second Tier security. At October 31, 1998, the portfolio securities were rated as follows: Tier Rating Percentage Based on Total Market Value (Unaudited) FIRST TIER SECOND TIER 100.00% 0.00% 2 Denotes a restricted security which is subject to restrictions on resale under Federal Securities laws. At October 31, 1998, these securities amounted to $2,000,000 which represents 1.2% of net assets. 3 Also represents cost for federal tax purposes. Note: The categories of investments are shown as a percentage of net assets ($168,097,785) at October 31, 1998. The following acronyms are used throughout this portfolio: AMBAC -American Municipal Bond Assurance Corporation BANs -Bond Anticipation Notes CP -Commercial Paper GO -General Obligation GTD -Guaranty HFA -Housing Finance Authority IDA -Industrial Development Authority IDRB -Industrial Development Revenue Bond INS -Insured LIQ -Liquidity Agreement LLC -Limited Liability Corporation LOC -Letter of Credit PRF -Prerefunded TANs -Tax Anticipation Notes TOBs -Tender Option Bonds UT -Unlimited Tax VRDNs -Variable Rate Demand Notes See Notes which are an integral part of the Financial Statements Statement of Assets and Liabilities October 31, 1998 ASSETS: Total investments in securities, at amortized cost and value $ 166,504,382 Cash 274,812 Income receivable 1,518,134 Deferred organizational costs 8,307 Other assets 11,400 Total assets 168,317,035 LIABILITIES: Income distribution payable 166,764 Accrued expenses 52,486 Total liabilities 219,250 Net Assets for 168,097,785 shares outstanding $ 168,097,785 NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE: $168,097,785 / 168,097,785 shares outstanding $1.00
See Notes which are an integral part of the Financial Statements Statement of Operations Year Ended October 31, 1998 INVESTMENT INCOME: Interest $ 6,464,815 EXPENSES: Investment advisory fee $ 856,835 Administrative personnel and services fee 133,509 Custodian fees 10,230 Transfer and dividend disbursing agent fees and expenses 17,117 Directors'/Trustees' fees 2,035 Auditing fees 12,000 Legal fees 10,723 Portfolio accounting fees 47,486 Shareholder services fee 428,418 Share registration costs 39,409 Printing and postage 14,172 Insurance premiums 9,131 Miscellaneous 10,490 Total expenses 1,591,555 WAIVERS: Waiver of investment advisory fee $ (649,041) Waiver of shareholder services fee (102,820) Total waivers (751,861) Net expenses 839,694 Net investment income $ 5,625,121
See Notes which are an integral part of the Financial Statements Statement of Changes in Net Assets
YEAR ENDED OCTOBER 31 1998 1997 INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment income $ 5,625,121 $ 5,103,583 DISTRIBUTIONS TO SHAREHOLDERS: Distributions from net investment income (5,625,121) (5,103,583) SHARE TRANSACTIONS: Proceeds from sale of shares 632,771,755 584,493,087 Net asset value of shares issued to shareholders in payment of distributions declared 3,758,781 2,937,442 Cost of shares redeemed (590,290,954) (588,512,359) Change in net assets resulting from share transactions 46,239,582 (1,081,830) Change in net assets 46,239,582 (1,081,830) NET ASSETS: Beginning of period 121,858,203 122,940,033 End of period $ 168,097,785 $ 121,858,203
See Notes which are an integral part of the Financial Statements Notes to Financial Statements October 31, 1998 ORGANIZATION Federated Municipal Cash Trust (the "Trust") is registered under the Investment Company Act of 1940, as amended (the "Act") as an open-end, management investment company. The Trust consists of 17 portfolios. The financial statements included herein are only those of Georgia Municipal Cash Trust (the "Fund"). The financial statements of the other portfolios are presented separately. The assets of each portfolio are segregated and a shareholder's interest is limited to the portfolio in which shares are held. The investment objective of the Fund is current income exempt from federal regular income tax and the income tax imposed by the State of Georgia 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. 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. RESTRICTED SECURITIES Restricted securities are securities that may only be resold upon registration under federal securities laws or in transactions exempt from such registration. Many restricted securities may be resold in the secondary market in transactions exempt from registration. In some cases, the restricted securities may be resold without registration upon exercise of a demand feature. Such restricted securities may be determined to be liquid under criteria established by the Board of Trustees. The Fund will not incur any registration costs upon such resales. Restricted securities are valued at amortized cost in accordance with Rule 2a-7 under the Investment Company Act of 1940. Additional information on each restricted security held at October 31, 1998 is as follows: ACQUISITION ACQUISITION SECURITY DATE COST Bibb County, GA, PT-199, 3.70% TOBs 6/19/1998 $2,000,000 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 October 31, 1998, capital paid-in aggregated $168,097,785. Transactions in shares were as follows:
YEAR ENDED OCTOBER 31 1998 1997 Shares sold 632,771,755 584,493,087 Shares issued to shareholders in payment of distributions declared 3,758,781 2,937,442 Shares redeemed (590,290,954) (588,512,359) Net change resulting from share transactions 46,239,582 (1,081,830)
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES INVESTMENT ADVISORY FEE Federated Management, the Fund's investment adviser (the "Adviser"), receives for its services an annual investment advisory fee equal to 0.50% 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 ("FSS"), the Fund will pay FSS up to 0.25% of average daily net assets of the Fund for the period. The fee paid to FSS is used to finance certain services for shareholders and to maintain shareholder accounts. FSS may voluntarily choose to waive any portion of its fee. FSS can modify or terminate this voluntary waiver at any time at its sole discretion. TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES FServ, through its subsidiary, Federated Shareholder Services Company ("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. ORGANIZATIONAL EXPENSES Organizational expenses of $13,648 were borne initially by the Adviser. The Fund has reimbursed the Adviser for these expenses. These expenses have been deferred and are being amortized over the five-year period following the Fund's effective date. INTERFUND TRANSACTIONS During the period ended October 31, 1998, the Fund engaged in purchase and sale transactions with funds that have a common investment adviser (or affiliated investment advisers), common Director/Trustees, and/or common Officers. These purchase and sale transactions were made at current market value pursuant to Rule 17a-7 under the Act amounting to $428,379,497 and $412,471,824, respectively. GENERAL Certain of the Officers and Trustees of the Trust are Officers and Directors or Trustees of the above companies. CONCENTRATION OF CREDIT RISK Since the Fund invests a substantial portion of its assets in issuers located in one state, it will be more susceptible to factors adversely affecting issuers of that state than would be a comparable tax-exempt mutual fund that invests nationally. In order to reduce the credit risk associated with such factors, at October 31, 1998, 61% of the securities in the portfolio of investments are backed by letters of credit or bond insurance of various financial institutions and financial guaranty assurance agencies. The percentage of investments insured by or supported (backed) by a letter of credit from any one institution or agency did not exceed 7% of total investments. 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 Board of Trustees of FEDERATED MUNICIPAL TRUST AND SHAREHOLDERS OF GEORGIA MUNICIPAL CASH TRUST: We have audited the accompanying statement of assets and liabilities of Georgia Municipal Cash Trust (an investment portfolio of Federated Municipal Trust, a Massachusetts business trust), including the schedule of portfolio investments, as of October 31, 1998, the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for the periods presented. These financial statements and financial highlights are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the 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 October 31, 1998, by correspondence with the custodian. 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 Georgia Municipal Cash Trust (an investment portfolio of Federated Municipal Trust) as of October 31, 1998, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and its financial highlights for the periods presented, in conformity with generally accepted accounting principles. Arthur Andersen LLP Boston, Massachusetts December 23, 1998 [Graphic] PROSPECTUS Georgia Municipal Cash Trust A Portfolio of Federated Municipal Trust December 31, 1998 A Statement of Additional Information (SAI) dated December 31, 1998, is incorporated by reference into this prospectus. To obtain the SAI 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] Georgia Municipal Cash 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. 811-5911 Cusip 314229691 G01204-01 (12/98) [Graphic] STATEMENT OF ADDITIONAL INFORMATION Georgia Municipal Cash Trust A Portfolio of Federated Municipal Trust This Statement of Additional Information (SAI) is not a prospectus. Read this SAI in conjunction with the prospectus for Georgia Municipal Cash Trust dated December 31, 1998. Obtain the prospectus without charge by calling 1-800-341- 7400. CONTENTS How is the Fund Organized? Securities in Which the Fund Invests How is the Fund Sold? Subaccounting Services Redemption in Kind Massachusetts Partnership Law Account and Share Information Tax Information Who Manages and Provides Services to the Fund? How Does the Fund Measure Performance? Who is Federated Investors, Inc.? Investment Ratings Addresses DECEMBER 31, 1998 [Federated Investors Logo] Federated Securities Corp., Distributor, subsidiary of Federated Investors, Inc. Cusip 314229691 G01204-02 (12/98) How is the Fund Organized? The Fund is a diversified portfolio of Federated Municipal Trust (Trust). The Trust is an open-end, management investment company that was established under the laws of the Commonwealth of Massachusetts on September 1, 1989. The Trust may offer separate series of shares representing interests in separate portfolios of securities. The Board of Trustees (the Board) has established one class of shares of the Fund (Shares). Securities in Which the Fund Invests SECURITIES DESCRIPTIONS AND TECHNIQUES In pursuing its investment strategy, the Fund may invest in the following tax- exempt securities for any purpose that is consistent with its investment objective. General Obligation Bonds General obligation bonds are supported by the issuer's full faith and credit. The issuer must levy and collect taxes sufficient to pay principal and interest on the bonds. However, the issuer's authority to levy additional taxes may be limited by its charter or state law. Special Revenue Bonds Special revenue bonds are payable solely from specific revenues received by the issuer. The revenues may consist of specific taxes, assessments, tolls, fees or other types of municipal revenues. For example, a municipality may issue bonds to build a toll road, and pledge the tolls to repay the bonds. Bondholders could not collect from the municipality's general taxes or revenues. Therefore, any shortfall in the tolls normally could result in a default on the bonds. Private Activity Bonds Private activity bonds are special revenue bonds used to finance private entities. For example, a municipality may issue bonds to finance a new factory to improve its local economy. The municipality would lend the proceeds to the company using the factory, and the company would agree make loan payments sufficient to repay the bonds. The bonds would be payable solely from the company's loan payments, not from any other revenues of the municipality. Therefore, any default on the loan normally would result in a default on the bonds. Municipal Leases Municipalities may enter into leases for equipment or facilities. In order to comply with state public financing laws, these leases are typically subject to annual appropriation. In other words, a municipality may end a lease, without penalty, by not providing for the lease payments in its annual budget. After the lease ends, the lessor (the Fund) can resell the equipment or facility but the Fund may lose money on the sale. The Fund may invest in securities supported by pools of municipal leases. The most common type of lease backed securities are certificates of participation (COPs). However, the Fund may also invest directly in individual leases. Credit Enhancement Common types of credit enhancement include guarantees, letters of credit, bond insurance and surety bonds. Credit enhancement also includes arrangements where securities or other liquid assets secure payment of a fixed income security. If a default occurs, these assets may be sold and the proceeds paid to a security's holders. Either form of credit enhancement reduces credit risks by providing another source of payment for a fixed income security. Investment Ratings A nationally recognized rating service'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 (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 IBCA, 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 rating service can be treated as being in one of the two highest short-term rating categories; currently, such securities must be rated by two rating services in one of their two highest rating categories. See "Regulatory Compliance." INVESTMENT RISKS There are many factors which may effect an investment in the Fund. The Fund's principal risks are described in its prospectus. An additional risk factor is outlined below. Tax Risk In order for the interest income from the securities to be exempt from federal regular income tax ("tax-exempt"), tax-exempt securities must meet certain legal requirements. Failure to meet such requirements may cause the interest received and distributed by the Fund to shareholders to be taxable. FUNDAMENTAL INVESTMENT POLICIES The Fund invests so that at least 80% of the Fund's annual interest income is exempt from federal regular income tax and Georgia state income tax. This policy is fundamental and cannot be changed without shareholder approval. 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 in amounts up to one-third of the value of its total assets, including the amounts borrowed. The Fund will not borrow money 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 value of its total assets are outstanding. Pledging Assets The Fund will not mortgage, pledge, or hypothecate any assets except as necessary to secure permitted borrowings. Lending Cash or Securities The Fund will not lend any of its assets, except that it may purchase or hold portfolio securities permitted by its investment objective, policies, and limitations, or the Trust's Declaration of Trust. 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, 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 invest 25% or more of the value of its total assets 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, except that 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 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 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 Board and repurchase agreements providing for settlement in more than seven days notice. 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 a nationally recognized rating service, 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 Board has 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 Board 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 Board 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 Board 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. 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 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. 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. 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 Trust have equal voting rights, except that in matters affecting only a particular Fund or class, only Shares of that Fund or class are entitled to vote. Trustees may be removed by the Board or by shareholders at a special meeting. A special meeting of shareholders will be called by the Board upon the written request of shareholders who own at least 10% of the Trust's outstanding shares of all series entitled to vote. As of December 8, 1998, the following shareholders owned of record, beneficially, or both, 5% or more of the outstanding Shares: Wachovia Bank of North Carolina, Winston-Salem, North Carolina, owned approximately 48,461806 Shares (22.15%); Cobatco, Synovus Trust Company, Columbus, Georgia, owned approximately 36,144,368 Shares (16.52%); BHC Securities Inc., Philadelphia, Pennsylvania, owned approximately 22,761,748 Shares (10.40%); and Harmut Lademacher, Alpharetta, Georgia, owned approximately 11,666,601 Shares (5.33%). Tax Information FEDERAL INCOME TAX The Fund intends to meet the requirements of Subchapter M of the Internal Revenue Code applicable to regulated investment companies. If these requirements are not met, it will not receive the special tax treatment and will pay federal income tax. The Fund will be treated as a single, separate entity for federal income tax purposes so that income earned and capital gains and losses realized by the Trust's other portfolios will be separate from those realized by the Fund. STATE TAXES Under existing Georgia law, shareholders of the Fund will not be subject to individual or corporate Georgia income taxes on distributions from the Fund to the extent that such distributions represent exempt-interest dividends for federal income tax purposes that are attributable to (1) interest-bearing obligations issued by or on behalf of the State of Georgia or its political subdivisions, or (2) interest on obligations of the United States or of any other issuer whose obligations are exempt from state income taxes under federal law. Distributions, if any, derived from capital gains or other sources generally will be taxable for Georgia income tax purposes to shareholders of the Fund who are subject to the Georgia income tax. Who Manages and Provides Services to the Fund? BOARD OF TRUSTEES The Board is responsible for managing the Trust's business affairs and for exercising all the Trust's powers except those reserved for the shareholders. Information about each Board member is provided below and includes the following data: name, address, birthdate, present position(s) held with the Trust, principal occupations for the past five years and other notable positions held, total compensation received as a Trustee from the Trust for its most recent fiscal year, and the total compensation received from the Federated Fund Complex for the most recent calendar year. The Trust is comprised of 17 Funds and the Federated Fund Complex is comprised of 56 investment companies, whose investment advisers are affiliated with the Fund's Adviser. As of December 8, 1998, 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.
Name Total Birthdate Aggregate Compensation From Address Principal Occupations Compensation Trust and Fund Position With Trust for Past 5 Years From Trust Complex - ----------------------------------------------------------------------------------------------------------------------------------- John F. Donahue##* Chief Executive Officer and Director or Trustee of $0 $0 for the Trust Birthdate: July 28, 1924 the Federated Fund Complex. Chairman and Director, and 56 other Federated Investors Tower Federated Investors, Inc.; Chairman and Trustee, investment 1001 Liberty Avenue Federated Advisers, Federated Management, and companies in the Pittsburgh, PA Federated Research; Chairman and Director, Federated Fund Complex CHAIRMAN and TRUSTEE Research Corp., and Federated Global Research Corp.; Chairman, Passport Research, Ltd. Thomas G. Bigley Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: February 3, 1934 Director, Member of Executive Committee, Children's Trust and 15 Old Timber Trail Hospital of Pittsburgh; formerly: Senior Partner, 56 other Pittsburgh, PA Ernst & Young LLP; Director, MED 3000 Group, Inc.; investment TRUSTEE Director, Member of Executive Committee, University companies in the of Pittsburgh. Fund Complex John T. Conroy, Jr. Director or Trustee of the Federated Fund Complex; $4,484.62 $122,362 for the Birthdate: June 23, 1937 President, Investment Properties Corporation; Senior Trust and Wood/IPC Commercial Dept. Vice President, John R. Wood and Associates, Inc., 56 other John R. Wood and Realtors; Partner or Trustee in private real estate investment Associates, Inc. Realtors ventures in Southwest Florida; formerly: President, companies in the 3255 Tamiami Trail North Naples Property Management, Inc. and Northgate Fund Complex Naples, FL Village Development Corporation. TRUSTEE William J. Copeland Director or Trustee of the Federated Fund Complex; $4,484.62 $122,362 for the Birthdate: July 4, 1918 Director and Member of the Executive Committee, Trust and One PNC Plaza-23rd Floor Michael Baker, Inc.; formerly: Vice Chairman and 56 other Pittsburgh, PA Director, PNC Bank, N.A., and PNC Bank Corp.; investment TRUSTEE Director, Ryan Homes, Inc. companies in the Fund Complex Retired: Director, United Refinery; Director, Forbes Fund; Chairman, Pittsburgh Foundation; Chairman, Pittsburgh Civic Light Opera. James E. Dowd, Esq. Director or Trustee of the Federated Fund Complex; $4,484.62 $122,362 for the Birthdate: May 18, 1922 Attorney-at-law; Director, The Emerging Germany Fund, Trust and 571 Hayward Mill Road Inc. 56 other Concord, MA investment TRUSTEE Retired: President, Boston Stock Exchange, Inc.; companies in the Regional Administrator, United States Securities and Fund Complex Exchange Commission. Lawrence D. Ellis, M.D.* Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: October 11, 1932 Professor of Medicine, University of Pittsburgh; Trust and 3471 Fifth Avenue Medical Director, University of Pittsburgh Medical 56 other Suite 1111 Center - Downtown; Hematologist, Oncologist, and investment Pittsburgh, PA Internist, Presbyterian and Montefiore Hospitals; companies in the TRUSTEE Member, National Board of Trustees, Leukemia Society Fund Complex of America. Edward L. Flaherty, Jr., Director or Trustee of the Federated Fund Complex; $4,484.62 $122,362 for the Esq. # Attorney, of Counsel, Miller, Ament, Henny & Kochuba; Trust and Birthdate: June 18, 1924 Director, Eat'N Park Restaurants, Inc.; formerly: 56 other Miller, Ament, Henny & Counsel, Horizon Financial, F.A., Western Region; investment Kochuba Partner, Meyer and Flaherty. companies in the 205 Ross Street Fund Complex Pittsburgh, PA TRUSTEE Peter E. Madden Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: March 16, 1942 formerly: Representative, Commonwealth of Trust and One Royal Palm Way Massachusetts General Court; President, State Street 56 other 100 Royal Palm Way Bank and Trust Company and State Street Corporation. investment Palm Beach, FL companies in the TRUSTEE Retired: Director, VISA USA and VISA International; Fund Complex Chairman and Director, Massachusetts Bankers Association; Director, Depository Trust Corporation. John E. Murray, Jr., J.D., Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the S.J.D. President, Law Professor, Duquesne University; Trust and Birthdate: December 20, 1932 Consulting Partner, Mollica & Murray. 56 other President, Duquesne investment University Retired: Dean and Professor of Law, University of companies in the Pittsburgh, PA Pittsburgh School of Law; Dean and Professor of Law, Fund Complex TRUSTEE Villanova University School of Law. Wesley W. Posvar Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: September 14, President, World Society of Ekistics, Athens; Trust and 1925 Professor, International Politics; Management 56 other 1202 Cathedral of Learning Consultant; Trustee, Carnegie Endowment for investment University of Pittsburgh International Peace, RAND Corporation, Online companies in the Pittsburgh, PA Computer Library Center, Inc., National Defense Fund Complex TRUSTEE University and U.S. Space Foundation; President Emeritus, University of Pittsburgh; Founding Chairman, National Advisory Council for Environmental Policy and Technology, Federal Emergency Management Advisory Board and Czech Management Center, Prague. Retired: Professor, United States Military Academy; Professor, United States Air Force Academy. Marjorie P. Smuts Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: June 21, 1935 Public Relations/Marketing/Conference Planning. Trust and 4905 Bayard Street 56 other Pittsburgh, PA Retired: National Spokesperson, Aluminum Company of investment TRUSTEE America; business owner. companies in the Fund Complex Glen R. Johnson* Trustee, Federated Investors, Inc.; staff member, $0 $0 for the Trust Birthdate: May 2, 1929 Federated Securities Corp. and Federated Investors Tower 8 other investment 1001 Liberty Avenue companies in the Pittsburgh, PA Fund Complex PRESIDENT and TRUSTEE J. Christopher Donahue##* President or Executive Vice President of the $0 $0 for the Trust Birthdate: April 11, 1949 Federated Fund Complex; Director or Trustee of some and Federated Investors Tower of the Funds in the Federated Fund Complex; President 18 other 1001 Liberty Avenue and Director, Federated Investors, Inc.; President investment Pittsburgh, PA and Trustee, Federated Advisers, Federated companies in the EXECUTIVE VICE PRESIDENT Management, and Federated Research; President and Fund Complex Director, Federated Research Corp. and Federated Global Research Corp.; President, Passport Research, Ltd.; Trustee, Federated Shareholder Services Company; Director, Federated Services Company. Edward C. Gonzales* Trustee or Director of some of the Funds in the $0 $0 for the Trust Birthdate: October 22, 1930 Federated Fund Complex; President, Executive Vice and Federated Investors Tower President and Treasurer of some of the Funds in the 1 other investment 1001 Liberty Avenue Federated Fund Complex; Vice Chairman, Federated companies in the Pittsburgh, PA Investors, Inc.; Vice President, Federated Advisers, Fund Complex EXECUTIVE VICE PRESIDENT 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. John W. McGonigle Executive Vice President and Secretary of the $0 $0 for the Trust Birthdate: October 26, 1938 Federated Fund Complex; Executive Vice President, and Federated Investors Tower Secretary, and Director, Federated Investors, Inc.; 56 other 1001 Liberty Avenue Trustee, Federated Advisers, Federated Management, investment Pittsburgh, PA and Federated Research; Director, Federated Research companies in the EXECUTIVE VICE PRESIDENT Corp. and Federated Global Research Corp.; Director, Fund Complex and SECRETARY Federated Services Company; Director, Federated Securities Corp. Richard J. Thomas Treasurer of the Federated Fund Complex; Vice $0 $0 for the Trust Birthdate: June 17, 1954 President - Funds Financial Services Division, and Federated Investors Tower Federated Investors, Inc.; Formerly: various 56 other 1001 Liberty Avenue management positions within Funds Financial Services investment Pittsburgh, PA Division of Federated Investors, Inc. companies in the TREASURER Fund Complex Richard B. Fisher* President or Vice President of some of the Funds in $0 $0 for the Trust Birthdate: May 17, 1923 the Federated Fund Complex; Director or Trustee of and Federated Investors Tower some of the Funds in the Federated Fund Complex; 6 other investment 1001 Liberty Avenue Executive Vice President, Federated Investors, Inc.; companies in the Pittsburgh, PA Chairman and Director, Federated Securities Corp. Fund Complex VICE PRESIDENT William D. Dawson, III Chief Investment Officer of this Fund and various $0 $0 for the Trust Birthdate: March 3, 1949 other Funds in the Federated Fund Complex; Executive and Federated Investors Tower Vice President, Federated Investment Counseling, 41 other 1001 Liberty Avenue Federated Global Research Corp., Federated Advisers, investment Pittsburgh, PA Federated Management, Federated Research, and companies in the CHIEF INVESTMENT OFFICER Passport Research, Ltd.; Registered Representative, Fund Complex 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. Mary Jo Ochson Senior Portfolio Manager and Vice President of eight $0 $0 for the Birthdate: September 12, investment companies in the Federated Fund Complex; Trust and 1953 Senior Vice President, Federated Investment 7 other investment Federated Investors Tower Counseling, Federated Advisers, Federated Global companies 1001 Liberty Avenue Research Corp., Federated Management, Federated in the Fund Complex Pittsburgh, PA Research, Federated Research Corp. and Passport SENIOR PORTFOLIO Research, Ltd.; Formerly: Vice President, Federated MANAGER/VICE PRESIDENT Advisers, Federated Management, Federated Research, Federated Research Corp. , Passport Research, Ltd. and Federated Global Research Corp. Jeff A. Kozemchak Senior Portfolio Manager and Vice President of four $0 $0 for the Birthdate: January 15, 1960 investment companies in the Federated Fund Complex; Trust and Federated Investors Tower Vice President, Federated Investment Counseling, 3 other investment 1001 Liberty Avenue Federated Advisers, Federated Global Research Corp., companies Pittsburgh, PA Federated Management, Federated Research, Federated in the Fund Complex SENIOR PORTFOLIO Research Corp. and Passport Research, Ltd.; MANAGER/VICE PRESIDENT Formerly: Assistant Vice President and Investment Analyst, Federated Research Corp. and Passport Research, Ltd. ; Assistant Vice President, Federated Advisers, Federated Management and Federated Research.
## Mr. Donahue is the father of J. Christopher Donahue, Executive Vice President of the Trust. 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 Trust, 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 Trust. 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: Maximum Average Aggregate Daily Administrative Fee Net Assets of the Federated Funds - -------------------------------------------------------------------------- 0.150 of 1% on the first $250 million 0.125 of 1% on the next $250 million 0.100 of 1% on the next $250 million 0.075 of 1% on assets in excess of $750 million The administrative fee received during any fiscal year shall be at least $125,000 per portfolio and $30,000 per each additional class of shares. Federated Services Company may voluntarily waive a portion of its fee and may reimburse the Fund for expenses. Federated Services Company also provides certain accounting and recordkeeping services with respect to the Fund's portfolio investments for a fee based on Fund assets plus out-of-pocket expenses. CUSTODIAN State Street Bank and Trust Company, Boston, Massachusetts, is custodian for the securities and cash of the Fund. Foreign instruments purchased by the Fund are held by foreign banks participating in a network coordinated by State Street Bank. TRANSFER AGENT AND DIVIDEND DISBURSING AGENT Federated Services Company, through its registered transfer agent subsidiary, Federated Shareholder Services Company, maintains all necessary shareholder records. The Fund pays the transfer agent a fee based on the size, type, and number of accounts and transactions made by shareholders. INDEPENDENT PUBLIC ACCOUNTANTS Arthur Andersen LLP is the independent public accountant for the Fund. FEES PAID BY THE FUND FOR SERVICES For the Year Ended October 31, 1998 1997 1996 - ---------------------------------------------------------------- Advisory Fee Earned $856,835 $767,263 $586,560 - ---------------------------------------------------------------- Advisory Fee Reduction 649,041 569,196 559,762 - ---------------------------------------------------------------- Brokerage Commissions 0 0 0 - ---------------------------------------------------------------- Administrative Fee 133,509 125,351 125,000 - ---------------------------------------------------------------- Shareholder Services Fee 325,598 ---- ---- - ---------------------------------------------------------------- If the Fund's expenses are capped at a particular level, the cap does not include reimbursement to the Fund of any expenses incurred by shareholders who use the transfer agent's subaccounting facilities. How does the Fund Measure Performance? The Fund may advertise Share performance by using the Securities and Exchange Commission's (SEC) standard method for calculating performance applicable to all mutual funds. The SEC also permits this standard performance information to be accompanied by non-standard performance information. Unless otherwise stated, any quoted Share performance reflects the effect of non-recurring charges, such as maximum sales charges, which, if excluded, would increase the total return and yield. The performance of Shares depends upon such variables as: portfolio quality; average portfolio maturity; type and value of portfolio securities; changes in interest rates; changes or differences in the Fund's or any class of Shares' expenses; and various other factors. Share performance fluctuates on a daily basis largely because net earnings and offering price per Share 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-, and since inception periods ended October 31, 1998. Yield, Effective Yield and Tax-Equivalent Yield given for the 7-day period ended October 31, 1998.
Share Class 7-Day Period 1 Year Since Inception on August 22, 1995 - ------------------------------------------------------------------------------------------------------------------------------------ Total Return -- 3.33% 3.39% - ------------------------------------------------------------------------------------------------------------------------------------ Yield 3.01% -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Effective Yield 3.05% -- -- Tax-Equivalent Yield 5.61% -- -- - ------------------------------------------------------------------------------------------------------------------------------------
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. The tax-equivalent yield of Shares is calculated similarly to the yield, but is adjusted to reflect the taxable yield that Shares would have had to earn to equal the actual yield, assuming a specific tax rate. 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. TAX EQUIVALENCY TABLE Set forth below is a sample of a tax-equivalency table that may be used in advertising and sales literature. This table is for illustrative purposes only and is not representative of past or future performance of the Fund. The interest earned by the tax-exempt securities owned by the Fund generally remains free from federal regular income tax and is often free from state and local taxes as well. However, some of the Fund's income may be subject to the federal alternative minimum tax and state and/or local taxes.
TAXABLE YIELD EQUIVALENT FOR 1998 STATE OF GEORGIA - ------------------------------------------------------------------------------------------------------------------------------------ TAX BRACKET: FEDERAL 15.00% 28.00% 31.00% 36.00% 39.60% COMBINED FEDERAL AND STATE: 21.000% 34.000% 37.000% 42.000% 45.600% - ------------------------------------------------------------------------------------------------------------------------------------ JOINT $1- $42,351- $102,301- $155,951- OVER RETURN 42,350 102,300 155,950 278,450 $278,450 SINGLE $1- $25,351- $61,401- $128,101- OVER RETURN 25,350 61,400 128,100 278,450 $278,450 - ------------------------------------------------------------------------------------------------------------------------------------ Tax-Exempt Yield Taxable Yield Equivalent - ------------------------------------------------------------------------------------------------------------------------------------ 1.50% 1.90% 2.27% 2.38% 2.59% 2.76% 2.00% 2.53% 3.03% 3.17% 3.45% 3.68% 2.50% 3.16% 3.79% 3.97% 4.31% 4.60% 3.00% 3.80% 4.55% 4.76% 5.17% 5.51% 3.50% 4.43% 5.30% 5.56% 6.03% 6.43% 4.00% 5.06% 6.06% 6.35% 6.90% 7.35% 4.50% 5.70% 6.82% 7.14% 7.76% 8.27% 5.00% 6.33% 7.58% 7.94% 8.62% 9.19% 5.50% 6.96% 8.33% 8.73% 9.48% 10.11% 6.00% 7.59% 9.09% 9.52% 10.34% 11.03% 6.50% 8.23% 9.85% 10.32% 11.21% 11.95% 7.00% 8.86% 10.61% 11.11% 12.07% 12.87%
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. 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., 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 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, 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, 1997, Federated managed 11 bond funds with approximately $2.1 billion in assets and 22 money market funds with approximately $10.9 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 tax-exempt 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 27 years' experience. As of December 31, 1997, Federated managed 29 equity funds totaling approximately $11.7 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, 1997, Federated managed 11 money market funds and 16 bond funds with assets approximating $17.1 billion and $5.6 billion, respectively. Federated's corporate bond decision making--based on intensive, diligent credit analysis--is backed by over 22 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 $200 billion. Government Funds In the government sector, as of December 31, 1997, Federated manages 9 mortgage- backed, 6 government/ agency and 18 government money market mutual funds, with assets approximating $5.9 billion, $1.5 billion and $35 billion, respectively. Federated trades approximately $400 million in U.S. government and mortgage- backed securities daily and places approximately $23 billion in repurchase agreements each day. Federated introduced the first U.S. government fund to invest in U.S. government bond securities in 1969. Federated has been a major force in the short- and intermediate-term government markets since 1982 and currently manages approximately $36 billion in government funds within these maturity ranges. 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, 1997, Federated managed more than $63.1 billion in assets across 51 money market funds, including 18 government, 11 prime and 22 municipal with assets approximating $35 billion, $17.1 billion and $10.9 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 $4 trillion to the more than 6,700 funds available, according to the Investment Company Institute. Federated distributes mutual funds through its subsidiaries for a variety of investment purposes. Specific markets include: FEDERATED CLIENTS OVERVIEW 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. Investment Ratings APPENDIX STANDARD & POOR'S SHORT-TERM MUNICIPAL OBLIGATION RATINGS A Standard & Poor's 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-1+, 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 rated 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. MOODY'S INVESTORS SERVICE, INC., SHORT-TERM MUNICIPAL OBLIGATION RATINGS Moody's Investor Service, Inc. 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 IBCA, 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. Addresses GEORGIA MUNICIPAL CASH 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 Management Federated Investors Tower 1001 Liberty Avenue, Pittsburgh, PA 15222-3779 Custodian State Street Bank and Trust Company P.O. Box 8600 Boston, MA 02266-8600 Transfer Agent and Dividend Disbursing Agent Federated Shareholder Services Company P.O. Box 8600 Boston, MA 02266-8600 Independent Public Accountants Arthur Andersen LLP 225 Franklin Street Boston, MA 02110-2812 Table of Contents
Massachusetts Municipal Cash Trust--Boston 1784 Funds Shares........................ 1 Shareholder Services................................................................ 4 How to reach the Fund............................................................... 4 Pricing of Fund Shares.............................................................. 4 How the Fund is sold................................................................ 4 How to open an account and purchase shares.......................................... 4 How to sell and exchange shares..................................................... 6 Account and share information....................................................... 7 Tax Information..................................................................... 9 More About Massachusetts Municipal Cash Trust--Boston 1784 Funds Shares............. 10 Management.......................................................................... 12 Financial Highlights................................................................ 13
Massachusetts Municipal Cash Trust--Boston 1784 Funds Shares This Risk/Return Summary briefly describes the principal risks of investing in the Fund. For further information on the Fund, please read the section entitled More About Massachusetts Municipal Cash Trust--Boston 1784 Funds Shares. What are the Fund's Goals? The Fund is a money market fund which seeks to maintain a stable net asset value of $1.00 per share. The Fund's investment objective is to provide current income which is exempt from federal regular income tax and Massachusetts state income tax consistent with stability of principal. What are the Fund's Main Investment Strategies? The Fund invests in tax-exempt securities so that the Fund's annual interest income is exempt from federal regular income tax and Massachusetts state income tax. Interest from the Fund's investments may be subject to the federal alternative minimum tax for individuals and corporations. What are the Main Risks of Investing in the Fund? Because the Fund may invest a significant portion of its assets in securities of a single issuer, an investment in the Fund may involve additional risks compared to a fully diversified money market fund. Although the Fund seeks to maintain a stable net asset value of $1.00 per share, it is possible to lose money by investing in the Fund. An investment in the Fund is not a deposit of BankBoston and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other governmental agency. How Has The Fund Performed? The chart and table below give an indication of the Fund's risks and performance. The chart shows changes in the Fund's performance from year to year. The table shows how the Fund's average annual returns for the periods indicated compare to those of a broad measure of market performance. When you consider this information, please remember that the Fund's performance in past years is not necessarily an indication of how the Fund will do in the future. Total Return (per calendar year) [Graphic] - See Appendix A-7 The year-to-date total return as of the most recent calendar quarter of September 30, 1998 was 2.23%.
Highest and Lowest Return (Quarterly 1994-1997) Quarter Ending Highest 0.88% June 30, 1995 Lowest 0.43% March 31, 1994 Average Annual Total Returns (through December 31, 1997) 1 Year Life of Fund (since 2/22/93) MA Municipal Cash 3.11% 2.73% Trust -- Boston 1784 Funds Shares - ----------------------------------------------------------------------------------------------------------------------------
For up-to-date yield information, please call 1-800-BKB-1784. Massachusetts Municipal Cash Trust-- Boston 1784 Funds Shares (CONTINUED) What Are The Fees And Expenses Of The Fund? This table describes the fees and expenses that you may pay if you buy and hold shares of the Massachusetts Municipal Cash Trust--Boston 1784 Funds Shares. SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT) Maximum Sales Charge (Load) Imposed on Purchases None Maximum Deferred Sales Charge (Load) None Maximum Sales Charge (Load) Imposed on Reinvested Dividends (and other Distributions). None Redemption Fee None Exchange Fee None ANNUAL FUND OPERATING EXPENSES (Before Waivers)(1) (expenses that are deducted from Fund assets) (as a percentage of average net assets) Management Fee (2) 0.50% Shareholder Services Fee (3) 0.25% Distribution (12b-1) Fee None Other Expenses 0.18% Total Annual Fund Operating Expenses 0.93% (1) Although not contractually obligated to do so, the Adviser and shareholder services provider waived certain amounts. These are shown below along with the net expenses the Fund actually paid for the fiscal year ended October 31, 1998. Waiver of Fund Expenses 0.36% Total Actual Annual Fund Operating Expenses (after waivers) 0.57% (2) The Adviser has 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 0.39% for the year ended October 31, 1998. (3) The shareholder services fee was voluntarily reduced. This voluntary reduction can be terminated at any time. There was no shareholder services fee paid by the Fund (after the voluntary reduction) for the year ended October 31, 1998.
EXAMPLE The following example is intended to help you compare the cost of investing in the Massachusetts Municipal Cash Trust--Boston 1784 Funds Shares with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund's Boston 1784 Funds 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 Massachusetts Municipal Cash Trust--Boston 1784 Funds Shares operating expenses are before waivers as shown above and remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS Boston 1784 Funds Shares $95 $296 $5,158 $1,143
SHAREHOLDER SERVICES How To Reach The Fund By telephone 1-800-BKB-1784 Call for account or Fund information or an account application. By regular mail Boston 1784 Funds P.O. Box 8524 Boston, MA 02266-8524 By overnight Boston 1784 Fundscourier c/o Boston Financial Data Services2 Heritage Drive North Quincy, MA 02171 Pricing Of Fund Shares You can purchase, redeem, or exchange Shares any day the New York Stock Exchange (NYSE) and the Federal Reserve Bank of Boston are open. When the Fund receives your transaction request in proper form, it is processed at the next determined net asset value (NAV). The Fund does not charge a sales charge. NAV is determined at 12:00 noon and 1:00 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 is $1,000. Subsequent investments must be in amounts of at least $250. If you participate in the automatic investment program, the minimum for additional Share purchases is $50. The Fund may waive any investment minimums from time to time. How The Fund Is Sold The Fund offers two share classes: Boston 1784 Funds Shares and Institutional Service Shares, each representing interests in a single portfolio of securities. This prospectus relates only to Boston 1784 Funds Shares. Each share class has other expenses, which affect their performance. Please call 1-800-341-7400 for more information concerning the other class. The Fund's Distributor markets the Shares described in this prospectus to institutions or individuals, directly or though investment professionals. The Fund may not be a suitable investment for retirement plans or for non- Massachusetts taxpayers because it invests in Massachusetts municipal securities. The Distributor and its affiliates may pay out of their assets other 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 Open An Account And Purchase Shares You may purchase Shares through an investment professional or through an exchange from another fund in the Boston 1784 Funds Family. You may also purchase shares through certain financial institutions, including BankBoston. These institutions may have their own procedures for buying and selling shares, and may charge fees. Contact your financial institution for more information. The Fund and the Distributor reserve the right to reject any request to purchase or exchange Shares. Complete and sign the appropriate account application. Purchase orders must be received by 11:30 a.m. (Eastern time) in order to receive that day's dividend. You will become the owner of Shares and receive dividends when the Fund receives your payment. By Wire. Purchases may also be made by wiring money from your bank account to your Fund account. Each time you wish to send a wire, you must call 1-800-BKB- 1784 to receive wiring instructions before you send money. By Check. If you wish to make your purchase by mail, please send a completed application and check payable to Boston 1784 Funds to: Boston 1784 Funds PO Box 8524 Boston, MA 02266-8524 If you send your check by overnight courier that requires a street address, see "How to Reach the Fund." By Electronic Transfer. Once you have opened an account, you may purchase additional Shares by debiting your predesignated bank account. You can establish this option by completing the "Electronic Transfer and Bank Wire" section of the application. By Automatic Investment. Automatic investing is an easy way to add to your account on a regular basis. Boston 1784 Funds offer an automatic investment plan to help you achieve your financial goals as simply and conveniently as possible. Please note that minimum purchase amounts apply. Call 1-800-BKB-1784 for information. Through An Exchange. On any business day, you may exchange all or a portion of your Shares into any other Fund in the Boston 1784 Funds family. To make exchanges, call 1-800-BKB-1784. Exchanges are processed at the net asset value next calculated after an exchange request in good order is received and approved. Please read the prospectus for the Fund into which you are exchanging. The Fund reserves the right to reject any exchange request or to change or terminate the exchange privilege at any time. An exchange is the sale of Shares of the Fund and purchase of shares of another fund, and could result in taxable gains or losses. Paying for Shares . Payments should be made in U.S. dollars and drawn on a U.S. bank; . Checks that are not made payable directly to Boston 1784 Funds ("third party checks") are not accepted; . Orders by mail are considered received when payment by check is converted into immediately available funds (normally the business day after the check is received) and Shares begin earning dividends the next day; . Cash and credit cards are not accepted; . If the check does not clear your bank, the Fund reserves the right to cancel your purchase; or . If the Fund is unable to debit your predesignated bank account on the day you purchase Shares, the Fund may make additional attempts or cancel the purchase. How To Sell And Exchange Shares Submit your redemption or exchange request by the end of regular trading on the NYSE (normally 4:00 p.m. Eastern Time). Redemption or exchange requests received by the Fund before 12:00 noon (Eastern time) will not include that day's dividend. Requests for redemptions over $100,000 must be in writing with signatures guaranteed (see below). If the Shares being sold were recently purchased by check, telephone or through an automatic investment program, the Fund may delay the mailing of your redemption check for up to 10 business days after purchase to allow the purchase to clear. You may gain or lose money when you redeem Shares. By Telephone. If you selected this option on your account application, you may make redemptions from your account by calling 1-800-BKB-1784. You may not close your account by telephone. If you would like to establish this option on an existing account, please call 1-800-BKB-1784. By Mail. To redeem all or part of your shares by mail, please send your request in writing to one of the addresses listed above under "How To Open An Account" and include the following information: . the name of the Fund, . the account number(s), . the amount of money or number of shares being redeemed, . the name(s) on the account, . the signature of a registered account owner, and . your daytime telephone number. By Wire. You may redeem Shares by wire by calling 1-800-BKB-1784. Redemption proceeds will be wired directly to the domestic commercial bank account you previously designated on your account application. You will be charged a fee for each wire redemption which will be deducted from your redemption proceeds. Signature Guarantees. Signatures must be guaranteed if: . your redemption will be sent to an address other than the address on our records; . your redemption will be sent to an address on our records that was changed in the past 30 days; or . a redemption is payable to someone other than the shareholder(s) of record. The Fund may also require signature guarantees for other redemptions. 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. Redemption proceeds may be credited to your predesignated bank account, paid by check, or paid by wire or electronic transfer as you previously designated on your account application. By Check. Redemption proceeds will be sent to the shareholder(s) on our records at the address on our records within seven days after receipt of a valid redemption request. By Wire. If you have selected this option, your redemption proceeds will be wired directly into your predesignated bank account, normally within one business day. There is no limitation on the number of redemption transactions by wire. However, there is a fee for each wire and your bank may charge an additional fee to receive the wire. If you would like to establish this option on an existing account, please call 1-800-BKB-1784 to sign up for this service. By Electronic Transfer. If you have established this option, your redemption proceeds will be transferred electronically to your predesignated bank account. To establish this option on an existing account, please call 1-800-BKB-1784 to request the appropriate form. 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, the proceeds will be reinvested in Shares. Additional Conditions Telephone Transactions. The Fund and its agents will each follow reasonable procedures to confirm that instructions received by telephone are genuine, which may include taping telephone conversations. The Fund and its agents will not be responsible for any losses that may result from acting on telephone instructions that it reasonably believes to be genuine. Share Certificates. The Fund does not issue share certificates. Account And Share Information Confirmations And Account Statements. You will receive confirmation of purchases, redemptions and exchanges. In addition, you will receive periodic statements reporting all account activity, including dividends and capital gains paid. Taxpayer Identification Number. On the account application or other appropriate form, you will be asked to certify that your social security or taxpayer identification number is correct and that you are not subject to backup withholding for failing to report income to the IRS. If you are subject to backup withholding or you did not certify your taxpayer identification number, the IRS requires the Fund to withhold 31% of any dividends and redemption or exchange proceeds. The Fund reserves the right to reject any application that does not include a certified social security or taxpayer identification number. Address Changes. A change in address on your account must be made in writing and be signed by all account owners. Include the name of the Fund, the account number(s), the name(s) on the account and both the old and new addresses. Call 1-800-BKB-1784 if you need more information. 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 elect cash payments and the payment is returned as undeliverable, your cash payment will be reinvested in Shares and your distribution option will convert to automatic reinvestment. If any distribution check remains uncashed for six months the check will no longer be honored, the check amount will be reinvested in Shares, and you will not accrue any interest or dividends on this amount prior to the reinvestment. If you purchase Shares just before the 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. Accounts may be closed if redemptions or exchanges cause the account balance to fall below the minimum initial investment amount. Before an account is closed, the shareholder will be notified and allowed 60 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. It is anticipated that Fund distributions will be primarily dividends that are exempt from federal income tax, although a portion of the Fund's dividends may not be exempt. Dividends may be subject to state and local taxes. The Fund's dividends will be exempt from Massachusetts state personal income tax if they are derived from interest on obligations exempt from Massachusetts personal income taxes. Capital gains and non-exempt dividends are taxable whether paid in cash or reinvested in the Fund. Redemptions and exchanges are taxable sales. Please consult your taxpreparer regarding your federal, state and local tax liability. More About Massachusetts Municipal Cash Trust--Boston 1784 Funds Shares Principal Investment Strategies The Fund invests in a portfolio of high-quality tax-exempt securities maturing in 13 months or less. The average maturity of the Fund's portfolio, computed on a dollar-weighted basis, will be 90 days or less. The Fund's Adviser performs a fundamental credit analysis to develop an approved list of issuers and securities that meet the Adviser's minimum credit standards. The Adviser targets an average portfolio maturity based upon its interest rate outlook and the tax-exempt securities available. The Adviser structures the portfolio by combining variable rate demand instruments and municipal notes. Depending on the supply of tax-exempt securities, the Adviser generally shortens the portfolio's maturity when it expects interest rates to rise and extends the maturity when it expects interest rates to fall. Temporary Defensive Investments. The Fund may temporarily depart from its principal investment strategies by investing in securities subject to federal regular income tax and Massachusetts state income tax, all of comparable quality to other securities in which the Fund invests. It may do this to minimize potential losses and maintain liquidity to meet shareholder redemptions during adverse market conditions. This may cause the Fund to give up greater investment returns to maintain the safety of principal, that is, the original amount invested by shareholders. This also may cause the Fund to receive and distribute taxable income to investors. Principal Securities In Which The Fund Invests Tax-Exempt Securities. Tax-exempt securities are fixed income securities that pay interest exempt from regular federal income taxes. States, counties, cities and other political subdivisions and authorities typically issue tax-exempt securities. Tax-exempt securities are generally differentiated by their source of repayment. Fixed Income Securities. Fixed Income 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. Variable Rate Demand Instruments. Variable rate demand instruments are tax- exempt securities that require the issuer or a third party, such as a dealer or bank, to repurchase the security for its face value upon demand. The securities also bear interest at a variable rate intended to cause the securities to trade at their face value. The Fund treats demand instruments as short-term securities, even though their stated maturity may extend beyond thirteen months. Municipal Notes. Municipal notes are short-term tax-exempt securities. Many municipalities issue such notes to fund their current operations prior to collecting taxes or other municipal revenues. Municipalities may also issue notes to fund capital projects prior to issuing long-term bonds. The issuers typically repay the notes at the end of their fiscal year, either with taxes, other revenues or proceeds from newly issued notes or bonds. Investment 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 rating services or be of comparable quality to securities having such ratings. Credit Enhancement. Credit enhancement consists of an arrangement in which a company agrees to pay amounts due on a fixed income security if the issuer defaults. In some cases the company providing credit enhancement makes all payments directly to the security holders and receives reimbursement from the issuer. Normally, the credit enhancer has greater financial resources and liquidity than the issuer. For this reason, the Adviser usually evaluates the credit risk of a fixed income security based solely upon its credit enhancement. 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 tax-exempt money market fund are described below. Credit Risk. Credit risk is the possibility that an issuer or a credit enhancer will default (fails to repay interest and principal when due). If an issuer or credit enhancer defaults, the Fund will lose money. Money market funds try to minimize this risk by purchasing higher quality securities. Many fixed income securities receive credit ratings from companies such as Standard & Poor's and Moody's Investor Services. Fixed income securities receive different credit ratings depending on the rating company's assessment of the likelihood of default by the issuer. The lower the credit rating, the greater the credit risk. If the security is unrated, greater reliance is placed on the Adviser's credit assessment. Market Risk. Prices of fixed income securities rise and fall in response to interest rate changes for similar securities. Generally, when interest rates rise, the 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. Sector Risk. Most of the Fund's securities will be invested in issuers located in Massachusetts. In addition, a substantial part of the Fund's portfolio may be comprised of tax-exempt securities issued or credit enhanced by companies in similar businesses or with other similar characteristics. As a result, the Fund will be more susceptible to any economic, business, political, or other developments which generally affect these issuers. Management Investment Adviser The Board of Trustees governs the Fund. The Board selects and oversees the Adviser, Federated Management. 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 and/or provide administrative services to more than 300 mutual funds and private accounts, which totaled over $120 billion in assets as of December 31, 1997. Federated was established in 1955 and is one of the largest mutual fund investment managers in the United States with more than 2,000 employees. Over 4,000 investment professionals make Federated Funds available to their customers. Management Fees The Adviser receives an annual investment advisory fee of .50% 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 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 affect on the Fund. Financial Highlights Reference is made to the Report of Independent Public Accountants on page 26. (For a share outstanding throughout each period.) The following financial highlights will help you understand the Fund's financial performance for the 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 all 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.
Net Net Net Ratio Asset Distributions Asset Assets Ratio of Net Value Net from Net Value End of Expenses Income Beginning Investment Investment End Total of Period to Average to Average of Period Income Income of Period Return/2/ (000) Net Assets Net Assets Boston 1784 Funds Shares For the Year Ended October 31, $1.00 0.03 (0.03) $1.00 3.03% $162,557 0.57% 2.97% 1998 For the Year Ended October 31, $1.00 0.03 (0.03) $1.00 3.07% $ 73,837 0.57% 3.03% 1997 For the Year Ended October 31, $1.00 0.03 (0.03) $1.00 3.05% $ 54,667 0.58% 3.01% 1996 For the Year Ended October 31, $1.00 0.03 (0.03) $1.00 3.30% $ 46,580 0.60% 3.25% 1995 For the Year Ended October 31, $1.00 0.02 (0.02) $1.00 2.05% $ 41,912 0.64% 2.09% 1994 For the Year Ended October 31, $1.00 0.01 (0.01) $1.00 1.25% $ 18,143 0.65% 1.85% 19931 Ratio of Expense Waiver/ Reimbursements to Average Net Assets/3/ Boston 1784 Funds Shares For the Year Ended October 31, 0.36% 1998 For the Year Ended October 31, 0.39% 1997 For the Year Ended October 31, 0.42% 1996 For the Year Ended October 31, 0.45% 1995 For the Year Ended October 31, 0.35% 1994 For the Year Ended October 31, 0.43% 1993/1/
* Computed on an annualized basis. 1 Reflects operations for the period from March 8, 1993 (date of initial public investment) to October 31, 1993. 2 Based on net asset value, which does not reflect the sales charge or contingent deferred sales charge, if applicable. 3 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) Massachusetts Municipal Cash Trust Portfolio of Investments October 31, 1998
Principal Amount Value (1) Short-Term Municipals--99.2% Massachusetts--95.6% $ 8,703,000 Ashland, MA, 4.00% BANs, 12/10/1998 $ 8,706,600 6,128,000 Attleboro, MA, 3.80% BANs, 7/2/1999 6,131,895 1,245,000 Attleboro, MA, 4.00% BANs, 12/22/1998 1,245,487 3,800,000 Boston, MA, UT GO, 4.50% Bonds (FGIC INS), 1/1/1999 3,805,545 1,000,000 Brockton, MA, 4.50% Bonds (MBIA INS), 4/1/1999 1,003,187 5,000,000 Central Berkshire, MA Regional School District, 4.10% BANs, 12/15/1998 5,002,646 26,721,542 Clipper, MA Tax-Exempt Trust, (Series A) Weekly VRDNs (Massachusetts State 26,721,542 Lottery Commission)/(AMBAC INS)/(State Street Bank and Trust Co. LIQ) 23,130,000 Clipper, MA Tax-Exempt Trust 1994-2 Weekly VRDNs (State Street Bank and Trust 23,130,000 Co. LIQ) 11,662,200 Clipper, MA Tax-Exempt Trust Weekly VRDNs (State Street Bank and Trust Co. LIQ) 11,662,200 3,465,000 Clipper, MA Tax-Exempt Trust, (Series 1994-1) Weekly VRDNs (Massachusetts State 3,465,000 HFA)/(MBIA INS)/(State Street Bank and Trust Co. LIQ) 3,000,000 Commonwealth of Massachusetts Weekly VRDNs (AMBAC INS)/(Citibank NA, New York 3,000,000 LIQ) 6,000,000 Commonwealth of Massachusetts, (1997 Series B) Weekly VRDNs (Landesbank 6,000,000 Hessen-Thueringen, Frankfurt LIQ) 11,175,000 Commonwealth of Massachusetts, (Series 1998 FR/RI-A20) Weekly VRDNs (MBIA 11,175,000 INS)/(National Westminster Bank, PLC, London LIQ) 8,855,000 Commonwealth of Massachusetts, Floater Certificates (Series 1998-41) Weekly 8,855,000 VRDNs (Morgan Stanley, Dean Witter Municipal Funding, Inc. LIQ) $ 5,000,000 Everett, MA, 4.00% BANs (Fleet National Bank, Springfield, MA LOC), 3/18/1999 $ 5,007,244 3,200,000 Framingham, MA IDA Weekly VRDNs (Perini Corp)/(Barclays Bank PLC, London LOC) 3,200,000 2,290,000 Framingham, MA, 4.00% BANs, 2/5/1999 2,292,021 2,430,000 Gloucester, MA, 3.75% BANs, 8/5/1999 2,441,697 2,100,000 Ipswich, MA, 4.00% BANs, 11/19/1998 2,100,402 2,190,000 Mansfield, MA, 3.40% BANs, 10/28/1999 2,196,277 15,800,000 Massachusetts HEFA, (Series A) Weekly VRDNs (Brigham & Women's 15,800,000 Hospital)/(Landesbank Hessen-Thueringen, Frankfurt LOC) 3,125,000 Massachusetts HEFA, (Series A) Weekly VRDNs (New England Home For Little 3,125,000 Wanderers)/(BankBoston, N.A. LOC) 2,000,000 Massachusetts HEFA, (Series B) Weekly VRDNs (Clark University)/(Fleet Bank N.A. 2,000,000 LOC) 4,725,000 Massachusetts HEFA, (Series B) Weekly VRDNs (Endicott College)/(BankBoston, N.A. 4,725,000 LOC) 9,915,000 Massachusetts HEFA, (Series B) Weekly VRDNs (Hallmark Health System)/(FSA 9,915,000 INS)/(Fleet National Bank, Springfield, MA LIQ) 8,415,000 Massachusetts HEFA, (Series F) Weekly VRDNs (Children's Hospital of 8,415,000 Boston)/(Sanwa Bank Ltd, Osaka LIQ) 2,300,000 Massachusetts HEFA, (Series I) Weekly VRDNs (Harvard University) 2,300,000 7,395,000 Massachusetts HEFA, PA-362 Weekly VRDNs (Amherst College)/(Merrill Lynch Capital 7,395,000 Services, Inc. LIQ) 3,120,000 Massachusetts IFA Weekly VRDNs (Kendall Square Entity)/(State Street Bank and 3,120,000 Trust Co. LOC) $ 1,800,000 Massachusetts IFA, (Series 1992) Weekly VRDNs (Holyoke Water Power $ 1,800,000 Co.)/(Canadian Imperial Bank of Commerce, Toronto LOC) 20,000,000 Massachusetts IFA, (Series 1992B), 3.40% CP (New England Power Co.), Mandatory 20,000,000 Tender 12/7/1998 17,100,000 Massachusetts IFA, (Series 1992B), 3.40% CP (New England Power Co.), Mandatory 17,100,000 Tender 12/9/1998 5,900,000 Massachusetts IFA, (Series 1994) Weekly VRDNs (Nova Realty Trust)/(Fleet 5,900,000 National Bank, Springfield, MA LOC) 2,000,000 Massachusetts IFA, (Series 1995) Weekly VRDNs (Goddard House)/(Fleet Bank N.A. 2,000,000 LOC) 5,800,000 Massachusetts IFA, (Series 1995) Weekly VRDNs (Whitehead Institute for 5,800,000 Biomedical Research) 7,009,000 Massachusetts IFA, (Series 1996) Weekly VRDNs (Newbury College)/(BankBoston, 7,009,000 N.A. LOC) 2,500,000 Massachusetts IFA, (Series 1997) Weekly VRDNs (Massachusetts Society for the 2,500,000 Prevention of Cruelty to Animals)/(Fleet National Bank, Springfield, MA LOC) 6,000,000 Massachusetts IFA, (Series 1997) Weekly VRDNs (Mount Ida College)/(Credit Local 6,000,000 de France LOC) 1,325,000 Massachusetts IFA, (Series A) Weekly VRDNs (Hockomock YMCA)/(Bank of Nova 1,325,000 Scotia, Toronto LOC) 9,875,000 Massachusetts IFA, (Series B) Weekly VRDNs (Williston North Hampton 9,875,000 School)/(Fleet National Bank, Springfield, MA LOC) 5,755,000 Massachusetts IFA, Revenue Bonds (Series 1995) Weekly VRDNs (Emerson College 5,755,000 Issue)/(BankBoston, N.A. LOC) $ 8,800,000 Massachusetts Municipal Wholesale Electric Company, Power Supply System Revenue $ 8,800,000 Bonds (1994 Series C) Weekly VRDNs (Canadian Imperial Bank of Commerce, Toronto LOC) 9,000,000 Massachusetts Port Authority, PT-1073 (Series 1998-D) Weekly VRDNs (Merrill 9,000,000 Lynch Capital Services, Inc. LIQ) 5,000,000 Massachusetts State HFA, Multi-Family Refunding Revenue Bonds (1995 Series A) 5,000,000 Weekly VRDNs (Republic National Bank of New York LIQ) 2,215,000 Massachusetts Turnpike Authority, (PA-324) Weekly VRDNs (MBIA INS)/(Merrill 2,215,000 Lynch Capital Services, Inc. LIQ) 8,295,000 Massachusetts Turnpike Authority, PT-135 Weekly VRDNs (MBIA INS)/(Banco 8,295,000 Santander SA LIQ) 14,400,000 Massachusetts Turnpike Authority, Variable Rate Certificates (Series 1997N) 14,400,000 Weekly VRDNs (MBIA INS)/(Bank of America NT and SA, San Francisco LIQ) 6,205,000 Melrose, MA, 3.80% BANs, 8/19/1999 6,212,113 1,815,000 Middleborough, MA, 4.00% BANs, 3/5/1999 1,816,781 1,117,500 Newbury, MA, 4.00% BANs, 8/13/1999 1,119,175 3,625,000 Newburyport, MA, 4.00% BANs, 2/12/1999 3,626,971 7,044,000 Paxton, MA, 4.00% BANs, 6/18/1999 7,052,509 2,220,000 Plymouth, MA, 3.25% BANs, 10/21/1999 2,225,009 4,050,000 Quabbin Regional School District, MA, 4.00% BANs, 1/15/1999 4,051,602 1,257,000 Randolph, MA, 4.00% BANs, 6/18/1999 1,258,456 5,000,000 Randolph, MA, 4.00% BANs, 7/13/1999 5,006,681 1,595,000 Randolph, MA, 4.00% BANs, 8/20/1999 1,598,685 2,980,000 Springfield, MA, 4.00% BANs (Fleet National Bank, Springfield, MA LOC), 6/25/1999 2,985,564 $ 2,000,000 Stow, MA, 3.75% BANs, 3/31/1999 $ 2,000,789 5,768,000 Stow, MA, 3.80% BANs, 8/20/1999 5,770,215 1,424,000 Stow, MA, 4.00% BANs, 3/31/1999 1,425,972 2,000,000 Topsfield, MA, 3.75% BANs, 9/23/1999 2,007,744 2,100,000 Ware, MA, 4.00% BANs, 12/18/1998 2,100,932 2,750,000 Ware, MA, 4.00% BANs, 12/18/1998 2,751,211 1,540,000 Ware, MA, 4.00% BANs, 6/26/1999 1,542,400 3,200,000 Westfield, MA, 3.75% BANs, 10/22/1999 3,221,133 6,120,000 (2)Weymouth, MA Housing Authority, PT 1062, 3.80% TOBs (Queen Ann 6,120,000 Apartments)/(Merrill Lynch Capital Services, Inc. LIQ)/(Merrill Lynch Capital Services, Inc. LOC), Optional Tender 8/5/1999 2,500,000 Weymouth, MA, 4.25% BANs, 11/5/1998 2,500,061 7,375,000 Worcester, MA, 4.00% BANs, 8/26/1999 7,386,549 Total 400,491,295 - ------------ Puerto Rico--3.6% 15,000,000 Commonwealth of Puerto Rico, Floating Rate Trust Receipts (Series 1997) Weekly 15,000,000 VRDNs (Commerzbank AG, Frankfurt LIQ)/(Commerzbank AG, Frankfurt LOC) Total Investments (at amortized cost)(3) $415,491,295 - ----------------------------------------------------------------------------------------------------------------------------
(1) The Fund may only invest in securities rated in one of the two highest short-term rating categories by nationally recognized statistical rating organizations ("NRSROs") or unrated securities of comparable quality. 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 MIG-1, or MIG-2 by Moody's Investors Service, Inc., F- 1+, F-1 and F-2 by Fitch IBCA, Inc. are all considered rated in one of the two highest short-term rating categories. Securities rated in the highest short-term rating category (and unrated securities of comparable quality) are identified as First Tier securities. Securities rated in the second highest short-term rating category (and unrated securities of comparable quality) are identified as Second Tier securities. The Fund follows applicable regulations in determining whether a security is rated and whether a security rated by multiple NRSROs in different rating categories should be identified as a First or Second Tier security. At October 31, 1998, the portfolio securities were rated as follows: TIER RATING PERCENTAGE BASED ON TOTAL MARKET VALUE (UNAUDITED) First Tier Second Tier 100.00% 0.00%
(2) Denotes a restricted security which is subject to restrictions on resale under Federal Securities laws. At October 31, 1998, restricted securities amounted to $6,120,000 which represents 1.5% of net assets. (3) Also represents cost for federal tax purposes. Note: The categories of investments are shown as a percentage of net assets ($418,943,091) at October 31, 1998. The following acronyms are used throughout this Portfolio: AMBAC--American Municipal Bond Assurance Corporation BANS--Bond Anticipation Notes CP--Commercial Paper FGIC--Financial Guaranty Insurance Company FSA--Financial Security Assurance GO--General Obligation HEFA--Health and Education Facilities Authority HFA--Housing Finance Authority IDA--Industrial Development Authority IFA--Industrial Finance Authority INS--Insured LIQ--Liquidity Agreement LOC--Letter of Credit MBIA--Municipal Bond Investors Assurance PLC--Public Limited Company RANS--Revenue Anticipation Notes SA--Support Agreement TOBS--Tender Option Bonds VRDNs--Variable Rate Demand Notes (See Notes which are an integral part of the Financial Statements) Massachusetts Municipal Cash Trust Statement of Assets and Liabilities October 31, 1998 Assets: Total investments in securities, at amortized cost and value $415,491,295 Cash 620,120 Income receivable 3,419,558 Receivable for shares sold 1,132 Prepaid expenses 7,159 Total assets 419,539,264 Liabilities: Payable for shares redeemed $ 24,993 Income distribution payable 494,020 Accrued expenses 77,160 Total liabilities 596,173 Net Assets for 418,943,091 shares outstanding $418,943,091 Net Asset Value, Offering Price and Redemption Proceeds Per Share: Institutional Service Shares: $256,385,640 / 256,385,640 shares outstanding $ 1.00 Boston 1784 Funds Shares: $162,557,451 / 162,557,451 shares outstanding $ 1.00 - ----------------------------------------------------------------------------------------------------------------------------
(See Notes which are an integral part of the Financial Statements) Massachusetts Municipal Cash Trust Statement of Operations Year Ended October 31, 1998 Investment Income: Interest $12,817,374 Expenses: Investment advisory fee $ 1,810,446 Administrative personnel and services fee 273,047 Custodian fees 15,646 Transfer and dividend disbursing agent fees and expenses 72,296 Directors'/Trustees' fees 2,902 Auditing fees 12,692 Legal fees-- 11,251 Portfolio accounting fees 90,795 Shareholder services fee--Institutional Service Shares 563,458 Shareholder services fee--Boston 1784 Funds Shares 341,765 Share registration costs 79,768 Printing and postage 34,046 Insurance premiums 22,713 Miscellaneous 640 Total expenses 3,331,465 Waivers-- Waiver of investment advisory fee $ (397,073) Waiver of shareholder services fee--Institutional Service Shares (563,458) Waiver of shareholder services fee--Boston 1784 Funds Shares (341,765) Total waivers (1,302,296) Net expenses 2,029,169 Net investment income $10,788,205 - ----------------------------------------------------------------------------------------------------------------------------------
(See Notes which are an integral part of the Financial Statements) Massachusetts Municipal Cash Trust Statement of Changes in Net Assets
Year Ended October 31, 1998 1997 Increase (Decrease) in Net Assets: Operations-- Net investment income $ 10,788,205 $ 6,125,532 Change in net assets resulting from operations 10,788,205 6,125,532 Distributions to Shareholders-- Distributions from net investment income Institutional Service Shares (6,723,838) (4,462,883) Boston 1784 Funds Shares (4,064,367) (1,662,649) Change in net assets resulting from distributions to shareholders (10,788,205) (6,125,532) Share Transactions-- Proceeds from sale of shares 1,191,190,660 682,162,039 Net asset value of shares issued to shareholders in payment of distributions 5,640,601 3,135,034 declared Cost of shares redeemed (993,594,809) (643,996,755) Change in net assets resulting from share transactions 203,236,452 41,300,318 Change in net assets 203,236,452 41,300,318 Net Assets:Beginning of period 215,706,639 174,406,321 End of period $ 418,943,091 $ 215,706,639 - -----------------------------------------------------------------------------------------------------------------------------
(See Notes which are an integral part of the Financial Statements) Massachusetts Municipal Cash Trust Notes to Financial Statements October 31, 1998 (1) Organization Federated Municipal Trust (the "Trust") is registered under the Investment Company Act of 1940, as amended (the "Act") as an open-end, management investment company. The Trust consists of 17 portfolios. The financial statements included herein are only those of Massachusetts Municipal Cash Trust (the "Fund"). The financial statements of the other portfolios are presented separately. The assets of each portfolio are segregated and a shareholder's interest is limited to the portfolio in which shares are held. The Fund offers two classes of shares: Institutional Service Shares and Boston 1784 Funds Shares. The investment objective of the Fund is to provide current income exempt from federal regular income tax and Massachusetts state income tax consistent with stability of principal. (2) 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. 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. Restricted Securities Restricted securities are securities that may only be resold upon registration under federal securities laws or in transactions exempt from such registration. Many restricted securities may be resold in the secondary market in transactions exempt from registration. In some cases, the restricted securities may be resold without registration upon exercise of a demand feature. Such restricted securities may be determined to be liquid under criteria established by the Board of Trustees ("Trustees"). The Fund will not incur any registration costs upon such resales. Restricted securities are valued at amortized cost in accordance with Rule 2a-7 under the Investment Company Act of 1940. Additional information on each restricted security held at October 31, 1998, is as follows:
Security Acquisition Date Acquisition Cost Weymouth, MA Housing Authority 8/31/1998 $6,120,000
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. (3) Shares of Beneficial Interest The Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest (without par value) for each class of shares. At October 31, 1998, capital paid-in aggregated $418,943,091. Transactions in shares were as follows:
Year Ended October 31, 1998 1997 Institutional Service Shares Shares sold 943,828,322 619,964,162 Shares issued to shareholders in payment of distributions declared 1,573,009 1,473,299 Shares redeemed (830,885,045) (599,306,953) Net change resulting from Institutional Service Share transactions 114,516,286 22,130,508 Boston 1784 Funds Shares Shares sold 247,362,338 62,197,877 Shares issued to shareholders in payment of distributions declared 4,067,592 1,661,735 Shares redeemed (162,709,764) (44,689,802) Net change resulting from Boston 1784 Funds Share transactions 88,720,166 19,169,810 Net change resulting from share transactions 203,236,452 41,300,318
(4) Investment Advisory Fee and Other Transactions with Affiliates Investment Advisory Fee Federated Management, the Fund's investment adviser (the "Adviser"), receives for its services an annual investment advisory fee equal to 0.50% 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 ("FSS"), the Fund will pay FSS up to 0.25% of average daily net assets of the Institutional Service Shares for the period. Under the terms of a Shareholder Services Agreement with BankBoston, N.A., the fund will pay BankBoston, N.A., up to 0.25% of average daily net assets of Boston 1784 Funds Shares for the period. These fees are used to finance certain services for shareholders and to maintain shareholder accounts. FSS and BankBoston, N.A. may voluntarily choose to waive any portion of their fees. FSS and BankBoston, N.A. can modify or terminate these voluntary waivers at any time at their sole discretion. Transfer and Dividend Disbursing Agent Fees and Expenses FServ, through its subsidiary Federated Shareholder Services Company ("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. Interfund Transactions During the period ended October 31, 1998, the Fund engaged in purchase and sale transactions with funds that have a common investment adviser (or affiliated investment advisers), common Directors/Trustees, and/or common Officers. These purchase and sale transactions were made at current market value pursuant to Rule 17a-7 under the Act amounting to $523,571,958 and $377,762,628, respectively. General Certain of the Officers and Directors of the Corporation are Officers and Directors or Trustees of the above companies. (5) Concentration of Credit Risk Since the Fund invests a substantial portion of its assets in issuers located in one state, it will be more susceptible to factors adversely affecting issuers of that state than would be a comparable tax-exempt mutual fund that invests nationally. In order to reduce the credit risk associated with such factors, at October 31, 1998, 46.4% of the securities in the portfolio of investments are backed by letters of credit or bond insurance of various financial institutions and financial guaranty assurance agencies. The percentage of investments insured by or supported (backed) by a letter of credit from any one institution or agency did not exceed 6.4% of total investments. (6) 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 Accountants To the Shareholders and Board of Trustees of Federated Municipal Trust(Massachusetts Municipal Cash Trust): We have audited the accompanying statement of assets and liabilities of Massachusetts Municipal Cash Trust (an investment portfolio of Federated Municipal Trust, a Massachusetts business trust), including the schedule of portfolio of investments, as of October 31, 1998 and the related statement of operations for the year then ended and 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 Trust's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements 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 October 31, 1998 by correspondence with the custodian. 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 Massachusetts Municipal Cash Trust (an investment portfolio of Federated Municipal Trust), as of October 31, 1998 and the results of its operations for the year then ended and the changes in its net assets and the financial highlights for the periods presented, in conformity with generally accepted accounting principles. Arthur Andersen LLP Boston, Massachusetts December 23, 1998 A Statement of Additional Information (SAI) dated December 31, 1998, is incorporated by reference into this prospectus. To obtain the SAI and other information without charge, call the Fund at 1-800-BKB-1784. 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. Boston 1784 Fundssm P.O. Box 8524 Boston, MA 02266-8524 1-800-BKB-1784 www.boston1784funds.com FEDERATED World-Class Investment Manager Federated Investors, Inc. Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 1-800-341-7400 www.federated investors.com Cusip 314229832 G00507-01 (12/98) File No. 811-5911 MF-0136 Prospectus Massachusetts Municipal Cash Trust--Boston 1784 Funds Shares 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. December 31, 1998 Statement of Additional Information December 31, 1998 Massachusetts Municipal Cash Trust [A Portfolio of Federated Municipal Trust] Boston 1784 Funds Shares This Statement of Additional Information (SAI) is not a prospectus. Read this SAI in conjunction with the prospectus for Massachusetts Municipal Cash Trust - Boston 1784 Funds Shares dated December 31,1998. To obtain the prospectus without charge, call 1-800-BKB-1784. ----------------------------------------------------------------------------- Contents ----------------------------------------------------------------------------- How is the Fund Organized? Securities in Which the Fund Invests How is the Fund Sold? Subaccounting Services Redemption in Kind Massachusetts Partnership Law Account and Share Information Tax Information Who Manages and Provides Services to the Fund? How Does the Fund Measure Performance? Who is Federated Investors, Inc.? Investment Ratings [Federated Investors Logo] Federated Securities Corp., Distributor, subsidiary of Federated Investors, Inc. CUSIP 314229832 0032603B (12/98) HOW IS THE FUND ORGANIZED? =============================================================================== The Fund is a diversified portfolio of Federated Municipal Trust (Trust). The Trust is an open-end, management investment company that was established under the laws of the Commonwealth of Massachusetts on September 1, 1989. The Trust may offer separate series of shares representing interests in separate portfolios of securities. The Board of Trustees (the Board) has established two classes of shares of the Fund, known as Institutional Service Shares and Boston 1784 Funds Shares (Shares). This SAI relates to Boston 1784 Funds Shares. SECURITIES IN WHICH THE FUND INVESTS =============================================================================== SECURITIES DESCRIPTIONS ANDTECHNIQUES In pursuing its investment strategy, the Fund may invest in the following tax- exempt securities for any purpose that is consistent with its investment objective. General Obligation Bonds General obligation bonds are supported by the issuer's full faith and credit. The issuer must levy and collect taxes sufficient to pay principal and interest on the bonds. However, the issuer's authority to levy additional taxes may be limited by its charter or state law. Special Revenue Bonds Special revenue bonds are payable solely from specific revenues received by the issuer. The revenues may consist of specific taxes, assessments, tolls, fees or other types of municipal revenues. For example, a municipality may issue bonds to build a toll road, and pledge the tolls to repay the bonds. Bondholders could not collect from the municipality's general taxes or revenues. Therefore, any shortfall in the tolls could result in a default on the bonds. Private Activity Bonds Private activity bonds are special revenue bonds used to finance private entities. For example, a municipality may issue bonds to finance a new factory to improve its local economy. The municipality would lend the proceeds to the company using the factory, and the company would agree to make loan payments sufficient to repay the bonds. The bonds would be payable solely from the company's loan payments, not from any other revenues of the municipality. Therefore, any default on the loan normally would result in a default on the bonds. Municipal Leases Municipalities may enter into leases for equipment or facilities. In order to comply with state public financing laws, these leases are typically subject to annual appropriation. In other words, a municipality may end a lease, without penalty, by not providing for the lease payments in its annual budget. After the lease ends, the lessor (the Fund) can resell the equipment or facility but the Fund may lose money on the sale. The Fund may invest in securities supported by pools of municipal leases. The most common type of lease backed securities are certificates of participation (COPs). However, the Fund may also invest directly in individual leases. Credit Enhancement Common types of credit enhancement include guarantees, letters of credit, bond insurance and surety bonds. Credit enhancement also includes arrangements where securities or other liquid assets secure payment of a fixed income security. If a default occurs, these assets may be sold and the proceeds paid to a security's holders. Either form of credit enhancement reduces credit risks by providing another source of payment for a fixed income security. Investment Ratings A nationally recognized rating service'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 (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 IBCA, 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 rating service can be treated as being in one of the two highest short-term rating categories; currently, such securities must be rated by two rating services in one of their two highest rating categories. See "Regulatory Compliance." Investment Risks There are many factors which may effect an investment in the Fund. The Fund's principal risks are described in its prospectus. An additional risk factor is outlined below. Tax Risk In order for the interest income from the securities to be exempt from federal regular income tax ("tax-exempt"), tax-exempt securities must meet certain legal requirements. Failure to meet such requirements may cause the interest received and distributed by the Fund to shareholders to be taxable. FUNDAMENTAL INVESTMENT POLICIES The Fund invests in tax-exempt securities so that at least 80% of the Fund's annual interest income is exempt from federal regular income tax and Massachusetts state income tax. This policy is fundamental and cannot be changed without shareholder approval. 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 the clearance of transactions. Issuing Senior Securities and Borrowing Money The Fund will not issue senior securities except that the Fund may borrow money in amounts up to one-third of the value of its total assets, including the amounts borrowed. The Fund will not borrow money 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 its total assets are outstanding. Pledging Assets The Fund will not mortgage, pledge, or hypothecate any assets except 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 non publicly issued Massachusetts tax-exempt securities or temporary investments or enter into repurchase agreements, in accordance with its investment objective, policies and limitations or Declaration of Trust. 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 or real estate limited partnerships, 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, (including instruments issued by a U.S. branch of a domestic bank or savings and loan having capital, surplus, and undivided profits in excess of $100,000,000 at the time of the investment), 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 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 Restricted and Illiquid Securities The Fund may invest in restricted securities. Restricted securities are any securities in which the Fund may invest pursuant to its investment objective and policies but which are subject to restrictions on resale under federal securities law. Under criteria established by the Board certain restricted securities are determined to be liquid. To the extent that restricted securities are not determined to be liquid the Fund will limit their purchase, together with other illiquid securities, to 10% of its net assets. 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 nationally recognized rating services 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 Board has 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 Board 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 Board 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 Board 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. 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 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. 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. 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 Trust have equal voting rights, except that in matters affecting only a particular Fund or class, only Shares of that Fund or class are entitled to vote. Trustees may be removed by the Board or by shareholders at a special meeting. A special meeting of shareholders will be called by the Board upon the written request of shareholders who own at least 10% of the Trust's outstanding shares of all series entitled to vote. As of December 8, 1998, the following shareholders owned of record, beneficially, or both, 5% or more of outstanding Institutional Service Shares: Cambridge Trust Company, Cambridge, Massachusetts, owned approximately 16,619,664 shares (6.56%); Bob and Company, Boston, Massachusetts, owned approximately 21,074,831 shares (8.32%); Turtle and Company, Boston, Massachusetts, owned approximately 35,044,626 shares (13.84%); and State Street Bank and Trust, North Quincy, Massachusetts, owned approximately 66,411,123 shares (26.22). As of December 8, 1998, the following shareholders owned of record, beneficially, or both, 5% or more of outstanding Boston 1784 Funds Shares: BankBoston, Boston, Massachusetts, owned approximately 163,767,132 shares (100.00%) Shareholders owning 25% or more of outstanding Shares may be in control and be able to affect the outcome of certain matters presented for a vote of shareholders. TAX INFORMATION =============================================================================== FEDERAL INCOME TAX The Fund intends to meet the requirements of Subchapter M of the Internal Revenue Code applicable to regulated investment companies. If these requirements are not met, it will not receive the special tax treatment and will pay federal income tax. The Fund will be treated as a single, separate entity for federal income tax purposes so that income earned and capital gains and losses realized by the Trust's other portfolios will be separate from those realized by the Fund. STATE TAXES Massachusetts Taxes Under existing Massachusetts laws, distributions made by the Fund will not be subject to Massachusetts personal income taxes to the extent that such dividends qualify as exempt interest dividends under the Internal Revenue Code, and represent (i) interest or gain on obligations issued by the Commonwealth of Massachusetts, its political subdivisions or agencies; or (ii) interest on obligations of the United States, its territories or possessions to the extent exempt from taxation by the states pursuant to federal law. Conversely, to the extent that the distributions made by the Fund are derived from other types of obligations, such dividends will be subject to Massachusetts personal income taxes. Shareholders subject to the Massachusetts corporate excise tax must include all dividends paid by the Fund in their net income, and the value of their shares of stock in the Fund in their net worth, when computing the Massachusetts excise tax. WHO MANAGES AND PROVIDES SERVICES TO THE FUND? =============================================================================== BOARD OF TRUSTEES The Board is responsible for managing the Trust's business affairs and for exercising all the Trust's powers except those reserved for the shareholders. Information about each Board member is provided below and includes the following data: name, address, birthdate, present position(s) held with the Trust, principal occupations for the past five years and other notable positions held, total compensation received as a Trustee from the Trust for its most recent fiscal year, and the total compensation received from the Federated Fund Complex for the most recent calendar year. The Trust is comprised of 17 Funds and the Federated Fund Complex is comprised of 56 investment companies, whose investment advisers are affiliated with the Fund's Adviser. As of December 8, 1998, the Fund's Board and Officers as a group owned less than 1% of the Fund's outstanding Institutional Service Shares. An asterisk (*) denotes a Trustee who is deemed to be an interested person as defined in the Investment Company Act of 1940. The following symbol (#) denotes a Member of the Board's Executive Committee, which handles the Board's responsibilities between its meetings.
Name Total Birthdate Aggregate Compensation From Address Principal Occupations Compensation Trust and Fund Position With Trust for Past 5 Years From Trust Complex - ----------------------------------------------------------------------------------------------------------------------------------- John F. Donahue##* Chief Executive Officer and Director or Trustee of $0 $0 for the Trust Birthdate: July 28, 1924 the Federated Fund Complex. Chairman and Director, and 56 other Federated Investors Tower Federated Investors, Inc.; Chairman and Trustee, investment 1001 Liberty Avenue Federated Advisers, Federated Management, and companies in the Pittsburgh, PA Federated Research; Chairman and Director, Federated Fund Complex CHAIRMAN and TRUSTEE Research Corp., and Federated Global Research Corp.; Chairman, Passport Research, Ltd. Thomas G. Bigley Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: February 3, 1934 Director, Member of Executive Committee, Children's Trust and 15 Old Timber Trail Hospital of Pittsburgh; formerly: Senior Partner, 56 other Pittsburgh, PA Ernst & Young LLP; Director, MED 3000 Group, Inc.; investment TRUSTEE Director, Member of Executive Committee, University companies in the of Pittsburgh. Fund Complex John T. Conroy, Jr. Director or Trustee of the Federated Fund Complex; $4,484.62 $122,362 for the Birthdate: June 23, 1937 President, Investment Properties Corporation; Senior Trust and Wood/IPC Commercial Dept. Vice President, John R. Wood and Associates, Inc., 56 other John R. Wood and Realtors; Partner or Trustee in private real estate investment Associates, Inc. Realtors ventures in Southwest Florida; formerly: President, companies in the 3255 Tamiami Trail North Naples Property Management, Inc. and Northgate Fund Complex Naples, FL Village Development Corporation. TRUSTEE William J. Copeland Director or Trustee of the Federated Fund Complex; $4,484.62 $122,362 for the Birthdate: July 4, 1918 Director and Member of the Executive Committee, Trust and One PNC Plaza-23rd Floor Michael Baker, Inc.; formerly: Vice Chairman and 56 other Pittsburgh, PA Director, PNC Bank, N.A., and PNC Bank Corp.; investment TRUSTEE Director, Ryan Homes, Inc. companies in the Fund Complex Retired: Director, United Refinery; Director, Forbes Fund; Chairman, Pittsburgh Foundation; Chairman, Pittsburgh Civic Light Opera. James E. Dowd, Esq. Director or Trustee of the Federated Fund Complex; $4,484.62 $122,362 for the Birthdate: May 18, 1922 Attorney-at-law; Director, The Emerging Germany Fund, Trust and 571 Hayward Mill Road Inc. 56 other Concord, MA investment TRUSTEE Retired: President, Boston Stock Exchange, Inc.; companies in the Regional Administrator, United States Securities and Fund Complex Exchange Commission. Lawrence D. Ellis, M.D.* Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: October 11, 1932 Professor of Medicine, University of Pittsburgh; Trust and 3471 Fifth Avenue Medical Director, University of Pittsburgh Medical 56 other Suite 1111 Center - Downtown; Hematologist, Oncologist, and investment Pittsburgh, PA Internist, Presbyterian and Montefiore Hospitals; companies in the TRUSTEE Member, National Board of Trustees, Leukemia Society Fund Complex of America. Edward L. Flaherty, Jr., Director or Trustee of the Federated Fund Complex; $4,484.62 $122,362 for the Esq. # Attorney, of Counsel, Miller, Ament, Henny & Kochuba; Trust and Birthdate: June 18, 1924 Director, Eat'N Park Restaurants, Inc.; formerly: 56 other Miller, Ament, Henny & Counsel, Horizon Financial, F.A., Western Region; investment Kochuba Partner, Meyer and Flaherty. companies in the 205 Ross Street Fund Complex Pittsburgh, PA TRUSTEE Peter E. Madden Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: March 16, 1942 formerly: Representative, Commonwealth of Trust and One Royal Palm Way Massachusetts General Court; President, State Street 56 other 100 Royal Palm Way Bank and Trust Company and State Street Corporation. investment Palm Beach, FL companies in the TRUSTEE Retired: Director, VISA USA and VISA International; Fund Complex Chairman and Director, Massachusetts Bankers Association; Director, Depository Trust Corporation. John E. Murray, Jr., J.D., Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the S.J.D. President, Law Professor, Duquesne University; Trust and Birthdate: December 20, 1932 Consulting Partner, Mollica & Murray. 56 other President, Duquesne investment University Retired: Dean and Professor of Law, University of companies in the Pittsburgh, PA Pittsburgh School of Law; Dean and Professor of Law, Fund Complex TRUSTEE Villanova University School of Law. Wesley W. Posvar Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: September 14, President, World Society of Ekistics, Athens; Trust and 1925 Professor, International Politics; Management 56 other 1202 Cathedral of Learning Consultant; Trustee, Carnegie Endowment for investment University of Pittsburgh International Peace, RAND Corporation, Online companies in the Pittsburgh, PA Computer Library Center, Inc., National Defense Fund Complex TRUSTEE University and U.S. Space Foundation; President Emeritus, University of Pittsburgh; Founding Chairman, National Advisory Council for Environmental Policy and Technology, Federal Emergency Management Advisory Board and Czech Management Center, Prague. Retired: Professor, United States Military Academy; Professor, United States Air Force Academy. Marjorie P. Smuts Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: June 21, 1935 Public Relations/Marketing/Conference Planning. Trust and 4905 Bayard Street 56 other Pittsburgh, PA Retired: National Spokesperson, Aluminum Company of investment TRUSTEE America; business owner. companies in the Fund Complex Glen R. Johnson* Trustee, Federated Investors, Inc.; staff member, $0 $0 for the Trust Birthdate: May 2, 1929 Federated Securities Corp. and Federated Investors Tower 8 other investment 1001 Liberty Avenue companies in the Pittsburgh, PA Fund Complex PRESIDENT and TRUSTEE J. Christopher Donahue##* President or Executive Vice President of the $0 $0 for the Trust Birthdate: April 11, 1949 Federated Fund Complex; Director or Trustee of some and Federated Investors Tower of the Funds in the Federated Fund Complex; President 18 other 1001 Liberty Avenue and Director, Federated Investors, Inc.; President investment Pittsburgh, PA and Trustee, Federated Advisers, Federated companies in the EXECUTIVE VICE PRESIDENT Management, and Federated Research; President and Fund Complex Director, Federated Research Corp. and Federated Global Research Corp.; President, Passport Research, Ltd.; Trustee, Federated Shareholder Services Company; Director, Federated Services Company. Edward C. Gonzales* Trustee or Director of some of the Funds in the $0 $0 for the Trust Birthdate: October 22, 1930 Federated Fund Complex; President, Executive Vice and Federated Investors Tower President and Treasurer of some of the Funds in the 1 other investment 1001 Liberty Avenue Federated Fund Complex; Vice Chairman, Federated companies in the Pittsburgh, PA Investors, Inc.; Vice President, Federated Advisers, Fund Complex EXECUTIVE VICE PRESIDENT 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. John W. McGonigle Executive Vice President and Secretary of the $0 $0 for the Trust Birthdate: October 26, 1938 Federated Fund Complex; Executive Vice President, and Federated Investors Tower Secretary, and Director, Federated Investors, Inc.; 56 other 1001 Liberty Avenue Trustee, Federated Advisers, Federated Management, investment Pittsburgh, PA and Federated Research; Director, Federated Research companies in the EXECUTIVE VICE PRESIDENT Corp. and Federated Global Research Corp.; Director, Fund Complex and SECRETARY Federated Services Company; Director, Federated Securities Corp. Richard J. Thomas Treasurer of the Federated Fund Complex; Vice $0 $0 for the Trust Birthdate: June 17, 1954 President - Funds Financial Services Division, and Federated Investors Tower Federated Investors, Inc.; Formerly: various 56 other 1001 Liberty Avenue management positions within Funds Financial Services investment Pittsburgh, PA Division of Federated Investors, Inc. companies in the TREASURER Fund Complex Richard B. Fisher* President or Vice President of some of the Funds in $0 $0 for the Trust Birthdate: May 17, 1923 the Federated Fund Complex; Director or Trustee of and Federated Investors Tower some of the Funds in the Federated Fund Complex; 6 other investment 1001 Liberty Avenue Executive Vice President, Federated Investors, Inc.; companies in the Pittsburgh, PA Chairman and Director, Federated Securities Corp. Fund Complex VICE PRESIDENT William D. Dawson, III Chief Investment Officer of this Fund and various $0 $0 for the Trust Birthdate: March 3, 1949 other Funds in the Federated Fund Complex; Executive and Federated Investors Tower Vice President, Federated Investment Counseling, 41 other 1001 Liberty Avenue Federated Global Research Corp., Federated Advisers, investment Pittsburgh, PA Federated Management, Federated Research, and companies in the CHIEF INVESTMENT OFFICER Passport Research, Ltd.; Registered Representative, Fund Complex 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. Mary Jo Ochson Senior Portfolio Manager and Vice President of eight $0 $0 for the Trust Birthdate: September 12, investment companies in the Federated Fund Complex; and 1953 Senior Vice President, Federated Investment 7 other investment Federated Investors Tower Counseling, Federated Advisers, Federated Global companies 1001 Liberty Avenue Research Corp., Federated Management, Federated in the Fund Complex Pittsburgh, PA Research, Federated Research Corp. and Passport SENIOR PORTFOLIO Research, Ltd.; Formerly: Vice President, Federated MANAGER/VICE PRESIDENT Advisers, Federated Management, Federated Research, Federated Research Corp. , Passport Research, Ltd. and Federated Global Research Corp. Jeff A. Kozemchak Senior Portfolio Manager and Vice President of four $0 $0 for the Trust Birthdate: January 15, 1960 investment companies in the Federated Fund Complex; and Federated Investors Tower Vice President, Federated Investment Counseling, 3 other investment 1001 Liberty Avenue Federated Advisers, Federated Global Research Corp., companies Pittsburgh, PA Federated Management, Federated Research, Federated in the Fund Complex SENIOR PORTFOLIO Research Corp. and Passport Research, Ltd.; MANAGER/VICE PRESIDENT Formerly: Assistant Vice President and Investment Analyst, Federated Research Corp. and Passport Research, Ltd. ; Assistant Vice President, Federated Advisers, Federated Management and Federated Research.
## Mr. Donahue is the father of J. Christopher Donahue, Executive Vice President of the Trust. INVESTMENT ADVISER The Adviser conducts investment research and makes investment decisions for the Fund. The Adviser is a wholly owned subsidiary of Federated Investors. The Adviser shall not be liable to the Trust, 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 Trust. 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: Maximum Average Aggregate Daily Net Administrative Fee Assets of the Federated Funds ------------------ ----------------------------- .15 of 1% on the first $250 million .125 of 1% on the next $250 million .10 of 1% on the next $250 million .075 of 1% on assets in excess of $750 million The administrative fee received during any fiscal year shall be at least $125,000 per portfolio and $30,000 per each additional class of Shares. Federated Services Company may voluntarily waive a portion of its fee and may reimburse the Fund for expenses. Federated Services Company also provides certain accounting and recordkeeping services with respect to the Fund's portfolio investments for a fee based on Fund assets plus out-of-pocket expenses. CUSTODIAN State Street Bank and Trust Company, Boston, Massachusetts, is custodian for the securities and cash of the Fund. Foreign instruments purchased by the Fund are held by foreign banks participating in a network coordinated by State Street Bank. TRANSFER AGENT AND DIVIDEND DISBURSING AGENT Federated Services Company, through its registered transfer agent subsidiary, Federated Shareholder Services Company, maintains all necessary shareholder records. The Funds pays the transfer agent a fee based on the size, type, and number of accounts and transactions made by shareholders. INDEPENDENT PUBLIC ACCOUNTANTS Arthur Andersen LLP is the independent public accountant for the Fund. FEES PAID BY THE FUND FOR SERVICES
For the Year ended October 31, 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------- Advisory Fee Earned $1,810,446 $1,006,548 $856,487 - ------------------------------------------------------------------------------------------------------------- Advisory Fee Reduction $397,073 $294,305 $297,835 - ------------------------------------------------------------------------------------------------------------- Brokerage Commissions $0 $0 $0 - ------------------------------------------------------------------------------------------------------------- Administrative Fee $273,047 $158,069 $155,108 - ------------------------------------------------------------------------------------------------------------- Shareholder Services Fee - ------------------------------------------------------------------------------------------------------------- Boston 1784 Funds Shares $0 ---- - ---- - -------------------------------------------------------------------------------
Fees are allocated among Classes based on their pro rata share of Fund assets, except for shareholder services fees, which are borne only by the applicable Class of Shares. HOW DOES THE FUND MEASURE PERFORMANCE? =============================================================================== The Fund may advertise Share performance by using the Securities and Exchange Commission's (SEC) standard method for calculating performance applicable to all mutual funds. The SEC also permits this standard performance information to be accompanied by non-standard performance information. Unless otherwise stated, any quoted Share performance reflects the effect of non-recurring charges, such as maximum sales charges, which, if excluded, would increase the total return and yield. The performance of Shares depends upon such variables as: portfolio quality; average portfolio maturity; type and value of portfolio securities; changes in interest rates; changes or differences in the Fund's or any class of Shares' expenses; and various other factors. Share performance fluctuates on a daily basis largely because net earnings and offering price per Share 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-years and since inception periods ended October 31, 1998. Yield, Effective Yield and Tax-Equivalent Yield given for the 7-day period ended October 31, 1998.
Share Class 7-Day Period 1 Year 5 Years Since Inception on March 8, 1993 - ------------------------------------------------------------------------------------------------------------- Boston 1784 Funds Shares - ------------------------------------------------------------------------------------------------------------- Total Return -- 3.03% 2.90% 2.77% - ------------------------------------------------------------------------------------------------------------- Yield 2.75% -- - -- -- - ------------------------------------------------------------------------------------------------------------- Effective Yield 2.79% -- -- -- Tax-Equivalent Yield 4.62% -- -- --
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. The tax- equivalent yield of Shares is calculated similarly to the yield, but is adjusted to reflect the taxable yield that Shares would have had to earn to equal the actual yield, assuming a specific tax rate. 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. TAX EQUIVALENCY TABLE Set forth below is a sample of a tax-equivalency table that may be used in advertising and sales literature. This table is for illustrative purposes only and is not representative of past or future performance of the Fund. The interest earned by the tax-exempt securities owned by the Fund generally remains free from federal regular income tax and is often free from state and local taxes as well. However, some of the Fund's income may be subject to the federal alternative minimum tax and state and/or local taxes.
TAXABLE YIELD EQUIVALENT FOR 1998 STATE OF MASSACHUSETTS - ------------------------------------------------------------------------------------------------------------------- TAX BRACKET: FEDERAL 15.00% 28.00% 31.00% 36.00% 39.60% COMBINED FEDERAL AND STATE 27.00% 40.00% 43.00% 48.00% 51.60% - ------------------------------------------------------------------------------------------------------------------- JOINT $1- $42,351- $102,301- $155,951- OVER RETURN 42,350 102,300 155,950 278,450 $278,450 SINGLE $1- $25,351- $61,401- $128,101- OVER RETURN 25,350 61,400 128,100 278,450 $278,450 - ------------------------------------------------------------------------------------------------------------------- TAX-EXEMPT YIELD TAXABLE YIELD EQUIVALENT - ------------------------------------------------------------------------------------------------------------------- 1.50% 2.05% 2.50% 2.63% 2.88% 3.10% 2.00% 2.74% 3.33% 3.51% 3.85% 4.13% 2.50% 3.42% 4.17% 4.39% 4.81% 5.17% 3.00% 4.11% 5.00% 5.26% 5.77% 6.20% 3.50% 4.79% 5.83% 6.14% 6.73% 7.23% 4.00% 5.48% 6.67% 7.02% 7.69% 8.26% 4.50% 6.16% 7.50% 7.89% 8.65% 9.30% 5.00% 6.85% 8.33% 8.77% 9.62% 10.33% 5.50% 7.53% 9.17% 9.65% 10.58% 11.36% 6.00% 8.22% 10.00% 10.53% 11.54% 12.40%
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. 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. 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 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, 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, 1997, Federated managed 11 bond funds with approximately $2.1 billion in assets and 22 money market funds with approximately $10.9 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 tax-exempt 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 27 years experience. As of December 31, 1997, Federated managed 29 equity funds totaling approximately $11.7 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, 1997, Federated managed 11 money market funds and 16 bond funds with assets approximating $17.1 billion and $5.6 billion, respectively. Federated's corporate bond decision making--based on intensive, diligent credit analysis--is backed by over 22 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 $200 billion. Government Funds In the government sector, as of December 31, 1997, Federated manages 9 mortgage- backed, 6 government/ agency and 18 government money market mutual funds, with assets approximating $5.9 billion, $1.5 billion and $35 billion, respectively. Federated trades approximately $400 million in U.S. government and mortgage- backed securities daily and places approximately $23 billion in repurchase agreements each day. Federated introduced the first U.S. government fund to invest in U.S. government bond securities in 1969. Federated has been a major force in the short- and intermediate-term government markets since 1982 and currently manages approximately $36 billion in government funds within these maturity ranges. 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, 1997, Federated managed more than $63.1 billion in assets across 51 money market funds, including 18 government, 11 prime and 22 municipal with assets approximating $35 billion, $17.1 billion and $10.9 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 $4 trillion to the more than 6,700 funds available, according to the Investment Company Institute. Federated distributes mutual funds through its subsidiaries for a variety of investment purposes. Specific markets include: FEDERATED CLIENTS OVERVIEW 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. Investment Ratings - -------------------------------------------------------------------------------- APPENDIX STANDARD & POOR'S SHORT-TERM MUNICIPAL OBLIGATION RATINGS A Standard & Poor's (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-1+, 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 rated 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. MOODY'S 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 SERVICE, L.P. 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. ADDRESSES ================================================================================ Massachusetts Municipal Cash Trust Boston 1784 Funds Shares Federated Investors Funds 5800 Corporate Drive Pittsburgh, PA 15237-7000 - ------------------------------------------------------------------------------- Distributor Federated Securities Corp. Federated Investors Tower 1001 Liberty Avenue, Pittsburgh, PA 15222-3779 - ------------------------------------------------------------------------------- Investment Adviser Federated Management Federated Investors Tower 1001 Liberty Avenue, Pittsburgh, PA 15222-3779 - ------------------------------------------------------------------------------- Custodian State Street Bank and Trust Company P.O. Box 8600 Boston, MA 02266-8600 - ------------------------------------------------------------------------------- Transfer Agent and Dividend Disbursing Agent Federated Shareholder Services Company P.O. Box 8600 Boston, MA 02266-8600 - ------------------------------------------------------------------------------- Independent Auditors Arthur Andersen LLP 225 Franklin Street Boston, MA 02110-2812 - ------------------------------------------------------------------------------- Prospectus Massachusetts Municipal Cash Trust A Portfolio of Federated Municipal Trust Institutional Service Shares A money market mutual fund seeking to provide current income exempt from federal regular income tax and Massachusetts state income tax. 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. 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? 6 How is the Fund Sold? 6 How to Purchase Shares 6 How to Redeem Shares 7 Account and Share Information 9 Who Manages the Fund? 10 Financial Information 11 Report of Independent Accountants 24 December 31, 1998 Risk/Return Summary WHAT IS THE FUND'S INVESTMENT OBJECTIVE? The Fund is a money market fund which seeks to maintain a stable net asset value of $1.00. The Fund's investment objective is to provide current income which is exempt from federal regular income tax and Massachusetts state income tax consistent with stability of principal. 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 tax-exempt securities so that the Fund's annual interest income is exempt from federal regular income tax and Massachusetts state income tax. Interest from the Fund's investments may be subject to the federal alternative minimum tax for individuals and corporations. WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND? Because the Fund may invest a significant portion of its assets in securities of a single issuer, an investment in the Fund may involve additional risks compared to a fully diversified money market 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] - See Appendix A-8 Historically, the Fund has maintained a constant $1.00 net asset value per share. The bar chart shows the variability of the Fund's Institutional Service Shares Class on a yearly basis. The Fund's Institutional Service Shares are not sold subject to a sales charge (load). Hence, the total returns displayed above are based upon the net asset value. The Fund's Institutional Service Shares year-to-date total return as of the most recent calendar quarter of September 30, 1998 was 2.24%. Within the period shown in the Chart, the Fund's Institutional Service Shares highest quarterly return was 1.14% (quarter ended March 31, 1991). Its lowest quarterly return was 0.46% (quarter ended March 31, 1994). The Fund's Institutional Service Shares Seven-Day Net Yield as of 12/31/97 was 3.35%. The following table represents the Fund's Institutional Service Shares Average Annual Total Return through 12/31/97.
Calendar Period Fund - ----------------------------------------------------------------------- 1 Year 3.13% - ----------------------------------------------------------------------- 5 Years 2.76% - ----------------------------------------------------------------------- Start of Performance1 3.18% - -----------------------------------------------------------------------
1 The Fund's Institutional Service Shares start of performance date was May 18, 1990. Investors may call the Fund at 1-800-341-7400 to acquire the current Seven-Day Net Yield. 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? Massachusetts Municipal Cash Trust Fees and Expenses This table describes the fees and expenses that you may pay if you buy, hold, and redeem shares of the Fund's Institutional Service Shares.
Shareholder Fees 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 a percentage of average net assets) Management Fee/2/............................................................................................ 0.50% Distribution (12b-1) Fee..................................................................................... None Shareholder Services Fee/3/.................................................................................. 0.25% Other Expenses............................................................................................... 0.16% Total Annual Fund Operating Expenses......................................................................... 0.91% - ------------------------------------------------------------------------------------------------------------------------ /1/ Although not contractually obligated to do so, the adviser and the shareholder services provider waived certain amounts. These are shown below along with the net expenses the Fund actually paid for the fiscal year ended October 31, 1998. Waiver of Fund Expenses.................................................................................. 0.36% Total Actual Annual Fund Operating Expenses (after waivers).............................................. 0.55% /2/ The adviser has 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 0.39% for the year ended October 31, 1998. /3/ The shareholder services fee has been voluntarily reduced. This voluntary reduction can be terminated at any time. There was no shareholder services fee paid by the Fund (after the voluntary reduction) for the year ended October 31, 1998.
Example The following Example is intended to help you compare the cost of investing in Massachusetts Municipal Cash Trust's Institutional Service Shares with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund's Institutional Service 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 Massachusetts Municipal Cash Trust's Institutional Service Shares operating expenses are before waivers as shown above and remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be: 1 Year 3 Years 5 Years 10 Years - ------------------------------------------------------------------------------- Expenses assuming no redemption $93 $290 $504 $1,120 - ------------------------------------------------------------------------------- What are the Fund's Investment Strategies? The Fund invests in a portfolio of high-quality tax-exempt securities maturing in 13 months or less. The average maturity of the Fund's portfolio, computed on a dollar-weighted basis, will be 90 days or less. The Fund's Adviser performs a fundamental credit analysis to develop an approved list of issuers and securities that meet the Adviser's minimum credit standards. The Adviser targets an average portfolio maturity based upon its interest rate outlook and the tax-exempt securities available. The Adviser structures the portfolio by combining variable rate demand instruments and municipal notes. Depending on the supply of tax-exempt securities, the Adviser generally shortens the portfolio's maturity when it expects interest rates to rise and extends the maturity when it expects interest rates to fall. Temporary Defensive Investments During adverse market conditions the Fund may temporarily depart from its principal investment strategies by investing in securities subject to federal regular income tax and Massachusetts state income tax. Temporary investments will be of comparable quality to other securities in which the Fund invests. This may cause the Fund to give up greater investment returns to maintain the safety of principal. This also may cause the Fund to receive and distribute taxable income to investors. What are the Principal Securities in Which the Fund Invests? Tax-Exempt securities Tax-exempt securities are fixed income securities that pay interest exempt from regular federal income taxes. States, counties, cities and other political subdivisions and authorities typically issue tax-exempt securities. Tax-exempt securities are generally differentiated by their source of repayment. Fixed Income Securities Fixed income 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. Variable Rate Demand Instruments Variable rate demand instruments are tax-exempt securities that require the issuer or a third party, such as a dealer or bank, to repurchase the security for its face value upon demand. The securities also bear interest at a variable rate intended to cause the securities to trade at their face value. The Fund treats demand instruments as short-term securities, even though their stated maturity may extend beyond thirteen months. Municipal Notes Municipal notes are short-term tax-exempt securities. Many municipalities issue such notes to fund their current operations before collecting taxes or other municipal revenues. Municipalities may also issue notes to fund capital projects prior to issuing long-term bonds. The issuers typically repay the notes at the end of their fiscal year, either with taxes, other revenues or proceeds from newly issued notes or bonds. Investment 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 rating services or be of comparable quality to securities having such ratings. Credit Enhancement Credit enhancement consist of an arrangement in which a company agrees to pay amounts due on a fixed income security if the issuer defaults. In some cases the company providing credit enhancement makes all payments directly to the security holders and receives reimbursement from the issuer. Normally, the credit enhancer has greater financial resources and liquidity than the issuer. For this reason, the Adviser usually evaluates the credit risk of a fixed income security based solely upon its credit enhancement. What are the Specific Risks of Investing in the Fund? Although there are many factors which may affect an investment in the Fund, the principal risks of investing in a tax-exempt money market fund are described below. Credit Risk . Credit risk is the possibility that an issuer or a credit enhancer will default (fails to repay interest and principal when due). If an issuer or credit enhancer defaults, the Fund will lose money. Money market funds try to minimize this risk by purchasing higher quality securities. . Many fixed income securities receive credit ratings from companies such as Standard & Poor's and Moody's Investor Services. Fixed income securities receive different credit ratings depending on the rating company's assessment of the likelihood of default by the issuer. The lower the credit rating, the greater the credit risk. If the security is unrated, greater reliance is placed on the Adviser's credit assessment. 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. Sector Risk . Most of the Fund's securities will be invested in issuers located in Massachusetts. In addition, a substantial part of the Fund's portfolio may be comprised of tax-exempt securities issued or credit enhanced by companies in similar businesses or with other similar characteristics. As a result, the Fund will be more susceptible to any economic, business, political, or other developments which generally affect these issuers. 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 determined net asset value (NAV). The Fund does not charge a sales charge. NAV is determined at 12:00 noon and 1:00 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 investment 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 offers two share classes: Institutional Service Shares and Boston 1784 Funds Shares each representing interests in a single portfolio of securities. This prospectus relates only to Institutional Service Shares. Each share class has different expenses, which affect their performance. Contact your investment professional or call 1-800-341-7400 for more information concerning the other class. The Fund's Distributor markets the Shares described in this prospectus to institutions acting in an agency or fiduciary capacity or to individuals directly or through investment professionals. The Fund may not be a suitable investment for retirement plans or for non-Massachusetts taxpayers because it invests in Massachusetts tax-exempt securities. The Distributor and its affiliates may pay out of their assets other 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 1:00 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) on the same day. 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 on the day 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 SYSTEMATIC INVESTMENT PROGRAM Once you have opened an account, you may automatically purchase additional Shares on a regular basis by completing the Systematic Investment Program (SIP) section of the New Account Form or by contacting the Fund or your investment professional. The minimum investment amount for SIPs is $50. BY AUTOMATED CLEARINGHOUSE (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 12:00 noon (Eastern time), your redemption will be wired to you the same day. You will not receive that day's dividend. If you call after 12:00 noon (Eastern time), your redemption will be wired to you the following business day. You will receive that day's dividend. Under limited circumstances, arrangements may be made with the Distributor for same- day payment of redemption proceeds, without that day's dividend, for redemption requests received before 2:00 p.m. (Eastern time). 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 30 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. SYSTEMATIC WITHDRAWAL PROGRAM You may automatically redeem Shares in a minimum amount of $100 on a regular basis. Complete the appropriate section of the New Account Form or an Account Service Options Form or contact your investment professional or the Fund. Your account value must meet the minimum initial investment amount at the time the program is established. This program may reduce, and eventually deplete, your account. Payments should not be considered yield or income. CHECKWRITING You may request checks to redeem your Fund Shares. Your account will continue to receive the daily dividend declared on the Shares being redeemed until a check is presented for payment. DEBIT CARD You may request a debit card account that allows you to redeem Shares. There is an annual fee for this service that the Fund will automatically deduct from your account. 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 Confirmations and Account Statements You will receive confirmation of purchases and redemptions (except for systematic transactions). In addition, you will receive periodic statements reporting all account activity, including systematic transactions, 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 the 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, 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. It is anticipated that Fund distributions will be primarily dividends that are exempt from federal income tax, although a portion of the Fund's dividends may not be exempt. Dividends may be subject to state and local taxes, although the Fund's dividends will be exempt from Massachusetts state personal income tax to the extent they are derived from interest on obligations exempt from Massachusetts personal income taxes. Capital gains and non-exempt dividends are taxable whether paid in cash or reinvested in the Fund. 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 Management. 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 and/or provide administrative services to more than 300 mutual funds and private accounts, which totaled over $120 billion in assets as of December 31, 1997. Federated was established in 1955 and is one of the largest mutual fund investment managers in the United States with more than 2,000 employees. Over 4,000 investment professionals make Federated Funds available to their customers. Advisory Fees The Adviser receives an annual investment advisory fee of 0.50% 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 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 affect 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--Institutional Service Shares (For a share outstanding throughout each period) Reference is made to the Report of Independent Public Accountants on page 24.
Year Ended October 31 1998 1997 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - --------------------------------------- Income from Investment Operations: - --------------------------------------- Net investment income 0.03 0.03 0.03 0.03 0.02 - --------------------------------------- Less Distributions: - --------------------------------------- Distributions from net investment income (0.03) (0.03) (0.03) (0.03) (0.02) - -------------------------------------------------------------------------------------------------------------------------------- Net Asset Value, End of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - -------------------------------------------------------------------------------------------------------------------------------- Total Return/1/ 3.04% 3.09% 3.07% 3.34% 2.14% - -------------------------------------------------------------------------------------------------------------------------------- Ratios to Average Net Assets: - -------------------------------------------------------------------------------------------------------------------------------- Expenses 0.55% 0.55% 0.55% 0.55% 0.55% - -------------------------------------------------------------------------------------------------------------------------------- Net investment income 2.98% 3.05% 3.02% 3.30% 2.12% - -------------------------------------------------------------------------------------------------------------------------------- Expense waiver/reimbursement2 0.36% 0.40% 0.42% 0.45% 0.35% - -------------------------------------------------------------------------------------------------------------------------------- Supplemental Data: - -------------------------------------------------------------------------------------------------------------------------------- Net assets, end of period (000 omitted) $256,386 $141,869 $119,739 $99,628 $90,013 - --------------------------------------------------------------------------------------------------------------------------------
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 October 31, 1998
Principal Amount Value - ------------------------------------------------------------------------------------------------------------------------------------ /1/SHORT-TERM MUNICIPALS--99.2% Massachusetts--95.6% $ 8,703,000 Ashland, MA, 4.00% BANs, 12/10/1998 $ 8,706,600 - -------------------------------------------------------------------------------------------- 6,128,000 Attleboro, MA, 3.80% BANs, 7/2/1999 6,131,895 - -------------------------------------------------------------------------------------------- 1,245,000 Attleboro, MA, 4.00% BANs, 12/22/1998 1,245,487 - -------------------------------------------------------------------------------------------- 3,800,000 Boston, MA, UT GO, 4.50% Bonds (FGIC INS), 1/1/1999 3,805,545 - -------------------------------------------------------------------------------------------- 1,000,000 Brockton, MA, 4.50% Bonds (MBIA INS), 4/1/1999 1,003,187 - -------------------------------------------------------------------------------------------- 5,000,000 Central Berkshire, MA Regional School District, 4.10% BANs, 12/15/1998 5,002,646 - -------------------------------------------------------------------------------------------- 26,721,542 Clipper, MA Tax Exempt Trust, (Series A) Weekly VRDNs (Massachusetts State Lottery Commission)/(AMBAC INS)/(State Street Bank and Trust Co. LIQ) 26,721,542 - -------------------------------------------------------------------------------------------- 23,130,000 Clipper, MA Tax Exempt Trust 1994-2 Weekly VRDNs (State Street Bank and Trust Co. LIQ) 23,130,000 - -------------------------------------------------------------------------------------------- 11,662,200 Clipper, MA Tax Exempt Trust Weekly VRDNs (State Street Bank and Trust Co. LIQ) 11,662,200 - -------------------------------------------------------------------------------------------- 3,465,000 Clipper, MA Tax Exempt Trust, (Series 1994-1) Weekly VRDNs (Massachusetts State HFA)/(MBIA INS)/(State Street Bank and Trust Co. LIQ) 3,465,000 - -------------------------------------------------------------------------------------------- 3,000,000 Commonwealth of Massachusetts Weekly VRDNs (AMBAC INS)/(Citibank NA, New York LIQ) 3,000,000 - -------------------------------------------------------------------------------------------- 6,000,000 Commonwealth of Massachusetts, (1997 Series B) Weekly VRDNs (Landesbank Hessen-Thueringen, Frankfurt LIQ) 6,000,000 - -------------------------------------------------------------------------------------------- 11,175,000 Commonwealth of Massachusetts, (Series 1998 FR/RI-A20) Weekly VRDNs (MBIA INS)/(National Westminster Bank, PLC, London LIQ) 11,175,000 - -------------------------------------------------------------------------------------------- 8,855,000 Commonwealth of Massachusetts, Floater Certificates (Series 1998-41) Weekly VRDNs (Morgan Stanley, Dean Witter Municipal Funding, Inc. LIQ) 8,855,000 - -------------------------------------------------------------------------------------------- 5,000,000 Everett, MA, 4.00% BANs (Fleet National Bank, Springfield, MA LOC), 3/18/1999 5,007,244 - -------------------------------------------------------------------------------------------- 3,200,000 Framingham, MA IDA Weekly VRDNs (Perini Corp)/(Barclays Bank PLC, London LOC) 3,200,000 - -------------------------------------------------------------------------------------------- 2,290,000 Framingham, MA, 4.00% BANs, 2/5/1999 2,292,021 - -------------------------------------------------------------------------------------------- 2,430,000 Gloucester, MA, 3.75% BANs, 8/5/1999 2,441,697 - -------------------------------------------------------------------------------------------- 2,100,000 Ipswich, MA, 4.00% BANs, 11/19/1998 2,100,402 - -------------------------------------------------------------------------------------------- 2,190,000 Mansfield, MA, 3.40% BANs, 10/28/1999 2,196,277 - -------------------------------------------------------------------------------------------- 15,800,000 Massachusetts HEFA, (Series A) Weekly VRDNs (Brigham & Women's Hospital)/(Landesbank Hessen-Thueringen, Frankfurt LOC) 15,800,000 - -------------------------------------------------------------------------------------------- 3,125,000 Massachusetts HEFA, (Series A) Weekly VRDNs (New England Home For Little Wanderers)/(BankBoston, N.A. LOC) 3,125,000 - -------------------------------------------------------------------------------------------- 2,000,000 Massachusetts HEFA, (Series B) Weekly VRDNs (Clark University)/(Fleet Bank N.A. LOC) 2,000,000 - -------------------------------------------------------------------------------------------- 4,725,000 Massachusetts HEFA, (Series B) Weekly VRDNs (Endicott College)/(BankBoston, N.A. LOC) 4,725,000 - -------------------------------------------------------------------------------------------- 9,915,000 Massachusetts HEFA, (Series B) Weekly VRDNs (Hallmark Health System)/(FSA INS)/(Fleet National Bank, Springfield, MA LIQ) 9,915,000 - -------------------------------------------------------------------------------------------- 8,415,000 Massachusetts HEFA, (Series F) Weekly VRDNs (Children's Hospital of Boston)/(Sanwa Bank Ltd, Osaka LIQ) 8,415,000 - -------------------------------------------------------------------------------------------- 2,300,000 Massachusetts HEFA, (Series I) Weekly VRDNs (Harvard University) 2,300,000 - -------------------------------------------------------------------------------------------- 7,395,000 Massachusetts HEFA, PA-362 Weekly VRDNs (Amherst College)/(Merrill Lynch Capital Services, Inc. LIQ) 7,395,000 - -------------------------------------------------------------------------------------------- 3,120,000 Massachusetts IFA Weekly VRDNs (Kendall Square Entity)/(State Street Bank and Trust Co. LOC) 3,120,000 - -------------------------------------------------------------------------------------------- 1,800,000 Massachusetts IFA, (Series 1992) Weekly VRDNs (Holyoke Water Power Co.)/(Canadian Imperial Bank of Commerce, Toronto LOC) 1,800,000 - -------------------------------------------------------------------------------------------- 20,000,000 Massachusetts IFA, (Series 1992B), 3.40% CP (New England Power Co.), Mandatory Tender 12/7/1998 20,000,000 - -------------------------------------------------------------------------------------------- 17,100,000 Massachusetts IFA, (Series 1992B), 3.40% CP (New England Power Co.), Mandatory Tender 12/9/1998 17,100,000 - -------------------------------------------------------------------------------------------- 5,900,000 Massachusetts IFA, (Series 1994) Weekly VRDNs (Nova Realty Trust)/(Fleet National Bank, Springfield, MA LOC) 5,900,000 - -------------------------------------------------------------------------------------------- 2,000,000 Massachusetts IFA, (Series 1995) Weekly VRDNs (Goddard House)/(Fleet Bank N.A. LOC) 2,000,000 - -------------------------------------------------------------------------------------------- 5,800,000 Massachusetts IFA, (Series 1995) Weekly VRDNs (Whitehead Institute for Biomedical Research) 5,800,000 - -------------------------------------------------------------------------------------------- 7,009,000 Massachusetts IFA, (Series 1996) Weekly VRDNs (Newbury College)/ (BankBoston, N.A. LOC) 7,009,000 - -------------------------------------------------------------------------------------------- 2,500,000 Massachusetts IFA, (Series 1997) Weekly VRDNs (Massachusetts Society for the Prevention of Cruelty to Animals)/(Fleet National Bank, Springfield, MA LOC) 2,500,000 - -------------------------------------------------------------------------------------------- 6,000,000 Massachusetts IFA, (Series 1997) Weekly VRDNs (Mount Ida College)/(Credit Local de France LOC) 6,000,000 - -------------------------------------------------------------------------------------------- 1,325,000 Massachusetts IFA, (Series A) Weekly VRDNs (Hockomock YMCA)/(Bank of Nova Scotia, Toronto LOC) 1,325,000 - -------------------------------------------------------------------------------------------- 9,875,000 Massachusetts IFA, (Series B) Weekly VRDNs (Williston North Hampton School)/(Fleet National Bank, Springfield, MA LOC) 9,875,000 - -------------------------------------------------------------------------------------------- 5,755,000 Massachusetts IFA, Revenue Bonds (Series 1995) Weekly VRDNs (Emerson College Issue)/(BankBoston, N.A. LOC) 5,755,000 - -------------------------------------------------------------------------------------------- 8,800,000 Massachusetts Municipal Wholesale Electric Company, Power Supply System Revenue Bonds (1994 Series C) Weekly VRDNs (Canadian Imperial Bank of Commerce, Toronto LOC) 8,800,000 - -------------------------------------------------------------------------------------------- 9,000,000 Massachusetts Port Authority, PT-1073 (Series 1998-D) Weekly VRDNs (Merrill Lynch Capital Services, Inc. LIQ) 9,000,000 - -------------------------------------------------------------------------------------------- 5,000,000 Massachusetts State HFA, Multi-Family Refunding Revenue Bonds (1995 Series A) Weekly VRDNs (Republic National Bank of New York LIQ) 5,000,000 - -------------------------------------------------------------------------------------------- 2,215,000 Massachusetts Turnpike Authority, (PA-324) Weekly VRDNs (MBIA INS)/(Merrill Lynch Capital Services, Inc. LIQ) 2,215,000 - -------------------------------------------------------------------------------------------- 8,295,000 Massachusetts Turnpike Authority, PT-135 Weekly VRDNs (MBIA INS)/(Banco Santander SA LIQ) 8,295,000 - -------------------------------------------------------------------------------------------- 14,400,000 Massachusetts Turnpike Authority, Variable Rate Certificates (Series 1997N) Weekly VRDNs (MBIA INS)/(Bank of America NT and SA, San Francisco LIQ) 14,400,000 - -------------------------------------------------------------------------------------------- 6,205,000 Melrose, MA, 3.80% BANs, 8/19/1999 6,212,113 - -------------------------------------------------------------------------------------------- 1,815,000 Middleborough, MA, 4.00% BANs, 3/5/1999 1,816,781 - -------------------------------------------------------------------------------------------- 1,117,500 Newbury, MA, 4.00% BANs, 8/13/1999 1,119,175 - -------------------------------------------------------------------------------------------- 3,625,000 Newburyport, MA, 4.00% BANs, 2/12/1999 3,626,971 - -------------------------------------------------------------------------------------------- 7,044,000 Paxton, MA, 4.00% BANs, 6/18/1999 7,052,509 - -------------------------------------------------------------------------------------------- 2,220,000 Plymouth, MA, 3.25% BANs, 10/21/1999 2,225,009 - -------------------------------------------------------------------------------------------- 4,050,000 Quabbin Regional School District, MA, 4.00% BANs, 1/15/1999 4,051,602 - -------------------------------------------------------------------------------------------- 1,257,000 Randolph, MA, 4.00% BANs, 6/18/1999 1,258,456 - -------------------------------------------------------------------------------------------- 5,000,000 Randolph, MA, 4.00% BANs, 7/13/1999 5,006,681 - -------------------------------------------------------------------------------------------- 1,595,000 Randolph, MA, 4.00% BANs, 8/20/1999 1,598,685 - -------------------------------------------------------------------------------------------- 2,980,000 Springfield, MA, 4.00% BANs (Fleet National Bank, Springfield, MA LOC), 6/25/1999 2,985,564 - -------------------------------------------------------------------------------------------- 2,000,000 Stow, MA, 3.75% BANs, 3/31/1999 2,000,789 - -------------------------------------------------------------------------------------------- 5,768,000 Stow, MA, 3.80% BANs, 8/20/1999 5,770,215 - -------------------------------------------------------------------------------------------- 1,424,000 Stow, MA, 4.00% BANs, 3/31/1999 1,425,972 - -------------------------------------------------------------------------------------------- 2,000,000 Topsfield, MA, 3.75% BANs, 9/23/1999 2,007,744 - -------------------------------------------------------------------------------------------- 2,100,000 Ware, MA, 4.00% BANs, 12/18/1998 2,100,932 - -------------------------------------------------------------------------------------------- 2,750,000 Ware, MA, 4.00% BANs, 12/18/1998 2,751,211 - -------------------------------------------------------------------------------------------- 1,540,000 Ware, MA, 4.00% BANs, 6/26/1999 1,542,400 - -------------------------------------------------------------------------------------------- 3,200,000 Westfield, MA, 3.75% BANs, 10/22/1999 3,221,133 - -------------------------------------------------------------------------------------------- 6,120,000 /2/Weymouth, MA Housing Authority, PT 1062, 3.80% TOBs (Queen Ann Apartments)/(Merrill Lynch Capital Services, Inc. LIQ)/(Merrill Lynch Capital Services, Inc. LOC), Optional Tender 8/5/1999 6,120,000 - -------------------------------------------------------------------------------------------- 2,500,000 Weymouth, MA, 4.25% BANs, 11/5/1998 2,500,061 - -------------------------------------------------------------------------------------------- 7,375,000 Worcester, MA, 4.00% BANs, 8/26/1999 7,386,549 - -------------------------------------------------------------------------------------------- Total 400,491,295 - -------------------------------------------------------------------------------------------- Puerto Rico--3.6% - -------------------------------------------------------------------------------------------- 15,000,000 Commonwealth of Puerto Rico, Floating Rate Trust Receipts (Series 1997) Weekly VRDNs (Commerzbank AG, Frankfurt LIQ)/(Commerzbank AG, Frankfurt LOC) 15,000,000 - -------------------------------------------------------------------------------------------- /3/TOTAL INVESTMENTS (AT AMORTIZED COST) $415,491,295 - --------------------------------------------------------------------------------------------
1 The Fund may only invest in securities rated in one of the two highest short- term rating categories by nationally recognized statistical rating organizations ("NRSROs") or unrated securities of comparable quality. 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, MIG-1, or MIG-2 by Moody's Investors Service, Inc., F- 1+, F-1 and F-2 by Fitch IBCA, Inc. are all considered rated in one of the two highest short-term rating categories. Securities rated in the highest short-term rating category (and unrated securities of comparable quality) are identified as First Tier securities. Securities rated in the second highest short-term rating category (and unrated securities of comparable quality) are identified as Second Tier securities. The Fund follows applicable regulations in determining whether a security is rated and whether a security rated by multiple NRSROs in different rating categories should be identified as a First or Second Tier security. At October 31, 1998, the portfolio securities were rated as follows: Tier Rating Percentage Based on Total Market Value (Unaudited) First Tier Second Tier ------------------------------------------ 100.00% 0.00% ------------------------------------------ 2 Denotes a restricted security which is subject to restrictions on resale under Federal Securities laws. At October 31, 1998, restricted securities amounted to $6,120,000 which represents 1.5% of net assets. 3 Also represents cost for federal tax purposes. Note: The categories of investments are shown as a percentage of net assets ($418,943,091) at October 31, 1998. The following acronyms are used throughout this portfolio: AMBAC --American Municipal Bond Assurance Corporation BANs --Bond Anticipation Notes CP --Commercial Paper FGIC --Financial Guaranty Insurance Company FSA --Financial Security Assurance GO --General Obligation HEFA --Health and Education Facilities Authority HFA --Housing Finance Authority IDA --Industrial Development Authority IFA --Industrial Finance Authority INS --Insured LIQ --Liquidity Agreement LOC --Letter of Credit MBIA --Municipal Bond Investors Assurance PLC --Public Limited Company RANs --Revenue Anticipation Notes SA --Support Agreement TOBs --Tender Option Bonds UT --Unlimited Tax VRDNs --Variable Rate Demand Notes See Notes which are an integral part of the Financial Statements Statement of Assets and Liabilities October 31, 1998
Assets: - --------------------------------------------------------------------------- Total investments in securities, at amortized cost and value $415,491,295 - --------------------------------------------------------------------------- Cash 620,120 - --------------------------------------------------------------------------- Income receivable 3,419,558 - --------------------------------------------------------------------------- Receivable for shares sold 1,132 - --------------------------------------------------------------------------- Prepaid expenses 7,159 - ----------------------------------------------------------------------------------------------------------------------- Total assets 419,539,264 - ----------------------------------------------------------------------------------------------------------------------- Liabilities: - --------------------------------------------------------------------------- Payable for shares redeemed $ 24,993 - --------------------------------------------------------------------------- Income distribution payable 494,020 - --------------------------------------------------------------------------- Accrued expenses 77,160 - ----------------------------------------------------------------------------------------------------------------------- Total liabilities 596,173 - ----------------------------------------------------------------------------------------------------------------------- Net Assets for 418,943,091 shares outstanding $418,943,091 - ----------------------------------------------------------------------------------------------------------------------- Net Asset Value, Offering Price and Redemption Proceeds Per Share: - --------------------------------------------------------------------------- Institutional Service Shares: - --------------------------------------------------------------------------- $256,385,640 / 256,385,640 shares outstanding $ 1.00 - ----------------------------------------------------------------------------------------------------------------------- Boston 1784 Funds Shares: - --------------------------------------------------------------------------- $162,557,451 / 162,557,451 shares outstanding $ 1.00 - -----------------------------------------------------------------------------------------------------------------------
See Notes which are an integral part of the Financial Statements Statement of Operations Year ended october 31, 1998
Investment Income: - --------------------------------------------------------------------------------------------------------------- Interest $12,817,374 - --------------------------------------------------------------------------------------------------------------- Expenses: - --------------------------------------------------------------------- Investment advisory fee $ 1,810,446 - --------------------------------------------------------------------- Administrative personnel and services fee 273,047 - --------------------------------------------------------------------- Custodian fees 15,646 - --------------------------------------------------------------------- Transfer and dividend disbursing agent fees and expenses 72,296 - --------------------------------------------------------------------- Directors'/Trustees' fees 2,902 - --------------------------------------------------------------------- Auditing fees 12,692 - --------------------------------------------------------------------- Legal fees 11,251 - --------------------------------------------------------------------- Portfolio accounting fees 90,795 - --------------------------------------------------------------------- Shareholder services fee--Institutional Service Shares 563,458 - --------------------------------------------------------------------- Shareholder services fee--Boston 1784 Funds Shares 341,765 - --------------------------------------------------------------------- Share registration costs 79,768 - --------------------------------------------------------------------- Printing and postage 34,046 - --------------------------------------------------------------------- Insurance premiums 22,713 - --------------------------------------------------------------------- Miscellaneous 640 - --------------------------------------------------------------------------------------------------------------- Total expenses 3,331,465 - --------------------------------------------------------------------------------------------------------------- Waivers: - --------------------------------------------------------------------- Waiver of investment advisory fee $(397,073) - --------------------------------------------------------------------- Waiver of shareholder services fee--Institutional Service Shares (563,458) - --------------------------------------------------------------------- Waiver of shareholder services fee--Boston 1784 Funds Shares (341,765) - --------------------------------------------------------------------------------------------------------------- Total waivers (1,302,296) - --------------------------------------------------------------------------------------------------------------- Net expenses 2,029,169 - --------------------------------------------------------------------------------------------------------------- Net investment income $10,788,205 - ---------------------------------------------------------------------------------------------------------------
See Notes which are an integral part of the Financial Statements Statement of Changes in Net Assets
Year Ended October 31 1998 1997 - --------------------------------------------------------------------------------------------------------------------- Increase (Decrease) in Net Assets - ---------------------------------------------------------------------- Operations: - ---------------------------------------------------------------------- Net investment income $ 10,788,205 $ 6,125,532 - --------------------------------------------------------------------------------------------------------------------- Change in net assets resulting from operations 10,788,205 6,125,532 - --------------------------------------------------------------------------------------------------------------------- Distributions to Shareholders: - ---------------------------------------------------------------------- Distributions from net investment income - ---------------------------------------------------------------------- Institutional Service Shares (6,723,838) (4,462,883) - ---------------------------------------------------------------------- Boston 1784 Funds Shares (4,064,367) (1,662,649) - --------------------------------------------------------------------------------------------------------------------- Change in net assets resulting from distributions to shareholders (10,788,205) (6,125,532) - ---------------------------------------------------------------------- Share Transactions: - ---------------------------------------------------------------------- Proceeds from sale of shares 1,191,190,660 682,162,039 - ---------------------------------------------------------------------- Net asset value of shares issued to shareholders in payment of distributions declared 5,640,601 3,135,034 - ---------------------------------------------------------------------- Cost of shares redeemed (993,594,809) (643,996,755) - --------------------------------------------------------------------------------------------------------------------- Change in net assets resulting from share transactions 203,236,452 41,300,318 - --------------------------------------------------------------------------------------------------------------------- Change in net assets 203,236,452 41,300,318 - --------------------------------------------------------------------------------------------------------------------- Net Assets: - ---------------------------------------------------------------------- Beginning of period 215,706,639 174,406,321 - --------------------------------------------------------------------------------------------------------------------- End of period $ 418,943,091 $ 215,706,639 - ---------------------------------------------------------------------------------------------------------------------
See Notes which are an integral part of the Financial Statements Notes to Financial Statements October 31, 1998 Organization Federated Municipal Trust (the "Trust") is registered under the Investment Company Act of 1940, as amended (the "Act") as an open-end, management investment company. The Trust consists of 17 portfolios. The financial statements included herein are only those of Massachusetts Municipal Cash Trust (the "Fund"). The financial statements of the other portfolios are presented separately. The assets of each portfolio are segregated and a shareholder's interest is limited to the portfolio in which shares are held. The Fund offers two classes of shares: Institutional Service Shares and Boston 1784 Funds Shares (formerly, 1784 Funds Shares and prior to that, BayFunds Shares). The investment objective of the Fund is to provide current income exempt from federal regular income tax and Massachusetts state income tax consistent with stability of principal. 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. 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. Restricted Securities Restricted securities are securities that may only be resold upon registration under federal securities laws or in transactions exempt from such registration. Many restricted securities may be resold in the secondary market in transactions exempt from registration. In some cases, the restricted securities may be resold without registration upon exercise of a demand feature. Such restricted securities may be determined to be liquid under criteria established by the Board of Trustees ("Trustees"). The Fund will not incur any registration costs upon such resales. Restricted securities are valued at amortized cost in accordance with Rule 2a-7 under the Investment Company Act of 1940. Additional information on each restricted security held at October 31, 1998, is as follows: Acquisition Acquisition Security Date Cost - ---------------------------------------------------------------------- Weymouth, MA Housing Authority 8/31/1998 $6,120,000 - ---------------------------------------------------------------------- Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts of assets, liabilities, expenses and revenues reported in the financial statements. Actual results could differ from those estimated. Other Investment transactions are accounted for on the trade date. Shares of Beneficial Interest The Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest (without par value) for each class of shares. At October 31, 1998, capital paid-in aggregated $418,943,091. Transactions in shares were as follows:
Year Ended October 31 1998 1997 - ----------------------------------------------------------------------------------------------------------------------- Institutional Service Shares: - --------------------------------------------------------------------------- Shares sold 943,828,322 619,964,162 - --------------------------------------------------------------------------- Shares issued to shareholders in payment of distributions declared 1,573,009 1,473,299 - --------------------------------------------------------------------------- Shares redeemed (830,885,045) (599,306,953) - ----------------------------------------------------------------------------------------------------------------------- Net change resulting from Institutional Service Share transactions 114,516,286 22,130,508 - ----------------------------------------------------------------------------------------------------------------------- Year Ended October 31 1998 1997 - --------------------------------------------------------------------------- Boston 1784 Funds Shares: - --------------------------------------------------------------------------- Shares sold 247,362,338 62,197,877 - --------------------------------------------------------------------------- Shares issued to shareholders in payment of distributions declared 4,067,592 1,661,735 - --------------------------------------------------------------------------- Shares redeemed (162,709,764) (44,689,802) - ----------------------------------------------------------------------------------------------------------------------- Net change resulting from Boston 1784 Funds Share transactions 88,720,166 19,169,810 - ----------------------------------------------------------------------------------------------------------------------- Net change resulting from share transactions 203,236,452 41,300,318 - ----------------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------------
Investment Advisory Fee and Other Transactions with Affiliates Investment Advisory Fee Federated Management, the Fund's investment adviser (the "Adviser"), receives for its services an annual investment advisory fee equal to 0.50% 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 ("FSS"), the Fund will pay FSS up to 0.25% of average daily net assets of the Institutional Serves Shares for the period. Under the terms of a Shareholder Service Agreement with BankBoston, N.A., the fund will pay BankBoston, N.A., up to 0.25% of average daily net assets of Boston 1784 Funds Shares for the period. These fees are used to finance certain services for shareholders and to maintain shareholder accounts. FSS and BankBoston, N.A. may voluntarily choose to waive any portion of their fees. FSS and BankBoston, N.A. can modify or terminate these voluntary waivers at any time at their sole discretion. Transfer and Dividend Disbursing Agent Fees and Expenses FServ, through its subsidiary, Federated Shareholder Services Company ("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. Interfund Transactions During the period ended October 31, 1998, the Fund engaged in purchase and sale transactions with funds that have a common investment adviser (or affiliated investment advisers), common Directors/Trustees, and/or common Officers. These purchase and sale transactions were made at current market value pursuant to Rule 17a-7 under the Act amounting to $523,571,958 and $377,762,628, respectively. General Certain of the Officers and Directors of the Corporation are Officers and Directors or Trustees of the above companies. Concentration of Credit Risk Since the Fund invests a substantial portion of its assets in issuers located in one state, it will be more susceptible to factors adversely affecting issuers of that state than would be a comparable tax-exempt mutual fund that invests nationally. In order to reduce the credit risk associated with such factors, at October 31, 1998, 46.4% of the securities in the portfolio of investments are backed by letters of credit or bond insurance of various financial institutions and financial guaranty assurance agencies. The percentage of investments insured by or supported (backed) by a letter of credit from any one institution or agency did not exceed 6.4% of total investments. 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 Accountants TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF FEDERATED MUNICIPAL TRUST (MASSACHUSSETTS MUNICIPAL CASH TRUST): We have audited the accompanying statement of assets and liabilities of Massachusetts Municipal Cash Trust (an investment portfolio of Federated Municipal Trust, a Massachusetts business trust), including the schedule of portfolio of investments, as of October 31, 1998 and the related statement of operations for the year then ended and the statement changes in net assets and the financial highlights for the periods presented. These financial statements and financial highlights are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements 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 October 31, 1998 by correspondence with the custodian. 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 Massachusetts Municipal Cash Trust (an investment portfolio of Federated Municipal Trust), as of October 31, 1998, and the results of its operations for the year then ended and the changes in its net assets and the financial highlights for the periods presented, in conformity with generally accepted accounting principles. Arthur Andersen LLP Boston, Massachusetts December 23, 1998 Massachusetts Municipal Cash Trust A Portfolio of Federated Municipal Trust INSTITUTIONAL SERVICE SHARES December 31, 1998 A Statement of Additional Information (SAI) dated December 31, 1998, is incorporated by reference into this prospectus. To obtain the SAI 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. Federated Massachusetts Municipal Cash Trust Federated Investors Fund 5800 Corporate Drive Pittsburgh, PA 15237-7000 1-800-341-7400 www.federatedinvestors.com Federated Securities Corp., Distributor Investment Company Act File No. 811-5911 Cusip 314229840 0032603A-ISS (12/98) Federated is a registered mark of Federated Investors, Inc. 1998 (copyright)Federated Investors, Inc. LOGO RECYCLED PAPER Statement of Additional Information December 31, 1998 Massachusetts Municipal Cash Trust [A Portfolio of Federated Municipal Trust] Institutional Service Shares This Statement of Additional Information (SAI) is not a prospectus. Read this SAI in conjunction with the prospectuses for Massachusetts Municipal Cash Trust dated December 31,1998. Obtain the prospectus without charge by calling 1-800-341-7400. ----------------------------------------------------------------------------- Contents ----------------------------------------------------------------------------- How is the Fund Organized? Securities in Which the Fund Invests How is the Fund Sold? Subaccounting Services Redemption in Kind Massachusetts Partnership Law Account and Share Information Tax Information Who Manages and Provides Services to the Fund? How Does the Fund Measure Performance? Who is Federated Investors, Inc.? Investment Ratings [Federated Investors Logo] Federated Securities Corp., Distributor, subsidiary of Federated Investors, Inc. CUSIP 314229303 0032603B-ISS (12/98) HOW IS THE FUND ORGANIZED? ================================================================================ The Fund is a diversified portfolio of Federated Municipal Trust (Trust). The Trust is an open-end, management investment company that was established under the laws of the Commonwealth of Massachusetts on September 1, 1989. The Trust may offer separate series of shares representing interests in separate portfolios of securities. The Board of Trustees (the Board) has established two classes of shares of the Fund, known as Institutional Service Shares and Boston 1784 Funds Shares (Shares). This SAI relates to Institutional Service Shares. SECURITIES IN WHICH THE FUND INVESTS ================================================================================ SECURITIES DESCRIPTIONS AND TECHNIQUES In pursuing its investment strategy, the Fund may invest in the following tax- exempt securities for any purpose that is consistent with its investment objective. General Obligation Bonds General obligation bonds are supported by the issuer's full faith and credit. The issuer must levy and collect taxes sufficient to pay principal and interest on the bonds. However, the issuer's authority to levy additional taxes may be limited by its charter or state law. Special Revenue Bonds Special revenue bonds are payable solely from specific revenues received by the issuer. The revenues may consist of specific taxes, assessments, tolls, fees or other types of municipal revenues. For example, a municipality may issue bonds to build a toll road, and pledge the tolls to repay the bonds. Bondholders could not collect from the municipality's general taxes or revenues. Therefore, any shortfall in the tolls could result in a default on the bonds. Private Activity Bonds Private activity bonds are special revenue bonds used to finance private entities. For example, a municipality may issue bonds to finance a new factory to improve its local economy. The municipality would lend the proceeds to the company using the factory, and the company would agree make loan payments sufficient to repay the bonds. The bonds would be payable solely from the company's loan payments, not from any other revenues of the municipality. Therefore, any default on the loan normally would result in a default on the bonds. Municipal Leases Municipalities may enter into leases for equipment or facilities. In order to comply with state public financing laws, these leases are typically subject to annual appropriation. In other words, a municipality may end a lease, without penalty, by not providing for the lease payments in its annual budget. After the lease ends, the lessor (the Fund) can resell the equipment or facility but the Fund may lose money on the sale. The Fund may invest in securities supported by pools of municipal leases. The most common type of lease backed securities are certificates of participation (COPs). However, the Fund may also invest directly in individual leases. Credit Enhancement Common types of credit enhancement include guarantees, letters of credit, bond insurance and surety bonds. Credit enhancement also includes arrangements where securities or other liquid assets secure payment of a fixed income security. If a default occurs these assets may be sold and the proceeds paid to a security's holders. Either form of credit enhancement reduces credit risks by providing another source of payment for a fixed income security. Investment Ratings A rating service'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 (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 IBCA, 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 rating service can be treated as being in one of the two highest short-term rating categories; currently, such securities must be rated by two rating services in one of their two highest rating categories. See "Regulatory Compliance." INVESTMENT RISKS There are many factors which may effect an investment in the Fund. The Fund's principal risks are described in its prospectus. An additional risk factor is outlined below. Tax Risk In order for the interest income from the securities to be exempt from federal regular income tax ("tax-exempt"), tax-exempt securities must meet certain legal requirements. Failure to meet such requirements may cause the interest received and distributed by the Fund to shareholders to be taxable. FUNDAMENTAL INVESTMENT POLICIES The Fund invests in tax-exempt securities so that at least 80% of the Fund's annual interest income is exempt from federal regular income tax and Massachusetts state income tax. This policy is fundamental and cannot be changed without shareholder approval. 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 the clearance of transactions. Issuing Senior Securities and Borrowing Money The Fund will not issue senior securities except that the Fund may borrow money in amounts up to one-third of the value of its total assets, including the amounts borrowed. The Fund will not borrow money 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 its total assets are outstanding. Pledging Assets The Fund will not mortgage, pledge, or hypothecate any assets except 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 non publicly issued Massachusetts tax-exempt securities or temporary investments or enter into repurchase agreements, in accordance with its investment objective, policies and limitations or Declaration of Trust. 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 or real estate limited partnerships, 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, (including instruments issued by a U.S. branch of a domestic bank or savings and loan having capital, surplus, and undivided profits in excess of $100,000,000 at the time of the investment), 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 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 Restricted and Illiquid Securities The Fund may invest in restricted securities. Restricted securities are any securities in which the Fund may invest pursuant to its investment objective and policies but which are subject to restrictions on resale under federal securities law. Under criteria established by the Board certain restricted securities are determined to be liquid. To the extent that restricted securities are not determined to be liquid the Fund will limit their purchase, together with other illiquid securities, to 10% of its net assets. 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 nationally recognized rating services, 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 Board has 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 Board 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 Board 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 Board 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. 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 professionals 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 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. 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. 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 Trust have equal voting rights, except that in matters affecting only a particular Fund or class, only Shares of that Fund or class are entitled to vote. Trustees may be removed by the Board or by shareholders at a special meeting. A special meeting of shareholders will be called by the Board upon the written request of shareholders who own at least 10% of the Trust's outstanding shares of all series entitled to vote. As of December 8, 1998, the following shareholders owned of record, beneficially, or both, 5% or more of outstanding Institutional Service Shares: Cambridge Trust Company, Cambridge, Massachusetts, owned approximately 16,619,664 shares (6.56%); Bob and Company, Boston, Massachusetts, owned approximately 21,074,831 shares (8.32%); Turtle and Company, Boston, Massachusetts, owned approximately 35,044,626 shares (13.84%); and State Street Bank and Trust, North Quincy, Massachusetts, owned approximately 66,411,123 shares (26.22). As of December 8, 1998, the following shareholders owned of record, beneficially, or both, 5% or more of outstanding Boston 1784 Funds Shares: BankBoston, Boston, Massachusetts, owned approximately 163,767,132 shares (100.00%) Shareholders owning 25% or more of outstanding Shares may be in control and be able to affect the outcome of certain matters presented for a vote of shareholders. TAX INFORMATION FEDERAL INCOME TAX The Fund intends to meet the requirements of Subchapter M of the Internal Revenue Code applicable to regulated investment companies. If these requirements are not met, it will not receive the special tax treatment and will pay federal income tax. The Fund will be treated as a single, separate entity for federal income tax purposes so that income earned and capital gains and losses realized by the Trust's other portfolios will be separate from those realized by the Fund. STATE TAXES Massachusetts Taxes Under existing Massachusetts laws, distributions made by the Fund will not be subject to Massachusetts personal income taxes to the extent that such dividends qualify as exempt interest dividends under the Internal Revenue Code, and represent (i) interest or gain on obligations issued by the Commonwealth of Massachusetts, its political subdivisions or agencies; or (ii) interest on obligations of the United States, its territories or possessions to the extent exempt from taxation by the states pursuant to federal law. Conversely, to the extent that the distributions made by the Fund are derived from other types of obligations, such dividends will be subject to Massachusetts personal income taxes. Shareholders subject to the Massachusetts corporate excise tax must include all dividends paid by the Fund in their net income, and the value of their shares of stock in the Fund in their net worth, when computing the Massachusetts excise tax. WHO MANAGES AND PROVIDES SERVICES TO THE FUND? ================================================================================ BOARD OF TRUSTEES The Board is responsible for managing the Trust's business affairs and for exercising all the Trust's powers except those reserved for the shareholders. Information about each Board member is provided below and includes the following data: name, address, birthdate, present position(s) held with the Trust, principal occupations for the past five years and other notable positions held, total compensation received as a Trustee from the Trust for its most recent fiscal year, and the total compensation received from the Federated Fund Complex for the most recent calendar year. The Trust is comprised of 17 Funds and the Federated Fund Complex is comprised of 56 investment companies, whose investment advisers are affiliated with the Fund's Adviser. As of December 8, 1998, the Fund's Board and Officers as a group owned less than 1% of the Fund's outstanding Institutional Service Shares. An asterisk (*) denotes a Trustee who is deemed to be an interested person as defined in the Investment Company Act of 1940. The following symbol (#) denotes a Member of the Board's Executive Committee, which handles the Board's responsibilities between its meetings.
Total Name Compensation Birthdate Aggregate From Trust Address Principal Occupations Compensation and Fund Position With Trust for Past 5 Years From Trust Complex John F. Donahue##* Chief Executive Officer and Director or Trustee of the Federated $ 0 $0 for the Birthdate: July 28, 1924 Fund Complex. Chairman and Director, Federated Investors, Inc.; Trust and 56 Federated Investors Tower Chairman and Trustee, Federated Advisers, Federated Management, and other 1001 Liberty Avenue Federated Research; Chairman and Director, Federated Research Corp., investment Pittsburgh, PA and Federated Global Research Corp.; Chairman, Passport Research, companies in CHAIRMAN and TRUSTEE Ltd. the Fund Complex Thomas G. Bigley Director or Trustee of the Federated Fund Complex; Director, Member $4,076.31 $111,222 for Birthdate: February 3, 1934 of Executive Committee, Children's Hospital of Pittsburgh; formerly: the Trust 15 Old Timber Trail Senior Partner, Ernst & Young LLP; Director, MED 3000 Group, Inc.; and 56 other Pittsburgh, PA Director, Member of Executive Committee, University of Pittsburgh. investment TRUSTEE companies in the Fund Complex John T. Conroy, Jr. Director or Trustee of the Federated Fund Complex; President, $4,484.62 $122,362 for Birthdate: June 23, 1937 Investment Properties Corporation; Senior Vice President, John R. the Trust Wood/IPC Commercial Dept. Wood and Associates, Inc., Realtors; Partner or Trustee in private and 56 other John R. Wood and Associates, Inc. real estate ventures in Southwest Florida; formerly: President, investment Realtors Naples Property Management, Inc. and Northgate Village Development companies in 3255 Tamiami Trail North Naples, Corporation. the Fund FL Complex TRUSTEE William J. Copeland Director or Trustee of the Federated Fund Complex; Director and $4,484.62 $122,362 for Birthdate: July 4, 1918 Member of the Executive Committee, Michael Baker, Inc.; formerly: the Trust One PNC Plaza-23rd Floor Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp.; and 56 other Pittsburgh, PA Director, Ryan Homes, Inc. investment TRUSTEE companies in Retired: Director, United Refinery; Director, Forbes Fund; Chairman, the Fund Pittsburgh Foundation; Chairman, Pittsburgh Civic Light Opera. Complex James E. Dowd, Esq. Director or Trustee of the Federated Fund Complex; Attorney-at-law; $4,484.62 $122,362 for Birthdate: May 18, 1922 Director, The Emerging Germany Fund, Inc. the Trust 571 Hayward Mill Road and 56 other Concord, MA Retired: President, Boston Stock Exchange, Inc.; Regional investment TRUSTEE Administrator, United States Securities and Exchange Commission. companies in the Fund Complex Lawrence D. Ellis, M.D.* Director or Trustee of the Federated Fund Complex; Professor of $4,076.31 $111,222 for Birthdate: October 11, 1932 Medicine, University of Pittsburgh; Medical Director, University of the Trust 3471 Fifth Avenue Pittsburgh Medical Center Downtown; Hematologist, Oncologist, and and 56 other Suite 1111 Internist, Presbyterian and Montefiore Hospitals; Member, National investment Pittsburgh, PA Board of Trustees, Leukemia Society of America. companies in TRUSTEE the Fund Complex Edward L. Flaherty, Jr., Esq. # Director or Trustee of the Federated Fund Complex; Attorney, of $4,484.62 $122,362 for Birthdate: June 18, 1924 Counsel, Miller, Ament, Henny & Kochuba; Director, Eat'N Park the Trust Miller, Ament, Henny & Kochuba Restaurants, Inc.; formerly: Counsel, Horizon Financial, F.A., and 56 other 205 Ross Street Western Region; Partner, Meyer and Flaherty. investment Pittsburgh, PA companies in TRUSTEE the Fund Complex Peter E. Madden Director or Trustee of the Federated Fund Complex; formerly: $4,076.31 $111,222 for Birthdate: March 16, 1942 Representative, Commonwealth of Massachusetts General Court; the Trust One Royal Palm Way President, State Street Bank and Trust Company and State Street and 56 other 100 Royal Palm Way Corporation. investment Palm Beach, FL companies in TRUSTEE Retired: Director, VISA USA and VISA International; Chairman and the Fund Director, Massachusetts Bankers Association; Director, Depository Complex Trust Corporation. John E. Murray, Jr., J.D., S.J.D. Director or Trustee of the Federated Fund Complex; President, Law $4,076.31 $111,222 for Birthdate: December 20, 1932 Professor, Duquesne University; Consulting Partner, Mollica & Murray. the Trust President, Duquesne University and 56 other Pittsburgh, PA Retired: Dean and Professor of Law, University of Pittsburgh School investment TRUSTEE of Law; Dean and Professor of Law, Villanova University School of companies in Law. the Fund Complex Wesley W. Posvar Director or Trustee of the Federated Fund Complex; President, World $4,076.31 $111,222 for Birthdate: September 14, 1925 Society of Ekistics, Athens; Professor, International Politics; the Trust 1202 Cathedral of Learning Management Consultant; Trustee, Carnegie Endowment for International and 56 other University of Pittsburgh Peace, RAND Corporation, Online Computer Library Center, Inc., investment Pittsburgh, PA National Defense University and U.S. Space Foundation; President companies in TRUSTEE Emeritus, University of Pittsburgh; Founding Chairman, National the Fund Advisory Council for Environmental Policy and Technology, Federal Complex Emergency Management Advisory Board and Czech Management Center, Prague. Retired: Professor, United States Military Academy; Professor, United States Air Force Academy. Marjorie P. Smuts Director or Trustee of the Federated Fund Complex; Public $4,076.31 $111,222 for Birthdate: June 21, 1935 Relations/Marketing/Conference Planning. the Trust 4905 Bayard Street and 56 other Pittsburgh, PA Retired: National Spokesperson, Aluminum Company of America; investment TRUSTEE business owner. companies in the Fund Complex Glen R. Johnson* Trustee, Federated Investors, Inc.; staff member, Federated $ 0 $0 for the Birthdate: May 2, 1929 Securities Corp. Trust and 8 Federated Investors Tower other 1001 Liberty Avenue investment Pittsburgh, PA companies in PRESIDENT and TRUSTEE the Fund Complex J. Christopher Donahue##* President or Executive Vice President of the Federated Fund Complex; $ 0 $0 for the Birthdate: April 11, 1949 Director or Trustee of some of the Funds in the Federated Fund Trust and 18 Federated Investors Tower Complex; President and Director, Federated Investors, Inc.; other 1001 Liberty Avenue President and Trustee, Federated Advisers, Federated Management, and investment Pittsburgh, PA Federated Research; President and Director, Federated Research Corp. companies in EXECUTIVE VICE PRESDIENT and Federated Global Research Corp.; President, Passport Research, the Fund Ltd.; Trustee, Federated Shareholder Services Company; Director, Complex Federated Services Company. Edward C. Gonzales* Trustee or Director of some of the Funds in the Federated Fund $ 0 $0 for the Birthdate: October 22, 1930 Complex; President, Executive Vice President and Treasurer of some Trust and 1 Federated Investors Tower of the Funds in the Federated Fund Complex; Vice Chairman, Federated other 1001 Liberty Avenue Investors, Inc.; Vice President, Federated Advisers, Federated investment Pittsburgh, PA Management, Federated Research, Federated Research Corp., Federated companies in EXECUTIVE VICE PRESIDENT Global Research Corp. and Passport Research, Ltd.; Executive Vice the Fund President and Director, Federated Securities Corp.; Trustee, Complex Federated Shareholder Services Company. John W. McGonigle Executive Vice President and Secretary of the Federated Fund $ 0 $0 for the Birthdate: October 26, 1938 Complex; Executive Vice President, Secretary, and Director, Trust and 56 Federated Investors Tower Federated Investors, Inc.; Trustee, Federated Advisers, Federated other 1001 Liberty Avenue Management, and Federated Research; Director, Federated Research investment Pittsburgh, PA Corp. and Federated Global Research Corp.; Director, Federated companies in EXECUTIVE VICE PRESIDENT and Services Company; Director, Federated Securities Corp. the Fund SECRETARY Complex Richard J. Thomas Treasurer of the Federated Fund Complex; Vice President - Funds $ 0 $0 for the Birthdate: June 17, 1954 Financial Services Division, Federated Investors, Inc.; Formerly: Trust and 56 Federated Investors Tower various management positions within Funds Financial Services other 1001 Liberty Avenue Division of Federated Investors, Inc. investment Pittsburgh, PA companies in TREASURER the Fund Complex Richard B. Fisher* President or Vice President of some of the Funds in the Federated $ 0 $0 for the Birthdate: May 17, 1923 Fund Complex; Director or Trustee of some of the Funds in the Trust and 6 Federated Investors Tower Federated Fund Complex; Executive Vice President, Federated other 1001 Liberty Avenue Investors, Inc.; Chairman and Director, Federated Securities Corp. investment Pittsburgh, PA companies in VICE PRESIDENT the Fund Complex William D. Dawson, III Chief Investment Officer of this Fund and various other Funds in the $ 0 $0 for the Birthdate: March 3, 1949 Federated Fund Complex; Executive Vice President, Federated Trust and 41 Federated Investors Tower Investment Counseling, Federated Global Research Corp., Federated other 1001 Liberty Avenue Advisers, Federated Management, Federated Research, and Passport investment Pittsburgh, PA Research, Ltd.; Registered Representative, Federated Securities companies in CHIEF INVESTMENT OFFICER Corp.; Portfolio Manager, Federated Administrative Services; Vice the Fund President, Federated Investors, Inc.; Formerly: Executive Vice Complex 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. Mary Jo Ochson Senior Portfolio Manager and Vice President of eight investment $ 0 $0 for the Birthdate: September 12, 1953 companies in the Federated Fund Complex; Senior Vice President, Trust and 7 Federated Investors Tower Federated Investment Counseling, Federated Advisers, Federated other 1001 Liberty Avenue Global Research Corp., Federated Management, Federated Research, investment Pittsburgh, PA Federated Research Corp. and Passport Research, Ltd.; Formerly: Vice companies in SENIOR PORTFOLIO MANAGER/VICE President, Federated Advisers, Federated Management, Federated the Fund PRESIDENT Research, Federated Research Corp. , Passport Research, Ltd. and Complex Federated Global Research Corp. Jeff A. Kozemchak Senior Portfolio Manager and Vice President of four investment $ 0 $0 for the Birthdate: January 15, 1960 companies in the Federated Fund Complex; Vice President, Federated Trust and 3 Federated Investors Tower Investment Counseling, Federated Advisers, Federated Global Research other 1001 Liberty Avenue Corp., Federated Management, Federated Research, Federated Research investment Pittsburgh, PA Corp. and Passport Research, Ltd.; Formerly: Assistant Vice companies in SENIOR PORTFOLIO MANAGER/VICE President and Investment Analyst, Federated Research Corp. and the Fund PRESIDENT Passport Research, Ltd. ; Assistant Vice President, Federated Complex Advisers, Federated Management and Federated Research.
## Mr. Donahue is the father of J. Christopher Donahue, Executive Vice President of the Trust. 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 Trust, 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 Trust. 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: Maximum Average Aggregate Daily Net Administrative Fee Assets of the Federated Funds ------------------ ----------------------------- .15 of 1% on the first $250 million .125 of 1% on the next $250 million .10 of 1% on the next $250 million .075 of 1% on assets in excess of $750 million The administrative fee received during any fiscal year shall be at least $125,000 per portfolio and $30,000 per each additional class of Shares. Federated Services Company may voluntarily waive a portion of its fee and may reimburse the Fund for expenses. Federated Services Company also provides certain accounting and recordkeeping services with respect to the Fund's portfolio investments for a fee based on Fund assets plus out-of-pocket expenses. CUSTODIAN State Street Bank and Trust Company, Boston, Massachusetts, is custodian for the securities and cash of the Fund. Foreign instruments purchased by the Fund are held by foreign banks participating in a network coordinated by State Street Bank. TRANSFER AGENT AND DIVIDEND DISBURSING AGENT Federated Services Company, through its registered transfer agent subsidiary, Federated Shareholder Services Company, maintains all necessary shareholder records. The Funds pays the transfer agent a fee based on the size, type, and number of accounts and transactions made by shareholders. INDEPENDENT PUBLIC ACCOUNTANTS Arthur Andersen LLP is the independent public accountant for the Fund. FEES PAID BY THE FUND FOR SERVICES For the Year Ended October 31, 1998 1997 1996 - ------------------------------------------------------------------------------- Advisory Fee Earned $1,810,446 $1,006,548 $856,487 Advisory Fee Reduction 397,073 294,305 297,835 Brokerage Commissions 0 0 0 Administrative Fee 273,047 158,069 155,108 Shareholder Services Fee Institutional Service Shares 0 Fees are allocated among Classes based on their pro rata share of Fund assets, except for shareholder services fees, which are borne only by the applicable Class of Shares. If the Fund's expenses are capped at a particular level, the cap does not include reimbursement to the Fund of any expenses incurred by shareholders who use the transfer agent's subaccounting facilities. HOW DOES THE FUND MEASURE PERFORMANCE? ================================================================================ The Fund may advertise Share performance by using the Securities and Exchange Commission's (SEC) standard method for calculating performance applicable to all mutual funds. The SEC also permits this standard performance information to be accompanied by non-standard performance information. Unless otherwise stated, any quoted Share performance reflects the effect of non-recurring charges, such as maximum sales charges, which, if excluded, would increase the total return and yield. The performance of Shares depends upon such variables as: portfolio quality; average portfolio maturity; type and value of portfolio securities; changes in interest rates; changes or differences in the Fund's or any class of Shares' expenses; and various other factors. Share performance fluctuates on a daily basis largely because net earnings and offering price per Share 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-years and since inception periods ended October 31, 1998. Yield, Effective Yield and Tax-Equivalent Yield given for the 7-day period ended October 31, 1998.
Share Class 7-Day Period 1 Year 5 Years Since Inception on May 18, 1990 Institutional Service Shares Total Return -- 3.04% 2.94% 3.16% Yield 2.76% -- - -- -- Effective Yield 2.80% -- -- -- Tax-Equivalent Yield 4.64% -- -- --
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. The tax- equivalent yield of Shares is calculated similarly to the yield, but is adjusted to reflect the taxable yield that Shares would have had to earn to equal the actual yield, assuming a specific tax rate. 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. TAX EQUIVALENCY TABLE Set forth below is a sample of a tax-equivalency table that may be used in advertising and sales literature. This table is for illustrative purposes only and is not representative of past or future performance of the Fund. The interest earned by the tax-exempt securities owned by the Fund generally remains free from federal regular income tax and is often free from state and local taxes as well. However, some of the Fund's income may be subject to the federal alternative minimum tax and state and/or local taxes.
TAXABLE YIELD EQUIVALENT FOR 1998 STATE OF MASSACHUSETTS - -------------------------------------------------------------------------------- TAX BRACKET: FEDERAL 15.00% 28.00% 31.00% 36.00% 39.60% COMBINED FEDERAL AND STATE 27.00% 40.00% 43.00% 48.00% 51.60% - -------------------------------------------------------------------------------- JOINT $1- $42,351- $102,301- $155,951- OVER RETURN 42,350 102,300 155,950 278,450 $278,450 SINGLE $1- $25,351- $61,401- $128,101- OVER RETURN 25,350 61,400 128,100 278,450 $278,450 - -------------------------------------------------------------------------------- TAX-EXEMPT YIELD TAXABLE YIELD EQUIVALENT - -------------------------------------------------------------------------------- 1.50% 2.05% 2.50% 2.63% 2.88% 3.10% 2.00% 2.74% 3.33% 3.51% 3.85% 4.13% 2.50% 3.42% 4.17% 4.39% 4.81% 5.17% 3.00% 4.11% 5.00% 5.26% 5.77% 6.20% 3.50% 4.79% 5.83% 6.14% 6.73% 7.23% 4.00% 5.48% 6.67% 7.02% 7.69% 8.26% 4.50% 6.16% 7.50% 7.89% 8.65% 9.30% 5.00% 6.85% 8.33% 8.77% 9.62% 10.33% 5.50% 7.53% 9.17% 9.65% 10.58% 11.36% 6.00% 8.22% 10.00% 10.53% 11.54% 12.40%
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. 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., 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 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, 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, 1997, Federated managed 11 bond funds with approximately $2.1 billion in assets and 22 money market funds with approximately $10.9 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 tax-exempt 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 27 years' experience. As of December 31, 1997, Federated managed 29 equity funds totaling approximately $11.7 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, 1997, Federated managed 11 money market funds and 16 bond funds with assets approximating $17.1 billion and $5.6 billion, respectively. Federated's corporate bond decision making--based on intensive, diligent credit analysis--is backed by over 22 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 $200 billion. Government Funds In the government sector, as of December 31, 1997, Federated manages 9 mortgage- backed, 6 government/ agency and 18 government money market mutual funds, with assets approximating $5.9 billion, $1.5 billion and $35 billion, respectively. Federated trades approximately $400 million in U.S. government and mortgage- backed securities daily and places approximately $23 billion in repurchase agreements each day. Federated introduced the first U.S. government fund to invest in U.S. government bond securities in 1969. Federated has been a major force in the short- and intermediate-term government markets since 1982 and currently manages approximately $36 billion in government funds within these maturity ranges. 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, 1997, Federated managed more than $63.1 billion in assets across 51 money market funds, including 18 government, 11 prime and 22 municipal with assets approximating $35 billion, $17.1 billion and $10.9 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 $4 trillion to the more than 6,700 funds available, according to the Investment Company Institute. Federated distributes mutual funds through its subsidiaries for a variety of investment purposes. Specific markets include: FEDERATED CLIENTS OVERVIEW 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. Investment Ratings - -------------------------------------------------------------------------------- APPENDIX Standard & Poor's Short-Term Municipal Obligation Ratings A Standard & Poor's (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-1+, 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 rated 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. Moody's 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 Service, L.P. 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. ADDRESSES ================================================================================ Massachusetts Municipal Cash Trust Institutional Service Shares Federated Investors Funds 5800 Corporate Drive Pittsburgh, PA 15237-7000 - -------------------------------------------------------------------------------- Distributor Federated Securities Corp. Federated Investors Tower 1001 Liberty Avenue, Pittsburgh, PA 15222-3779 - -------------------------------------------------------------------------------- Investment Adviser Federated Management Federated Investors Tower 1001 Liberty Avenue, Pittsburgh, PA 15222-3779 - -------------------------------------------------------------------------------- Custodian State Street Bank and Trust Company P.O. Box 8600 Boston, MA 02266-8600 - -------------------------------------------------------------------------------- Transfer Agent and Dividend Disbursing Agent Federated Shareholder Services Company P.O. Box 8600 Boston, MA 02266-8600 - -------------------------------------------------------------------------------- Independent Auditors Arthur Andersen LLP 225 Franklin Street Boston, MA 02110-2812 - -------------------------------------------------------------------------------- PROSPECTUS Maryland Municipal Cash Trust A Portfolio of Federated Municipal Trust A money market mutual fund seeking to provide current income exempt from federal regular income tax and the personal income taxes imposed by the State of Maryland. 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. December 31, 1998 CONTENTS Risk/Return Summary 1 What are the Fund's Fees and Expenses? 2 What are the Fund's Investment Strategies? 3 What are the Principal Securities in Which the Fund Invests? 3 What are the Specific Risks of Investing in the Fund? 4 What do Shares Cost? 5 How is the Fund Sold? 5 How to Purchase Shares 5 How to Redeem Shares 7 Account and Share Information 9 Who Manages the Fund? 9 Financial Information 10 Report of Independent Public Accountants 21 Risk/Return Summary WHAT IS THE FUND'S INVESTMENT OBJECTIVE? The Fund is a money market fund which seeks to maintain a stable net asset value of $1.00. The Fund's investment objective is to provide current income exempt from federal regular income tax and the personal income taxes imposed by the State of Maryland and Maryland municipalities 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 tax-exempt securities so that the Fund's annual interest income is exempt from federal regular income tax and Maryland state and local income tax. Interest from the Fund's investments may be subject to the federal alternative minimum tax for individuals and corporations. WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND? Because the Fund may invest a significant portion of its assets in securities of a single issuer, an investment in the Fund may involve additional risks compared to a fully diversified money market 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 representation omitted. Please see Appendix B3.] Historically, the Fund has maintained a constant $1.00 net asset value per share. The bar chart shows the variability of the Fund's total returns on a yearly basis. The Fund's Shares are not sold subject to a sales charge (load). The total returns displayed above are based upon net asset value. The Fund's Shares year-to-date total return as of the most recent calendar quarter of September 30, 1998, was 2.26%. Within the period shown in the Chart, the Fund's highest quarterly return was 0.89% (quarter ended June 30, 1995). Its lowest quarterly return was 0.72% (quarter ended March 31, 1997). The Fund's Seven-Day Net Yield as of 12/31/1997, was 3.46%. The following table represents the Fund's Average Annual Total Return through 12/31/1997.
CALENDAR PERIOD FUND 1 Year 3.13% Start of Performance 1 3.14%
1 The Fund's start of performance date was May 9, 1994. Investors may call the Fund at 1-800-341-7400 to acquire the Seven-Day Net Yield. 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? MARYLAND MUNICIPAL CASH TRUST FEES AND EXPENSES This table describes the fees and expenses that you may pay when you buy, hold, and redeem Shares of the Fund.
SHAREHOLDER FEES 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 a percentage of average net assets) Management Fee 2 0.50% Distribution (12b-1) Fee None Shareholder Services Fee 3 0.25% Other Expenses 0.46% Total Annual Fund Operating Expenses 1.21% 1 Although not contractually obligated to do so, the Adviser and shareholder services provider waived certain amounts. These are shown below along with the net expenses the Fund actually paid for the fiscal year ended October 31, 1998. Waiver of Fund Expenses 0.51% Total Actual Annual Fund Operating Expenses (after waivers) 0.70% 2 The Adviser voluntarily waived the management fee. The Adviser can terminate this voluntary waiver at any time. There was no management fee paid by the Fund (after the voluntary waiver) for the year ended October 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 0.24% for the year ended October 31, 1998.
EXAMPLE The following Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund 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 operating expenses are BEFORE WAIVERS as shown above and remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS Expenses assuming no redemption $123 $384 $665 $1,466
What are the Fund's Investment Strategies? The Fund invests in a portfolio of high-quality tax-exempt securities maturing in 13 months or less. The average maturity of the Fund's portfolio, computed on a dollar-weighted basis, will be 90 days or less. The Fund's Adviser performs a fundamental credit analysis to develop an approved list of issuers and securities that meet the Adviser's minimum credit standards. The Adviser targets an average portfolio maturity based upon its interest rate outlook and the tax-exempt securities available. The Adviser structures the portfolio by combining variable rate demand instruments and municipal notes. Depending on the supply of tax-exempt securities, the Adviser generally shortens the portfolio's maturity when it expects interest rates to rise and extends the maturity when it expects interest rates to fall. TEMPORARY DEFENSIVE INVESTMENTS During adverse market conditions the Fund may temporarily depart from its principal investment strategies by investing in securities subject to federal regular income tax and Maryland state and local income tax. Temporary investments will be of comparable quality to other securities in which the Fund invests. This may cause the Fund to give up greater investment returns to maintain the safety of principal. This also may cause the Fund to receive and distribute taxable income to investors. What are the Principal Securities in Which the Fund Invests? TAX-EXEMPT SECURITIES Tax-exempt securities are fixed income securities that pay interest exempt from regular federal income taxes. States, counties, cities and other political subdivisions and authorities typically issue tax exempt securities. Tax-exempt securities are generally differentiated by their source of repayment. FIXED INCOME SECURITIES Fixed income 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. VARIABLE RATE DEMAND INSTRUMENTS Variable rate demand instruments are tax-exempt securities that require the issuer or a third party, such as a dealer or bank, to repurchase the security for its face value upon demand. The securities also bear interest at a variable rate intended to cause the securities to trade at their face value. The Fund treats demand instruments as short-term securities, even though their stated maturity may extend beyond 13 months. MUNICIPAL NOTES Municipal notes are short-term tax-exempt securities. Many municipalities issue such notes to fund their current operations prior to collecting taxes or other municipal revenues. Municipalities may also issue notes to fund capital projects prior to issuing long-term bonds. The issuers typically repay the notes at the end of their fiscal year, either with taxes, other revenues or proceeds from newly issued notes or bonds. INVESTMENT 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 rating services or be of comparable quality to securities having such ratings. CREDIT ENHANCEMENT Credit enhancement consists of an arrangement in which a company agrees to pay amounts due on a fixed income security if the issuer defaults. In some cases the company providing credit enhancement makes all payments directly to the security holders and receives reimbursement from the issuer. Normally, the credit enhancer has greater financial resources and liquidity than the issuer. For this reason, the Adviser usually evaluates the credit risk of a fixed income security based solely upon its credit enhancement. 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 tax-exempt money market fund are described below. CREDIT RISK Credit risk is the possibility that an issuer or a credit enhancer will default (fails to repay interest and principal when due). If an issuer or credit enhancer defaults, the Fund will lose money. Money market funds try to minimize this risk by purchasing higher quality securities. Many fixed income securities receive credit ratings from companies such as Standard & Poor's and Moody's Investor Services. Fixed income securities receive different credit ratings depending on the rating company's assessment of the likelihood of default by the issuer. The lower the credit rating, the greater the credit risk. If the security is unrated, greater reliance is placed on the Adviser's credit assessment. 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. SECTOR RISK Most of the Fund's securities will be invested in issuers located in Maryland. In addition, a substantial part of the Fund's portfolio may be comprised of tax-exempt securities issued or credit enhanced by companies in similar businesses or with other similar characteristics. As a result, the Fund will be more susceptible to any economic, business, political, or other developments which generally affect these issuers. 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 determined net asset value (NAV). The Fund does not charge a sales charge. NAV is determined at 12:00 noon and 1:00 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 $10,000. There is no required minimum subsequent investment amount. An account may be opened with a smaller minimum amount as long as the $10,000 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 institutions acting in an agency or fiduciary capacity or to individuals directly or through investment professionals. The Fund may not be a suitable investment for retirement plans or non-Maryland taxpayers because it invests in Maryland tax-exempt securities. 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 1:00 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 on the day 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 SYSTEMATIC INVESTMENT PROGRAM Once you have opened an account, you may automatically purchase additional Shares on a regular basis by completing the Systematic Investment Program (SIP) section of the New Account Form or by contacting the Fund or your investment professional. The minimum investment amount for SIPs is $50. BY AUTOMATED CLEARINGHOUSE (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 12:00 noon (Eastern time), your redemption will be wired to you the same day. You will not receive that day's dividend. If you call after 12:00 noon (Eastern time), your redemption will be wired to you the following business day. You will receive that day's dividend. Under limited circumstances, arrangements may be made with the Distributor for same-day payment of redemption proceeds, without that day's dividend, for redemption requests received before 2:00 p.m. (Eastern time). 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 30 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 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. SYSTEMATIC WITHDRAWAL PROGRAM You may automatically redeem Shares in a minimum amount of $100 on a regular basis. Complete the appropriate section of the New Account Form or an Account Service Options Form or contact your investment professional or the Fund. Your account value must meet the minimum initial investment amount at the time the program is established. This program may reduce, and eventually deplete, your account. Payments should not be considered yield or income. CHECKWRITING You may request checks to redeem your Fund Shares. Your account will continue to receive the daily dividend declared on the Shares being redeemed until a check is presented for payment. DEBIT CARD You may request a debit card account that allows you to redeem Shares. There is an annual fee for this service that the Fund will automatically deduct from your account. 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 CONFIRMATIONS AND ACCOUNT STATEMENTS You will receive confirmation of purchases and redemptions. In addition, you will receive periodic statements reporting all account activity, including systematic transactions, 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, 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. It is anticipated that Fund distributions will be primarily dividends that are exempt from federal income tax, although a portion of the Fund's dividends may not be exempt. Dividends may be subject to state and local taxes, although the Fund's dividends will be exempt from Maryland state and local income tax to the extent they are derived from interest on obligations exempt from Maryland state and local income tax. Capital gains and non-exempt dividends are taxable whether paid in cash or reinvested in the Fund. 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 Management. 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 and/or provide administrative services to more than 300 mutual funds and private accounts, which totaled over $120 billion in assets as of December 31, 1997. Federated was established in 1955 and is one of the largest mutual fund investment managers in the United States with more than 2,000 employees. Over 4,000 investment professionals make Federated Funds available to their customers. ADVISORY FEES The Adviser receives an annual investment advisory fee of 0.50% 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 21.
YEAR ENDED OCTOBER 31 1998 1997 1996 1995 1994 1 NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 INCOME FROM INVESTMENT OPERATIONS: Net investment income 0.03 0.03 0.03 0.03 0.01 LESS DISTRIBUTIONS: Distributions from net investment income (0.03) (0.03) (0.03) (0.03) (0.01) NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 TOTAL RETURN 2 3.05% 3.10% 3.11% 3.36% 1.30% RATIOS TO AVERAGE NET ASSETS: Expenses 0.70% 0.69% 0.65% 0.65% 0.46% 3 Net investment income 3.00% 3.05% 3.09% 3.30% 2.68% 3 Expense waiver/reimbursement 4 0.51% 0.63% 0.65% 0.50% 0.53% 3 SUPPLEMENTAL DATA: Net assets, end of period (000 omitted) $66,136 $45,575 $54,286 $51,400 $56,275
1 Reflects operations for the period from May 9, 1994 (date of initial public investment) to October 31, 1994. For the period from April 25, 1994 (start of business) to May 9, 1994, the Fund had no investment activity. 2 Based on net asset value, which does not reflect the sales charge or contingent deferred sales charge, if applicable. 3 Computed on an annualized basis. 4 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 October 31, 1998
PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-101.3% 1 MARYLAND-99.2% $ 2,000,000 Anne Arundel County, MD, 3.65% TOBs (Baltimore Gas & Electric Co.), Optional Tender 6/30/1999 $ 2,000,000 2,000,000 Anne Arundel County, MD, EDRB (Series 1988), 3.05% CP (Baltimore Gas & Electric Co.), Mandatory Tender 3/8/1999 2,000,000 3,775,000 Anne Arundel County, MD, Economic Development Revenue Bonds (Series 1996) Weekly VRDNs (Atlas Container Corp. Project)/ (Mellon Bank N.A., Pittsburgh LOC) 3,775,000 2,175,000 Baltimore County, MD IDA, (Series 1994A) Weekly VRDNs (Pitts Realty Limited Partnership)/(PNC National Bank, Delaware LOC) 2,175,000 2,100,000 Baltimore County, MD Port Facility Monthly VRDNs (Occidental Petroleum Corp.)/(Morgan Guaranty Trust Co., New York LOC) 2,100,000 1,750,000 Baltimore County, MD, Revenue Bonds (1994 Issue) Weekly VRDNs (Direct Marketing Associates, Inc. Facility)/(First National Bank of Maryland, Baltimore LOC) 1,750,000 2,700,000 Baltimore, MD PCR Weekly VRDNs (SCM Plants, Inc.)/(Barclays Bank PLC, London LOC) 2,700,000 650,000 Baltimore, MD, 8.90% Bonds (MBIA INS), 10/15/1999 684,489 1,100,000 Carroll County, MD, Variable Rate Economic Development Refunding Revenue Bonds (Series 1995B) Weekly VRDNs (Evapco, Inc. Project)/(Nationsbank of Maryland, N.A. LOC) 1,100,000 1,000,000 Frederick County, MD, 7.20% Bonds (United States Treasury PRF), 4/1/1999 (@102) 1,034,170 2,170,000 Harford County, MD, EDRB (Series 1996) Weekly VRDNs (Citrus and Allied Essences Ltd.)/(First National Bank of Maryland, Baltimore LOC) 2,170,000 2,750,000 Maryland EDC, Tax Exempt Adjustable Mode IDRB's (Series 1998) Weekly VRDNs (Morrison Health Care, Inc.)/(Wachovia Bank of NC, N.A., Winston-Salem LOC) 2,750,000 2,000,000 Maryland Health & Higher Educational Facilities Authority, (Series 1998A) Weekly VRDNs (Charlestown Community)/(First Union National Bank, Charlotte, N.C. LOC) 2,000,000 3,000,000 Maryland Health & Higher Educational Facilities Authority, Revenue Bonds (Series 1994) Weekly VRDNs (University Physicians, Inc.)/(First National Bank of Maryland, Baltimore LOC) 3,000,000 3,305,000 Maryland State Community Development Administration, (PA- 170) Weekly VRDNs (Merrill Lynch Capital Services, Inc. LIQ) 3,305,000 1,935,000 Maryland State Community Development Administration, (Series 1990A) Weekly VRDNs (College Estates)/(First National Bank of Maryland, Baltimore LOC) 1,935,000 5,000,000 Maryland State Community Development Administration, (Series 1990B) Weekly VRDNs (Cherry Hill Apartment Ltd.)/ (Nationsbank, N.A., Charlotte LOC) 5,000,000 1,800,000 Maryland State Energy Financing Administration, Annual Tender Solid Waste Disposal Revenue Refunding Bonds, 4.20% TOBs (Nevamar Corp.)/(International Paper Co. GTD), Optional Tender 9/1/1999 1,800,000 3,000,000 Maryland State Energy Financing Administration, IDRB (Series 1988) Weekly VRDNs (Morningstar Foods, Inc.)/(First Union National Bank, Charlotte, N.C. LOC) 3,000,000 2,500,000 Maryland State Energy Financing Administration, Limited Obligation Variable Rate Demand Revenue Bonds (Series 1996) Weekly VRDNs (Keywell L.L.C.)/(Bank of America, IL LOC) 2,500,000 1,000,000 Maryland State IDFA, Economic Development Revenue Bonds (Series 1996) Weekly VRDNs (Townsend Culinary, Inc.)/ (SunTrust Bank, Atlanta LOC) 1,000,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 MARYLAND-CONTINUED $ 3,300,000 Maryland State IDFA, Economic Development Revenue Refunding Bonds (Series 1994) Weekly VRDNs (Johnson Controls, Inc.) $ 3,300,000 1,000,000 Maryland State IDFA, Limited Obligation Economic Development Revenue Bonds (Series 1994) Weekly VRDNs (Rock-Tenn Converting Co.)/(SunTrust Bank, Atlanta LOC) 1,000,000 3,000,000 Montgomery County, MD, EDR Weekly VRDNs (Howard Hughes Medical Center) 3,000,000 1,390,000 Prince George's County, MD, 6.125% Bonds, 1/15/1999 1,396,709 1,345,000 Prince George's County, MD, Equipment Acquisition Program, 3.50% Bonds (MBIA INS), 11/1/1999 1,348,241 1,100,000 Prince George's County, MD, IDRB (Series 1993), 3.90% TOBs (International Paper Co.), Optional Tender 7/15/1999 1,100,000 1,000,000 Prince George's County, MD, Series A, 6.60% Bonds, 2/1/1999 1,006,937 2,640,000 Queen Annes County, MD Economic Development Revenue, (Series 1994), 3.80% TOBs (Safeway, Inc.)/(Bankers Trust Co., New York LOC), Mandatory Tender 12/1/1998 2,640,000 3,000,000 Wicomico County, MD, EDRB (Series 1994) Weekly VRDNs (Field Container Co. L.P.)/(Northern Trust Co., Chicago, IL LOC) 3,000,000 Total 65,570,546 PUERTO RICO-2.1% 1,400,000 Puerto Rico Industrial, Medical & Environmental PCA, (Series 1983A), 3.60% TOBs (Reynolds Metals Co.)/(ABN AMRO Bank N.V., Amsterdam LOC), Optional Tender 9/1/1999 1,400,000 Total Investments (at amortized cost) 2 $ 66,970,546
Securities that are subject to Alternative Minimum Tax represents 52.2% of the portfolio as calculated based upon total portfolio market value. 1 The Fund may only invest in securities rated in one of the two highest short-term rating categories by nationally recognized statistical rating organizations ("NRSROs") or unrated securities of comparable quality. 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, MIG-1 or MIG-2 by Moody's Investors Service, Inc., or F-1+, F-1, or F-2 by Fitch IBCA, Inc. are all considered rated in one of the two highest short-term rating categories. Securities rated in the highest short-term rating category (and unrated securities of comparable quality) are identified as First Tier securities. Securities rated in the second highest short-term rating category (and unrated securities of comparable quality) are identified as Second Tier securities. The Fund follows applicable regulations in determining whether a security is rated and whether a security rated by multiple NRSROs in different rating categories should be identified as a First or Second Tier security. At October 31, 1998, the portfolio securities were rated as follows: Tier Rating Based on Total Market Value (Unaudited)
FIRST TIER SECOND TIER 95.67% 4.33%
2 Also represents cost for federal tax purposes. Note: The categories of investments are shown as a percentage of net assets ($66,136,320) at October 31, 1998. The following acronyms are used throughout this portfolio:
CP -Commercial Paper EDC -Economic Development Commission EDR -Economic Development Revenue EDRB -Economic Development Revenue Bonds GTD -Guaranty IDA -Industrial Development Authority IDRB -Industrial Development Revenue Bond IDFA -Industrial Development Finance Authority INS -Insured LIQ -Liquidity Agreement LOC -Letter of Credit MBIA -Municipal Bond Investors Assurance PCA -Pollution Control Authority PCR -Pollution Control Revenue PLC -Public Limited Company PRF -Prerefunded TOBs -Tender Option Bonds VRDNs -Variable Rate Demand Notes
See Notes which are an integral part of the Financial Statements Statement of Assets and Liabilities October 31, 1998
ASSETS: Total investments in securities, at amortized cost and value $ 66,970,546 Cash 211,087 Income receivable 340,190 Receivable for shares sold 940 Deferred organizational costs 6,616 Other Assets 4,862 Total assets 67,534,241 LIABILITIES: Payable for investments purchased $ 1,348,764 Income distribution payable 22,288 Accrued expenses 26,869 Total liabilities 1,397,921 Net Assets for 66,136,320 shares outstanding $ 66,136,320 NET ASSET VALUE, OFFERING PRICE, AND REDEMPTION PROCEEDS PER SHARE: $66,136,320 / 66,136,320 shares outstanding $1.00
See Notes which are an integral part of the Financial Statements Statement of Operations Year Ended October 31, 1998
INVESTMENT INCOME: Interest $ 2,129,415 EXPENSES: Investment advisory fee $ 287,116 Administrative personnel and services fee 125,001 Custodian fees 1,213 Transfer and dividend disbursing agent fees and expenses 23,546 Directors'/Trustees' fees 1,022 Auditing fees 12,000 Legal fees 10,315 Portfolio accounting fees 41,306 Shareholder services fee 143,558 Share registration costs 29,283 Printing and postage 12,949 Insurance premiums 5,535 Miscellaneous 4,502 Total expenses 697,346 WAIVERS: Waiver of investment advisory fee $ (287,116) Waiver of shareholder services fee (5,742) Total waivers (292,858) Net expenses 404,488 Net investment income $ 1,724,927
See Notes which are an integral part of the Financial Statements Statement of Changes in Net Assets
YEAR ENDED OCTOBER 31 1998 1997 INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income $ 1,724,927 $ 1,396,308 DISTRIBUTIONS TO SHAREHOLDERS: Distributions from net investment income (1,724,927) (1,396,308) SHARE TRANSACTIONS: Proceeds from sale of shares 162,453,813 143,776,753 Net asset value of shares issued to shareholders in payment of distributions declared 1,432,310 1,155,608 Cost of shares redeemed (143,324,566) (153,643,401) Change in net assets resulting from share transactions 20,561,557 (8,711,040) Change in net assets 20,561,557 (8,711,040) NET ASSETS: Beginning of period 45,574,763 54,285,803 End of period $ 66,136,320 $ 45,574,763
See Notes which are an integral part of the Financial Statements Notes to Financial Statements October 31, 1998 ORGANIZATION Federated Municipal Trust (the "Trust") is registered under the Investment Company Act of 1940, as amended (the "Act") as an open-end, management investment company. The Trust consists of 17 portfolios. The financial statements included herein are only those of Maryland Municipal Cash Trust (the "Fund"). The financial statements of the other portfolios are presented separately. The assets of each portfolio are segregated and a shareholder's interest is limited to the portfolio in which shares are held. The investment objective of the Fund is to provide current income exempt from federal regular income tax and the personal income taxes imposed by the State of Maryland and Maryland municipalities 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. 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 Board of Trustees (the "Trustees") to issue an unlimited number of full and fractional shares of beneficial interest (without par value). At October 31, 1998, capital paid-in aggregated $66,136,320. Transactions in shares were as follows:
YEAR ENDED OCTOBER 31 1998 1997 Shares sold 162,453,813 143,776,753 Shares issued to shareholders in payment of distributions declared 1,432,310 1,155,608 Shares redeemed (143,324,566) (153,643,401) Net change resulting from share transactions 20,561,557 (8,711,040)
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES INVESTMENT ADVISORY FEE Federated Management, the Fund's investment adviser (the "Adviser"), receives for its services an annual investment advisory fee equal to 0.50% of the Fund's average daily net assets. The Adviser may voluntarily choose to waive any portion of its fee and/or reimburse certain operating expenses of the Fund. The Adviser can modify or terminate this voluntary waiver and/ or reimbursement 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 ("FSS"), the Fund will pay FSS up to 0.25% of average daily net assets of the Fund for the period. The fee paid to FSS is used to finance certain services for shareholders and to maintain shareholder accounts. FSS may voluntarily choose to waive any portion of its fee. FSS can modify or terminate this voluntary waiver at any time at its sole discretion. TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES FServ, through its subsidiary, Federated Shareholder Services Company ("FSSC") serves as transfer 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. ORGANIZATIONAL EXPENSES Organizational expenses of $45,952 were borne initially by the Adviser. The fund has reimbursed the Adviser for these expenses. These expenses have been deferred and are being amortized over the five-year period following the Fund's effective date. INTERFUND TRANSACTIONS During the period ended October 31, 1998, the Fund engaged in purchase and sale transactions with funds that have a common investment adviser (of affiliated investment advisers), common Directors/Trustees, and/or common Officers. These purchase and sale transactions were made at current market value pursuant to Rule 17a-7 under the Act amounting to $122,245,000 and $101,540,000, respectively. GENERAL Certain of the Officers and Trustees of the Trust are Officers and Directors or Trustees of the above companies. CONCENTRATION OF CREDIT RISK Since the Fund invests a substantial portion of its assets in issuers located in one state, it will be more susceptible to factors adversely affecting issuers of that state than would be a comparable tax-exempt mutual fund that invests nationally. In order to reduce the credit risk associated with such factors, at October 31, 1998, 68.1% of the securities in the portfolio of investments are backed by letters of credit or bond insurance of various financial institutions and financial guaranty assurance agencies. The percentage of investments insured by or supported (backed) by a letter of credit from any one institution or agency did not exceed 13.2% of total investments. 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 BOARD OF TRUSTEES OF FEDERATED MUNICIPAL TRUST OF MARYLAND MUNICIPAL CASH TRUST: We have audited the accompanying statement of assets and liabilities of Maryland Municipal Cash Trust (an investment portfolio of Federated Municipal Trust, a Massachusetts business trust), including the schedule of portfolio investments, as of October 31, 1998, the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for the periods presented. These financial statements and financial highlights are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the 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 October 31, 1998, by correspondence with the custodian and the broker. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Maryland Municipal Cash Trust (an investment portfolio of Federated Municipal Trust) as of October 31, 1998, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and its financial highlights for the periods presented, in conformity with generally accepted accounting principles. Arthur Andersen LLP Boston, Massachusetts December 23, 1998 [Graphic] PROSPECTUS Maryland Municipal Cash Trust A Portfolio of Federated Municipal Trust December 31, 1998 A Statement of Additional Information (SAI) dated December 31, 1998, is incorporated by reference into this prospectus. To obtain the SAI 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] Maryland Municipal Cash 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. 811-5911 Cusip 314229774 G00105-01-A (12/98) [Graphic] STATEMENT OF ADDITIONAL INFORMATION Maryland Municipal Cash Trust A Portfolio of Federated Municipal Trust This Statement of Additional Information (SAI) is not a prospectus. Read this SAI in conjunction with the prospectus for Maryland Municipal Cash Trust dated December 31, 1998. Obtain the prospectus without charge by calling 1-800-341- 7400. CONTENTS How is the Fund Organized? Securities in Which the Fund Invests How is the Fund Sold? Subaccounting Services Redemption in Kind Massachusetts Partnership Law Account and Share Information Tax Information Who Manages and Provides Services to the Fund? How Does the Fund Measure Performance? Who is Federated Investors, Inc.? Investment Ratings Addresses DECEMBER 31, 1998 [Federated Investors Logo] Federated Securities Corp., Distributor, subsidiary of Federated Investors, Inc. Cusip 314229774 G00105-02-B (12/98) How is the Fund Organized? The Fund is a diversified portfolio of Federated Municipal Trust (Trust). The Trust is an open-end, management investment company that was established under the laws of the Commonwealth of Massachusetts on September 1, 1989. The Trust may offer separate series of shares representing interests in separate portfolios of securities. The Board of Trustees (the Board) has established one class of shares of the Fund (Shares). Securities in Which the Fund Invests SECURITIES DESCRIPTIONS AND TECHNIQUES In pursuing its investment strategy, the Fund may invest in the following tax- exempt securities for any purpose that is consistent with its investment objective. General Obligation Bonds General obligation bonds are supported by the issuer's full faith and credit. The issuer must levy and collect taxes sufficient to pay principal and interest on the bonds. However, the issuer's authority to levy additional taxes may be limited by its charter or state law. Special Revenue Bonds Special revenue bonds are payable solely from specific revenues received by the issuer. The revenues may consist of specific taxes, assessments, tolls, fees or other types of municipal revenues. For example, a municipality may issue bonds to build a toll road, and pledge the tolls to repay the bonds. Bondholders could not collect from the municipality's general taxes or revenues. Therefore, any shortfall in the tolls normally could result in a default on the bonds. Private Activity Bonds Private activity bonds are special revenue bonds used to finance private entities. For example, a municipality may issue bonds to finance a new factory to improve its local economy. The municipality would lend the proceeds to the company using the factory, and the company would agree make loan payments sufficient to repay the bonds. The bonds would be payable solely from the company's loan payments, not from any other revenues of the municipality. Therefore, any default on the loan normally would result in a default on the bonds. Municipal Leases Municipalities may enter into leases for equipment or facilities. In order to comply with state public financing laws, these leases are typically subject to annual appropriation. In other words, a municipality may end a lease, without penalty, by not providing for the lease payments in its annual budget. After the lease ends, the lessor (the Fund) can resell the equipment or facility but the Fund may lose money on the sale. The Fund may invest in securities supported by pools of municipal leases. The most common type of lease backed securities are certificates of participation (COPs). However, the Fund may also invest directly in individual leases. Credit Enhancement Common types of credit enhancement include guarantees, letters of credit, bond insurance and surety bonds. Credit enhancement also includes arrangements where securities or other liquid assets secure payment of a fixed income security. If a default occurs, these assets may be sold and the proceeds paid to a security's holders. Either form of credit enhancement reduces credit risks by providing another source of payment for a fixed income security. Investment Ratings A nationally recognized rating service'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 (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 IBCA, 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 rating service can be treated as being in one of the two highest short-term rating categories; currently, such securities must be rated by two rating services in one of their two highest rating categories. See "Regulatory Compliance." INVESTMENT RISKS There are many factors which may effect an investment in the Fund. The Fund's principal risks are described in its prospectus. An additional risk factor is outlined below. Tax Risk In order for the interest income from the securities to be exempt from federal regular income tax ("tax-exempt"), tax-exempt securities must meet certain legal requirements. Failure to meet such requirements may cause the interest received and distributed by the Fund to shareholders to be taxable. FUNDAMENTAL INVESTMENT POLICIES The Fund invests so that at least 80% of the Fund's annual interest income is exempt from federal regular income tax and Maryland state and local income tax. This policy is fundamental and cannot be changed without shareholder approval. 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 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 net 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. 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 its 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 Maryland municipal securities or temporary investments or enter into repurchase agreements in accordance with its investment objective, policies, and 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 Real Estate The Fund will not purchase or sell real estate or real estate limited partnerships, 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 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 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 Board and repurchase agreements providing for settlement in more than seven days notice. 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 a nationally recognized rating service, 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 Board has 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 Board 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 Board 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 Board 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. 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 to 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 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. 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. 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 Trust have equal voting rights, except that in matters affecting only a particular Fund or class, only Shares of that Fund or class are entitled to vote. Trustees may be removed by the Board or by shareholders at a special meeting. A special meeting of shareholders will be called by the Board upon the written request of shareholders who own at least 10% of the Trust's outstanding shares of all series entitled to vote. As of December 8, 1998, the following shareholders owned of record, beneficially, or both, 5% or more of the outstanding Shares: First Union Capital Markets Corp., Charlotte, North Carolina, owned approximately 23,321,136 Shares (34.09%); Arthur L. Smith, Baltimore, Maryland, owned approximately 3,621,520 Shares (5.29%); and Farmers & Co., Frederick, Maryland, owned approximately 5,862,613 Shares (8.57%). Shareholders owning 25% or more of outstanding Shares may be in control and be able to affect the outcome of certain matters presented for a vote of shareholders. Tax Information FEDERAL INCOME TAX The Fund intends to meet the requirements of Subchapter M of the Internal Revenue Code applicable to regulated investment companies. If these requirements are not met, it will not receive the special tax treatment and will pay federal income tax. The Fund will be treated as a single, separate entity for federal income tax purposes so that income earned and capital gains and losses realized by the Trust's other portfolios will be separate from those realized by the Fund. STATE TAXES Under existing Maryland laws, distributions made by the Fund will not be subject to Maryland state or local income taxes to the extent that such distributions qualify as exempt-interest dividends under the Internal Revenue Code, and represent (i) interest on tax-exempt obligations of Maryland or its political subdivisions or authorities; (ii) interest on obligations of the United States or an authority, commission, instrumentality, possession or territory of the United States; or (iii) gain realized by the Fund from the sale or exchange of bonds issued by Maryland, a political subdivision of Maryland, or the United States government (excluding obligations issued by the District of Columbia, a territory or possession of the United States, or a department, agency, instrumentality, or political subdivision of the District, territory or possession). Conversely, to the extent that distributions made by the Fund are derived from other types of obligations, such distributions will be subject to Maryland income taxes. Who Manages and Provides Services to the Fund? BOARD OF TRUSTEES The Board is responsible for managing the Trust's business affairs and for exercising all the Trust's powers except those reserved for the shareholders. Information about each Board member is provided below and includes the following data: name, address, birthdate, present position(s) held with the Trust, principal occupations for the past five years and other notable positions held, total compensation received as a Trustee from the Trust for its most recent fiscal year, and the total compensation received from the Federated Fund Complex for the most recent calendar year. The Trust is comprised of 17 Funds and the Federated Fund Complex is comprised of 56 investment companies, whose investment advisers are affiliated with the Fund's Adviser. As of December 8, 1998, 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.
Name Total Birthdate Aggregate Compensation From Address Principal Occupations Compensation Trust and Fund Position With Trust for Past 5 Years From Trust Complex - ------------------------------------------------------------------------------------------------------------------------------------ John F. Donahue##* Chief Executive Officer and Director or Trustee of $0 $0 for the Trust Birthdate: July 28, 1924 the Federated Fund Complex. Chairman and Director, and 56 other Federated Investors Tower Federated Investors, Inc.; Chairman and Trustee, investment 1001 Liberty Avenue Federated Advisers, Federated Management, and companies in the Pittsburgh, PA Federated Research; Chairman and Director, Federated Fund Complex CHAIRMAN and TRUSTEE Research Corp., and Federated Global Research Corp.; Chairman, Passport Research, Ltd. Thomas G. Bigley Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: February 3, 1934 Director, Member of Executive Committee, Children's Trust and 15 Old Timber Trail Hospital of Pittsburgh; formerly: Senior Partner, 56 other Pittsburgh, PA Ernst & Young LLP; Director, MED 3000 Group, Inc.; investment TRUSTEE Director, Member of Executive Committee, University companies in the of Pittsburgh. Fund Complex John T. Conroy, Jr. Director or Trustee of the Federated Fund Complex; $4,484.62 $122,362 for the Birthdate: June 23, 1937 President, Investment Properties Corporation; Senior Trust and Wood/IPC Commercial Dept. Vice President, John R. Wood and Associates, Inc., 56 other John R. Wood and Realtors; Partner or Trustee in private real estate investment Associates, Inc. Realtors ventures in Southwest Florida; formerly: President, companies in the 3255 Tamiami Trail North Naples Property Management, Inc. and Northgate Fund Complex Naples, FL Village Development Corporation. TRUSTEE William J. Copeland Director or Trustee of the Federated Fund Complex; $4,484.62 $122,362 for the Birthdate: July 4, 1918 Director and Member of the Executive Committee, Trust and One PNC Plaza-23rd Floor Michael Baker, Inc.; formerly: Vice Chairman and 56 other Pittsburgh, PA Director, PNC Bank, N.A., and PNC Bank Corp.; investment TRUSTEE Director, Ryan Homes, Inc. companies in the Fund Complex Retired: Director, United Refinery; Director, Forbes Fund; Chairman, Pittsburgh Foundation; Chairman, Pittsburgh Civic Light Opera. James E. Dowd, Esq. Director or Trustee of the Federated Fund Complex; $4,484.62 $122,362 for the Birthdate: May 18, 1922 Attorney-at-law; Director, The Emerging Germany Fund, Trust and 571 Hayward Mill Road Inc. 56 other Concord, MA investment TRUSTEE Retired: President, Boston Stock Exchange, Inc.; companies in the Regional Administrator, United States Securities and Fund Complex Exchange Commission. Lawrence D. Ellis, M.D.* Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: October 11, 1932 Professor of Medicine, University of Pittsburgh; Trust and 3471 Fifth Avenue Medical Director, University of Pittsburgh Medical 56 other Suite 1111 Center - Downtown; Hematologist, Oncologist, and investment Pittsburgh, PA Internist, Presbyterian and Montefiore Hospitals; companies in the TRUSTEE Member, National Board of Trustees, Leukemia Society Fund Complex of America. Edward L. Flaherty, Jr., Director or Trustee of the Federated Fund Complex; $4,484.62 $122,362 for the Esq. # Attorney, of Counsel, Miller, Ament, Henny & Kochuba; Trust and Birthdate: June 18, 1924 Director, Eat'N Park Restaurants, Inc.; formerly: 56 other Miller, Ament, Henny & Counsel, Horizon Financial, F.A., Western Region; investment Kochuba Partner, Meyer and Flaherty. companies in the 205 Ross Street Fund Complex Pittsburgh, PA TRUSTEE Peter E. Madden Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: March 16, 1942 formerly: Representative, Commonwealth of Trust and One Royal Palm Way Massachusetts General Court; President, State Street 56 other 100 Royal Palm Way Bank and Trust Company and State Street Corporation. investment Palm Beach, FL companies in the TRUSTEE Retired: Director, VISA USA and VISA International; Fund Complex Chairman and Director, Massachusetts Bankers Association; Director, Depository Trust Corporation. John E. Murray, Jr., J.D., Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the S.J.D. President, Law Professor, Duquesne University; Trust and Birthdate: December 20, 1932 Consulting Partner, Mollica & Murray. 56 other President, Duquesne investment University Retired: Dean and Professor of Law, University of companies in the Pittsburgh, PA Pittsburgh School of Law; Dean and Professor of Law, Fund Complex TRUSTEE Villanova University School of Law. Wesley W. Posvar Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: September 14, President, World Society of Ekistics, Athens; Trust and 1925 Professor, International Politics; Management 56 other 1202 Cathedral of Learning Consultant; Trustee, Carnegie Endowment for investment University of Pittsburgh International Peace, RAND Corporation, Online companies in the Pittsburgh, PA Computer Library Center, Inc., National Defense Fund Complex TRUSTEE University and U.S. Space Foundation; President Emeritus, University of Pittsburgh; Founding Chairman, National Advisory Council for Environmental Policy and Technology, Federal Emergency Management Advisory Board and Czech Management Center, Prague. Retired: Professor, United States Military Academy; Professor, United States Air Force Academy. Marjorie P. Smuts Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: June 21, 1935 Public Relations/Marketing/Conference Planning. Trust and 4905 Bayard Street 56 other Pittsburgh, PA Retired: National Spokesperson, Aluminum Company of investment TRUSTEE America; business owner. companies in the Fund Complex Glen R. Johnson* Trustee, Federated Investors, Inc.; staff member, $0 $0 for the Trust Birthdate: May 2, 1929 Federated Securities Corp. and Federated Investors Tower 8 other investment 1001 Liberty Avenue companies in the Pittsburgh, PA Fund Complex PRESIDENT and TRUSTEE J. Christopher Donahue##* President or Executive Vice President of the $0 $0 for the Trust Birthdate: April 11, 1949 Federated Fund Complex; Director or Trustee of some and Federated Investors Tower of the Funds in the Federated Fund Complex; President 18 other 1001 Liberty Avenue and Director, Federated Investors, Inc.; President investment Pittsburgh, PA and Trustee, Federated Advisers, Federated companies in the EXECUTIVE VICE PRESIDENT Management, and Federated Research; President and Fund Complex Director, Federated Research Corp. and Federated Global Research Corp.; President, Passport Research, Ltd.; Trustee, Federated Shareholder Services Company; Director, Federated Services Company. Edward C. Gonzales* Trustee or Director of some of the Funds in the $0 $0 for the Trust Birthdate: October 22, 1930 Federated Fund Complex; President, Executive Vice and Federated Investors Tower President and Treasurer of some of the Funds in the 1 other investment 1001 Liberty Avenue Federated Fund Complex; Vice Chairman, Federated companies in the Pittsburgh, PA Investors, Inc.; Vice President, Federated Advisers, Fund Complex EXECUTIVE VICE PRESIDENT 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. John W. McGonigle Executive Vice President and Secretary of the $0 $0 for the Trust Birthdate: October 26, 1938 Federated Fund Complex; Executive Vice President, and Federated Investors Tower Secretary, and Director, Federated Investors, Inc.; 56 other 1001 Liberty Avenue Trustee, Federated Advisers, Federated Management, investment Pittsburgh, PA and Federated Research; Director, Federated Research companies in the EXECUTIVE VICE PRESIDENT Corp. and Federated Global Research Corp.; Director, Fund Complex and SECRETARY Federated Services Company; Director, Federated Securities Corp. Richard J. Thomas Treasurer of the Federated Fund Complex; Vice $0 $0 for the Trust Birthdate: June 17, 1954 President - Funds Financial Services Division, and Federated Investors Tower Federated Investors, Inc.; Formerly: various 56 other 1001 Liberty Avenue management positions within Funds Financial Services investment Pittsburgh, PA Division of Federated Investors, Inc. companies in the TREASURER Fund Complex Richard B. Fisher* President or Vice President of some of the Funds in $0 $0 for the Trust Birthdate: May 17, 1923 the Federated Fund Complex; Director or Trustee of and Federated Investors Tower some of the Funds in the Federated Fund Complex; 6 other investment 1001 Liberty Avenue Executive Vice President, Federated Investors, Inc.; companies in the Pittsburgh, PA Chairman and Director, Federated Securities Corp. Fund Complex VICE PRESIDENT William D. Dawson, III Chief Investment Officer of this Fund and various $0 $0 for the Trust Birthdate: March 3, 1949 other Funds in the Federated Fund Complex; Executive and Federated Investors Tower Vice President, Federated Investment Counseling, 41 other 1001 Liberty Avenue Federated Global Research Corp., Federated Advisers, investment Pittsburgh, PA Federated Management, Federated Research, and companies in the CHIEF INVESTMENT OFFICER Passport Research, Ltd.; Registered Representative, Fund Complex 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. Mary Jo Ochson Senior Portfolio Manager and Vice President of eight $0 $0 for the Birthdate: September 12, investment companies in the Federated Fund Complex; Trust and 1953 Senior Vice President, Federated Investment 7 other investment Federated Investors Tower Counseling, Federated Advisers, Federated Global companies 1001 Liberty Avenue Research Corp., Federated Management, Federated in the Fund Complex Pittsburgh, PA Research, Federated Research Corp. and Passport SENIOR PORTFOLIO Research, Ltd.; Formerly: Vice President, Federated MANAGER/VICE PRESIDENT Advisers, Federated Management, Federated Research, Federated Research Corp. , Passport Research, Ltd. and Federated Global Research Corp. Jeff A. Kozemchak Senior Portfolio Manager and Vice President of four $0 $0 for the Birthdate: January 15, 1960 investment companies in the Federated Fund Complex; Trust and Federated Investors Tower Vice President, Federated Investment Counseling, 3 other investment 1001 Liberty Avenue Federated Advisers, Federated Global Research Corp., companies Pittsburgh, PA Federated Management, Federated Research, Federated in the Fund Complex SENIOR PORTFOLIO Research Corp. and Passport Research, Ltd.; MANAGER/VICE PRESIDENT Formerly: Assistant Vice President and Investment Analyst, Federated Research Corp. and Passport Research, Ltd. ; Assistant Vice President, Federated Advisers, Federated Management and Federated Research.
## Mr. Donahue is the father of J. Christopher Donahue, Executive Vice President of the Trust. 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 Trust, 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 Trust. 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:
Maximum Average Aggregate Daily Administrative Fee Net Assets of the Federated Funds - ----------------------------------------------------------------- 0.150 of 1% on the first $250 million 0.125 of 1% on the next $250 million 0.100 of 1% on the next $250 million 0.075 of 1% on assets in excess of $750 million
The administrative fee received during any fiscal year shall be at least $125,000 per portfolio and $30,000 per each additional class of shares. Federated Services Company may voluntarily waive a portion of its fee and may reimburse the Fund for expenses. Federated Services Company also provides certain accounting and recordkeeping services with respect to the Fund's portfolio investments for a fee based on Fund assets plus out-of-pocket expenses. CUSTODIAN State Street Bank and Trust Company, Boston, Massachusetts, is custodian for the securities and cash of the Fund. Foreign instruments purchased by the Fund are held by foreign banks participating in a network coordinated by State Street Bank. TRANSFER AGENT AND DIVIDEND DISBURSING AGENT Federated Services Company, through its registered transfer agent subsidiary, Federated Shareholder Services Company, maintains all necessary shareholder records. The Fund pays the transfer agent a fee based on the size, type, and number of accounts and transactions made by shareholders. INDEPENDENT PUBLIC ACCOUNTANTS Arthur Andersen LLP is the independent public accountant for the Fund. FEES PAID BY THE FUND FOR SERVICES For the Year Ended October 31, 1998 1997 1996 - ---------------------------------------------------------------- Advisory Fee Earned $287,116 $229,262 $237,399 - ---------------------------------------------------------------- Advisory Fee Reduction 287,116 229,262 237,399 - ---------------------------------------------------------------- Brokerage Commissions 0 0 0 - ---------------------------------------------------------------- Administrative Fee 125,001 125,000 125,000 - ---------------------------------------------------------------- Shareholder Services Fee 137,816 ---- ---- - ---------------------------------------------------------------- If the Fund's expenses are capped at a particular level, the cap does not include reimbursement to the Fund of any expenses incurred by shareholders who use the transfer agent's subaccounting facilities. How does the Fund Measure Performance? The Fund may advertise Share performance by using the Securities and Exchange Commission's (SEC) standard method for calculating performance applicable to all mutual funds. The SEC also permits this standard performance information to be accompanied by non-standard performance information. Unless otherwise stated, any quoted Share performance reflects the effect of non-recurring charges, such as maximum sales charges, which, if excluded, would increase the total return and yield. The performance of Shares depends upon such variables as: portfolio quality; average portfolio maturity; type and value of portfolio securities; changes in interest rates; changes or differences in the Fund's or any class of Shares' expenses; and various other factors. Share performance fluctuates on a daily basis largely because net earnings and offering price per Share 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-, and since inception periods ended October 31, 1998. Yield, Effective Yield and Tax-Equivalent Yield given for the 7-day period ended October 31, 1998.
Share Class 7-Day Period 1 Year Since Inception on May 9, 1994 - ------------------------------------------------------------------------------------------------------------------------------------ Total Return -- 3.05% 3.11% - ------------------------------------------------------------------------------------------------------------------------------------ Yield 2.54% -- -- Effective Yield 2.58% -- -- Tax-Equivalent Yield 4.90% -- -- - ------------------------------------------------------------------------------------------------------------------------------------
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. The tax-equivalent yield of Shares is calculated similarly to the yield, but is adjusted to reflect the taxable yield that Shares would have had to earn to equal the actual yield, assuming a specific tax rate. 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. TAX EQUIVALENCY TABLE Set forth below is a sample of a tax-equivalency table that may be used in advertising and sales literature. This table is for illustrative purposes only and is not representative of past or future performance of the Fund. The interest earned by the tax-exempt securities owned by the Fund generally remains free from federal regular income tax and is often free from state and local taxes as well. However, some of the Fund's income may be subject to the federal alternative minimum tax and state and/or local taxes.
TAXABLE YIELD EQUIVALENT FOR 1998 STATE OF MARYLAND - ------------------------------------------------------------------------------------------------------------------------------------ TAX BRACKET: FEDERAL: 15.00% 28.00% 31.00% 36.00% 39.60% COMBINED FEDERAL AND STATE: 22.00% 35.00% 38.75% 43.75% 47.35% - ------------------------------------------------------------------------------------------------------------------------------------ JOINT $1- $42,351- $102,301- $155,951- OVER RETURN 42,350 102,300 155,950 278,450 $278,450 SINGLE $1- $25,351- $61,401- $128,101- OVER RETURN 25,350 61,400 128,100 278,450 $278,450 - ------------------------------------------------------------------------------------------------------------------------------------ Tax-Exempt Yield Taxable Yield Equivalent - ------------------------------------------------------------------------------------------------------------------------------------ 1.50% 1.92% 2.31% 2.45% 2.67% 2.85% 2.00% 2.56% 3.08% 3.27% 3.56% 3.80% 2.50% 3.21% 3.85% 4.08% 4.44% 4.75% 3.00% 3.85% 4.62% 4.90% 5.33% 5.70% 3.50% 4.49% 5.38% 5.71% 6.22% 6.65% 4.00% 5.13% 6.15% 6.53% 7.11% 7.60% 4.50% 5.77% 6.92% 7.35% 8.00% 8.55% 5.00% 6.41% 7.69% 8.16% 8.89% 9.50% 5.50% 7.05% 8.46% 8.98% 9.78% 10.45% 6.00% 7.69% 9.23% 9.80% 10.67% 11.40%
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. 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., 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 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, 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, 1997, Federated managed 11 bond funds with approximately $2.1 billion in assets and 22 money market funds with approximately $10.9 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 tax-exempt 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 27 years' experience. As of December 31, 1997, Federated managed 29 equity funds totaling approximately $11.7 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, 1997, Federated managed 11 money market funds and 16 bond funds with assets approximating $17.1 billion and $5.6 billion, respectively. Federated's corporate bond decision making--based on intensive, diligent credit analysis--is backed by over 22 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 $200 billion. Government Funds In the government sector, as of December 31, 1997, Federated manages 9 mortgage- backed, 6 government/ agency and 18 government money market mutual funds, with assets approximating $5.9 billion, $1.5 billion and $35 billion, respectively. Federated trades approximately $400 million in U.S. government and mortgage- backed securities daily and places approximately $23 billion in repurchase agreements each day. Federated introduced the first U.S. government fund to invest in U.S. government bond securities in 1969. Federated has been a major force in the short- and intermediate-term government markets since 1982 and currently manages approximately $36 billion in government funds within these maturity ranges. 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, 1997, Federated managed more than $63.1 billion in assets across 51 money market funds, including 18 government, 11 prime and 22 municipal with assets approximating $35 billion, $17.1 billion and $10.9 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 $4 trillion to the more than 6,700 funds available, according to the Investment Company Institute. Federated distributes mutual funds through its subsidiaries for a variety of investment purposes. Specific markets include: FEDERATED CLIENTS OVERVIEW 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. Investment Ratings APPENDIX STANDARD & POOR'S SHORT-TERM MUNICIPAL OBLIGATION RATINGS A Standard & Poor's 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-1+, 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 rated 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. MOODY'S INVESTORS SERVICE, INC., SHORT-TERM MUNICIPAL OBLIGATION RATINGS Moody's Investor Service, Inc. 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 IBCA, 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. Addresses MARYLAND MUNICIPAL CASH 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 Management Federated Investors Tower 1001 Liberty Avenue, Pittsburgh, PA 15222-3779 Custodian State Street Bank and Trust Company P.O. Box 8600 Boston, MA 02266-8600 Transfer Agent and Dividend Disbursing Agent Federated Shareholder Services Company P.O. Box 8600 Boston, MA 02266-8600 Independent Public Accountants Arthur Andersen LLP 225 Franklin Street Boston, MA 02110-2812 PROSPECTUS Michigan Municipal Cash Trust A Portfolio of Federated Municipal Trust INSTITUTIONAL SHARES A money market mutual fund seeking to provide current income exempt from federal regular income tax and the personal income taxes imposed by the State of Michigan. 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.December 31, 1998 DECEMBER 31, 1998 CONTENTS Risk/Return Summary 1 What are the Fund's Fees and Expenses? 2 What are the Fund's Investment Strategies? 3 What are the Principal Securities in Which the Fund Invests? 4 What are the Specific Risks of Investing in the Fund? 4 What do Shares Cost? 5 How is the Fund Sold? 6 How to Purchase Shares 6 How to Redeem Shares 7 Account and Share Information 9 Who Manages the Fund? 10 Financial Information 11 Report of Independent Public Accountants 25 Risk/Return Summary WHAT IS THE FUND'S INVESTMENT OBJECTIVE? The Fund is a money market fund which seeks to maintain a stable net asset value of $1.00. The Fund's investment objective is to provide current income exempt from federal regular income tax and the personal income tax imposed by the State of Michigan 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 tax-exempt securities so that the Fund's annual interest income is exempt from federal regular income tax and Michigan state income and intangibles tax. Interest from the Fund's investments may be subject to the federal alternative minimum tax for individuals and corporations. WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND? Because the Fund may invest a significant portion of its assets in securities of a single issuer, an investment in the Fund may involve additional risks compared to a fully diversified money market 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] - See Appendix A-3 Historically, the Fund has maintained a constant $1.00 net asset value per share. The bar chart shows the variability of the Fund's Institutional Shares Class on a yearly basis. The Fund's Institutional Shares are not sold subject to a sales charge (load). Hence, the total returns displayed above are based upon the net asset value. The Fund's Institutional Shares year-to-date total return as of the most recent calendar quarter of September 30, 1998 was 2.49%. Within the period shown in the Chart, the Fund's highest quarterly return was 0.90% (quarter ended June 30, 1997). Its lowest quarterly return was 0.78% (quarter ended March 31, 1997). The Fund's Institutional Shares Seven-Day Net Yield as of 12/31/97 was 3.75%. The following table represents the Fund's Institutional Shares Average Annual Total Return through 12/31/97. CALENDAR PERIOD FUND 1 Year 3.47% Start of Performance 1 3.41% 1 The Fund's start of performance date was March 2, 1996. Investors may call the Fund at 1-800-341-7400 to acquire the current Seven- Day Net Yield. While 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? MICHIGAN MUNICIPAL CASH TRUST FEES AND EXPENSES This table describes the fees and expenses that you may pay if you buy, hold and redeem shares of the Fund's Institutional Shares. SHAREHOLDER FEES 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 a percentage of average net assets) Management Fee 2 0.50% Distribution (12b-1) Fee None Shareholder Services Fee 3 0.25% Other Expenses 0.23% Total Annual Fund Operating Expenses 0.98% 1 Although not contractually obligated to do so, the adviser and shareholder services provider waived certain amounts. These are shown below along with the net expenses the Fund actually paid for the fiscal year ended October 31, 1998. Waiver of Fund Expenses 0.58% Total Actual Annual Operating Expenses (after waivers) 0.40% 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 0.17% for the year ended October 31, 1998. 3 The shareholder services fee for Institutional Shares has been voluntarily waived. This voluntary waiver can be terminated at any time. There was no shareholder services fee paid by the Fund (after the voluntary waiver) for the year ended October 31, 1998.
EXAMPLE The following Example is intended to help you compare the cost of investing in the Fund's Institutional Shares with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund's Institutional 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 Institutional Shares' operating expenses are BEFORE WAIVERS as shown above and remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be: 1 YEAR 3 YEARS 5 YEARS 10 YEARS Expenses assuming no redemption $100 $312 $542 $1,201 WHAT ARE THE FUND'S INVESTMENT STRATEGIES? The Fund invests in a portfolio of high-quality tax-exempt securities maturing in 13 months or less. The average maturity of the Fund's portfolio, computed on a dollar-weighted basis, will be 90 days or less. The Fund's Adviser performs a fundamental credit analysis to develop an approved list of issuers and securities that meet the Adviser's minimum credit standards. The Adviser targets an average portfolio maturity based upon its interest rate outlook and the tax-exempt securities available. The Adviser structures the portfolio by combining variable rate demand instruments and municipal notes. Depending on the supply of tax-exempt securities, the Adviser generally shortens the portfolio's maturity when it expects interest rates to rise and extends the maturity when it expects interest rates to fall. TEMPORARY DEFENSIVE INVESTMENTS During adverse market conditions the Fund may temporarily depart from its principal investment strategies by investing in securities subject to federal regular income tax and the personal income tax imposed by the State of Michigan. Temporary investments will be of comparable quality to other securities in which the Fund invests. This may cause the Fund to give up greater investment returns to maintain the safety of principal. This also may cause the Fund to receive and distribute taxable income to investors. WHAT ARE THE PRINCIPAL SECURITIES IN WHICH THE FUND INVESTS? TAX-EXEMPT SECURITIES Tax-exempt securities are fixed income securities that pay interest exempt from regular federal income taxes. States, counties, cities and other political subdivisions and authorities typically issue tax-exempt securities. Tax-exempt securities are generally differentiated by their source of repayment. FIXED INCOME SECURITIES Fixed income 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. VARIABLE RATE DEMAND INSTRUMENTS Variable rate demand instruments are tax-exempt securities that require the issuer or a third party, such as a dealer or bank, to repurchase the security for its face value upon demand. The securities also bear interest at a variable rate intended to cause the securities to trade at their face value. The Fund treats demand instruments as short-term securities, even though their stated maturity may extend beyond 13 months. MUNICIPAL NOTES Municipal notes are short-term tax-exempt securities. Many municipalities issue such notes to fund their current operations before collecting taxes or other municipal revenues. Municipalities may also issue notes to fund capital projects before issuing long-term bonds. The issuers typically repay the notes at the end of their fiscal year, either with taxes, other revenues or proceeds from newly issued notes or bonds. INVESTMENT 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 rating services or be of comparable quality to securities having such ratings. CREDIT ENHANCEMENT Credit enhancement consists of an arrangement in which a company agrees to pay amounts due on a fixed income security if the issuer defaults. In some cases the company providing credit enhancement makes all payments directly to the security holders and receives reimbursement from the issuer. Normally, the credit enhancer has greater financial resources and liquidity than the issuer. For this reason, the Adviser usually evaluates the credit risk of a fixed income security based solely upon its credit enhancement. WHAT ARE THE SPECIFIC RISKS OF INVESTING IN THE FUND? Although there are many factors which may affect an investment in the Fund, the principal risks of investing in a tax-exempt money market fund are described below. CREDIT RISK Credit risk is the possibility that an issuer or a credit enhancer will default (fails to repay interest and principal when due). If an issuer or credit enhancer defaults, the Fund will lose money. Money market funds try to minimize this risk by purchasing higher quality securities. Many fixed income securities receive credit ratings from companies such as Standard & Poor's and Moody's Investor Services. Fixed income securities receive different credit ratings depending on the rating company's assessment of the likelihood of default by the issuer. The lower the credit rating, the greater the credit risk. If the security is unrated, greater reliance is placed on the Adviser's credit assessment. 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. SECTOR RISK Most of the Fund's securities will be invested in issuers located in Michigan. In addition, a substantial part of the Fund's portfolio may be comprised of tax-exempt securities issued or credit enhanced by companies in similar businesses or with other similar characteristics. As a result, the Fund will be more susceptible to any economic, business, political, or other developments which generally affect these issuers. 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 determined net asset value (NAV). The Fund does not charge a sales charge. NAV is determined at 12:00 noon and 1:00 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 investment 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 offers two share classes: Institutional Shares and Institutional Service Shares each representing interests in a single portfolio of securities. This prospectus relates only to Institutional Shares. Each share class has different expenses, which affect their performance. Contact your investment professional or call 1-800-341-7400 for more information concerning the other class. The Fund's Distributor markets the Shares described in this prospectus to institutions acting in an agency or fiduciary capacity or to individuals directly or through investment professionals. The Fund may not be a suitable investment for retirement plans or for non-Michigan taxpayers because it invests in Michigan tax-exempt securities. The Distributor and its affiliates may pay out of their assets other 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 1:00 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 on the day 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 CLEARINGHOUSE (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 12:00 noon (Eastern time), your redemption will be wired to you the same day. You will not receive that day's dividend. If you call after 12:00 noon (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 SERVICES 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 30 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 CONFIRMATION AND ACCOUNT STATEMENTS You will receive confirmation of purchases and redemptions. In addition, 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 the 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, 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. It is anticipated that Fund distributions will be primarily dividends that are exempt from federal income tax, although a portion of the Fund's dividends may not be exempt. Dividends may be subject to state and local taxes, although the Fund's dividends will be exempt from Michigan state personal income tax to the extent they are derived from interest on obligations exempt from Michigan personal income taxes. Capital gains and non-exempt dividends are taxable whether paid in cash or reinvested in the Fund. 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 Management. 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 and/or provide administrative services to more than 300 mutual funds and private accounts, which totaled over $120 billion in assets as of December 31, 1997. Federated was established in 1955 and is one of the largest mutual fund investment managers in the United States with more than 2,000 employees. Over 4,000 investment professionals make Federated Funds available to their customers. ADVISORY FEES The Adviser receives an annual investment advisory fee of 0.50% 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 affect 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 finanical statements, is included in this prospectus. FINANCIAL HIGHLIGHTS-INSTITUTIONAL SHARES (For a share outstanding throughout each period) Reference is made to the Report of Independent Public Accountants on page 25.
YEAR ENDED OCTOBER 31 1998 1997 1996 1 NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 INCOME FROM INVESTMENT OPERATIONS: Net investment income 0.03 0.03 0.02 LESS DISTRIBUTIONS: Distributions from net investment income (0.03) (0.03) (0.02) NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 TOTAL RETURN 2 3.36% 3.43% 2.19% RATIOS TO AVERAGE NET ASSETS: Expenses 0.40% 0.40% 0.37% 3 Net investment income 3.31% 3.39% 3.40% 3 Expense waiver/reimbursement 4 0.58% 0.66% 0.89% 3 SUPPLEMENTAL DATA: Net assets, end of period (000 omitted) $19,564 $13,370 $11,614
1 Reflects operations for the period from March 2, 1996 (date of initial public investment) to October 31, 1996. 2 Based on net asset value, which does not reflect the sales charge or contingent deferred sales charge, if applicable. 3 Computed on an annualized basis. 4 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 October 31, 1998
PRINCIPAL AMOUNT VALUE Short-Term Municipals-100.0% 1 MICHIGAN-98.5% $ 5,000,000 ABN AMRO MuniTOPS Certificates Trust (Michigan Non-AMT) Series 1998-11 Weekly VRDNs (DeWitt, MI Public Schools)/(FSA INS)/(ABN AMRO Bank N.V., Amsterdam LIQ) $ 5,000,000 2,000,000 Ann Arbor, MI Public School District, 4.75% Bonds, 5/1/1999 2,017,224 3,900,000 Auburn Hills, MI EDC, Limited Obligation Multi-Option Revenue Bonds (Series 1995) Weekly VRDNs (Suburban Tool, Inc.)/(Huntington National Bank, Columbus, OH LOC) 3,900,000 909,000 Battle Creek, MI Economic Development Corporation, Limited Obligation Economic Development Revenue Refunding Bonds (Series 1992) Weekly VRDNs (Michigan Carton & Paperboard Co.)/(American National Bank, Chicago LOC) 909,000 1,375,000 Bedford Township, MI Economic Development Corp., EDRB (Series 1985) Weekly VRDNs (Form-Tech Steel Inc.)/(KeyBank, N.A. LOC) 1,375,000 2,285,000 Berrien County, MI Economic Development Corp., Economic Development Refunding Revenue Bonds (Series 1992) Weekly VRDNs (Arlington Metals Corp.)/(American National Bank, Chicago LOC) 2,285,000 4,475,000 Bruce Township, MI Hospital Finance Authority, Adjustable Rate Tender Securities (Series 1988B), 3.75% TOBs (Sisters of Charity Health Care System)/(MBIA INS)/(Morgan Guaranty Trust Co., New York LIQ), Optional Tender 11/2/1998 4,475,000 1,375,000 Clarkston Community Schools, MI, 5.50% Bonds, 5/1/1999 1,387,596 5,000,000 Clarkston Community Schools, MI, PA-175 Weekly VRDNs (MBIA INS)/(Merrill Lynch Capital Services, Inc. LIQ) 5,000,000 650,000 Dearborn, MI Economic Development Corp., (Series 1990) Weekly VRDNs (Exhibit Productions, Inc. Project)/(First of America Bank, N.A. LOC) 650,000 500,000 Dexter, MI Community Schools, School Building and Site Bonds (1998), 3.80% Bonds (FGIC INS), 5/1/1999 500,000 1,000,000 Grand Rapids, MI Water Supply System, Series 1993 Weekly VRDNs (FGIC INS)/(Societe Generale, Paris LIQ) 1,000,000 1,655,000 Ingham County, MI Building Authority, 3.90% Bonds (AMBAC INS), 11/1/1998 1,655,000 1,455,000 Ingham County, MI Economic Development Corp., Adjustable Demand Limited Obligation Revenue Bonds (Series 1995) Weekly VRDNs (Martin Luther Memorial Home, Inc.)/(Bank One, Indiana, N.A. LOC) 1,455,000 1,500,000 Jackson County, MI Public Schools, State Aid Note (Series 1998B), 4.25% Bonds (Comerica Bank, Detroit, MI LOC), 7/2/1999 1,505,772 5,850,000 Kalamazoo, MI City School District, State Aid Note, (Series 1998C), 3.75% BANs (First of America Bank, N.A. LOC), 9/16/1999 5,867,278 5,000,000 2 Kalamazoo, MI Hospital Finance Authority, PT-189, 3.70% TOBs (Bronson Methodist Hospital)/(MBIA INS)/(Bayerische Hypotheken-Und Wechsel-Bank Ag LIQ), Optional Tender 5/13/1999 5,000,000 4,500,000 Kalamazoo, MI, 3.70% TANs, 12/1/1998 4,500,743 PRINCIPAL AMOUNT VALUE Short-Term Municipals-Continued 1 MICHIGAN-CONTINUED $ 500,000 Lansing, MI Sewer Disposal System, 3.35% Bonds (FSA INS), 5/1/1999 $ 500,000 1,400,000 Macomb County, MI Community College District, Community College Bonds, (Series 1998), 3.70% Bonds, 5/1/1999 1,398,958 3,400,000 Michigan Higher Education Student Loan Authority, (Series XII-D) Weekly VRDNs (AMBAC INS)/(Kredietbank N.V., Brussels LIQ) 3,400,000 1,400,000 Michigan Higher Education Student Loan Authority, Refunding Revenue Bonds (Series X11-B) Weekly VRDNs (AMBAC INS)/ (Kredietbank N.V., Brussels LIQ) 1,400,000 3,100,000 Michigan Job Development Authority, Limited Obligation Revenue Bonds Weekly VRDNs (Andersons Project)/(Credit Lyonnais, Paris LOC) 3,100,000 5,000,000 Michigan State Building Authority, (Series 1), 3.30% CP (Canadian Imperial Bank of Commerce, Toronto LOC), Mandatory Tender 2/9/1999 5,000,000 4,950,000 2 Michigan State Hospital Finance Authority, (Series 1993A) PT-169, 3.80% TOBs (St. John Hospital, MI)/(AMBAC INS)/ (Banco Santander SA LIQ), Mandatory Tender 5/6/1999 4,950,000 775,000 Michigan State Hospital Finance Authority, (Series 1998A), 4.10% Bonds (Hackley Hospital Obligated Group), 5/1/1999 775,000 11,200,000 Michigan State Hospital Finance Authority, (Series A) Weekly VRDNs (OSF Health Care Systems) 11,200,000 3,185,000 Michigan State Housing Development Authority, (Series 1990A) Weekly VRDNs (FSA INS)/(CDC Municipal Products, Inc. LIQ) 3,185,000 3,695,000 Michigan State Housing Development Authority, MERLOTs (Series G) Weekly VRDNs (MBIA INS)/(Corestates Bank N.A., Philadelphia, PA LIQ) 3,806,293 2,100,000 Michigan State Housing Development Authority, Revenue Bonds (Series A), 3.30% CP (Landesbank Hessen-Thueringen, Frankfurt LOC), Mandatory Tender 1/21/1999 2,100,000 2,000,000 Michigan State Trunk Line, (Series A), 7.00% Bonds (United States Treasury PRF), 8/15/1999 (@102) 2,095,839 1,800,000 Michigan State, 6.50% Bonds, 12/1/1998 1,804,175 2,000,000 Michigan Strategic Fund Weekly VRDNs (Tesco Engineering)/ (Bank of Tokyo-Mitsubishi Ltd. LOC) 2,000,000 5,895,000 Michigan Strategic Fund Weekly VRDNs (United Fixtures Co.)/ (Bankers Trust Co., New York LOC) 5,895,000 6,000,000 Michigan Strategic Fund, (Series 1989) Weekly VRDNs (Hi-Lex Controls Inc.)/ (Bank of Tokyo-Mitsubishi Ltd. LOC) 6,000,000 5,620,000 Michigan Strategic Fund, (Series 1991) Weekly VRDNs (AGA Gas, Inc.)/(Svenska Handelsbanken, Stockholm LOC) 5,620,000 800,000 Michigan Strategic Fund, (Series 1995) Weekly VRDNs (Rood Industries, Inc. Project)/(NBD Bank, Michigan LOC) 800,000 2,200,000 Michigan Strategic Fund, (Series 1998) Weekly VRDNs (Wolverine Printing)/(Huntington National Bank, Columbus, OH LOC) 2,200,000 1,500,000 Michigan Strategic Fund, Adjustable Rate Demand IDRB's Weekly VRDNs (Bruin Land Holdings LLC)/(Huntington National Bank, Columbus, OH LOC) 1,500,000 PRINCIPAL AMOUNT VALUE Short-Term Municipals-Continued 1 MICHIGAN-CONTINUED $ 1,530,000 Michigan Strategic Fund, Adjustable Rate Demand Notes (Series 1998) Weekly VRDNs (Wolverine Leasing)/(Huntington National Bank, Columbus, OH LOC) $ 1,530,000 2,500,000 Michigan Strategic Fund, Adjustable Rate Limited Obligation Revenue and Revenue Refunding Bonds (Series 1996) Weekly VRDNs (C-Tec, Inc.)/(SunTrust Bank, Atlanta LOC) 2,500,000 7,000,000 Michigan Strategic Fund, Limited Obligation PCR Bonds (Series 1993) Weekly VRDNs (Allied-Signal, Inc.) 7,000,000 850,000 Michigan Strategic Fund, Limited Obligation Revenue Bonds (Series 1995) Weekly VRDNs (Rowe Thomas Company Project)/ (Comerica Bank, Detroit, MI LOC) 850,000 1,300,000 Michigan Strategic Fund, Limited Obligation Revenue Bonds (Series 1994) Weekly VRDNs (Wilkie Metal Products, Inc.)/ (Norwest Bank Minnesota, N.A. LOC) 1,300,000 3,945,000 Michigan Strategic Fund, Limited Obligation Revenue Bonds (Series 1995) Weekly VRDNs (Bear Lake Associates Project)/ (Old Kent Bank & Trust Co., Grand Rapids LOC) 3,945,000 775,000 Michigan Strategic Fund, Limited Obligation Revenue Bonds (Series 1995) Weekly VRDNs (Hercules Drawn Steel Corporation Project)/(KeyBank, N.A. LOC) 775,000 3,675,000 Michigan Strategic Fund, Limited Obligation Revenue Bonds (Series 1995) Weekly VRDNs (J.R. Automation Technologies Project)/(Old Kent Bank & Trust Co., Grand Rapids LOC) 3,675,000 910,000 Michigan Strategic Fund, Limited Obligation Revenue Bonds (Series 1995) Weekly VRDNs (RSR Project)/(Old Kent Bank & Trust Co., Grand Rapids LOC) 910,000 8,500,000 Michigan Strategic Fund, Limited Obligation Revenue Bonds (Series 1995) Weekly VRDNs (United Waste Systems, Inc.)/ (Bank of America, IL LOC) 8,500,000 4,710,000 Michigan Strategic Fund, Limited Obligation Revenue Bonds (Series 1995) Weekly VRDNs (Wayne Disposal-Oakland, Inc. Project)/(Comerica Bank, Detroit, MI LOC) 4,710,000 800,000 Michigan Strategic Fund, Limited Obligation Revenue Bonds (Series 1996) Weekly VRDNs (ACI Properties, L.L.C. Project)/ (Comerica Bank, Detroit, MI LOC) 800,000 865,000 Michigan Strategic Fund, Limited Obligation Revenue Bonds (Series 1996) Weekly VRDNs (Akemi, Inc.)/(Comerica Bank, Detroit, MI LOC) 865,000 950,000 Michigan Strategic Fund, Limited Obligation Revenue Bonds (Series 1996) Weekly VRDNs (Echo Properties, L.L.C. Project)/(Comerica Bank, Detroit, MI LOC) 950,000 2,300,000 Michigan Strategic Fund, Limited Obligation Revenue Bonds (Series 1996) Weekly VRDNs (G & T Real Estate Investments Co., L.L.C.)/(NBD Bank, Michigan LOC) 2,300,000 920,000 Michigan Strategic Fund, Limited Obligation Revenue Bonds (Series 1996) Weekly VRDNs (Inalfa-Hollandia, Inc.)/ (Comerica Bank, Detroit, MI LOC) 920,000 3,000,000 Michigan Strategic Fund, Limited Obligation Revenue Bonds (Series 1996) Weekly VRDNs (RMT Woodworth, Inc.)/(Comerica Bank, Detroit, MI LOC) 3,000,000 3,675,000 Michigan Strategic Fund, Limited Obligation Revenue Bonds (Series 1997) Weekly VRDNs (Enprotech Mechanical Services, Inc.)/(Michigan National Bank, Farmington Hills LOC) 3,675,000 1,350,000 Michigan Strategic Fund, Limited Obligation Revenue Bonds (Series 1997A) Weekly VRDNs (EPI Printers, Inc.)/(Comerica Bank, Detroit, MI LOC) 1,350,000 5,460,000 Michigan Strategic Fund, Limited Obligation Revenue Bonds Weekly VRDNs (Hess Industries, Inc.)/(Norwest Bank Minnesota, N.A. LOC) 5,460,000 1,610,000 Michigan Strategic Fund, Limited Obligation Revenue Bonds, (Series 1995) Weekly VRDNs (Welch Properties Project)/(Old Kent Bank & Trust Co., Grand Rapids LOC) 1,610,000 PRINCIPAL AMOUNT VALUE Short-Term Municipals-Continued 1 MICHIGAN-CONTINUED $ 2,025,000 Michigan Strategic Fund, Variable Rate Demand Limited Obligation Revenue Bonds (Series 1996) Weekly VRDNs (R.H. Wyner Associates, Inc.)/(State Street Bank and Trust Co. LOC) $ 2,025,000 2,450,000 Michigan Strategic Fund, Variable Rate Demand Limited Obligation Revenue Bonds (Series 1998) Weekly VRDNs (Monroe Publishing Co.)/(Comerica, Inc. LOC) 2,450,000 3,995,000 Monroe County, MI Pollution Control Authority, (PT-143) Weekly VRDNs (Detroit Edison Co.)/(FGIC INS)/(Merrill Lynch Capital Services, Inc. LIQ) 3,995,000 3,440,000 Monroe County, MI Pollution Control Authority, (Series CDC- 1997M) Weekly VRDNs (Detroit Edison Co.)/(AMBAC INS)/(CDC Municipal Products, Inc. LIQ) 3,440,000 7,370,000 Monroe County, MI Pollution Control Authority, PT-108 Weekly VRDNs (Detroit Edison Co.)/(FGIC INS)/(Merrill Lynch Capital Services, Inc. LIQ) 7,370,000 3,000,000 Oakland County, MI EDC, Limited Obligation Revenue Bonds (Series 1997) Weekly VRDNs (Stone Soap Company, Inc.)/ (Michigan National Bank, Farmington Hills LOC) 3,000,000 5,500,000 Wayne County, MI, PT-1061 Weekly VRDNs (Detroit Metropolitan Wayne County Airport)/(MBIA INS)/(Merrill Lynch Capital Services, Inc. LIQ) 5,500,000 Total 201,617,878 PUERTO RICO-1.5% 2,000,000 Puerto Rico Industrial, Medical & Environmental PCA, (1983 Series A), 4.00% TOBs (Merck & Co., Inc.), Optional Tender 12/1/1998 2,000,319 1,075,000 Puerto Rico Industrial, Medical & Environmental PCA, Pollution Control Facilities Financing Authority (Series 1983 A), 3.75% TOBs (Schering Plough Corp.)/(Morgan Guaranty Trust Co., New York LOC), Optional Tender 12/1/1998 1,075,000 Total 3,075,319 Total Investments (at amortized cost) 3 $204,693,197
Securities that are subject to Alternative Minimum Tax represent 55.8% of portfolio as calculated upon total portfolio market value. 1 The Fund may only invest in securities rated in one of the two highest short-term rating categories by nationally recognized statistical rating organizations ("NRSROs") or unrated securities of comparable quality. 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, MIG-1 or MIG-2 by Moody's Investors Service, Inc., or F-1+, F-1, or F-2 by Fitch IBCA, Inc. are all considered rated in one of the two highest short-term rating categories. Securities rated in the highest short-term rating category (and unrated securities of comparable quality) are identified as First Tier securities. Securities rated in the second highest short-term rating category (and unrated securities of comparable quality) are identified as Second Tier securities. The Fund follows applicable regulations in determining whether a security is rated and whether a security rated by multiple NRSROs in different rating categories should be identified as a First or Second Tier security. At October 31, 1998, the portfolio securities were rated as follows: Tier Rating Based on Total Market Value (Unaudited) FIRST TIER SECOND TIER 100.0% 00.0% 2 Denotes a restricted security which is subject to restrictions on resale under Federal securities laws. At October 31, 1998 these securities amounted to $9,950,000 which represents 4.9% of net assets. 3 Also represents cost for federal tax purposes. Note: The categories of investments are shown as a percentage of net assets ($204,552,930) at October 31, 1998. The following acronyms are used throughout this portfolio: AMBAC -American Municipal Bond Assurance Corporation AMT -Alternative Minimum Tax BANs -Bond Anticipation Notes CP -Commercial Paper EDC -Economic Development Commission EDRB -Economic Development Revenue Bonds FGIC -Financial Guaranty Insurance Company FSA -Financial Security Assurance IDRB -Industrial Development Revenue Bond INS -Insured LIQ -Liquidity Agreement LLC -Limited Liability Corporation LOC -Letter of Credit MBIA -Municipal Bond Investors Assurance MERLOTS -Municipal Exempt Receipts - Liquidity Optional Tender Series PCA -Pollution Control Authority PCR -Pollution Control Revenue PRF -Prerefunded SA -Support Agreement TANs -Tax Anticipation Notes TOBs -Tender Option Bonds VRDNs -Variable Rate Demand Notes See Notes which are an integral part of the Financial Statements Statement of Assets and Liabilities October 31, 1998 ASSETS: Total investments in securities, at amortized cost and value $ 204,693,197 Cash 110,457 Income receivable 1,505,577 Receivable for shares sold 119,159 Deferred organizational costs 9,219 Other assets 5,803 Total assets 206,443,412 LIABILITIES: Payable for investments purchased $ 1,700,000 Income distribution payable 168,915 Accrued expenses 21,567 Total liabilities 1,890,482 Net Assets for 204,552,930 shares outstanding $ 204,552,930 NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE: INSTITUTIONAL SERVICE SHARES: $184,989,106 / 184,989,106 shares outstanding $1.00 INSTITUTIONAL SHARES: $19,563,824 / 19,563,824 shares outstanding $1.00
See Notes which are an integral part of the Financial Statements STATEMENT OF OPERATIONS Year Ended October 31, 1998 INVESTMENT INCOME: Interest $ 6,985,867 EXPENSES: Investment advisory fee $ 938,574 Administrative personnel and services fee 155,001 Custodian fees 12,212 Transfer and dividend disbursing agent fees and expenses 105,067 Directors'/Trustees' fees 1,757 Auditing fees 12,691 Legal fees 13,458 Portfolio accounting fees 59,722 Shareholder services fee-Institutional Service Shares 428,375 Shareholder services fee-Institutional Shares 40,876 Share registration costs 34,162 Printing and postage 19,606 Insurance premiums 13,411 Miscellaneous 8,412 Total expenses 1,843,324 WAIVERS: Waiver of investment advisory fee $ (614,954) Waiver of shareholder services fee-Institutional Service Shares (154,215) Waiver of shareholder services fee-Institutional Shares (40,876) Total waivers (810,045) Net expenses 1,033,279 Net investment income $ 5,952,588
See Notes which are an integral part of the Financial Statements STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED OCTOBER 31 1998 1997 INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income $ 5,952,588 $ 4,245,771 DISTRIBUTIONS TO SHAREHOLDERS: Distributions from net investment income Institutional Service Shares (5,412,823) (3,793,687) Institutional Shares (539,765) (452,084) Change in net assets resulting from distributions to shareholders (5,952,588) (4,245,771) SHARE TRANSACTIONS: Proceeds from sale of shares 846,148,992 843,340,942 Net asset value of shares issued to shareholders in payment of distributions declared 4,227,137 2,986,927 Cost of shares redeemed (806,298,824) (789,741,373) Change in net assets resulting from share transactions 44,077,305 56,586,496 Change in net assets 44,077,305 56,586,496 NET ASSETS: Beginning of period 160,475,625 103,889,129 End of period $ 204,552,930 $ 160,475,625
See Notes which are an integral part of the Financial Statements NOTES TO FINANCIAL STATEMENTS October 31, 1998 ORGANIZATION Federated Municipal Trust (the "Trust") is registered under the Investment Company Act of 1940, as amended (the "Act") as an open-end, management investment company. The Trust consists of 17 portfolios. The financial statements included herein are only those of Michigan Municipal Cash Trust (the "Fund"). The financial statements of the other portfolios are presented separately. The assets of each portfolio are segregated and a shareholder's interest is limited to the portfolio in which shares are held. The Fund offers two classes of shares: Institutional Service Shares and Institutional Shares. The investment objective of the Fund is current income exempt from federal regular income tax and the personal income tax imposed by the State of Michigan consistent with the 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. 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. RESTRICTED SECURITIES Restricted securities are securities that may only be resold upon registration under federal securities laws or in transactions exempt from such registration. Many restricted securities may be resold in the secondary market in transactions exempt from registration. In some cases, the restricted securities may be resold without registration upon exercise of a demand feature. Such restricted securities may be determined to be liquid under criteria established by the Board of Trustees (the "Trustees"). The Fund will not incur any registration costs upon such resales. Restricted securities are valued at amortized cost in accordance with Rule 2a-7 under the Investment Company Act of 1940. Additional information on each restricted security held at October 31, 1998, is as follows:
SECURITY Acquisition Date Acquisition Cost Kalamazoo, MI Hospital Finance Authority 6/18/1998 $ 5,000,000 Michigan State Hospital Finance Authority (Series 1993A) 10/1/1998 4,950,000
USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts of assets, liabilities, expenses and revenues reported in the financial statements. Actual results could differ from those estimated. OTHER Investment transactions are accounted for on the trade date. SHARES OF BENEFICIAL INTEREST The Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest (without par value) for each class of shares. At October 31, 1998, capital paid-in aggregated $204,552,930. Transactions in shares were as follows:
YEAR ENDED OCTOBER 31 1998 1997 INSTITUTIONAL SHARES Shares sold 78,879,030 62,432,870 Shares issued to shareholders in payment of distributions declared 34,996 30,464 Shares redeemed (72,720,480) (60,706,728) Net change resulting from Institutional Share transactions 6,193,546 1,756,606 YEAR ENDED OCTOBER 31 1998 1997 INSTITUTIONAL SERVICE SHARES Shares sold 767,269,962 780,908,072 Shares issued to shareholders in payment of distributions declared 4,192,141 2,956,463 Shares redeemed (733,578,344) (729,034,645) Net change resulting from Institutional Service Share transactions 37,883,759 54,829,890 Net change resulting from share transactions 44,077,305 56,586,496
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES INVESTMENT ADVISORY FEE Federated Management, the Fund's investment adviser (the "Adviser"), receives for its services an annual investment advisory fee equal to 0.50% of the Fund's average daily net assets. The Adviser may voluntarily choose to waive any portion of its fee and/or reimburse certain operating expenses of the Fund. The Adviser can modify or terminate this voluntary waiver and/ or reimbursement 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 ("FSS"), the Fund will pay FSS up to 0.25% of average daily net assets of the Fund for the period. The fee paid to FSS is used to finance certain services for shareholders and to maintain shareholder accounts. FSS may voluntarily choose to waive any portion of its fee. FSS can modify or terminate this voluntary waiver at any time at its sole discretion. TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES FFServ, through its subsidiary, Federated Shareholder Services Company ("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. ORGANIZATIONAL EXPENSES Organizational expenses of $18,618 were borne initially by the Adviser. The Fund has agreed to reimburse the Adviser for the organizational expenses during the five-year period following the effective date. INTERFUND TRANSACTIONS During the period ended October 31, 1998, the Fund engaged in purchase and sale transactions with funds that have a common investment adviser (or affiliated investment advisers), common Directors/Trustees, and/or common Officers. These purchase and sale transactions were made at current market value pursuant to Rule 17a-7 under the Act amounting to $403,630,000 and $388,800,000, respectively. GENERAL Certain of the Officers and Trustees of the Trust are Officers and Directors or Trustees of the above companies. CONCENTRATION OF CREDIT RISK Since the Fund invests a substantial portion of its assets in issuers located in one state, it will be more susceptible to factors adversely affecting issuers of that state than would be a comparable tax-exempt mutual fund that invests nationally. In order to reduce the credit risk associated with such factors, at October 31, 1998, 83.3% of the securities in the portfolio of investments are backed by letters of credit or bond insurance of various financial institutions and financial guaranty assurance agencies. The percentage of investments insured by or supported (backed) by a letter of credit from any one institution or agency did not exceed 11.6% of total investments. 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 BOARD OF TRUSTEES OF FEDERATED MUNICIPAL TRUST AND SHAREHOLDERS OF MICHIGAN MUNICIPAL CASH TRUST: We have audited the accompanying statement of assets and liabilities of Michigan Municipal Cash Trust (an investment portfolio of Federated Municipal Trust, a Massachusetts business trust), including the schedule of portfolio investments, as of October 31, 1998, the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for the periods presented. These financial statements and financial highlights are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the 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 October 31, 1998, by correspondence with the custodian and broker. As to securities purchased but not received, we requested the confirmation from the broker and, when the reply was not received, we carried out 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 Michigan Municipal Cash Trust (an investment portfolio of Federated Municipal Trust) as of October 31, 1998, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and its financial highlights for the periods presented, in conformity with generally accepted accounting principles. Arthur Andersen LLP Boston, Massachusetts December 23, 1998 [Graphic] PROSPECTUS MICHIGAN MUNICIPAL CASH TRUST A Portfolio of Federated Municipal Trust INSTITUTIONAL SHARES December 31, 1998 A Statement of Additional Information (SAI) dated December 31, 1998, is incorporated by reference into this prospectus. To obtain the SAI 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] Michigan Municipal Cash 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. 811-5911 Cusip 314229667 G01212-04-IS (12/98) [Graphic] PROSPECTUS Michigan Municipal Cash Trust A Portfolio of Federated Municipal Trust INSTITUTIONAL SERVICE SHARES A money market mutual fund seeking to provide current income exempt from federal regular income tax and the personal income taxes imposed by the State of Michigan. 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. December 31, 1998 CONTENTS Risk/Return Summary 1 What are the Fund's Fees and Expenses? 2 What are the Fund's Investment Strategies? 3 What are the Principal Securities in Which the Fund Invests? 4 What are the Specific Risks of Investing in the Fund? 4 What do Shares Cost? 5 How is the Fund Sold? 6 How to Purchase Shares 6 How to Redeem Shares 7 Account and Share Information 10 Who Manages the Fund? 11 Financial Information 11 Report of Independent Public Accountants 25 RISK/RETURN SUMMARY WHAT IS THE FUND'S INVESTMENT OBJECTIVE? The Fund is a money market fund which seeks to maintain a stable net asset value of $1.00. The Fund's investment objective is to provide current income exempt from federal regular income tax and the personal income tax imposed by the State of Michigan 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 tax-exempt securities so that the Fund's annual interest income is exempt from federal regular income tax and Michigan state income and intangibles tax. Interest from the Fund's investments may be subject to the federal alternative minimum tax for individuals and corporations. WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND? Because the Fund may invest a significant portion of its assets in securities of a single issuer, an investment in the Fund may involve additional risks compared to a fully diversified money market 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] - See Appendix A-4 Historically, the Fund has maintained a constant $1.00 net asset value per share. The bar chart shows the variability of the Fund's Institutional Service Shares Class on a yearly basis. The Fund's Institutional Service Shares are not sold subject to a sales charge (load). Hence, the total returns displayed above are based upon the net asset value. The Fund's Institutional Service Shares year-to-date total return as of the most recent calendar quarter of September 30, 1998 was 2.36%. Within the period shown in the Chart, the Fund's Institutional Service Shares highest quarterly return was 0.86% (quarter ended June 30, 1997). Its lowest quarterly return was 0.75% (quarters ended March 31, 1996 and March 31, 1997) . The Fund's Institutional Service Shares Seven-Day Net Yield as of 12/31/97 was 3.59%. The following table represents the Fund's Institutional Service Shares Average Annual Total Return through 12/31/97. CALENDAR PERIOD FUND 1 Year 3.31% Start of Performance 1 3.34% 1 The Fund's Institutional Service Shares start of performance date was June 20, 1995. Investors may call the Fund at 1-800-341-7400 to acquire the current Seven- Day Net Yield. While 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? MICHIGAN MUNICIPAL CASH TRUST FEES AND EXPENSES This table describes the fees and expenses that you may pay if you buy, hold and redeem shares of the Fund's Institutional Service Shares. SHAREHOLDER FEES 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 a percentage of average net assets) Management Fee 2 0.50% Distribution (12b-1) Fee None Shareholder Services Fee 3 0.25% Other Expenses 0.23% Total Annual Fund Operating Expenses 0.98% 1 Although not contractually obligated to do so, the adviser and shareholder services provider waived certain amounts. These are shown below along with the net expenses the Fund actually paid for the fiscal year ended October 31, 1998. Waiver of Fund Expenses 0.42% Total Actual Annual Operating Expenses (after waivers) 0.56% 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 0.17% for the year ended October 31, 1998. 3 The shareholder services fee for Institutional Service Shares has been voluntarily waived. This voluntary waiver can be terminated at any time. The shareholder services fee paid by the Fund (after the voluntary waiver) was 0.16% for the year ended October 31, 1998.
EXAMPLE The following Example is intended to help you compare the cost of investing in the Fund's Institutional Service Shares with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund's Institutional Service 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 Institutional Service Shares' operating expenses are BEFORE WAIVERS as shown above and remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be: 1 YEAR 3 YEARS 5 YEARS 10 YEARS Expenses assuming no redemption $100 $312 $542 $1,201 WHAT ARE THE FUND'S INVESTMENT STRATEGIES? The Fund invests in a portfolio of high-quality tax-exempt securities maturing in 13 months or less. The average maturity of the Fund's portfolio, computed on a dollar-weighted basis, will be 90 days or less. The Fund's Adviser performs a fundamental credit analysis to develop an approved list of issuers and securities that meet the Adviser's minimum credit standards. The Adviser targets an average portfolio maturity based upon its interest rate outlook and the tax-exempt securities available. The Adviser structures the portfolio by combining variable rate demand instruments and municipal notes. Depending on the supply of tax-exempt securities, the Adviser generally shortens the portfolio's maturity when it expects interest rates to rise and extends the maturity when it expects interest rates to fall. TEMPORARY DEFENSIVE INVESTMENTS During adverse market conditions the Fund may temporarily depart from its principal investment strategies by investing in securities subject to federal regular income tax and the personal income tax imposed by the State of Michigan. Temporary investments will be of comparable quality to other securities in which the Fund invests. This may cause the Fund to give up greater investment returns to maintain the safety of principal. This also may cause the Fund to receive and distribute taxable income to investors. WHAT ARE THE PRINCIPAL SECURITIES IN WHICH THE FUND INVESTS? TAX-EXEMPT SECURITIES Tax-exempt securities are fixed income securities that pay interest exempt from regular federal income taxes. States, counties, cities and other political subdivisions and authorities typically issue tax-exempt securities. Tax-exempt securities are generally differentiated by their source of repayment. FIXED INCOME SECURITIES Fixed income 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. VARIABLE RATE DEMAND INSTRUMENTS Variable rate demand instruments are tax-exempt securities that require the issuer or a third party, such as a dealer or bank, to repurchase the security for its face value upon demand. The securities also bear interest at a variable rate intended to cause the securities to trade at their face value. The Fund treats demand instruments as short-term securities, even though their stated maturity may extend beyond 13 months. MUNICIPAL NOTES Municipal notes are short-term tax-exempt securities. Many municipalities issue such notes to fund their current operations before collecting taxes or other municipal revenues. Municipalities may also issue notes to fund capital projects prior to issuing long-term bonds. The issuers typically repay the notes at the end of their fiscal year, either with taxes, other revenues or proceeds from newly issued notes or bonds. INVESTMENT 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 rating services or be of comparable quality to securities having such ratings. CREDIT ENHANCEMENT Credit enhancement consists of an arrangement in which a company agrees to pay amounts due on a fixed income security if the issuer defaults. In some cases the company providing credit enhancement makes all payments directly to the security holders and receives reimbursement from the issuer. Normally, the credit enhancer has greater financial resources and liquidity than the issuer. For this reason, the Adviser usually evaluates the credit risk of a fixed income security based solely upon its credit enhancement. WHAT ARE THE SPECIFIC RISKS OF INVESTING IN THE FUND? Although there are many factors which may affect an investment in the Fund, the principal risks of investing in a tax-exempt money market fund are described below. CREDIT RISK Credit risk is the possibility that an issuer or a credit enhancer will default (fails to repay interest and principal when due). If an issuer or credit enhancer defaults, the Fund will lose money. Money market funds try to minimize this risk by purchasing higher quality securities. Many fixed income securities receive credit ratings from companies such as Standard & Poor's and Moody's Investor Services. Fixed income securities receive different credit ratings depending on the rating company's assessment of the likelihood of default by the issuer. The lower the credit rating, the greater the credit risk. If the security is unrated, greater reliance is placed on the Adviser's credit assessment. 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. SECTOR RISK Most of the Fund's securities will be invested in issuers located in Michigan. In addition, a substantial part of the Fund's portfolio may be comprised of tax-exempt securities issued or credit enhanced by companies in similar businesses or with other similar characteristics. As a result, the Fund will be more susceptible to any economic, business, political, or other developments which generally affect these issuers. 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 determined net asset value (NAV). The Fund does not charge a sales charge. NAV is determined at 12:00 noon and 1:00 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 $10,000. There is no required minimum subsequent investment amount. An account may be opened with a smaller amount as long as the $10,000 minimum is reached within 90 days. An institutional investor's minimum investment 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 offers two share classes: Institutional Shares and Institutional Service Shares each representing interests in a single portfolio of securities.This prospectus relates only to Institutional Service Shares. Each share class has different expenses, which affect their performance. Contact your investment professional or call 1-800-341-7400 for more information concerning the other class.The Fund's Distributor markets the Shares described in this prospectus to institutions acting in an agency or fiduciary capacity or to individuals directly or through investment professionals. The Fund may not be a suitable investment for retirement plans or for non-Michigan taxpayers because it invests in Michigan tax- exempt securities. The Distributor and its affiliates may pay out of their assets other 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 1:00 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 on the day 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 SYSTEMATIC INVESTMENT PROGRAM Once you have opened an account, you may automatically purchase additional Shares on a regular basis by completing the Systematic Investment Program (SIP) section of the New Account Form or by contacting the Fund or your investment professional. The minimum investment amount for SIPs is $50. BY AUTOMATED CLEARINGHOUSE (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 12:00 noon (Eastern time), your redemption will be wired to you the same day. You will not receive that day's dividend. If you call after 12:00 noon (Eastern time), your redemption will be wired to you the following business day. You will receive that day's dividend. Under limited circumstances, arrangements may be made with the Distributor for same-day payment of redemption proceeds, without that day's dividend, for redemption requests received before 2:00 p.m. (Eastern time). 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 30 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. SYSTEMATIC WITHDRAWAL PROGRAM You may automatically redeem Shares in a minimum amount of $100 on a regular basis. Complete the appropriate section of the New Account Form or an Account Service Options Form or contact your investment professional or the Fund. Your account value must meet the minimum initial investment amount at the time the program is established. This program may reduce, and eventually deplete, your account. Payments should not be considered yield or income. CHECKWRITING You may request checks to redeem your Fund Shares. Your account will continue to receive the daily dividend declared on the Shares being redeemed until a check is presented for payment. DEBIT CARD You may request a debit card account that allows you to redeem Shares. There is an annual fee for this service that the Fund will automatically deduct from your account. 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 CONFIRMATIONS AND ACCOUNT STATEMENTS You will receive confirmations of purchases and redemptions (except for systematic transactions). In addition, you will receive periodic statements reporting all account activity, including systematic transactions, 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 the 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, 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. It is anticipated that Fund distributions will be primarily dividends that are exempt from federal income tax, although a portion of the Fund's dividends may not be exempt. Dividends may be subject to state and local taxes, although the Fund's dividends will be exempt from Michigan state personal income tax to the extent they are derived from interest on obligations exempt from Michigan personal income taxes. Capital gains and non-exempt dividends are taxable whether paid in cash or reinvested in the Fund. 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 Management. 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 and/or provide administrative services to more than 300 mutual funds and private accounts, which totaled over $120 billion in assets as of December 31, 1997. Federated was established in 1955 and is one of the largest mutual fund investment managers in the United States with more than 2,000 employees. Over 4,000 investment professionals make Federated Funds available to their customers. ADVISORY FEES The Adviser receives an annual investment advisory fee of 0.50% 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 affect 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 finanical statements, is included in this prospectus. FINANCIAL HIGHLIGHTS-INSTITUTIONAL SERVICE SHARES (For a share outstanding throughout each period) Reference is made to the Report of Independent Public Accountants on page 25.
YEAR ENDED OCTOBER 31 1998 1997 1996 1995 1 NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 INCOME FROM INVESTMENT OPERATIONS: Net investment income 0.03 0.03 0.03 0.01 LESS DISTRIBUTIONS: Distributions from net investment income (0.03) (0.03) (0.03) (0.01) NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 TOTAL RETURN 2 3.20% 3.27% 3.26 % 1.35% RATIOS TO AVERAGE NET ASSETS: Expenses 0.56% 0.55% 0.50% 0.32% 3 Net investment income 3.16% 3.22% 3.21% 3.67% 3 Expense waiver/reimbursement 4 0.42% 0.51% 0.76% 1.63% 3 SUPPLEMENTAL DATA: Net assets, end of period (000 omitted) $184,989 $147,105 $92,275 $30,133
1 Reflects operations for the period from June 20, 1995 (date of initial public investment) to October 31, 1995. 2 Based on net asset value, which does not reflect the sales charge or contingent deferred sales charge, if applicable. 3 Computed on an annualized basis. 4 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 October 31, 1998
PRINCIPAL AMOUNT VALUE Short-Term Municipals-100.0% 1 MICHIGAN-98.5% $ 5,000,000 ABN AMRO MuniTOPS Certificates Trust (Michigan Non-AMT) Series 1998-11 Weekly VRDNs (DeWitt, MI Public Schools)/(FSA INS)/(ABN AMRO Bank N.V., Amsterdam LIQ) $ 5,000,000 2,000,000 Ann Arbor, MI Public School District, 4.75% Bonds, 5/1/1999 2,017,224 3,900,000 Auburn Hills, MI EDC, Limited Obligation Multi-Option Revenue Bonds (Series 1995) Weekly VRDNs (Suburban Tool, Inc.)/(Huntington National Bank, Columbus, OH LOC) 3,900,000 909,000 Battle Creek, MI Economic Development Corporation, Limited Obligation Economic Development Revenue Refunding Bonds (Series 1992) Weekly VRDNs (Michigan Carton & Paperboard Co.)/(American National Bank, Chicago LOC) 909,000 1,375,000 Bedford Township, MI Economic Development Corp., EDRB (Series 1985) Weekly VRDNs (Form-Tech Steel Inc.)/(KeyBank, N.A. LOC) 1,375,000 2,285,000 Berrien County, MI Economic Development Corp., Economic Development Refunding Revenue Bonds (Series 1992) Weekly VRDNs (Arlington Metals Corp.)/(American National Bank, Chicago LOC) 2,285,000 4,475,000 Bruce Township, MI Hospital Finance Authority, Adjustable Rate Tender Securities (Series 1988B), 3.75% TOBs (Sisters of Charity Health Care System)/(MBIA INS)/(Morgan Guaranty Trust Co., New York LIQ), Optional Tender 11/2/1998 4,475,000 1,375,000 Clarkston Community Schools, MI, 5.50% Bonds, 5/1/1999 1,387,596 5,000,000 Clarkston Community Schools, MI, PA-175 Weekly VRDNs (MBIA INS)/(Merrill Lynch Capital Services, Inc. LIQ) 5,000,000 650,000 Dearborn, MI Economic Development Corp., (Series 1990) Weekly VRDNs (Exhibit Productions, Inc. Project)/(First of America Bank, N.A. LOC) 650,000 500,000 Dexter, MI Community Schools, School Building and Site Bonds (1998), 3.80% Bonds (FGIC INS), 5/1/1999 500,000 1,000,000 Grand Rapids, MI Water Supply System, Series 1993 Weekly VRDNs (FGIC INS)/(Societe Generale, Paris LIQ) 1,000,000 1,655,000 Ingham County, MI Building Authority, 3.90% Bonds (AMBAC INS), 11/1/1998 1,655,000 1,455,000 Ingham County, MI Economic Development Corp., Adjustable Demand Limited Obligation Revenue Bonds (Series 1995) Weekly VRDNs (Martin Luther Memorial Home, Inc.)/(Bank One, Indiana, N.A. LOC) 1,455,000 1,500,000 Jackson County, MI Public Schools, State Aid Note (Series 1998B), 4.25% Bonds (Comerica Bank, Detroit, MI LOC), 7/2/1999 1,505,772 5,850,000 Kalamazoo, MI City School District, State Aid Note, (Series 1998C), 3.75% BANs (First of America Bank, N.A. LOC), 9/16/1999 5,867,278 5,000,000 2 Kalamazoo, MI Hospital Finance Authority, PT-189, 3.70% TOBs (Bronson Methodist Hospital)/(MBIA INS)/(Bayerische Hypotheken-Und Wechsel-Bank Ag LIQ), Optional Tender 5/13/1999 5,000,000 4,500,000 Kalamazoo, MI, 3.70% TANs, 12/1/1998 4,500,743 PRINCIPAL AMOUNT VALUE Short-Term Municipals-Continued 1 MICHIGAN-CONTINUED $ 500,000 Lansing, MI Sewer Disposal System, 3.35% Bonds (FSA INS), 5/1/1999 $ 500,000 1,400,000 Macomb County, MI Community College District, Community College Bonds, (Series 1998), 3.70% Bonds, 5/1/1999 1,398,958 3,400,000 Michigan Higher Education Student Loan Authority, (Series XII-D) Weekly VRDNs (AMBAC INS)/(Kredietbank N.V., Brussels LIQ) 3,400,000 1,400,000 Michigan Higher Education Student Loan Authority, Refunding Revenue Bonds (Series X11-B) Weekly VRDNs (AMBAC INS)/ (Kredietbank N.V., Brussels LIQ) 1,400,000 3,100,000 Michigan Job Development Authority, Limited Obligation Revenue Bonds Weekly VRDNs (Andersons Project)/(Credit Lyonnais, Paris LOC) 3,100,000 5,000,000 Michigan State Building Authority, (Series 1), 3.30% CP (Canadian Imperial Bank of Commerce, Toronto LOC), Mandatory Tender 2/9/1999 5,000,000 4,950,000 2 Michigan State Hospital Finance Authority, (Series 1993A) PT-169, 3.80% TOBs (St. John Hospital, MI)/(AMBAC INS)/ (Banco Santander SA LIQ), Mandatory Tender 5/6/1999 4,950,000 775,000 Michigan State Hospital Finance Authority, (Series 1998A), 4.10% Bonds (Hackley Hospital Obligated Group), 5/1/1999 775,000 11,200,000 Michigan State Hospital Finance Authority, (Series A) Weekly VRDNs (OSF Health Care Systems) 11,200,000 3,185,000 Michigan State Housing Development Authority, (Series 1990A) Weekly VRDNs (FSA INS)/(CDC Municipal Products, Inc. LIQ) 3,185,000 3,695,000 Michigan State Housing Development Authority, MERLOTs (Series G) Weekly VRDNs (MBIA INS)/(Corestates Bank N.A., Philadelphia, PA LIQ) 3,806,293 2,100,000 Michigan State Housing Development Authority, Revenue Bonds (Series A), 3.30% CP (Landesbank Hessen-Thueringen, Frankfurt LOC), Mandatory Tender 1/21/1999 2,100,000 2,000,000 Michigan State Trunk Line, (Series A), 7.00% Bonds (United States Treasury PRF), 8/15/1999 (@102) 2,095,839 1,800,000 Michigan State, 6.50% Bonds, 12/1/1998 1,804,175 2,000,000 Michigan Strategic Fund Weekly VRDNs (Tesco Engineering)/ (Bank of Tokyo-Mitsubishi Ltd. LOC) 2,000,000 5,895,000 Michigan Strategic Fund Weekly VRDNs (United Fixtures Co.)/ (Bankers Trust Co., New York LOC) 5,895,000 6,000,000 Michigan Strategic Fund, (Series 1989) Weekly VRDNs (Hi-Lex Controls Inc.)/ (Bank of Tokyo-Mitsubishi Ltd. LOC) 6,000,000 5,620,000 Michigan Strategic Fund, (Series 1991) Weekly VRDNs (AGA Gas, Inc.)/(Svenska Handelsbanken, Stockholm LOC) 5,620,000 800,000 Michigan Strategic Fund, (Series 1995) Weekly VRDNs (Rood Industries, Inc. Project)/(NBD Bank, Michigan LOC) 800,000 2,200,000 Michigan Strategic Fund, (Series 1998) Weekly VRDNs (Wolverine Printing)/(Huntington National Bank, Columbus, OH LOC) 2,200,000 1,500,000 Michigan Strategic Fund, Adjustable Rate Demand IDRB's Weekly VRDNs (Bruin Land Holdings LLC)/(Huntington National Bank, Columbus, OH LOC) 1,500,000 PRINCIPAL AMOUNT VALUE Short-Term Municipals-Continued 1 MICHIGAN-CONTINUED $ 1,530,000 Michigan Strategic Fund, Adjustable Rate Demand Notes (Series 1998) Weekly VRDNs (Wolverine Leasing)/(Huntington National Bank, Columbus, OH LOC) $ 1,530,000 2,500,000 Michigan Strategic Fund, Adjustable Rate Limited Obligation Revenue and Revenue Refunding Bonds (Series 1996) Weekly VRDNs (C-Tec, Inc.)/(SunTrust Bank, Atlanta LOC) 2,500,000 7,000,000 Michigan Strategic Fund, Limited Obligation PCR Bonds (Series 1993) Weekly VRDNs (Allied-Signal, Inc.) 7,000,000 850,000 Michigan Strategic Fund, Limited Obligation Revenue Bonds (Series 1995) Weekly VRDNs (Rowe Thomas Company Project)/ (Comerica Bank, Detroit, MI LOC) 850,000 1,300,000 Michigan Strategic Fund, Limited Obligation Revenue Bonds (Series 1994) Weekly VRDNs (Wilkie Metal Products, Inc.)/ (Norwest Bank Minnesota, N.A. LOC) 1,300,000 3,945,000 Michigan Strategic Fund, Limited Obligation Revenue Bonds (Series 1995) Weekly VRDNs (Bear Lake Associates Project)/ (Old Kent Bank & Trust Co., Grand Rapids LOC) 3,945,000 775,000 Michigan Strategic Fund, Limited Obligation Revenue Bonds (Series 1995) Weekly VRDNs (Hercules Drawn Steel Corporation Project)/(KeyBank, N.A. LOC) 775,000 3,675,000 Michigan Strategic Fund, Limited Obligation Revenue Bonds (Series 1995) Weekly VRDNs (J.R. Automation Technologies Project)/(Old Kent Bank & Trust Co., Grand Rapids LOC) 3,675,000 910,000 Michigan Strategic Fund, Limited Obligation Revenue Bonds (Series 1995) Weekly VRDNs (RSR Project)/(Old Kent Bank & Trust Co., Grand Rapids LOC) 910,000 8,500,000 Michigan Strategic Fund, Limited Obligation Revenue Bonds (Series 1995) Weekly VRDNs (United Waste Systems, Inc.)/ (Bank of America, IL LOC) 8,500,000 4,710,000 Michigan Strategic Fund, Limited Obligation Revenue Bonds (Series 1995) Weekly VRDNs (Wayne Disposal-Oakland, Inc. Project)/(Comerica Bank, Detroit, MI LOC) 4,710,000 800,000 Michigan Strategic Fund, Limited Obligation Revenue Bonds (Series 1996) Weekly VRDNs (ACI Properties, L.L.C. Project)/ (Comerica Bank, Detroit, MI LOC) 800,000 865,000 Michigan Strategic Fund, Limited Obligation Revenue Bonds (Series 1996) Weekly VRDNs (Akemi, Inc.)/(Comerica Bank, Detroit, MI LOC) 865,000 950,000 Michigan Strategic Fund, Limited Obligation Revenue Bonds (Series 1996) Weekly VRDNs (Echo Properties, L.L.C. Project)/(Comerica Bank, Detroit, MI LOC) 950,000 2,300,000 Michigan Strategic Fund, Limited Obligation Revenue Bonds (Series 1996) Weekly VRDNs (G & T Real Estate Investments Co., L.L.C.)/(NBD Bank, Michigan LOC) 2,300,000 920,000 Michigan Strategic Fund, Limited Obligation Revenue Bonds (Series 1996) Weekly VRDNs (Inalfa-Hollandia, Inc.)/ (Comerica Bank, Detroit, MI LOC) 920,000 3,000,000 Michigan Strategic Fund, Limited Obligation Revenue Bonds (Series 1996) Weekly VRDNs (RMT Woodworth, Inc.)/(Comerica Bank, Detroit, MI LOC) 3,000,000 3,675,000 Michigan Strategic Fund, Limited Obligation Revenue Bonds (Series 1997) Weekly VRDNs (Enprotech Mechanical Services, Inc.)/(Michigan National Bank, Farmington Hills LOC) 3,675,000 1,350,000 Michigan Strategic Fund, Limited Obligation Revenue Bonds (Series 1997A) Weekly VRDNs (EPI Printers, Inc.)/(Comerica Bank, Detroit, MI LOC) 1,350,000 5,460,000 Michigan Strategic Fund, Limited Obligation Revenue Bonds Weekly VRDNs (Hess Industries, Inc.)/(Norwest Bank Minnesota, N.A. LOC) 5,460,000 1,610,000 Michigan Strategic Fund, Limited Obligation Revenue Bonds, (Series 1995) Weekly VRDNs (Welch Properties Project)/(Old Kent Bank & Trust Co., Grand Rapids LOC) 1,610,000 PRINCIPAL AMOUNT VALUE Short-Term Municipals-Continued 1 MICHIGAN-CONTINUED $ 2,025,000 Michigan Strategic Fund, Variable Rate Demand Limited Obligation Revenue Bonds (Series 1996) Weekly VRDNs (R.H. Wyner Associates, Inc.)/(State Street Bank and Trust Co. LOC) $ 2,025,000 2,450,000 Michigan Strategic Fund, Variable Rate Demand Limited Obligation Revenue Bonds (Series 1998) Weekly VRDNs (Monroe Publishing Co.)/(Comerica, Inc. LOC) 2,450,000 3,995,000 Monroe County, MI Pollution Control Authority, (PT-143) Weekly VRDNs (Detroit Edison Co.)/(FGIC INS)/(Merrill Lynch Capital Services, Inc. LIQ) 3,995,000 3,440,000 Monroe County, MI Pollution Control Authority, (Series CDC- 1997M) Weekly VRDNs (Detroit Edison Co.)/(AMBAC INS)/(CDC Municipal Products, Inc. LIQ) 3,440,000 7,370,000 Monroe County, MI Pollution Control Authority, PT-108 Weekly VRDNs (Detroit Edison Co.)/(FGIC INS)/(Merrill Lynch Capital Services, Inc. LIQ) 7,370,000 3,000,000 Oakland County, MI EDC, Limited Obligation Revenue Bonds (Series 1997) Weekly VRDNs (Stone Soap Company, Inc.)/ (Michigan National Bank, Farmington Hills LOC) 3,000,000 5,500,000 Wayne County, MI, PT-1061 Weekly VRDNs (Detroit Metropolitan Wayne County Airport)/(MBIA INS)/(Merrill Lynch Capital Services, Inc. LIQ) 5,500,000 Total 201,617,878 PUERTO RICO-1.5% 2,000,000 Puerto Rico Industrial, Medical & Environmental PCA, (1983 Series A), 4.00% TOBs (Merck & Co., Inc.), Optional Tender 12/1/1998 2,000,319 1,075,000 Puerto Rico Industrial, Medical & Environmental PCA, Pollution Control Facilities Financing Authority (Series 1983 A), 3.75% TOBs (Schering Plough Corp.)/(Morgan Guaranty Trust Co., New York LOC), Optional Tender 12/1/1998 1,075,000 Total 3,075,319 Total Investments (at amortized cost) 3 $204,693,197
Securities that are subject to Alternative Minimum Tax represent 55.8% of portfolio as calculated upon total portfolio market value. 1 The Fund may only invest in securities rated in one of the two highest short-term rating categories by nationally recognized statistical rating organizations ("NRSROs") or unrated securities of comparable quality. 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, MIG-1 or MIG-2 by Moody's Investors Service, Inc., or F-1+, F-1, or F-2 by Fitch IBCA, Inc. are all considered rated in one of the two highest short-term rating categories. Securities rated in the highest short-term rating category (and unrated securities of comparable quality) are identified as First Tier securities. Securities rated in the second highest short-term rating category (and unrated securities of comparable quality) are identified as Second Tier securities. The Fund follows applicable regulations in determining whether a security is rated and whether a security rated by multiple NRSROs in different rating categories should be identified as a First or Second Tier security. At October 31, 1998, the portfolio securities were rated as follows: Tier Rating Based on Total Market Value (Unaudited) FIRST TIER SECOND TIER 100.0% 00.0% 2 Denotes a restricted security which is subject to restrictions on resale under Federal securities laws. At October 31, 1998 these securities amounted to $9,950,000 which represents 4.9% of net assets. 3 Also represents cost for federal tax purposes. Note: The categories of investments are shown as a percentage of net assets ($204,552,930) at October 31, 1998. The following acronyms are used throughout this portfolio: AMBAC -American Municipal Bond Assurance Corporation AMT -Alternative Minimum Tax BANs -Bond Anticipation Notes CP -Commercial Paper EDC -Economic Development Commission EDRB -Economic Development Revenue Bonds FGIC -Financial Guaranty Insurance Company FSA -Financial Security Assurance IDRB -Industrial Development Revenue Bond INS -Insured LIQ -Liquidity Agreement LLC -Limited Liability Corporation LOC -Letter of Credit MBIA -Municipal Bond Investors Assurance MERLOTS -Municipal Exempt Receipts - Liquidity Optional Tender Series PCA -Pollution Control Authority PCR -Pollution Control Revenue PRF -Prerefunded SA -Support Agreement TANs -Tax Anticipation Notes TOBs -Tender Option Bonds VRDNs -Variable Rate Demand Notes See Notes which are an integral part of the Financial Statements STATEMENT OF ASSETS AND LIABILITIES October 31, 1998
ASSETS: Total investments in securities, at amortized cost and value $ 204,693,197 Cash 110,457 Income receivable 1,505,577 Receivable for shares sold 119,159 Deferred organizational costs 9,219 Other assets 5,803 Total assets 206,443,412 LIABILITIES: Payable for investments purchased $ 1,700,000 Income distribution payable 168,915 Accrued expenses 21,567 Total liabilities 1,890,482 Net Assets for 204,552,930 shares outstanding $ 204,552,930 NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE: INSTITUTIONAL SERVICE SHARES: $184,989,106 / 184,989,106 shares outstanding $1.00 INSTITUTIONAL SHARES: $19,563,824 / 19,563,824 shares outstanding $1.00
See Notes which are an integral part of the Financial Statements STATEMENT OF OPERATIONS Year Ended October 31, 1998 INVESTMENT INCOME: Interest $ 6,985,867 EXPENSES: Investment advisory fee $ 938,574 Administrative personnel and services fee 155,001 Custodian fees 12,212 Transfer and dividend disbursing agent fees and expenses 105,067 Directors'/Trustees' fees 1,757 Auditing fees 12,691 Legal fees 13,458 Portfolio accounting fees 59,722 Shareholder services fee-Institutional Service Shares 428,375 Shareholder services fee-Institutional Shares 40,876 Share registration costs 34,162 Printing and postage 19,606 Insurance premiums 13,411 Miscellaneous 8,412 Total expenses 1,843,324 WAIVERS- Waiver of investment advisory fee $ (614,954) Waiver of shareholder services fee-Institutional Service Shares (154,215) Waiver of shareholder services fee-Institutional Shares (40,876) Total waivers (810,045) Net expenses 1,033,279 Net investment income $ 5,952,588
See Notes which are an integral part of the Financial Statements STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED OCTOBER 31 1998 1997 INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income $ 5,952,588 $ 4,245,771 DISTRIBUTIONS TO SHAREHOLDERS: Distributions from net investment income Institutional Service Shares (5,412,823) (3,793,687) Institutional Shares (539,765) (452,084) Change in net assets resulting from distributions to shareholders (5,952,588) (4,245,771) SHARE TRANSACTIONS: Proceeds from sale of shares 846,148,992 843,340,942 Net asset value of shares issued to shareholders in payment of distributions declared 4,227,137 2,986,927 Cost of shares redeemed (806,298,824) (789,741,373) Change in net assets resulting from share transactions 44,077,305 56,586,496 Change in net assets 44,077,305 56,586,496 NET ASSETS: Beginning of period 160,475,625 103,889,129 End of period $ 204,552,930 $ 160,475,625
See Notes which are an integral part of the Financial Statements NOTES TO FINANCIAL STATEMENTS October 31, 1998 ORGANIZATION Federated Municipal Trust (the "Trust") is registered under the Investment Company Act of 1940, as amended (the "Act") as an open-end, management investment company. The Trust consists of 17 portfolios. The financial statements included herein are only those of Michigan Municipal Cash Trust (the "Fund"). The financial statements of the other portfolios are presented separately. The assets of each portfolio are segregated and a shareholder's interest is limited to the portfolio in which shares are held. The Fund offers two classes of shares: Institutional Service Shares and Institutional Shares. The investment objective of the Fund is current income exempt from federal regular income tax and the personal income tax imposed by the State of Michigan consistent with the 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. 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. RESTRICTED SECURITIES Restricted securities are securities that may only be resold upon registration under federal securities laws or in transactions exempt from such registration. Many restricted securities may be resold in the secondary market in transactions exempt from registration. In some cases, the restricted securities may be resold without registration upon exercise of a demand feature. Such restricted securities may be determined to be liquid under criteria established by the Board of Trustees (the "Trustees"). The Fund will not incur any registration costs upon such resales. Restricted securities are valued at amortized cost in accordance with Rule 2a-7 under the Investment Company Act of 1940. Additional information on each restricted security held at October 31, 1998, is as follows: Acquisition Acquisition SECURITY Date Cost Kalamazoo, MI Hospital Finance Authority 6/18/1998 $5,000,000 Michigan State Hospital Finance Authority (Series 1993A) 10/1/1998 4,950,000 USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts of assets, liabilities, expenses and revenues reported in the financial statements. Actual results could differ from those estimated. OTHER Investment transactions are accounted for on the trade date. SHARES OF BENEFICIAL INTEREST The Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest (without par value) for each class of shares. At October 31, 1998, capital paid-in aggregated $204,552,930. Transactions in shares were as follows:
YEAR ENDED OCTOBER 31 1998 1997 INSTITUTIONAL SERVICE SHARES Shares sold 767,269,962 780,908,072 Shares issued to shareholders in payment of distributions declared 4,192,141 2,956,463 Shares redeemed (733,578,344) (729,034,645) Net change resulting from Institutional Service Share transactions 37,883,759 54,829,890 YEAR ENDED OCTOBER 31 1998 1997 INSTITUTIONAL SHARES Shares sold 78,879,030 62,432,870 Shares issued to shareholders in payment of distributions declared 34,996 30,464 Shares redeemed (72,720,480) (60,706,728) Net change resulting from Institutional Share transactions 6,193,546 1,756,606 Net change resulting from share transactions 44,077,305 56,586,496
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES INVESTMENT ADVISORY FEE Federated Management, the Fund's investment adviser (the "Adviser"), receives for its services an annual investment advisory fee equal to 0.50% of the Fund's average daily net assets. The Adviser may voluntarily choose to waive any portion of its fee and/or reimburse certain operating expenses of the Fund. The Adviser can modify or terminate this voluntary waiver and/ or reimbursement 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 ("FSS"), the Fund will pay FSS up to 0.25% of average daily net assets of the Fund for the period. The fee paid to FSS is used to finance certain services for shareholders and to maintain shareholder accounts. FSS may voluntarily choose to waive any portion of its fee. FSS can modify or terminate this voluntary waiver at any time at its sole discretion. TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES FFServ, through its subsidiary, Federated Shareholder Services Company ("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. ORGANIZATIONAL EXPENSES Organizational expenses of $18,618 were borne initially by the Adviser. The Fund has agreed to reimburse the Adviser for the organizational expenses during the five-year period following the effective date. INTERFUND TRANSACTIONS During the period ended October 31, 1998, the Fund engaged in purchase and sale transactions with funds that have a common investment adviser (or affiliated investment advisers), common Directors/Trustees, and/or common Officers. These purchase and sale transactions were made at current market value pursuant to Rule 17a-7 under the Act amounting to $403,630,000 and $388,800,000, respectively. GENERAL Certain of the Officers and Trustees of the Trust are Officers and Directors or Trustees of the above companies. CONCENTRATION OF CREDIT RISK Since the Fund invests a substantial portion of its assets in issuers located in one state, it will be more susceptible to factors adversely affecting issuers of that state than would be a comparable tax-exempt mutual fund that invests nationally. In order to reduce the credit risk associated with such factors, at October 31, 1998, 83.3% of the securities in the portfolio of investments are backed by letters of credit or bond insurance of various financial institutions and financial guaranty assurance agencies. The percentage of investments insured by or supported (backed) by a letter of credit from any one institution or agency did not exceed 11.6% of total investments. 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 BOARD OF TRUSTEES OF FEDERATED MUNICIPAL TRUST AND SHAREHOLDERS OF MICHIGAN MUNICIPAL CASH TRUST: We have audited the accompanying statement of assets and liabilities of Michigan Municipal Cash Trust (an investment portfolio of Federated Municipal Trust, a Massachusetts business trust), including the schedule of portfolio investments, as of October 31, 1998, the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for the periods presented. These financial statements and financial highlights are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the 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 October 31, 1998, by correspondence with the custodian and broker. As to securities purchased but not received, we requested the confirmation from the broker and, when the reply was not received, we carried out 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 Michigan Municipal Cash Trust (an investment portfolio of Federated Municipal Trust) as of October 31, 1998, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and its financial highlights for the periods presented, in conformity with generally accepted accounting principles. Arthur Andersen LLP Boston, Massachusetts December 23, 1998 [Graphic] PROSPECTUS MICHIGAN MUNICIPAL CASH TRUST A Portfolio of Federated Municipal Trust INSTITUTIONAL SERVICE SHARES December 31, 1998 A Statement of Additional Information (SAI) dated December 31, 1998, is incorporated by reference into this prospectus. To obtain the SAI 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] Michigan Municipal Cash 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. 811-5911 Cusip 314229725 G01212-01 (12/98) [Graphic] STATEMENT OF ADDITIONAL INFORMATION Michigan Municipal Cash Trust A Portfolio of Federated Municipal Trust INSTITUTIONAL SHARES INSTITUTIONAL SERVICE SHARES This Statement of Additional Information (SAI) is not a prospectus. Read this SAI in conjunction with the prospectuses for Michigan Municipal Cash Trust dated December 31, 1998. Obtain the prospectuses without charge by calling 1-800-341- 7400. CONTENTS How is the Fund Organized? Securities in Which the Fund Invests How is the Fund Sold? Subaccounting Services Redemption in Kind Massachusetts Partnership Law Account and Share Information Tax Information Who Manages and Provides Services to the Fund? How Does the Fund Measure Performance? Who is Federated Investors, Inc.? Investment Ratings Addresses STATEMENT DATED DECEMBER 31, 1998 [Federated Investors Logo] Federated Securities Corp., Distributor, subsidiary of Federated Investors, Inc. Cusip 314229667 Cusip 314229725 G01212-02 (12/98) How is the Fund Organized? The Fund is a diversified portfolio of Federated Municipal Trust (Trust). The Trust is an open-end, management investment company that was established under the laws of the Commonwealth of Massachusetts on September 1, 1989. The Trust may offer separate series of shares representing interests in separate portfolios of securities. The Board of Trustees (the Board) has established two classes of shares of the Fund, known as Institutional Shares and Institutional Service Shares (Shares). This SAI relates to both of the classes of the above-mentioned Shares. Securities in Which the Fund Invests SECURITIES DESCRIPTIONS AND TECHNIQUES In pursuing its investment strategy, the Fund may invest in the following tax- exempt securities for any purpose that is consistent with its investment objective. General Obligation Bonds General obligation bonds are supported by the issuer's full faith and credit. The issuer must levy and collect taxes sufficient to pay principal and interest on the bonds. However, the issuer's authority to levy additional taxes may be limited by its charter or state law. SPECIAL REVENUE BONDS Special revenue bonds are payable solely from specific revenues received by the issuer. The revenues may consist of specific taxes, assessments, tolls, fees or other types of municipal revenues. For example, a municipality may issue bonds to build a toll road, and pledge the tolls to repay the bonds. Bondholders could not collect from the municipality's general taxes or revenues. Therefore, any shortfall in the tolls could result in a default on the bonds. Private Activity Bonds Private activity bonds are special revenue bonds used to finance private entities. For example, a municipality may issue bonds to finance a new factory to improve its local economy. The municipality would lend the proceeds to the company using the factory, and the company would agree make loan payments sufficient to repay the bonds. The bonds would be payable solely from the company's loan payments, not from any other revenues of the municipality. Therefore, any default on the loan normally would result in a default on the bonds. MUNICIPAL LEASES Municipalities may enter into leases for equipment or facilities. In order to comply with state public financing laws, these leases are typically subject to annual appropriation. In other words, a municipality may end a lease, without penalty, by not providing for the lease payments in its annual budget. After the lease ends, the lessor (the Fund) can resell the equipment or facility but the Fund may lose money on the sale. The Fund may invest in securities supported by pools of municipal leases. The most common type of lease backed securities are certificates of participation (COPs). However, the Fund may also invest directly in individual leases. CREDIT ENHANCEMENT Common types of credit enhancement include guarantees, letters of credit, bond insurance and surety bonds. Credit enhancement also includes arrangements where securities or other liquid assets secure payment of a fixed income security. If a default occurs, these assets may be sold and the proceeds paid to a security's holders. Either form of credit enhancement reduces credit risks by providing another source of payment for a fixed income security. INVESTMENT 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 rating services or be of comparable quality to securities having such ratings. A rating service'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 (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 IBCA, 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 rating service can be treated as being in one of the two highest short- term rating categories; currently, such securities must be rated by two rating services in one of their two highest rating categories. See "Regulatory Compliance." INVESTMENT RISKS There are many factors which may effect an investment in the Fund. The Fund's principal risks are described in its prospectus. An additional risk factor is outlined below. Tax Risk In order for the interest income from the securities to be exempt from federal regular income tax ("tax-exempt"), tax-exempt securities must meet certain legal requirements. Failure to meet such requirements may cause the interest received and distributed by the Fund to shareholders to be taxable. FUNDAMENTAL INVESTMENT POLICIES The Fund invests in tax-exempt securities so that at least 80% of the Fund's annual interest income is exempt from federal regular income tax and Michigan state income and intangibles tax. This policy is fundamental and cannot be changed without shareholder approval. 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 in amounts up to one-third of the value of its total assets, including the amounts borrowed. The Fund will not borrow money 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. Pledging Assets The Fund will not mortgage, pledge, or hypothecate any assets except as necessary to secure permitted borrowings. Lending Cash or Securities The Fund will not lend any of its assets, except that it may purchase or hold portfolio securities permitted by its investment objective, policies, and limitations or Declaration of Trust. 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, 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 invest 25% or more of the value of its total assets 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, except that 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 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 investment 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 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 Board and repurchase agreements providing for settlement in more than seven days after notice. 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. DETERMINING MARKET VALUE OF SECURITIES The Board has 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 Board 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 Board 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 Board 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. 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 nformational 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 to 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 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. 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. 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 Trust have equal voting rights, except that in matters affecting only a particular Fund or class, only Shares of that Fund or class are entitled to vote. Trustees may be removed by the Board or by shareholders at a special meeting. A special meeting of shareholders will be called by the Board upon the written request of shareholders who own at least 10% of the Trust's outstanding shares of all series entitled to vote. As of December 8, 1998 the following shareholders owned of record, beneficially, or both, 5% or more of the outstanding Institutional Shares: National City Bank, Cleveland, Ohio, owned approximately 1,449,609 Shares (8.37%); Sunatco Partnership, as nominee for SNB as trustee, custodian or agent, Hancock, Michigan, owned approximately 4,377,032 Shares (25.28%); and First Mar & Co., MFC First National Bank, Marquette, Michigan, owned approximately 8,724,286 Shares (50.39%). As of December 8, 1998, the following shareholders owned of record, beneficially, or both, 5% or more of the outstanding Institutional Service Shares: VAR & Co., US Bank, N.A., St. Paul, Minnesota, owned approximately 34,343,119 Shares (17.96%) and McDonald & Co. Securities, Inc. (for the exclusive benefit of customers), Cincinnati, Ohio, owned approximately 53,342,662 Shares (27.90%). Shareholders owning 25% or more of outstanding Shares may be in control and be able to affect the outcome of certain matters presented for a vote of shareholders. Tax Information FEDERAL INCOME TAX The Fund intends to meet the requirements of Subchapter M of the Internal Revenue Code applicable to regulated investment companies. If these requirements are not met, it will not receive the special tax treatment and will pay federal income tax. The Fund will be treated as a single, separate entity for federal income tax purposes so that income earned and capital gains and losses realized by the Trust's other portfolios will be separate from those realized by the Fund. STATE TAXES Under existing Michigan laws, distributions made by the Fund will not be subject to Michigan personal income taxes to the extent that such distributions qualify as exempt-interest dividends under the Internal Revenue Code, and represent (i) interest from obligations of Michigan or any of its political subdivisions, or (ii) income from obligations of the United States government which are exempted from state income taxation by a law of the United States. The portion of a shareholder's shares in the Fund representing (i) bonds or other similar obligations of Michigan or its political subdivisions, or (ii) obligations of the United States which are exempt from taxation by a law of the United States, and dividends paid by the Fund representing interest payments on securities, will be exempt from Michigan intangibles tax. 1995 Public Act 5 repeals the intangibles tax effective January 1, 1998. Distributions of the Fund are not subject to the Michigan Single Business Tax to the extent that such distributions are derived from interest on obligations of Michigan or its political subdivisions, or obligations of the United States government that are exempt from state taxation by a law of the United States. Certain municipalities in Michigan also impose an income tax on individuals and corporations. However, to the extent that the dividends from the Fund are exempt from federal regular income taxes, such dividends also will be exempt from Michigan municipal income taxes. Who Manages and Provides Services to the Fund? BOARD OF TRUSTEES The Board is responsible for managing the Trust's business affairs and for exercising all the Trust's powers except those reserved for the shareholders. Information about each Board member is provided below and includes the following data: name, address, birthdate, present position(s) held with the Trust, principal occupations for the past five years and other notable positions held, total compensation received as a Trustee from the Trust for its most recent fiscal year, and the total compensation received from the Federated Fund Complex for the most recent calendar year. The Trust is comprised of 17 Funds and the Federated Fund Complex is comprised of 56 investment companies, whose investment advisers are affiliated with the Fund's Adviser. As of December 8, 1998, 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.
Name Total Birthdate Aggregate Compensation From Address Principal Occupations Compensation Trust and Fund Position With Trust for Past 5 Years From Trust Complex - ------------------------------- ---------------------------------------------------------- - ----------------- ------------------- John F. Donahue##* Chief Executive Officer and Director or Trustee of $0 $0 for the Trust Birthdate: July 28, 1924 the Federated Fund Complex. Chairman and Director, and 56 other Federated Investors Tower Federated Investors, Inc.; Chairman and Trustee, investment 1001 Liberty Avenue Federated Advisers, Federated Management, and companies in the Pittsburgh, PA Federated Research; Chairman and Director, Federated Fund Complex CHAIRMAN and TRUSTEE Research Corp., and Federated Global Research Corp.; Chairman, Passport Research, Ltd. Thomas G. Bigley Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: February 3, 1934 Director, Member of Executive Committee, Children's Trust and 15 Old Timber Trail Hospital of Pittsburgh; formerly: Senior Partner, 56 other Pittsburgh, PA Ernst & Young LLP; Director, MED 3000 Group, Inc.; investment TRUSTEE Director, Member of Executive Committee, University companies in the of Pittsburgh. Fund Complex John T. Conroy, Jr. Director or Trustee of the Federated Fund Complex; $4,484.62 $122,362 for the Birthdate: June 23, 1937 President, Investment Properties Corporation; Senior Trust and Wood/IPC Commercial Dept. Vice President, John R. Wood and Associates, Inc., 56 other John R. Wood and Realtors; Partner or Trustee in private real estate investment Associates, Inc. Realtors ventures in Southwest Florida; formerly: President, companies in the 3255 Tamiami Trail North Naples Property Management, Inc. and Northgate Fund Complex Naples, FL Village Development Corporation. TRUSTEE William J. Copeland Director or Trustee of the Federated Fund Complex; $4,484.62 $122,362 for the Birthdate: July 4, 1918 Director and Member of the Executive Committee, Trust and One PNC Plaza-23rd Floor Michael Baker, Inc.; formerly: Vice Chairman and 56 other Pittsburgh, PA Director, PNC Bank, N.A., and PNC Bank Corp.; investment TRUSTEE Director, Ryan Homes, Inc. companies in the Fund Complex Retired: Director, United Refinery; Director, Forbes Fund; Chairman, Pittsburgh Foundation; Chairman, Pittsburgh Civic Light Opera. James E. Dowd, Esq. Director or Trustee of the Federated Fund Complex; $4,484.62 $122,362 for the Birthdate: May 18, 1922 Attorney-at-law; Director, The Emerging Germany Fund, Trust and 571 Hayward Mill Road Inc. 56 other Concord, MA investment TRUSTEE Retired: President, Boston Stock Exchange, Inc.; companies in the Regional Administrator, United States Securities and Fund Complex Exchange Commission. Lawrence D. Ellis, M.D.* Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: October 11, 1932 Professor of Medicine, University of Pittsburgh; Trust and 3471 Fifth Avenue Medical Director, University of Pittsburgh Medical 56 other Suite 1111 Center - Downtown; Hematologist, Oncologist, and investment Pittsburgh, PA Internist, Presbyterian and Montefiore Hospitals; companies in the TRUSTEE Member, National Board of Trustees, Leukemia Society Fund Complex of America. Edward L. Flaherty, Jr., Director or Trustee of the Federated Fund Complex; $4,484.62 $122,362 for the Esq. # Attorney, of Counsel, Miller, Ament, Henny & Kochuba; Trust and Birthdate: June 18, 1924 Director, Eat'N Park Restaurants, Inc.; formerly: 56 other Miller, Ament, Henny & Counsel, Horizon Financial, F.A., Western Region; investment Kochuba Partner, Meyer and Flaherty. companies in the 205 Ross Street Fund Complex Pittsburgh, PA TRUSTEE Peter E. Madden Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: March 16, 1942 formerly: Representative, Commonwealth of Trust and One Royal Palm Way Massachusetts General Court; President, State Street 56 other 100 Royal Palm Way Bank and Trust Company and State Street Corporation. investment Palm Beach, FL companies in the TRUSTEE Retired: Director, VISA USA and VISA International; Fund Complex Chairman and Director, Massachusetts Bankers Association; Director, Depository Trust Corporation. John E. Murray, Jr., J.D., Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the S.J.D. President, Law Professor, Duquesne University; Trust and Birthdate: December 20, 1932 Consulting Partner, Mollica & Murray. 56 other President, Duquesne investment University Retired: Dean and Professor of Law, University of companies in the Pittsburgh, PA Pittsburgh School of Law; Dean and Professor of Law, Fund Complex TRUSTEE Villanova University School of Law. Wesley W. Posvar Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: September 14, President, World Society of Ekistics, Athens; Trust and 1925 Professor, International Politics; Management 56 other 1202 Cathedral of Learning Consultant; Trustee, Carnegie Endowment for investment University of Pittsburgh International Peace, RAND Corporation, Online companies in the Pittsburgh, PA Computer Library Center, Inc., National Defense Fund Complex TRUSTEE University and U.S. Space Foundation; President Emeritus, University of Pittsburgh; Founding Chairman, National Advisory Council for Environmental Policy and Technology, Federal Emergency Management Advisory Board and Czech Management Center, Prague. Retired: Professor, United States Military Academy; Professor, United States Air Force Academy. Marjorie P. Smuts Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: June 21, 1935 Public Relations/Marketing/Conference Planning. Trust and 4905 Bayard Street 56 other Pittsburgh, PA Retired: National Spokesperson, Aluminum Company of investment TRUSTEE America; business owner. companies in the Fund Complex Glen R. Johnson* Trustee, Federated Investors, Inc.; staff member, $0 $0 for the Trust Birthdate: May 2, 1929 Federated Securities Corp. and Federated Investors Tower 8 other investment 1001 Liberty Avenue companies in the Pittsburgh, PA Fund Complex PRESIDENT and TRUSTEE J. Christopher Donahue##* President or Executive Vice President of the $0 $0 for the Trust Birthdate: April 11, 1949 Federated Fund Complex; Director or Trustee of some and Federated Investors Tower of the Funds in the Federated Fund Complex; President 18 other 1001 Liberty Avenue and Director, Federated Investors, Inc.; President investment Pittsburgh, PA and Trustee, Federated Advisers, Federated companies in the EXECUTIVE VICE PRESDIENT Management, and Federated Research; President and Fund Complex Director, Federated Research Corp. and Federated Global Research Corp.; President, Passport Research, Ltd.; Trustee, Federated Shareholder Services Company; Director, Federated Services Company. Edward C. Gonzales* Trustee or Director of some of the Funds in the $0 $0 for the Trust Birthdate: October 22, 1930 Federated Fund Complex; President, Executive Vice and Federated Investors Tower President and Treasurer of some of the Funds in the 1 other investment 1001 Liberty Avenue Federated Fund Complex; Vice Chairman, Federated companies in the Pittsburgh, PA Investors, Inc.; Vice President, Federated Advisers, Fund Complex EXECUTIVE VICE PRESIDENT 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. John W. McGonigle Executive Vice President and Secretary of the $0 $0 for the Trust Birthdate: October 26, 1938 Federated Fund Complex; Executive Vice President, and Federated Investors Tower Secretary, and Director, Federated Investors, Inc.; 56 other 1001 Liberty Avenue Trustee, Federated Advisers, Federated Management, investment Pittsburgh, PA and Federated Research; Director, Federated Research companies in the EXECUTIVE VICE PRESIDENT Corp. and Federated Global Research Corp.; Director, Fund Complex and SECRETARY Federated Services Company; Director, Federated Securities Corp. Richard J. Thomas Treasurer of the Federated Fund Complex; Vice $0 $0 for the Trust Birthdate: June 17, 1954 President - Funds Financial Services Division, and Federated Investors Tower Federated Investors, Inc.; Formerly: various 56 other 1001 Liberty Avenue management positions within Funds Financial Services investment Pittsburgh, PA Division of Federated Investors, Inc. companies in the TREASURER Fund Complex Richard B. Fisher* President or Vice President of some of the Funds in $0 $0 for the Trust Birthdate: May 17, 1923 the Federated Fund Complex; Director or Trustee of and Federated Investors Tower some of the Funds in the Federated Fund Complex; 6 other investment 1001 Liberty Avenue Executive Vice President, Federated Investors, Inc.; companies in the Pittsburgh, PA Chairman and Director, Federated Securities Corp. Fund Complex VICE PRESIDENT William D. Dawson, III Chief Investment Officer of this Fund and various $0 $0 for the Trust Birthdate: March 3, 1949 other Funds in the Federated Fund Complex; Executive and Federated Investors Tower Vice President, Federated Investment Counseling, 41 other 1001 Liberty Avenue Federated Global Research Corp., Federated Advisers, investment Pittsburgh, PA Federated Management, Federated Research, and companies in the CHIEF INVESTMENT OFFICER Passport Research, Ltd.; Registered Representative, Fund Complex 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. Mary Jo Ochson Senior Portfolio Manager and Vice President of eight $0 $0 for the Trust Birthdate: September 12, investment companies in the Federated Fund Complex; and 1953 Senior Vice President, Federated Investment 7 other investment Federated Investors Tower Counseling, Federated Advisers, Federated Global companies 1001 Liberty Avenue Research Corp., Federated Management, Federated in the Fund Complex Pittsburgh, PA Research, Federated Research Corp. and Passport SENIOR PORTFOLIO Research, Ltd.; Formerly: Vice President, Federated MANAGER/VICE PRESIDENT Advisers, Federated Management, Federated Research, Federated Research Corp. , Passport Research, Ltd. and Federated Global Research Corp. Jeff A. Kozemchak Senior Portfolio Manager and Vice President of four $0 $0 for the Trust Birthdate: January 15, 1960 investment companies in the Federated Fund Complex; and Federated Investors Tower Vice President, Federated Investment Counseling, 3 other investment 1001 Liberty Avenue Federated Advisers, Federated Global Research Corp., companies Pittsburgh, PA Federated Management, Federated Research, Federated in the Fund Complex SENIOR PORTFOLIO Research Corp. and Passport Research, Ltd.; MANAGER/VICE PRESIDENT Formerly: Assistant Vice President and Investment Analyst, Federated Research Corp. and Passport Research, Ltd. ; Assistant Vice President, Federated Advisers, Federated Management and Federated Research.
## Mr. Donahue is the father of J. Christopher Donahue, Executive Vice President of the Trust. 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 Trust, 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 Trust. 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: Maximum Average Aggregate Daily Administrative Fee Net Assets of the Federated Funds - ------------------ ------------------------------------ 0.150 of 1% on the first $250 million 0.125 of 1% on the next $250 million 0.100 of 1% on the next $250 million 0.075 of 1% on assets in excess of $750 million The administrative fee received during any fiscal year shall be at least $125,000 per portfolio and $30,000 per each additional class of shares. Federated Services Company may voluntarily waive a portion of its fee and may reimburse the Fund for expenses. Federated Services Company also provides certain accounting and recordkeeping services with respect to the Fund's portfolio investments for a fee based on Fund assets plus out-of-pocket expenses. CUSTODIAN State Street Bank and Trust Company, Boston, Massachusetts, is custodian for the securities and cash of the Fund. Foreign instruments purchased by the Fund are held by foreign banks participating in a network coordinated by State Street Bank. TRANSFER AGENT AND DIVIDEND DISBURSING AGENT Federated Services Company, through its registered transfer agent subsidiary, Federated Shareholder Services Company, maintains all necessary shareholder records. The Fund pays the transfer agent a fee based on the size, type, and number of accounts and transactions made by shareholders. INDEPENDENT PUBLIC ACCOUNTANTS Arthur Andersen LLP is the independent public accountant for the Fund. FEES PAID BY THE FUND FOR SERVICES For the Year Ended October 31, 1998 1997 1996 - -------------------------------------------------------------- Advisory Fee Earned $938,574 $655,534 $337,325 - -------------------------------------------------------------- Advisory Fee Reduction 614,954 542,531 337,325 - -------------------------------------------------------------- Brokerage Commissions 0 0 0 - -------------------------------------------------------------- Administrative Fee 155,001 155,000 145,082 - -------------------------------------------------------------- Shareholder Services Fee - -------------------------------------------------------------- Institutional Shares 0 --- --- - -------------------------------------------------------------- Institutional Service Shares 274,160 --- --- - -------------------------------------------------------------- Fees are allocated among Classes based on their pro rata share of Fund assets, except for shareholder services fees, which are borne only by the applicable Class of Shares. If the Fund's expenses are capped at a particular level, the cap does not include reimbursement to the Fund of any expenses incurred by shareholders who use the transfer agent's subaccounting facilities. How does the Fund Measure Performance? The Fund may advertise Share performance by using the Securities and Exchange Commission's (SEC) standard method for calculating performance applicable to all mutual funds. The SEC also permits this standard performance information to be accompanied by non-standard performance information. Unless otherwise stated, any quoted Share performance reflects the effect of non-recurring charges, such as maximum sales charges, which, if excluded, would increase the total return and yield. The performance of Shares depends upon such variables as: portfolio quality; average portfolio maturity; type and value of portfolio securities; changes in interest rates; changes or differences in the Fund's or any class of Shares' expenses; and various other factors. Share performance fluctuates on a daily basis largely because net earnings and offering price per Share 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 and since inception periods ended October 31, 1998. Yield, Effective Yield and Tax-Equivalent Yield given for the 7-day period ended October 31, 1998.
Share Class 7-Day Period 1 Year Since Inception on March 2, 1996 - ------------------------------------------------------------------------------------------------------------------------------------ Institutional Shares - ------------------------------------------------------------------------------------------------------------------------------------ Total Return -- 3.36% 3.38% - ------------------------------------------------------------------------------------------------------------------------------------ Yield 2.93% -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Effective Yield 2.97% -- -- Tax-Equivalent Yield 5.30% -- -- Share Class 7-Day Period 1 Year Since Inception on June 20, 1995 - ------------------------------------------------------------------------------------------------------------------------------------ Institutional Service Shares - ------------------------------------------------------------------------------------------------------------------------------------ Total Return -- 3.20% 3.29% - ------------------------------------------------------------------------------------------------------------------------------------ Yield 2.77% -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Effective Yield 2.81% -- -- Tax-Equivalent Yield 5.02% -- --
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. The tax-equivalent yield of Shares is calculated similarly to the yield, but is adjusted to reflect the taxable yield that Shares would have had to earn to equal the actual yield, assuming a specific tax rate. 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. TAX EQUIVALENCY TABLE Set forth below is a sample of a tax-equivalency table that may be used in advertising and sales literature. This table is for illustrative purposes only and is not representative of past or future performance of the Fund. The interest earned by the tax-exempt securities owned by the Fund generally remains free from federal regular income tax and is often free from state and local taxes as well. However, some of the Fund's income may be subject to the federal alternative minimum tax and state and/or local taxes.
TAXABLE YIELD EQUIVALENT FOR 1998 STATE OF MICHIGAN - ------------------------------------------------------------------------------------------------------------------------------------ COMBINED FEDERAL AND STATE INCOME TAX BRACKET: 19.40% 32.40% 35.40% 40.40% 44.00% - ------------------------------------------------------------------------------------------------------------------------------------ JOINT $1- $42,351- $102,301- $155,951- OVER RETURN 42,350 102,300 155,950 278,450 $278,450 SINGLE $1- $25,351- $61,401- $128,101- OVER RETURN 25,350 61,400 128,100 278,450 $278,450 - ------------------------------------------------------------------------------------------------------------------------------------ TAX-EXEMPT YIELD TAXABLE YIELD EQUIVALENT - ------------------------------------------------------------------------------------------------------------------------------------ 1.50% 1.86% 2.22% 2.32% 2.52% 2.68% 2.00% 2.48% 2.96% 3.10% 3.36% 3.57% 2.50% 3.10% 3.70% 3.87% 4.19% 4.46% 3.00% 3.72% 4.44% 4.64% 5.03% 5.36% 3.50% 4.34% 5.18% 5.42% 5.87% 6.25% 4.00% 4.96% 5.92% 6.19% 6.71% 7.14% 4.50% 5.58% 6.66% 6.97% 7.55% 8.04% 5.00% 6.20% 7.40% 7.74% 8.39% 8.93% 5.50% 6.82% 8.14% 8.51% 9.23% 9.82% 6.00% 7.44% 8.88% 9.29% 10.07% 10.71%
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. 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. 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 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 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, 1997, Federated managed 11 bond funds with approximately $2.1 billion in assets and 22 money market funds with approximately $10.9 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 tax-exempt 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 27 years' experience. As of December 31, 1997, Federated managed 29 equity funds totaling approximately $11.7 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, 1997, Federated managed 11 money market funds and 16 bond funds with assets approximating $17.1 billion and $5.6 billion, respectively. Federated's corporate bond decision making--based on intensive, diligent credit analysis--is backed by over 22 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 $200 billion. GOVERNMENT FUNDS In the government sector, as of December 31, 1997, Federated manages 9 mortgage- backed, 6 government/ agency and 18 government money market mutual funds, with assets approximating $5.9 billion, $1.5 billion and $35 billion, respectively. Federated trades approximately $400 million in U.S. government and mortgage- backed securities daily and places approximately $23 billion in repurchase agreements each day. Federated introduced the first U.S. government fund to invest in U.S. government bond securities in 1969. Federated has been a major force in the short- and intermediate-term government markets since 1982 and currently manages approximately $36 billion in government funds within these maturity ranges. 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, 1997, Federated managed more than $63.1 billion in assets across 51 money market funds, including 18 government, 11 prime and 22 municipal with assets approximating $35 billion, $17.1 billion and $10.9 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 $4 trillion to the more than 6,700 funds available, according to the Investment Company Institute. Federated distributes mutual funds through its subsidiaries for a variety of investment purposes. Specific markets include: FEDERATED CLIENTS OVERVIEW 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. Investment Ratings APPENDIX STANDARD & POOR'S SHORT-TERM MUNICIPAL OBLIGATION RATINGS A Standard & Poor's (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-1+, 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 rated 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. MOODY'S 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 INVESTOR SERVICE, L.P. 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. Addresses MICHIGAN MUNICIPAL CASH TRUST Institutional Shares Institutional Service Shares Federated Investors Funds 5800 Corporate Drive Pittsburgh, PA 15237-7000 Distributor Federated Securities Corp. Federated Investors Tower 1001 Liberty Avenue, Pittsburgh, PA 15222-3779 Investment Adviser Federated Management Federated Investors Tower 1001 Liberty Avenue, Pittsburgh, PA 15222-3779 Custodian State Street Bank and Trust Company P.O. Box 8600 Boston, MA 02266-8600 Transfer Agent and Dividend Disbursing Agent Federated Shareholder Services Company P.O. Box 8600 Boston, MA 02266-8600 Independent Public Accountants Arthur Andersen LLP 225 Franklin Street Boston, MA 02110-2812 PROSPECTUS Minnesota Municipal Cash Trust A Portfolio of Federated Municipal Trust CASH SERIES SHARES A money market mutual fund seeking to provide current income exempt from federal regular income tax and the regular personal income taxes imposed by the State of Minnesota. 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. December 31, 1998 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? 6 How is the Fund Sold? 6 How to Purchase Shares 7 How to Redeem Shares 8 Account and Share Information 10 Who Manages the Fund? 11 Financial Information 12 Report of Independent Public Accountants 29 Risk/Return Summary WHAT IS THE FUND'S INVESTMENT OBJECTIVE? The Fund is a money market fund which seeks to maintain a stable net asset value of $1.00. The Fund's investment objective is to provide current income which is exempt from federal regular income tax and the regular personal income taxes imposed by the State of Minnesota consistent with stability of principal.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 tax-exempt securities so that the Fund's annual interest income is exempt from federal regular income tax and the regular personal income taxes imposed by the State of Minnesota. Interest from the Fund's investments may be subject to the federal alternative minimum tax for individuals and corporations. WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND? Because the Fund may invest a significant portion of its assets in securities of a single issuer, an investment in the Fund may involve additional risks compared to a fully diversified money market 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] - See Appendix A-1 Historically, the Fund has maintained a constant $1.00 net asset value per share. The bar chart shows the variability of the Fund's Cash Series Shares on a yearly basis. The Fund's Cash Series Shares are not sold subject to a sales charge (load). Hence, the total returns displayed above are based upon the net asset value. The Fund's Cash Series Shares year to date total return as of the most recent calendar quarter of September 30, 1998 was 2.16%. Within the period shown in the Chart, the Fund's highest quarterly return was 1.04% (quarter ended June 30, 1991). Its lowest quarterly return was 0.46% (quarter ended March 31, 1994). The Fund's Cash Series Shares Seven-Day Net Yield as of 12/31/97 was 3.30%. The following table represents the Fund's Cash Series Shares Average Annual Total Return through 12/31/97. CALENDAR PERIOD FUND 1 Year 3.01% 5 Years 2.74% Start of Performance 1 2.92% 1 The Start of Performance date for Cash Series Shares was December 31, 1990. Investors may call the Fund at 1-800-341-7400 to acquire the current Seven- Day Net Yield. While past performance does not necessarily predict future performance, this information provides you with historical performance Infomation 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? MINNESOTA MUNICIPAL CASH TRUST FEES AND EXPENSES This table describes the fees and expenses that you may pay if you buy, hold and redeem shares of the Fund's Cash Series Shares.
SHAREHOLDER FEES 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 a percentage of average net assets) Management Fee 2 0.40% Distribution (12b-1) Fee 3 0.50% Shareholder Services Fee 0.25% Other Expenses 0.15% Total Annual Fund Operating Expenses 1.30% 1 Although not contractually obligated to do so, the adviser and distributor waived certain amounts. These are shown below along with the net expenses the Fund actually paid for the fiscal year ended October 31, 1998. Waiver of Fund Expenses 0.50% Total Actual Annual Operating Expenses (after waivers) 0.80% 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 0.15% for the year ended October 31, 1998. 3 The distribution (12b-1) fee for Cash Series Shares has been voluntarily reduced. This voluntary reduction can be terminated at any time. The distribution (12b-1) fee paid by the Fund (after the voluntary reduction) was 0.25% for the year ended October 31, 1998.
EXAMPLE The following Example is intended to help you compare the cost of investing in the Fund's Cash Series Shares with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund's Cash Series 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 Cash Series Shares' operating expenses are BEFORE WAIVERS as shown above and remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be: 1 YEAR 3 YEARS 5 YEARS 10 YEARS Expenses assuming no redemption $132 $412 $713 $1,568 WHAT ARE THE FUND'S INVESTMENT STRATEGIES? The Fund invests in a portfolio of high-quality tax-exempt securities maturing in 13 months or less. The average maturity of the Fund's portfolio, computed on a dollar-weighted basis, will be 90 days or less. The Fund's Adviser performs a fundamental credit analysis to develop an approved list of issuers and securities that meet the Adviser's minimum credit standards. The Adviser targets an average portfolio maturity based upon its interest rate outlook and the tax-exempt securities available. The Adviser structures the portfolio by combining variable rate demand instruments and municipal notes. Depending on the supply of tax-exempt securities, the Adviser generally shortens the portfolio's maturity when it expects interest rates to rise and extends the maturity when it expects interest rates to fall. TEMPORARY DEFENSIVE INVESTMENTS During adverse market conditions the Fund may temporarily depart from its principal investment strategies by investing in securities subject to federal regular income tax and the regular personal income taxes imposed by the State of Minnesota. Temporary investments will be of comparable quality to other securities in which the Fund invests. This may cause the Fund to give up greater investment returns to maintain the safety of principal. This also may cause the Fund to receive and distribute taxable income to investors. WHAT ARE THE PRINCIPAL SECURITIES IN WHICH THE FUND INVESTS? TAX-EXEMPT SECURITIES Tax-exempt securities are fixed income securities that pay interest exempt from regular federal income taxes. States, counties, cities and other political subdivisions and authorities typically issue tax-exempt securities. Tax-exempt securities are generally differentiated by their source of repayment. FIXED INCOME SECURITIES Fixed Income 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.variable rate demand instruments Variable rate demand instruments are tax-exempt securities that require the issuer or a third party, such as a dealer or bank, to repurchase the security for its face value upon demand. The securities also bear interest at a variable rate intended to cause the securities to trade at their face value. The Fund treats demand instruments as short-term securities, even though their stated maturity may extend beyond 13 months. MUNICIPAL NOTES Municipal notes are short-term tax-exempt securities. Many municipalities issue such notes to fund their current operations before collecting taxes or other municipal revenues. Municipalities may also issue notes to fund capital projects prior to issuing long-term bonds. The issuers typically repay the notes at the end of their fiscal year, either with taxes, other revenues or proceeds from newly issued notes or bonds. INVESTMENT 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 rating services or be of comparable quality to securities having such ratings. CREDIT ENHANCEMENT Credit enhancement consists of an arrangement in which a company agrees to pay amounts due on a fixed income security if the issuer defaults. In some cases the company providing credit enhancement makes all payments directly to the security holders and receives reimbursement from the issuer. Normally, the credit enhancer has greater financial resources and liquidity than the issuer. For this reason, the Adviser usually evaluates the credit risk of a fixed income security based solely upon its credit enhancement. WHAT ARE THE SPECIFIC RISKS OF INVESTING IN THE FUND? Although there are many factors which may affect an investment in the Fund, the principal risks of investing in a tax-exempt money market fund are described below. CREDIT RISK Credit risk is the possibility that an issuer or a credit enhancer will default (fails to repay interest and principal when due). If an issuer or credit enhancer defaults, the Fund will lose money. Money market funds try to minimize this risk by purchasing higher quality securities. Many fixed income securities receive credit ratings from companies such as Standard & Poor's and Moody's Investor Services. Fixed income securities receive different credit ratings depending on the rating company's assessment of the likelihood of default by the issuer. The lower the credit rating, the greater the credit risk. If the security is unrated, greater reliance is placed on the Adviser's credit assessment. 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. SECTOR RISK Most of the Fund's securities will be invested in issuers located in Minnesota. In addition, a substantial part of the Fund's portfolio may be comprised of tax-exempt securities issued or credit enhanced by companies in similar businesses or with other similar characteristics. As a result, the Fund will be more susceptible to any economic, business, political, or other developments which generally affect these issuers. 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 determined net asset value (NAV). The Fund does not charge a sales charge. NAV is determined at 12:00 noon and 1:00 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 $10,000. There is no required minimum subsequent investment amount. An account may be opened with a smaller amount as long as the $10,000 minimum is reached within 90 days. An institutional investor's minimum investment 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 offers two share classes: Institutional Shares and Cash Series Shares each representing interests in a single portfolio of securities. This prospectus relates only to Cash Series Shares. Each share class has different expenses, which affect their performance. Contact your investment professional or call 1-800-341-7400 for more information concerning the other class. The Fund's Distributor markets the Shares described in this prospectus to institutions or individuals, directly or through investment professionals. The Fund may not be a suitable investment for retirement plans or for non- Minnesota taxpayers because it invests in Minnesota tax-exempt securities. When the Distributor receives marketing fees, it may pay some or all of them to investment professionals. The Distributor and its affiliates may pay out of their assets other amounts (including items of material value) to investment professionals for marketing and servicing Shares. The Distributor is a subsidiary of Federated Investors, Inc. (Federated). RULE 12B-1 PLAN The Fund has adopted a Rule 12b-1 Plan, which allows it to pay marketing fees to the Distributor and investment professionals for the sale, distribution and customer servicing of the Fund's Cash Series Shares. Because these Shares pay marketing fees on an ongoing basis, your investment cost may be higher over time than other shares with different sales charges and marketing fees. 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 1:00 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 on the day 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 SYSTEMATIC INVESTMENT PROGRAM Once you have opened an account, you may automatically purchase additional Shares on a regular basis by completing the Systematic Investment Program (SIP) section of the New Account Form or by contacting the Fund or your investment professional. The minimum investment amount for SIPs is $50. BY AUTOMATED CLEARINGHOUSE (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 12:00 noon (Eastern time), your redemption will be wired to you the same day. You will not receive that day's dividend. If you call after 12:00 noon (Eastern time), your redemption will be wired to you the following business day. You will receive that day's dividend. Under limited circumstances, arrangements may be made with the Distributor for same-day payment of redemption proceeds, without that day's dividend, for redemption requests received before 2:00 p.m. (Eastern time). 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 30 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. SYSTEMATIC WITHDRAWAL PROGRAM You may automatically redeem Shares in a minimum amount of $100 on a regular basis. Complete the appropriate section of the New Account Form or an Account Service Options Form or contact your investment professional or the Fund. Your account value must meet the minimum initial investment amount at the time the program is established. This program may reduce, and eventually deplete, your account. Payments should not be considered yield or income. CHECKWRITING You may request checks to redeem your Fund Shares. Your account will continue to receive the daily dividend declared on the Shares being redeemed until a check is presented for payment. DEBIT CARD You may request a debit card account that allows you to redeem Shares. There is an annual fee for this service that the Fund will automatically deduct from your account. 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 CONFIRMATIONS AND ACCOUNT STATEMENTS You will receive confirmation of purchases and redemptions (except for systematic transactions). In addition, you will receive periodic statements reporting all account activity, including systematic transactions, 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 the 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, 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. It is anticipated that Fund distributions will be primarily dividends that are exempt from federal income tax, although a portion of the Fund's dividends may not be exempt. Dividends may be subject to state and local taxes, although the Fund's dividends will be exempt from Minnesota state personal income tax to the extent they are derived from interest on obligations exempt from Minnesota personal income taxes. Capital gains and non-exempt dividends are taxable whether paid in cash or reinvested in the Fund. 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 Management. 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 and/or provide administrative services to more than 300 mutual funds and private accounts, which totaled over $120 billion in assets as of December 31, 1997. Federated was established in 1955 and is one of the largest mutual fund investment managers in the United States with more than 2,000 employees. Over 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 affect 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 finanical statements, is included in this prospectus. FINANCIAL HIGHLIGHTS-CASH SERIES SHARES (For a share outstanding throughout each period) Reference is made to the Report of Independent Public Accountants on page 29.
YEAR ENDED OCTOBER 31 1998 1997 1996 1995 1994 NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 INCOME FROM INVESTMENT OPERATIONS: Net investment income 0.03 0.03 0.03 0.03 0.02 LESS DISTRIBUTIONS: Distributions from net investment income (0.03) (0.03) (0.03) (0.03) (0.02) NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 TOTAL RETURN 1 2.93% 2.97% 2.97% 3.41% 2.17% RATIOS TO AVERAGE NET ASSETS: Expenses 0.80% 0.80% 0.80% 0.70% 0.71% Net investment income 2.89% 2.92% 2.93% 3.37% 2.15% Expense waiver/reimbursement 2 0.50% 0.51% 0.51% 0.62% 0.61% SUPPLEMENTAL DATA: Net assets, end of period (000 omitted) $207,599 $221,227 $235,614 $131,471 $94,335
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 October 31, 1998
PRINCIPAL AMOUNT VALUE Short-Term Municipals-99.5% 1 MINNESOTA-97.3% $ 34,029,000 ABN AMRO MuniTOPS Certificates Trust (Minnesota Non-AMT) Series 1998-6 Weekly VRDNs (Minneapolis/St. Paul, MN Airport Commission)/(AMBAC INS)/(ABN AMRO Bank N.V., Amsterdam LOC) $ 34,029,000 1,550,000 Albert Lea, MN Independent School District No. 241, 3.35% RANs (Minnesota State GTD), 9/20/1999 1,552,257 5,600,000 Anoka City, MN Solid Waste Disposal Authority, 3.65% CP (United Power Associates)/(National Rural Utilities Cooperative Finance Corp. GTD), Mandatory Tender 1/14/1999 5,600,000 1,950,000 Anoka, MN, Multifamily Housing Revenue Bonds Weekly VRDNs (Walker Plaza Project)/(U.S. Bank, NA, Minneapolis LOC) 1,950,000 3,575,000 Apple Valley, MN, IDRB (Series 1995) Weekly VRDNs (AV Development Co. Project)/(Firstar Bank, Minnesota LOC) 3,575,000 4,725,000 Avon, MN, (Series 1998) Weekly VRDNs (Vesper Corp.)/ (KeyBank, N.A. LOC) 4,725,000 1,915,000 Baudette, MN, IDR (Series 1989) Weekly VRDNs (Reid Powell, Inc.)/(Nationsbank, N.A., Charlotte LOC) 1,915,000 9,000,000 Becker, MN, PCR (Series 1993A & B), 2.90% CP (Northern States Power Co.), Mandatory Tender 2/10/1999 9,000,000 6,700,000 Becker, MN, PCR (Series 1993A & B), 3.00% CP (Northern States Power Co.), Mandatory Tender 2/11/1999 6,700,000 9,500,000 Becker, MN, PCR (Series 1993A & B), 3.25% CP (Northern States Power Co.), Mandatory Tender 1/12/1999 9,500,000 2,855,000 Blaine, MN, Industrial Development Revenue Bonds (Series 1996) Weekly VRDNs (S & S of Minnesota, LLC Project)/ (Norwest Bank Minnesota, N.A. LOC) 2,855,000 1,300,000 Bloomington, MN, Port Authority, Special Tax Revenue Refunding Bonds (Series 1996B) Weekly VRDNs (Mall of America)/(FSA INS)/(Credit Local de France LIQ) 1,300,000 7,500,000 Bloomington, MN, 4.75% Bonds, 12/1/1998 7,505,992 2,700,000 Bloomington, MN, IDRB (Series 1995) Weekly VRDNs (Now Technologies, Inc. Project)/(Norwest Bank Minnesota, N.A. LOC) 2,700,000 5,000,000 Bloomington, MN, Multifamily Housing Weekly VRDNs (Crow/ Bloomington Apartments)/(Citibank NA, New York LOC) 5,000,000 10,300,000 Burnsville, MN, Variable Rate Demand Revenue Bonds (Series 1996) Weekly VRDNs (YMCA Projects)/(Norwest Bank Minnesota, N.A. LOC) 10,300,000 3,520,000 Burnsville, MN, Adjustable Rate IDRB (Series 1996) Weekly VRDNs (Caire, Inc. Project)/(Bank One, Wisconsin, N.A. LOC) 3,520,000 3,840,000 Byron, MN, IDB Weekly VRDNs (Schmidt Printing)/(Norwest Bank Minnesota, N.A. LOC) 3,840,000 PRINCIPAL AMOUNT VALUE Short-Term Municipals-Continued 1 MINNESOTA-CONTINUED $ 1,205,000 Chanhassen, MN, IDA, (Series 1995) Weekly VRDNs (Building Management Group, L.L.C. Project)/(Norwest Bank Minnesota, N.A. LOC) $ 1,205,000 5,000,000 Cloquet, MN, Industrial Facilities Revenue Bonds (Series 1996A) Weekly VRDNs (Potlatch Corp.)/(Credit Suisse First Boston LOC) 5,000,000 2,700,000 Coon Rapids, MN, Hospital Authority, (Series 1985) Weekly VRDNs (Health Central System)/(Norwest Bank Minnesota, N.A. LOC) 2,700,000 3,160,000 Coon Rapids, MN, (Series 1996) Weekly VRDNs (Medical Enterprise Associates Project)/(Norwest Bank Minnesota, N.A. LOC) 3,160,000 2,350,000 Cottage Grove, MN, IDR Refunding Bonds (Series 1995) Weekly VRDNs (Supervalu Inc.)/ (Wachovia Bank of NC, N.A., Winston-Salem LOC) 2,350,000 10,745,000 2 Dakota County & Washington County, MN, Housing & Redevelopment Authority, MERLOTs (Series J), 3.80% TOBs (United States Treasury COL)/(Corestates Bank N.A., Philadelphia, PA LIQ), Optional Tender 12/1/1998 10,745,000 1,765,000 Dakota County, MN, Housing & Redevelopment Authority, Multifamily Rental Housing Revenue Bonds (Series 1994-B) Weekly VRDNs (Westwood Ridge Senior Residence Project)/ (U.S. Bank, N.A., Minneapolis LOC) 1,765,000 3,000,000 2 Dakota County, Washington County & Anoka City, MN, Housing & Redevelopment Authority, MERLOTs (Series H), 3.80% TOBs (United States Treasury COL)/(Corestates Bank N.A., Philadelphia, PA LIQ), Optional Tender 12/1/1998 3,000,000 3,100,000 Duluth, MN, (Series 1985) Weekly VRDNs (Wachovia Bank of Georgia N.A., Atlanta LOC) 3,100,000 9,000,000 Duluth, MN, Certificates of Indebtedness (Series 1998), 3.98% TANs, 12/31/1998 9,003,573 810,000 Eden Prairie, MN, IDA, #194 Weekly VRDNs (Richard W. Cohen Project)/(Norwest Bank Minnesota, N.A. LOC) 810,000 1,170,000 Eden Prairie, MN, IDA, (Series 1996) Weekly VRDNs (Challenge Printing, Inc. Project)/(Norwest Bank Minnesota, N.A. LOC) 1,170,000 1,360,000 Eden Prairie, MN, IDA, (Series 1995) Weekly VRDNs (Robert Lothenbach Project)/(Norwest Bank Minnesota, N.A. LOC) 1,360,000 675,000 Elk River, MN, Weekly VRDNs (Tescom Corp.)/(Norwest Bank Minnesota, N.A. LOC) 675,000 2,500,000 Faribault, MN, ISD No. 656, 3.75% TANs (Minnesota State GTD), 3/30/1999 2,501,473 2,945,000 Farmington, MN, (Series 1996) Weekly VRDNs (Lexington Standard Corporation Project)/(Norwest Bank Minnesota, N.A. LOC) 2,945,000 2,200,000 Hennepin Co. MN, (Series 1995C) Weekly VRDNs 2,200,000 7,250,000 Hennepin Co. MN, (Series 1996C) Weekly VRDNs 7,250,000 7,100,000 Hubbard Co. MN, Solid Waste Disposal (Series 1990) Weekly VRDNs (Potlatch Corp.)/(Credit Suisse First Boston LOC) 7,100,000 5,665,000 Lakeville, MN, ISD 194, PT-1098 Weekly VRDNs (Minnesota State GTD)/(Merrill Lynch Capital Services, Inc. LIQ) 5,665,000 5,600,000 Lino Lakes, MN, Variable Rate Demand IDRBs (Series 1997) Weekly VRDNs (Taylor Corp.)/(Norwest Bank Minnesota, N.A. LOC) 5,600,000 PRINCIPAL AMOUNT VALUE Short-Term Municipals-Continued 1 MINNESOTA-CONTINUED $ 1,000,000 MN Insured Municipal Securities Trust, Series 1996A, Floating Rate Certificates Weekly VRDNs (Eden Prairie MN, ISD 272)/(MBIA INS)/(Norwest Bank Minnesota, N.A. LIQ) $ 1,000,000 1,125,000 MN Insured Municipal Securities Trust, Series 1996B, Floating Rate Certificates Weekly VRDNs (Eden Prairie MN, ISD 272)/(MBIA INS)/(Norwest Bank Minnesota, N.A. LIQ) 1,125,000 2,500,000 MN Insured Municipal Securities Trust, Series 1996H, Floating Rate Certificates Weekly VRDNs (St. Louis Park, MN Health Care Facilities)/(AMBAC INS)/(Norwest Bank Minnesota, N.A. LIQ) 2,500,000 2,250,000 MN Municipal Securities Trust, Series 1996D, Floating Rate Certificates Weekly VRDNs (North St. Paul-Maplewood, MN ISD 622)/(Norwest Bank Minnesota, N.A. LIQ) 2,250,000 5,000,000 MN Municipal Securities Trust, Series 1996F, Floating Rate Certificates Weekly VRDNs Benedictine Health System)/(Connie Lee INS)/(Norwest Bank Minnesota, N.A. LIQ) 5,000,000 4,000,000 MN Municipal Securities Trust, Series 1996H, Floating Rate Certificates Weekly VRDNs (Rosemount, MN ISD 196)/(FSA INS)/ (Norwest Bank Minnesota, N.A. LIQ) 4,000,000 3,600,000 Maple Grove, MN, Variable Rate Demand IDRB's (Series 1998) Weekly VRDNs (Spancrete Midwest Co.)/(Norwest Bank Minnesota, N.A. LOC) 3,600,000 950,000 Maplewood, MN, (Series 1997) Weekly VRDNs (Camada Ltd. Partnership)/(Norwest Bank Minnesota, N.A. LOC) 950,000 4,525,000 Maplewood, MN, Multifamily Housing (Series 1993) Weekly VRDNs (Silver Ridge Project)/(Federal Home Loan Bank of Chicago LOC) 4,525,000 660,000 Minneapolis, MN, IDA Weekly VRDNs (JTJ Co.)/(U.S. Bank, N.A., Minneapolis LOC) 660,000 6,000,000 Minneapolis, MN, (Series 1995B) Weekly VRDNs 6,000,000 3,330,000 Minneapolis, MN, (Series 1998), 4.50% Bonds, 3/1/1999 3,339,184 7,000,000 Minneapolis, MN, Housing Development Revenue Refunding Bonds (Series 1988) Weekly VRDNs (Symphony Place)/(Citibank N.A., New York LOC) 7,000,000 900,000 Minneapolis, MN, Variable Rate Demand Commercial Development Revenue Refunding Bonds (Series 1996) Weekly VRDNs (WNB & Company Project)/(U.S. Bank, N.A., Minneapolis LOC) 900,000 10,165,000 Minneapolis, MN, Variable Rate Housing Revenue Bonds Weekly VRDNs (One Ten Grant Project)/(U.S. Bank, N.A., Minneapolis LOC) 10,165,000 370,000 Minneapolis, MN, Various Purpose Bonds (Series 1996) Weekly VRDNs (Bayerische Vereinsbank AG, Munich LIQ) 370,000 4,900,000 Minneapolis, MN, Various Purpose Bonds (Series 1997B) Weekly VRDNs (Bayerische Vereinsbank AG, Munich LIQ) 4,900,000 3,160,000 2 Minneapolis/St. Paul MN Housing Finance Board, SFM Revenue Bonds, MERLOTs (Series D), 3.85% TOBs (GNMA COL)/(Corestates Bank N.A., Philadelphia, PA LIQ), Optional Tender 1/1/1999 3,160,000 8,000,000 Minnesota Agricultural and Economic Development Board, (Series 1996) Weekly VRDNs (Evangelical Lutheran Good Samaritan Society)/(Rabobank Nederland, Utrecht LOC) 8,000,000 8,000,000 Minnesota State Commissioner of Iron Range Resources & Rehabilitation, (Series 1991) Weekly VRDNs (Louisiana- Pacific Corp.)/(Wachovia Bank of NC, N.A., Winston-Salem LOC) 8,000,000 4,995,000 Minnesota State HFA, (Series 1998C) PT-204, % TOBs (Bayerische Vereinsbank AG, Munich LIQ), Optional Tender 5/19/1999 4,995,000 PRINCIPAL AMOUNT VALUE Short-Term Municipals-Continued 1 MINNESOTA-CONTINUED $ 5,000,000 Minnesota State HFA, Convertible Single Family Mortgage (Series M), 3.80% TOBs, Mandatory Tender 12/10/1998 $ 5,000,000 615,000 Minnesota State HFA, Convertible Single Family Mortgage Bonds (Series N), 3.90% TOBs, Mandatory Tender 12/10/1998 615,000 3,800,000 Minnesota State Higher Education Coordinating Board, (Series 1992A) Weekly VRDNs (U.S. Bank, N.A., Minneapolis LIQ) 3,800,000 7,000,000 Minnesota State Higher Education Coordinating Board, 1992 (Series B) Weekly VRDNs (U.S. Bank, N.A., Minneapolis LIQ) 7,000,000 6,500,000 Minnesota State Higher Education Coordinating Board, 1992 (Series C) Weekly VRDNs (U.S. Bank, N.A., Minneapolis LIQ) 6,500,000 12,700,000 Minnesota State Higher Education Coordinating Board, 1992 (Series C) Weekly VRDNs (U.S. Bank, N.A., Minneapolis LIQ) 12,700,000 5,750,000 Minnesota State Higher Education Facility Authority, (Series Four-S) Weekly VRDNs (Bethel College and Seminary)/(Allied Irish Banks PLC LOC) 5,750,000 4,310,000 Minnesota State, (Series A), 5.00% Bonds (AMBAC INS), 6/30/1999 4,362,982 1,500,000 Minnesota State, 5.00% Bonds, 11/1/1998 1,500,000 5,000,000 Minnesota Tax and Aid Anticipation Borrowing Program, (Series 1998 B), 3.625% TANs (Minnesota State GTD), 8/27/1999 5,000,000 7,145,000 Minnesota Tax and Aid Anticipation Borrowing Program, (Series 1998A), 3.65% TANs (Minnesota State GTD), 2/9/1999 7,145,000 3,250,000 Minnesota Tax and Aid Anticipation Borrowing Program, (Series 1998A), 3.67% TANs (Minnesota State GTD), 8/20/1999 3,250,000 10,000,000 Minnesota Tax and Aid Anticipation Borrowing Program, (Series 1998B), 3.90% TANs (Minnesota State GTD), 3/4/1999 10,011,390 1,085,000 Minnetonka, MN, IDRB (Series 1996) Weekly VRDNs (PGI Cos., Inc.)/(Norwest Bank Minnesota, N.A. LOC) 1,085,000 5,900,000 Minnetonka, MN, Multifamily Housing Revenue Refunding Bonds (Series 1995) Weekly VRDNs (Southampton Apartments Project (MN))/(National Bank of Canada, Montreal LOC) 5,900,000 6,500,000 Minnetonka, MN, Rental Housing Revenue Bonds (Series 1998), 4.42% TOBs (Bayerische Landesbank Girozentrale), Mandatory Tender 5/1/1999 6,500,000 1,300,000 New Brighton, MN, IDR Weekly VRDNs (Unicare Homes, Inc.)/ (Paribas, Paris LOC) 1,300,000 1,000,000 New Hope, MN, IDRB, (Series 1994) Weekly VRDNs (Gaines and Hanson Printing Co.)/ (Norwest Bank Minnesota, N.A. LOC) 1,000,000 3,020,000 New Hope, MN, Weekly VRDNs (Paddock Labs)/(U.S. Bank, N.A., Minneapolis LOC) 3,020,000 4,650,000 Olmsted County, MN, Building Authority, Certificates of Participation Weekly VRDNs (Human Services Infrastructure)/ (Toronto-Dominion Bank LOC) 4,650,000 1,190,000 Plymouth, MN, Weekly VRDNs (Nuaire, Inc.)/(Norwest Bank Minnesota, N.A. LOC) 1,190,000 PRINCIPAL AMOUNT VALUE Short-Term Municipals-continued 1 MINNESOTA-CONTINUED $ 3,500,000 Plymouth, MN, IDRB (Series 1994) Weekly VRDNs (Olympic Steel, Inc.)/(National City Bank, Ohio LOC) $ 3,500,000 1,200,000 Port Authority of Saint Paul, MN, (Series 1998A) Weekly VRDNs (Bix Fruit Co.)/(Firstar Bank, Milwaukee LOC) 1,200,000 2,500,000 Port Authority of Saint Paul, MN, Variable Rate Demand IDRB's (Series 1998A) Weekly VRDNs (National Checking Co.)/ (U.S. Bank, N.A., Minneapolis LOC) 2,500,000 925,000 Port of Austin, MN, Weekly VRDNs (Mower House Color)/ (Norwest Bank Minnesota, N.A. LOC) 925,000 14,000,000 Rochester, MN, Health Care Facility Authority Weekly VRDNs (Mayo Foundation)/(Rabobank Nederland, Utrecht LIQ) 14,000,000 1,650,000 Rocori, MN, Independent School District No. 750, (Series 1998), 4.25% Bonds (Minnesota State GTD), 9/3/1999 1,656,898 500,000 Rogers, MN, IDA Weekly VRDNs (Metal Sales Manufacturing Corp)/(KeyBank, N.A. LOC) 500,000 2,555,000 Rogers, MN, IDA, IDRB Weekly VRDNs (DAC Development, LLC Project)/(Norwest Bank Minnesota, N.A. LOC) 2,555,000 23,500,000 Rosemount, MN, PCR (Series 1984) Weekly VRDNs (Koch Refining Co.) 23,500,000 1,095,000 Savage, MN, (Series A), 5.00% Bonds (FGIC INS), 2/1/1999 1,099,376 4,000,000 Shakopee, MN, Hospital Finance Authority Weekly VRDNs (St. Francis Regional Medical Center)/(Citibank N.A., New York LOC) 4,000,000 940,000 Southern Minnesota Municipal Power Agency, (Series 1991A), 5.10% Bonds (FGIC INS), 1/1/1999 942,212 6,500,000 Southern Minnesota Municipal Power Agency, 3.50% CP, Mandatory Tender 11/10/1998 6,500,000 10,500,000 Southern Minnesota Municipal Power Agency, 3.50% CP, Mandatory Tender 11/13/1998 10,500,000 1,135,000 St. Cloud, MN, Housing & Redevelopment Authority, Revenue Refunding Bonds (Series 1994A) Weekly VRDNs (Coborn's Incorporated Project)/ (Norwest Bank Minnesota, N.A. LOC) 1,135,000 2,262,500 St. Cloud, MN, Housing & Redevelopment Authority, Revenue Refunding Bonds (Series 1994B) Weekly VRDNs (Coborn's Incorporated Project)/ (Norwest Bank Minnesota, N.A. LOC) 2,262,500 7,100,000 St. Cloud, MN, (Series 1997-A) Weekly VRDNs (The Saint Cloud Hospital)/(Rabobank Nederland, Utrecht LOC) 7,100,000 9,400,000 St. Louis Park, MN, Health Care Facilities, Floating Rate Monthly Demand IDRB's (Series 1984) Weekly VRDNs (Unicare Homes, Inc.)/(Banque Paribas, Paris LOC) 9,400,000 4,600,000 St. Paul, MN, Housing & Redevelopment Authority Weekly VRDNs (District Cooling St. Paul, Inc.)/(Credit Local de France LOC) 4,600,000 400,000 St. Paul, MN, Housing & Redevelopment Authority Weekly VRDNs (United Way)/(U.S. Bank, N.A., Minneapolis LOC) 400,000 2,000,000 St. Paul, MN, Housing & Redevelopment Authority, District Cooling Revenue Bonds (1995 Series I) Weekly VRDNs (Credit Local de France LOC) 2,000,000 PRINCIPAL AMOUNT VALUE Short-Term Municipals-continued 1 MINNESOTA-CONTINUED $ 2,625,000 St. Paul, MN, Housing & Redevelopment Authority, Hampden Square Apartments (Series A), 4.318% TOBs (Bayerische Landesbank Girozentrale), Mandatory Tender 7/1/1999 $ 2,625,000 5,000,000 St. Paul, MN, Port Authority, (Series 1991) Weekly VRDNs (West Gate Office)/(U.S. Bank, N.A., Minneapolis LOC) 5,000,000 1,000,000 Steele County, MN, IDRB (Series 1994) Weekly VRDNs (Blount, Inc.)/(Nationsbank, N.A., Charlotte LOC) 1,000,000 5,495,000 Trust Receipts (Series 1998 FR/RI-C8) Weekly VRDNs (Bank of America NT and SA, San Francisco SWP) 5,495,000 10,000,000 VRDC/IVRC Trust, Tax-Exempt Variable Rate Demand Certificates (Series 1997A) Weekly VRDNs (Regents of University of Minnesota)/(Citibank N.A., New York LIQ) 10,000,000 3,300,000 Victoria, MN, IDRB, (Series 1996A) Weekly VRDNs (HEI, Inc. Project)/(Norwest Bank Minnesota, N.A. LOC) 3,300,000 1,235,000 Victoria, MN, Industrial Development Revenue Bonds, (Series 1996B) Weekly VRDNs (HEI, Inc. Project)/(Norwest Bank Minnesota, N.A. LOC) 1,235,000 5,495,000 Washington County, MN, Housing & Redevelopment Authority, Trust Receipts (Series 1998 FR/RI-C9) Weekly VRDNs (Granada Pond Apartments)/(Bank of America NT and SA, San Francisco SWP) 5,495,000 2,100,000 Wells, MN, 3.95% TOBs (Stokely, Inc.)/(Corestates Bank N.A., Philadelphia, PA LOC), Optional Tender 12/1/1998 2,100,000 1,000,000 Western Minnesota Municipal Power Agency, MN, 10.25% Bonds (United States Treasury PRF), 1/1/1999 (@100) 1,010,563 2,500,000 Western Minnesota Municipal Power Agency, MN, Transmission Project (Series 1997 A), 4.25% BANs, 1/1/1999 2,500,000 975,000 White Bear, MN, Weekly VRDNs (Thermoform Plastic, Inc.)/ Norwest Bank Minnesota, N.A. LOC) 975,000 2,025,000 White Bear, MN, Variable Rate Demand Industrial Revenue Bonds Weekly VRDNs (N.A. Ternes Project)/(Firstar Bank, Minnesota LOC) 2,025,000 1,935,000 Winona, MN, ISD 381, 3.75% RANs (Minnesota State GTD), 9/22/ 1999 1,939,480 2,000,000 Winsted, MN, IDA Weekly VRDNs (Sterner Lighting Systems)/ (Fleet National Bank, Springfield, MA LOC) 2,000,000 Total 521,566,880 PRINCIPAL AMOUNT VALUE Short-Term Municipals-Continued 1 PUERTO RICO-2.2% $ 2,934,332 Commonwealth of Puerto Rico Municipal Revenues Collection Center, 1997A LeaseTOPS Trust Weekly VRDNs (ABN AMRO Bank N.V., Amsterdam LIQ)/(State Street Bank and Trust Co. LOC) $ 2,934,332 5,000,000 2 Commonwealth of Puerto Rico, (Series 1992A) P-Floats PT-140, 3.65% TOBs (FSA INS)/(Commerzbank AG, Frankfurt LIQ), Mandatory Tender 1/14/1999 5,000,000 3,790,000 Commonwealth of Puerto Rico, Municipal Securities Trust Receipts, (Series 1998-CMC4) Weekly VRDNs (MBIA INS)/(Chase Manhattan Corp. LIQ) 3,790,000 Total 11,724,332 Total Investments (at amortized cost) 3 $ 533,291,212
Securities that are subject to Alternative Minimum Tax represent 29.6% of the portfolio as calculated based upon total portfolio market value. 1 The fund may only invest in securities rated in one of the two highest short-term rating categories by nationally recognized statistical rating organizations ("NRSROs") or unrated securities of comparable quality. 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, MIG-1 or MIG-2 by Moody's Investors Service, Inc., or F-1+, F-1, or F-2 by Fitch IBCA, Inc. are all considered rated in one of the two highest short-term rating categories. Securities rated in the highest short-term rating category (and unrated securities of comparable quality) are identified as First Tier securities. Securities rated in the second highest short-term rating category (and unrated securities of comparable quality) are identified as Second Tier securities. The Fund follows applicable regulations in determining whether a security is rated and whether a security rated by multiple NRSROs in different rating categories should be identified as a First or Second Tier security. At October 31, 1998, the portfolio securities were rated as follows: Tier Rating Percentage Based on Total Market Value (Unaudited) FIRST TIER SECOND TIER 100.00% 0.00% 2 Denotes a restricted security which is subject to restrictions on resale under Federal Securities laws. At October 31, 1998, these securities amounted to $21,905,000 which represents 4.1% of net assets. 3 Also represents cost for federal tax purposes. Note: The categories of investments are shown as a percentage of net assets ($536,106,212) at October 31, 1998. The following acronyms are used throughout this portfolio: AMBAC -American Municipal Bond Assurance Corporation AMT -Alternative Minimum Tax BANs -Bond Anticipation Notes COL -Collateralized CP -Commercial Paper FGIC -Financial Guaranty Insurance Company FSA -Financial Security Assurance GNMA -Government National Mortgage Association GTD -Guaranty HFA -Housing Finance Authority IDA -Industrial Development Authority IDB -Industrial Development Bond IDR -Industrial Development Revenue IDRB -Industrial Development Revenue Bond INS -Insured ISD -Independent School District LIQ -Liquidity Agreement LLC -Limited Liability Corporation LOC -Letter of Credit MBIA -Municipal Bond Investors Assurance MERLOTS -Municipal Exempt Receipts - Liquidity Optional Tender Series PCR -Pollution Control Revenue PLC -Public Limited Company PRF -Prerefunded RANs -Revenue Anticipation Notes SA -Support Agreement TANs -Tax Anticipation Notes TOBs -Tender Option Bonds VRDNs -Variable Rate Demand Notes See Notes which are an integral part of the Financial Statements STATEMENT OF ASSETS AND LIABILITIES October 31, 1998 ASSETS: Total investments in securities, at amortized cost and value $ 533,291,212 Cash 550,726 Income receivable 3,291,735 Receivable for shares sold 43,783 Prepaid expenses 13,090 TOTAL ASSETS 537,190,546 LIABILITIES: Income distribution payable $ 891,233 Accrued expenses 193,101 TOTAL LIABILITIES 1,084,334 Net Assets for 536,106,212 shares outstanding $ 536,106,212 NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE: INSTITUTIONAL SHARES: $328,507,225 / 328,507,225 shares outstanding $1.00 CASH SERIES SHARES: $207,598,987 / 207,598,987 shares outstanding $1.00
See Notes which are an integral part of the Financial Statements STATEMENT OF OPERATIONS Year Ended October 31, 1998 INVESTMENT INCOME: Interest $ 20,018,457 EXPENSES: Investment advisory fee $ 2,168,395 Administrative personnel and services fee 408,779 Custodian fees 26,550 Transfer and dividend disbursing agent fees and expenses 131,671 Directors'/Trustees' fees 4,632 Auditing fees 12,135 Legal fees 18,238 Portfolio accounting fees 107,038 Distribution services fee-Cash Series Shares 1,211,281 Shareholder services fee-Institutional Shares 749,642 Shareholder services fee-Cash Series Shares 605,640 Share registration costs 69,228 Printing and postage 32,247 Insurance premiums 39,556 Miscellaneous 3,306 TOTAL EXPENSES 5,588,338 WAIVERS: Waiver of investment advisory fee $ (1,379,144) Waiver of distribution services fee-Cash Series Shares (605,640) Waiver of shareholder services fee-Institutional Shares (749,642) TOTAL WAIVERS (2,734,426) Net expenses 2,853,912 Net investment income $ 17,164,545
See Notes which are an integral part of the Financial Statements STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED OCTOBER 31 1998 1997 INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income $ 17,164,545 $ 14,244,131 DISTRIBUTIONS TO SHAREHOLDERS: Distributions from net investment income Institutional Shares (10,155,213) (7,772,322) Cash Series Shares (7,009,332) (6,471,809) CHANGE IN NET ASSETS RESULTING FROM DISTRIBUTIONS TO SHAREHOLDERS (17,164,545) (14,244,131) SHARE TRANSACTIONS: Proceeds from sale of shares 1,392,083,828 1,220,304,237 Net asset value of shares issued to shareholders in payment of distributions declared 7,214,822 6,706,186 Cost of shares redeemed (1,292,784,856) (1,250,475,198) Change in net assets resulting from share transactions 106,513,794 (23,464,775) Change in net assets 106,513,794 (23,464,775) NET ASSETS: Beginning of period 429,592,418 453,057,193 End of period $ 536,106,212 $ 429,592,418
See Notes which are an integral part of the Financial Statements NOTES TO FINANCIAL STATEMENTS October 31, 1998 ORGANIZATION Federated Municipal Trust (the "Trust") is registered under the Investment Company Act of 1940, as amended (the "Act") as an open-end, management investment company. The Trust consists of 17 portfolios. The financial statements included herein are only those of Minnesota Municipal Cash Trust (the "Fund"). The financial statements of the other portfolios are presented separately. The assets of each portfolio are segregated and a shareholder's interest is limited to the portfolio in which shares are held. The Fund offers two classes of shares: Institutional Shares and Cash Series Shares. The investment objective of the Fund is current income exempt from federal regular income tax and the regular personal income taxes imposed by the State of Minnesota consistent with stability of principal. 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. 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. RESTRICTED SECURITIES Restricted securities are securities that may only be resold upon registration under federal securities laws or in transactions exempt from such registration. Many restricted securities may be resold in the secondary market in transactions exempt from registration. In some cases, the restricted securities may be resold without registration upon exercise of a demand feature. Such restricted securities may be determined to be liquid under criteria established by the Board of Trustees (the "Trustees"). The Fund will not incur any registration costs upon such resales. Restricted securities are valued at amortized cost in accordance with Rule 2a-7 under the Investment Company Act of 1940. Additional information on each restricted security held at October 31, 1998, is as follows: Acquisition Acquisition SECURITY Date Cost Commonwealth of Puerto Rico (Series 1992A) P-Floats PT-140 2/12/1998 $ 5,000,000 Minneapolis/St. Paul MN Housing Finance Board, SFM Revenue Bonds, MERLOTs (Series D) 10/1/1998 3,160,000 Dakota County, Washington County & Anoka City, MN Housing & Redevelopment Authority, MERLOTs (Series H) 9/1/1998 3,000,000 Dakota County & Washington County MN Housing & Redevelopment Authority, MERLOTs (Series J) 9/1/1998 10,745,000 USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts of assets, liabilities, expenses and revenues reported in the financial statements. Actual results could differ from those estimated. OTHER Investment transactions are accounted for on the trade date. SHARES OF BENEFICIAL INTEREST The Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest (without par value) for each class of shares. At October 31, 1998, capital paid-in aggregated $536,106,212. Transactions in shares were as follows:
YEAR ENDED OCTOBER 31 1998 1997 CASH SERIES SHARES: Shares sold 648,659,025 623,382,912 Shares issued to shareholders in payment of distributions declared 6,851,690 6,382,638 Shares redeemed (669,138,653) (644,152,774) NET CHANGE RESULTING FROM CASH SERIES SHARE TRANSACTIONS (13,627,938) (14,387,224) YEAR ENDED OCTOBER 31 1998 1997 INSTITUTIONAL SHARES: Shares sold 743,424,803 596,921,325 Shares issued to shareholders in payment of distributions declared 363,132 323,548 Shares redeemed (623,646,203) (606,322,424) NET CHANGE RESULTING FROM INSTITUTIONAL SHARE TRANSACTIONS 120,141,732 (9,077,551) NET CHANGE RESULTING FROM SHARE TRANSACTIONS 106,513,794 (23,464,775)
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES INVESTMENT ADVISORY FEE Federated Management, 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. DISTRIBUTION SERVICES FEE The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b- 1 under the Act. Under the terms of the Plan, the Fund will compensate Federated Securities Corp.("FSC"), the principal distributor, from the net assets of the Fund to finance activities intended to result in the sale of the Fund's Cash Series Shares. The Plan provides that the Fund may incur distribution expenses up to 0.50% of the average daily net assets of the Cash Series, annually, to compensate FSC. FSC may voluntarily choose to waive any portion of its fee. FSC can modify or terminate this voluntary waiver at any time at its sole discretion. SHAREHOLDER SERVICES FEE Under the terms of a Shareholder Services Agreement with Federated Shareholder Services ("FSS"), the Fund will pay Federated Shareholder Services up to 0.25% of average daily net assets of the Fund shares for the period. The fee paid to FSS is used to finance certain services for shareholders and to maintain shareholder accounts. FSS may voluntarily choose to waive any portion of its fee. FSS can modify or terminate this voluntary waiver at any time at its sole discretion. 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. INTERFUND TRANSACTIONS During the period ended October 31, 1998, the Fund engaged in purchase and sale transactions with funds that have a common investment adviser (or affiliated investment advisers), common Directors/Trustees, and/or common Officers. These purchase and sale transactions were made at current market value pursuant to Rule 17a-7 under the Act amounting to $767,167,340 and $706,792,340, respectively. GENERAL Certain of the Officers and Trustees of the Trust are Officers and Directors or Trustees of the above companies. CONCENTRATION OF CREDIT RISK Since the Fund invests a substantial portion of its assets in issuers located in one state, it will be more susceptible to factors adversely affecting issuers of that state than would be a comparable tax-exempt mutual fund that invests nationally. In order to reduce the credit risk associated with such factors, at October 31, 1998, 51.3% of the securities in the portfolio of investments are backed by letters of credit or bond insurance of various financial institutions and financial guaranty assurance agencies. The percentage of investments insured by or supported (backed) by a letter of credit from any one institution or agency did not exceed11.2% of total investments. 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 BOARD OF TRUSTEES OF FEDERATED MUNICIPAL TRUST AND SHAREHOLDERS OF MINNESOTA MUNICIPAL CASH TRUST: We have audited the accompanying statement of assets and liabilities of Minnesota Municipal Cash Trust (an investment portfolio of Federated Municipal Trust, a Massachusetts business trust), including the schedule of portfolio investments, as of October 31, 1998, the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for the periods presented. These financial statements and financial highlights are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the 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 October 31, 1998, by correspondence with the custodian. 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 Minnesota Municipal Cash Trust (an investment portfolio of Federated Municipal Trust) as of October 31, 1998, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and its financial highlights for the periods presented, in conformity with generally accepted accounting principles. Arthur Andersen LLP Boston, Massachusetts December 23, 1998 [Graphic] PROSPECTUS Minnesota Municipal Cash Trust A Portfolio of Federated Municipal Trust CASH SERIES SHARES DECEMBER 31, 1998 A Statement of Additional Information (SAI) dated December 31, 1998, is incorporated by reference into this prospectus. To obtain the SAI 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] Federated Minnesota Municipal Cash 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. 811-5911 Cusip 314229873 0082715A-CSS (12/98) [Graphic] PROSPECTUS Minnesota Municipal Cash Trust A Portfolio of Federated Municipal Trust INSTITUTIONAL SHARES A money market mutual fund seeking to provide current income exempt from federal regular income tax and the regular personal income taxes imposed by the State of Minnesota. 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. December 31, 1998 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? 5 What are the Specific Risks of Investing in the Fund? 6 What do Shares Cost? 6 How is the Fund Sold? 7 How to Purchase Shares 7 How to Redeem Shares 8 Account and Share Information 10 Who Manages the Fund? 11 Financial Information 12 Report of Independent Public Accountants 29 Risk/Return Summary WHAT IS THE FUND'S INVESTMENT OBJECTIVE? The Fund is a money market fund which seeks to maintain a stable net asset value of $1.00. The Fund's investment objective is to provide current income which is exempt from federal regular income tax and the regular personal income taxes imposed by the State of Minnesota consistent with stability of principal. 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 tax-exempt securities so that the Fund's annual interest income is exempt from federal regular income tax and the regular personal income taxes imposed by the State of Minnesota. Interest from the Fund's investments may be subject to the federal alternative minimum tax for individuals and corporations. WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND? Because the Fund may invest a significant portion of its assets in securities of a single issuer, an investment in the Fund may involve additional risks compared to a fully diversified money market 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] - See Appendix A-2 Historically, the Fund has maintained a constant $1.00 net asset value per share. The bar chart shows the variability of the Fund's Institutional Shares on a yearly basis. The Fund's Institutional Shares are not sold subject to a sales charge (load). Hence, the total returns displayed above are based upon the net asset value. The Fund's Institutional Shares year to date total return as of the most recent calendar quarter of September 30, 1998 was 2.54%. Within the period shown in the Chart, the Fund's highest quarterly return was 1.13% (quarter ended September 30, 1991). Its lowest quarterly return was 0.56% (quarter ended March 31, 1994). The Fund's Institutional Shares Seven-Day Net Yield as of 12/31/97 was 3.80%. The following table represents the Fund's Institutional Shares Average Annual Total Return through 12/31/97. CALENDAR PERIOD FUND 1 Year 3.53% 5 Years 3.19% Start of Performance 1 3.47% 1 The Fund's start of performance date was September 10, 1990. Investors may call the Fund at 1-800-341-7400 to acquire the current Seven- Day Net Yield. While 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? MINNESOTA MUNICIPAL CASH TRUST FEES AND EXPENSES This table describes the fees and expenses that you may pay if you buy, hold and redeem shares of the Fund's Institutional Shares.
SHAREHOLDER FEES 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 a percentage of average net assets) Management Fee 2 0.40% Distribution (12b-1) Fee None Shareholder Services Fee 3 0.25% Other Expenses 0.15% Total Annual Fund Operating Expenses 0.80% 1 Although not contractually obligated to do so, the adviser and shareholder services provider waived certain amounts. These are shown below along with the net expenses the Fund actually paid for the fiscal year ended October 31, 1998. Waiver of Fund Expenses 0.50% Total Actual Annual Operating Expenses (after waivers) 0.30% 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 0.15% for the year ended October 31, 1998. 3 The shareholder services fee for Institutional Shares has been voluntarily waived. This voluntary waiver can be terminated at any time. There was no shareholder services fee paid by the Fund (after the voluntary waiver) for the year ended October 31, 1998.
EXAMPLE The following Example is intended to help you compare the cost of investing in the Fund's Institutional Shares with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund's Institutional 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 Institutional Shares' operating expenses are BEFORE WAIVERS as shown above and remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be: 1 YEAR 3 YEARS 5 YEARS 10 YEARS Expenses assuming no redemption $82 $255 $444 $990 What Are The Fund's Investment Strategies? The Fund invests in a portfolio of high-quality tax-exempt securities maturing in 13 months or less. The average maturity of the Fund's portfolio, computed on a dollar-weighted basis, will be 90 days or less. The Fund's Adviser performs a fundamental credit analysis to develop an approved list of issuers and securities that meet the Adviser's minimum credit standards. The Adviser targets an average portfolio maturity based upon its interest rate outlook and the tax-exempt securities available. The Adviser structures the portfolio by combining variable rate demand instruments and municipal notes. Depending on the supply of tax-exempt securities, the Adviser generally shortens the portfolio's maturity when it expects interest rates to rise and extends the maturity when it expects interest rates to fall. TEMPORARY DEFENSIVE INVESTMENTS During adverse market conditions the Fund may temporarily depart from its principal investment strategies by investing in securities subject to federal regular income tax and the regular personal income taxes imposed by the State of Minnesota. Temporary investments will be of comparable quality to other securities in which the Fund invests. This may cause the Fund to give up greater investment returns to maintain the safety of principal. This also may cause the Fund to receive and distribute taxable income to investors. What are the Principal Securities in Which the Fund Invests? TAX-EXEMPT SECURITIES Tax-exempt securities are fixed income securities that pay interest exempt from regular federal income taxes. States, counties, cities and other political subdivisions and authorities typically issue tax exempt securities. Tax-exempt securities are generally differentiated by their source of repayment. FIXED INCOME SECURITIES Fixed income 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. VARIABLE RATE DEMAND INSTRUMENTS Variable rate demand instruments are tax-exempt securities that require the issuer or a third party, such as a dealer or bank, to repurchase the security for its face value upon demand. The securities also bear interest at a variable rate intended to cause the securities to trade at their face value. The Fund treats demand instruments as short-term securities, even though their stated maturity may extend beyond 13 months. MUNICIPAL NOTES Municipal notes are short-term tax-exempt securities. Many municipalities issue such notes to fund their current operations before collecting taxes or other municipal revenues. Municipalities may also issue notes to fund capital projects prior to issuing long-term bonds. The issuers typically repay the notes at the end of their fiscal year, either with taxes, other revenues or proceeds from newly issued notes or bonds. INVESTMENT 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 rating services or be of comparable quality to securities having such ratings. CREDIT ENHANCEMENT Credit enhancement consists of an arrangement in which a company agrees to pay amounts due on a fixed income security if the issuer defaults. In some cases the company providing credit enhancement makes all payments directly to the security holders and receives reimbursement from the issuer. Normally, the credit enhancer has greater financial resources and liquidity than the issuer. For this reason, the Adviser usually evaluates the credit risk of a fixed income security based solely upon its credit enhancement. What Are The Specific Risks Of Investing In The Fund? Although there are many factors which may affect an investment in the Fund, the principal risks of investing in a tax-exempt money market fund are described below. CREDIT RISK Credit risk is the possibility that an issuer or a credit enhancer will default (fails to repay interest and principal when due). If an issuer or credit enhancer defaults, the Fund will lose money. Money market funds try to minimize this risk by purchasing higher quality securities. Many fixed income securities receive credit ratings from companies such as Standard & Poor's and Moody's Investor Services. Fixed income securities receive different credit ratings depending on the rating company's assessment of the likelihood of default by the issuer. The lower the credit rating, the greater the credit risk. If the security is unrated, greater reliance is placed on the Adviser's credit assessment. 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. SECTOR RISK Most of the Fund's securities will be invested in issuers located in Minnesota. In addition, a substantial part of the Fund's portfolio may be comprised of tax-exempt securities issued or credit enhanced by companies in similar businesses or with other similar characteristics. As a result, the Fund will be more susceptible to any economic, business, political, or other developments which generally affect these issuers. 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 determined net asset value (NAV). The Fund does not charge a sales charge. NAV is determined at 12:00 noon and 1:00 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 investment 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 offers two share classes: Institutional Shares and Cash Series Shares each representing interests in a single portfolio of securities. This prospectus relates only to Institutional Shares. Each share class has different expenses, which affect their performance. Contact your investment professional or call 1-800-341-7400 for more information concerning the other class. The Fund's Distributor markets the Shares described in this prospectus to institutions acting in an agency or fiduciary capacity or to individuals directly or through investment professionals. The Fund may not be a suitable investment for retirement plans or for non-Minnesota taxpayers because it invests in Minnesota tax-exempt securities. The Distributor and its affiliates may pay out of their assets other 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 1:00 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 on the day 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 CLEARINGHOUSE (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 12:00 noon (Eastern time), your redemption will be wired to you the same day. You will not receive that day's dividend. If you call after 12:00 noon (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 request 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 30 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 CONFIRMATIONS AND ACCOUNT STATEMENTS You will receive confirmation of purchases and redemptions (except for systematic transactions). In addition, 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 the 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, 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. It is anticipated that Fund distributions will be primarily dividends that are exempt from federal income tax, although a portion of the Fund's dividends may not be exempt. Dividends may be subject to state and local taxes, although the Fund's dividends will be exempt from Minnesota state personal income tax to the extent they are derived from interest on obligations exempt from Minnesota personal income taxes. Capital gains and non-exempt dividends are taxable whether paid in cash or reinvested in the Fund. 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 Management. 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 and/or provide administrative services to more than 300 mutual funds and private accounts, which totaled over $120 billion in assets as of December 31, 1997. Federated was established in 1955 and is one of the largest mutual fund investment managers in the United States with more than 2,000 employees. Over 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 affect 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-INSTITUTIONAL SHARES (For a share outstanding throughout each period) Reference is made to the Report of Independent Public Accountants on page 29.
YEAR ENDED OCTOBER 31 1998 1997 1996 1995 1994 NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 INCOME FROM INVESTMENT OPERATIONS: Net investment income 0.03 0.03 0.03 0.04 0.03 LESS DISTRIBUTIONS: Distributions from net investment income (0.03) (0.03) (0.03) (0.04) (0.03) NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 TOTAL RETURN 1 3.44% 3.48% 3.49% 3.82% 2.58% RATIOS TO AVERAGE NET ASSETS: Expenses 0.30% 0.30% 0.30% 0.30% 0.31% Net investment income 3.39% 3.42% 3.43% 3.77% 2.55% Expense waiver/reimbursement 2 0.50% 0.51% 0.51% 0.52% 0.34% SUPPLEMENTAL DATA: Net assets, end of period (000 omitted) $328,507 $208,365 $217,443 $212,392 $159,704
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 October 31, 1998
PRINCIPAL AMOUNT VALUE Short-Term Municipals-99.5% 1 MINNESOTA-97.3% $ 34,029,000 ABN AMRO MuniTOPS Certificates Trust (Minnesota Non-AMT) Series 1998-6 Weekly VRDNs (Minneapolis/St. Paul, MN Airport Commission)/(AMBAC INS)/(ABN AMRO Bank N.V., Amsterdam LOC) $ 34,029,000 1,550,000 Albert Lea, MN Independent School District No. 241, 3.35% RANs (Minnesota State GTD), 9/20/1999 1,552,257 5,600,000 Anoka City, MN Solid Waste Disposal Authority, 3.65% CP (United Power Associates)/(National Rural Utilities Cooperative Finance Corp. GTD), Mandatory Tender 1/14/1999 5,600,000 1,950,000 Anoka, MN, Multifamily Housing Revenue Bonds Weekly VRDNs (Walker Plaza Project)/(U.S. Bank, NA, Minneapolis LOC) 1,950,000 3,575,000 Apple Valley, MN, IDRB (Series 1995) Weekly VRDNs (AV Development Co. Project)/(Firstar Bank, Minnesota LOC) 3,575,000 4,725,000 Avon, MN, (Series 1998) Weekly VRDNs (Vesper Corp.)/ (KeyBank, N.A. LOC) 4,725,000 1,915,000 Baudette, MN, IDR (Series 1989) Weekly VRDNs (Reid Powell, Inc.)/(Nationsbank, N.A., Charlotte LOC) 1,915,000 9,000,000 Becker, MN, PCR (Series 1993A & B), 2.90% CP (Northern States Power Co.), Mandatory Tender 2/10/1999 9,000,000 6,700,000 Becker, MN, PCR (Series 1993A & B), 3.00% CP (Northern States Power Co.), Mandatory Tender 2/11/1999 6,700,000 9,500,000 Becker, MN, PCR (Series 1993A & B), 3.25% CP (Northern States Power Co.), Mandatory Tender 1/12/1999 9,500,000 2,855,000 Blaine, MN, Industrial Development Revenue Bonds (Series 1996) Weekly VRDNs (S & S of Minnesota, LLC Project)/ (Norwest Bank Minnesota, N.A. LOC) 2,855,000 1,300,000 Bloomington, MN, Port Authority, Special Tax Revenue Refunding Bonds (Series 1996B) Weekly VRDNs (Mall of America)/(FSA INS)/(Credit Local de France LIQ) 1,300,000 7,500,000 Bloomington, MN, 4.75% Bonds, 12/1/1998 7,505,992 2,700,000 Bloomington, MN, IDRB (Series 1995) Weekly VRDNs (Now Technologies, Inc. Project)/(Norwest Bank Minnesota, N.A. LOC) 2,700,000 5,000,000 Bloomington, MN, Multifamily Housing Weekly VRDNs (Crow/ Bloomington Apartments)/(Citibank NA, New York LOC) 5,000,000 10,300,000 Burnsville, MN, Variable Rate Demand Revenue Bonds (Series 1996) Weekly VRDNs (YMCA Projects)/(Norwest Bank Minnesota, N.A. LOC) 10,300,000 3,520,000 Burnsville, MN, Adjustable Rate IDRB (Series 1996) Weekly VRDNs (Caire, Inc. Project)/(Bank One, Wisconsin, N.A. LOC) 3,520,000 3,840,000 Byron, MN, IDB Weekly VRDNs (Schmidt Printing)/(Norwest Bank Minnesota, N.A. LOC) 3,840,000 PRINCIPAL AMOUNT VALUE Short-Term Municipals-Continued 1 MINNESOTA-CONTINUED $ 1,205,000 Chanhassen, MN, IDA, (Series 1995) Weekly VRDNs (Building Management Group, L.L.C. Project)/(Norwest Bank Minnesota, N.A. LOC) $ 1,205,000 5,000,000 Cloquet, MN, Industrial Facilities Revenue Bonds (Series 1996A) Weekly VRDNs (Potlatch Corp.)/(Credit Suisse First Boston LOC) 5,000,000 2,700,000 Coon Rapids, MN, Hospital Authority, (Series 1985) Weekly VRDNs (Health Central System)/(Norwest Bank Minnesota, N.A. LOC) 2,700,000 3,160,000 Coon Rapids, MN, (Series 1996) Weekly VRDNs (Medical Enterprise Associates Project)/(Norwest Bank Minnesota, N.A. LOC) 3,160,000 2,350,000 Cottage Grove, MN, IDR Refunding Bonds (Series 1995) Weekly VRDNs (Supervalu Inc.)/ (Wachovia Bank of NC, N.A., Winston-Salem LOC) 2,350,000 10,745,000 2 Dakota County & Washington County, MN, Housing & Redevelopment Authority, MERLOTs (Series J), 3.80% TOBs (United States Treasury COL)/(Corestates Bank N.A., Philadelphia, PA LIQ), Optional Tender 12/1/1998 10,745,000 1,765,000 Dakota County, MN, Housing & Redevelopment Authority, Multifamily Rental Housing Revenue Bonds (Series 1994-B) Weekly VRDNs (Westwood Ridge Senior Residence Project)/ (U.S. Bank, N.A., Minneapolis LOC) 1,765,000 3,000,000 2 Dakota County, Washington County & Anoka City, MN, Housing & Redevelopment Authority, MERLOTs (Series H), 3.80% TOBs (United States Treasury COL)/(Corestates Bank N.A., Philadelphia, PA LIQ), Optional Tender 12/1/1998 3,000,000 3,100,000 Duluth, MN, (Series 1985) Weekly VRDNs (Wachovia Bank of Georgia N.A., Atlanta LOC) 3,100,000 9,000,000 Duluth, MN, Certificates of Indebtedness (Series 1998), 3.98% TANs, 12/31/1998 9,003,573 810,000 Eden Prairie, MN, IDA, #194 Weekly VRDNs (Richard W. Cohen Project)/(Norwest Bank Minnesota, N.A. LOC) 810,000 1,170,000 Eden Prairie, MN, IDA, (Series 1996) Weekly VRDNs (Challenge Printing, Inc. Project)/(Norwest Bank Minnesota, N.A. LOC) 1,170,000 1,360,000 Eden Prairie, MN, IDA, (Series 1995) Weekly VRDNs (Robert Lothenbach Project)/(Norwest Bank Minnesota, N.A. LOC) 1,360,000 675,000 Elk River, MN, Weekly VRDNs (Tescom Corp.)/(Norwest Bank Minnesota, N.A. LOC) 675,000 2,500,000 Faribault, MN, ISD No. 656, 3.75% TANs (Minnesota State GTD), 3/30/1999 2,501,473 2,945,000 Farmington, MN, (Series 1996) Weekly VRDNs (Lexington Standard Corporation Project)/(Norwest Bank Minnesota, N.A. LOC) 2,945,000 2,200,000 Hennepin Co. MN, (Series 1995C) Weekly VRDNs 2,200,000 7,250,000 Hennepin Co. MN, (Series 1996C) Weekly VRDNs 7,250,000 7,100,000 Hubbard Co. MN, Solid Waste Disposal (Series 1990) Weekly VRDNs (Potlatch Corp.)/(Credit Suisse First Boston LOC) 7,100,000 5,665,000 Lakeville, MN, ISD 194, PT-1098 Weekly VRDNs (Minnesota State GTD)/(Merrill Lynch Capital Services, Inc. LIQ) 5,665,000 5,600,000 Lino Lakes, MN, Variable Rate Demand IDRBs (Series 1997) Weekly VRDNs (Taylor Corp.)/(Norwest Bank Minnesota, N.A. LOC) 5,600,000 PRINCIPAL AMOUNT VALUE Short-Term Municipals-Continued 1 MINNESOTA-CONTINUED $ 1,000,000 MN Insured Municipal Securities Trust, Series 1996A, Floating Rate Certificates Weekly VRDNs (Eden Prairie MN, ISD 272)/(MBIA INS)/(Norwest Bank Minnesota, N.A. LIQ) $ 1,000,000 1,125,000 MN Insured Municipal Securities Trust, Series 1996B, Floating Rate Certificates Weekly VRDNs (Eden Prairie MN, ISD 272)/(MBIA INS)/(Norwest Bank Minnesota, N.A. LIQ) 1,125,000 2,500,000 MN Insured Municipal Securities Trust, Series 1996H, Floating Rate Certificates Weekly VRDNs (St. Louis Park, MN Health Care Facilities)/(AMBAC INS)/(Norwest Bank Minnesota, N.A. LIQ) 2,500,000 2,250,000 MN Municipal Securities Trust, Series 1996D, Floating Rate Certificates Weekly VRDNs (North St. Paul-Maplewood, MN ISD 622)/(Norwest Bank Minnesota, N.A. LIQ) 2,250,000 5,000,000 MN Municipal Securities Trust, Series 1996F, Floating Rate Certificates Weekly VRDNs Benedictine Health System)/(Connie Lee INS)/(Norwest Bank Minnesota, N.A. LIQ) $ 5,000,000 4,000,000 MN Municipal Securities Trust, Series 1996H, Floating Rate Certificates Weekly VRDNs (Rosemount, MN ISD 196)/(FSA INS)/ (Norwest Bank Minnesota, N.A. LIQ) 4,000,000 3,600,000 Maple Grove, MN, Variable Rate Demand IDRB's (Series 1998) Weekly VRDNs (Spancrete Midwest Co.)/(Norwest Bank Minnesota, N.A. LOC) 3,600,000 950,000 Maplewood, MN, (Series 1997) Weekly VRDNs (Camada Ltd. Partnership)/(Norwest Bank Minnesota, N.A. LOC) 950,000 4,525,000 Maplewood, MN, Multifamily Housing (Series 1993) Weekly VRDNs (Silver Ridge Project)/(Federal Home Loan Bank of Chicago LOC) 4,525,000 660,000 Minneapolis, MN, IDA Weekly VRDNs (JTJ Co.)/(U.S. Bank, N.A., Minneapolis LOC) 660,000 6,000,000 Minneapolis, MN, (Series 1995B) Weekly VRDNs 6,000,000 3,330,000 Minneapolis, MN, (Series 1998), 4.50% Bonds, 3/1/1999 3,339,184 7,000,000 Minneapolis, MN, Housing Development Revenue Refunding Bonds (Series 1988) Weekly VRDNs (Symphony Place)/(Citibank N.A., New York LOC) 7,000,000 900,000 Minneapolis, MN, Variable Rate Demand Commercial Development Revenue Refunding Bonds (Series 1996) Weekly VRDNs (WNB & Company Project)/(U.S. Bank, N.A., Minneapolis LOC) 900,000 10,165,000 Minneapolis, MN, Variable Rate Housing Revenue Bonds Weekly VRDNs (One Ten Grant Project)/(U.S. Bank, N.A., Minneapolis LOC) 10,165,000 370,000 Minneapolis, MN, Various Purpose Bonds (Series 1996) Weekly VRDNs (Bayerische Vereinsbank AG, Munich LIQ) 370,000 4,900,000 Minneapolis, MN, Various Purpose Bonds (Series 1997B) Weekly VRDNs (Bayerische Vereinsbank AG, Munich LIQ) 4,900,000 3,160,000 2 Minneapolis/St. Paul MN Housing Finance Board, SFM Revenue Bonds, MERLOTs (Series D), 3.85% TOBs (GNMA COL)/(Corestates Bank N.A., Philadelphia, PA LIQ), Optional Tender 1/1/1999 3,160,000 8,000,000 Minnesota Agricultural and Economic Development Board, (Series 1996) Weekly VRDNs (Evangelical Lutheran Good Samaritan Society)/(Rabobank Nederland, Utrecht LOC) 8,000,000 8,000,000 Minnesota State Commissioner of Iron Range Resources & Rehabilitation, (Series 1991) Weekly VRDNs (Louisiana- Pacific Corp.)/(Wachovia Bank of NC, N.A., Winston-Salem LOC) 8,000,000 4,995,000 Minnesota State HFA, (Series 1998C) PT-204, % TOBs (Bayerische Vereinsbank AG, Munich LIQ), Optional Tender 5/19/1999 4,995,000 PRINCIPAL AMOUNT VALUE Short-Term Municipals-Continued 1 MINNESOTA-CONTINUED $ 5,000,000 Minnesota State HFA, Convertible Single Family Mortgage (Series M), 3.80% TOBs, Mandatory Tender 12/10/1998 5,000,000 615,000 Minnesota State HFA, Convertible Single Family Mortgage Bonds (Series N), 3.90% TOBs, Mandatory Tender 12/10/1998 615,000 3,800,000 Minnesota State Higher Education Coordinating Board, (Series 1992A) Weekly VRDNs (U.S. Bank, N.A., Minneapolis LIQ) 3,800,000 7,000,000 Minnesota State Higher Education Coordinating Board, 1992 (Series B) Weekly VRDNs (U.S. Bank, N.A., Minneapolis LIQ) 7,000,000 6,500,000 Minnesota State Higher Education Coordinating Board, 1992 (Series C) Weekly VRDNs (U.S. Bank, N.A., Minneapolis LIQ) 6,500,000 12,700,000 Minnesota State Higher Education Coordinating Board, 1992 (Series C) Weekly VRDNs (U.S. Bank, N.A., Minneapolis LIQ) 12,700,000 5,750,000 Minnesota State Higher Education Facility Authority, (Series Four-S) Weekly VRDNs (Bethel College and Seminary)/(Allied Irish Banks PLC LOC) 5,750,000 4,310,000 Minnesota State, (Series A), 5.00% Bonds (AMBAC INS), 6/30/ 1999 4,362,982 1,500,000 Minnesota State, 5.00% Bonds, 11/1/1998 1,500,000 5,000,000 Minnesota Tax and Aid Anticipation Borrowing Program, (Series 1998 B), 3.625% TANs (Minnesota State GTD), 8/27/1999 5,000,000 7,145,000 Minnesota Tax and Aid Anticipation Borrowing Program, (Series 1998A), 3.65% TANs (Minnesota State GTD), 2/9/1999 7,145,000 3,250,000 Minnesota Tax and Aid Anticipation Borrowing Program, (Series 1998A), 3.67% TANs (Minnesota State GTD), 8/20/1999 3,250,000 10,000,000 Minnesota Tax and Aid Anticipation Borrowing Program, (Series 1998B), 3.90% TANs (Minnesota State GTD), 3/4/1999 10,011,390 1,085,000 Minnetonka, MN, IDRB (Series 1996) Weekly VRDNs (PGI Cos., Inc.)/(Norwest Bank Minnesota, N.A. LOC) 1,085,000 5,900,000 Minnetonka, MN, Multifamily Housing Revenue Refunding Bonds (Series 1995) Weekly VRDNs (Southampton Apartments Project (MN))/(National Bank of Canada, Montreal LOC) 5,900,000 6,500,000 Minnetonka, MN, Rental Housing Revenue Bonds (Series 1998), 4.42% TOBs (Bayerische Landesbank Girozentrale), Mandatory Tender 5/1/1999 6,500,000 1,300,000 New Brighton, MN, IDR Weekly VRDNs (Unicare Homes, Inc.)/ (Paribas, Paris LOC) 1,300,000 1,000,000 New Hope, MN, IDRB, (Series 1994) Weekly VRDNs (Gaines and Hanson Printing Co.)/ (Norwest Bank Minnesota, N.A. LOC) 1,000,000 3,020,000 New Hope, MN, Weekly VRDNs (Paddock Labs)/(U.S. Bank, N.A., Minneapolis LOC) 3,020,000 4,650,000 Olmsted County, MN, Building Authority, Certificates of Participation Weekly VRDNs (Human Services Infrastructure)/ Toronto-Dominion Bank LOC) 4,650,000 1,190,000 Plymouth, MN, Weekly VRDNs (Nuaire, Inc.)/(Norwest Bank Minnesota, N.A. LOC) 1,190,000 PRINCIPAL AMOUNT VALUE Short-Term Municipals-Continued 1 MINNESOTA-CONTINUED $ 3,500,000 Plymouth, MN, IDRB (Series 1994) Weekly VRDNs (Olympic Steel, Inc.)/(National City Bank, Ohio LOC) $ 3,500,000 1,200,000 Port Authority of Saint Paul, MN, (Series 1998A) Weekly VRDNs (Bix Fruit Co.)/(Firstar Bank, Milwaukee LOC) 1,200,000 2,500,000 Port Authority of Saint Paul, MN, Variable Rate Demand IDRB's (Series 1998A) Weekly VRDNs (National Checking Co.)/ (U.S. Bank, N.A., Minneapolis LOC) 2,500,000 925,000 Port of Austin, MN, Weekly VRDNs (Mower House Color)/ (Norwest Bank Minnesota, N.A. LOC) 925,000 14,000,000 Rochester, MN, Health Care Facility Authority Weekly VRDNs (Mayo Foundation)/(Rabobank Nederland, Utrecht LIQ) 14,000,000 1,650,000 Rocori, MN, Independent School District No. 750, (Series 1998), 4.25% Bonds (Minnesota State GTD), 9/3/1999 1,656,898 500,000 Rogers, MN, IDA Weekly VRDNs (Metal Sales Manufacturing Corp)/(KeyBank, N.A. LOC) 500,000 2,555,000 Rogers, MN, IDA, IDRB Weekly VRDNs (DAC Development, LLC Project)/(Norwest Bank Minnesota, N.A. LOC) 2,555,000 23,500,000 Rosemount, MN, PCR (Series 1984) Weekly VRDNs (Koch Refining Co.) 23,500,000 1,095,000 Savage, MN, (Series A), 5.00% Bonds (FGIC INS), 2/1/1999 1,099,376 4,000,000 Shakopee, MN, Hospital Finance Authority Weekly VRDNs (St. Francis Regional Medical Center)/(Citibank N.A., New York LOC) 4,000,000 940,000 Southern Minnesota Municipal Power Agency, (Series 1991A), 5.10% Bonds (FGIC INS), 1/1/1999 942,212 6,500,000 Southern Minnesota Municipal Power Agency, 3.50% CP, Mandatory Tender 11/10/1998 6,500,000 10,500,000 Southern Minnesota Municipal Power Agency, 3.50% CP, Mandatory Tender 11/13/1998 10,500,000 1,135,000 St. Cloud, MN, Housing & Redevelopment Authority, Revenue Refunding Bonds (Series 1994A) Weekly VRDNs (Coborn's Incorporated Project)/ (Norwest Bank Minnesota, N.A. LOC) 1,135,000 2,262,500 St. Cloud, MN, Housing & Redevelopment Authority, Revenue Refunding Bonds (Series 1994B) Weekly VRDNs (Coborn's Incorporated Project)/ (Norwest Bank Minnesota, N.A. LOC) 2,262,500 7,100,000 St. Cloud, MN, (Series 1997-A) Weekly VRDNs (The Saint Cloud Hospital)/(Rabobank Nederland, Utrecht LOC) 7,100,000 9,400,000 St. Louis Park, MN, Health Care Facilities, Floating Rate Monthly Demand IDRB's (Series 1984) Weekly VRDNs (Unicare Homes, Inc.)/(Banque Paribas, Paris LOC) 9,400,000 4,600,000 St. Paul, MN, Housing & Redevelopment Authority Weekly VRDNs (District Cooling St. Paul, Inc.)/(Credit Local de France LOC) 4,600,000 400,000 St. Paul, MN, Housing & Redevelopment Authority Weekly VRDNs United Way)/(U.S. Bank, N.A., Minneapolis LOC) 400,000 2,000,000 St. Paul, MN, Housing & Redevelopment Authority, District Cooling Revenue Bonds (1995 Series I) Weekly VRDNs (Credit Local de France LOC) 2,000,000 PRINCIPAL AMOUNT VALUE Short-Term Municipals-Continued 1 MINNESOTA-CONTINUED $ 2,625,000 St. Paul, MN, Housing & Redevelopment Authority, Hampden Square Apartments (Series A), 4.318% TOBs (Bayerische Landesbank Girozentrale), Mandatory Tender 7/1/1999 $ 2,625,000 5,000,000 St. Paul, MN, Port Authority, (Series 1991) Weekly VRDNs (West Gate Office)/(U.S. Bank, N.A., Minneapolis LOC) 5,000,000 1,000,000 Steele County, MN, IDRB (Series 1994) Weekly VRDNs (Blount, Inc.)/(Nationsbank, N.A., Charlotte LOC) 1,000,000 5,495,000 Trust Receipts (Series 1998 FR/RI-C8) Weekly VRDNs (Bank of America NT and SA, San Francisco SWP) 5,495,000 10,000,000 VRDC/IVRC Trust, Tax-Exempt Variable Rate Demand Certificates (Series 1997A) Weekly VRDNs (Regents of University of Minnesota)/(Citibank N.A., New York LIQ) 10,000,000 3,300,000 Victoria, MN, IDRB, (Series 1996A) Weekly VRDNs (HEI, Inc. Project)/(Norwest Bank Minnesota, N.A. LOC) 3,300,000 1,235,000 Victoria, MN, Industrial Development Revenue Bonds, (Series 1996B) Weekly VRDNs (HEI, Inc. Project)/(Norwest Bank Minnesota, N.A. LOC) 1,235,000 5,495,000 Washington County, MN, Housing & Redevelopment Authority, Trust Receipts (Series 1998 FR/RI-C9) Weekly VRDNs (Granada Pond Apartments)/(Bank of America NT and SA, San Francisco SWP) 5,495,000 2,100,000 Wells, MN, 3.95% TOBs (Stokely, Inc.)/(Corestates Bank N.A., Philadelphia, PA LOC), Optional Tender 12/1/1998 2,100,000 1,000,000 Western Minnesota Municipal Power Agency, MN, 10.25% Bonds (United States Treasury PRF), 1/1/1999 (@100) 1,010,563 2,500,000 Western Minnesota Municipal Power Agency, MN, Transmission Project (Series 1997 A), 4.25% BANs, 1/1/1999 2,500,000 975,000 White Bear, MN, Weekly VRDNs (Thermoform Plastic, Inc.)/ (Norwest Bank Minnesota, N.A. LOC) 975,000 2,025,000 White Bear, MN, Variable Rate Demand Industrial Revenue Bonds Weekly VRDNs (N.A. Ternes Project)/(Firstar Bank, Minnesota LOC) 2,025,000 1,935,000 Winona, MN, ISD 381, 3.75% RANs (Minnesota State GTD), 9/22/ 1999 1,939,480 2,000,000 Winsted, MN, IDA Weekly VRDNs (Sterner Lighting Systems)/ (Fleet National Bank, Springfield, MA LOC) 2,000,000 Total 521,566,880 PRINCIPAL AMOUNT VALUE Short-Term Municipals-Continued 1 PUERTO RICO-2.2% 2,934,332 Commonwealth of Puerto Rico Municipal Revenues Collection Center, 1997A LeaseTOPS Trust Weekly VRDNs (ABN AMRO Bank N.V., Amsterdam LIQ)/(State Street Bank and Trust Co. LOC) $ 2,934,332 5,000,000 2 Commonwealth of Puerto Rico, (Series 1992A) P-Floats PT-140, 3.65% TOBs (FSA INS)/(Commerzbank AG, Frankfurt LIQ), Mandatory Tender 1/14/1999 5,000,000 3,790,000 Commonwealth of Puerto Rico, Municipal Securities Trust Receipts, (Series 1998-CMC4) Weekly VRDNs (MBIA INS)/(Chase Manhattan Corp. LIQ) 3,790,000 Total 11,724,332 Total Investments (at amortized cost) 3 $ 533,291,212 Securities that are subject to Alternative Minimum Tax represent 29.6% of the portfolio as calculated based upon total portfolio market value. 1 The fund may only invest in securities rated in one of the two highest short-term rating categories by nationally recognized statistical rating organizations ("NRSROs") or unrated securities of comparable quality. 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, MIG-1 or MIG-2 by Moody's Investors Service, Inc., or F-1+, F-1, or F-2 by Fitch IBCA, Inc. are all considered rated in one of the two highest short-term rating categories. Securities rated in the highest short-term rating category (and unrated securities of comparable quality) are identified as First Tier securities. Securities rated in the second highest short-term rating category (and unrated securities of comparable quality) are identified as Second Tier securities. The Fund follows applicable regulations in determining whether a security is rated and whether a security rated by multiple NRSROs in different rating categories should be identified as a First or Second Tier security. At October 31, 1998, the portfolio securities were rated as follows: Tier Rating Percentage Based on Total Market Value (Unaudited) FIRST TIER SECOND TIER 100.00% 0.00% 2 Denotes a restricted security which is subject to restrictions on resale under Federal Securities laws. At October 31, 1998, these securities amounted to $21,905,000 which represents 4.1% of net assets. 3 Also represents cost for federal tax purposes. Note: The categories of investments are shown as a percentage of net assets ($536,106,212) at October 31, 1998. The following acronyms are used throughout this portfolio: AMBAC -American Municipal Bond Assurance Corporation AMT -Alternative Minimum Tax BANs -Bond Anticipation Notes COL -Collateralized CP -Commercial Paper FGIC -Financial Guaranty Insurance Company FSA -Financial Security Assurance GNMA -Government National Mortgage Association GTD -Guaranty HFA -Housing Finance Authority IDA -Industrial Development Authority IDB -Industrial Development Bond IDR -Industrial Development Revenue IDRB -Industrial Development Revenue Bond INS -Insured ISD -Independent School District LIQ -Liquidity Agreement LLC -Limited Liability Corporation LOC -Letter of Credit MBIA -Municipal Bond Investors Assurance MERLOTs -Municipal Exempt Receipts - Liquidity Optional Tender Series PCR -Pollution Control Revenue PLC -Public Limited Company PRF -Prerefunded RANs -Revenue Anticipation Notes SA -Support Agreement TANs -Tax Anticipation Notes TOBs -Tender Option Bonds VRDNs -Variable Rate Demand Notes
See Notes which are an integral part of the Financial Statements STATEMENT OF ASSETS AND LIABILITIES October 31, 1998 ASSETS: Total investments in securities, at amortized cost and value $ 533,291,212 Cash 550,726 Income receivable 3,291,735 Receivable for shares sold 43,783 Prepaid expenses 13,090 TOTAL ASSETS 537,190,546 LIABILITIES: Income distribution payable $ 891,233 Accrued expenses 193,101 Total Liabilities 1,084,334 Net Assets for 536,106,212 shares outstanding $ 536,106,212 NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE: INSTITUTIONAL SHARES: $328,507,225 / 328,507,225 shares outstanding $1.00 CASH SERIES SHARES: $207,598,987 / 207,598,987 shares outstanding $1.00
See Notes which are an integral part of the Financial Statements STATEMENT OF OPERATIONS Year Ended October 31, 1998 INVESTMENT INCOME: Interest $ 20,018,457 EXPENSES: Investment advisory fee $ 2,168,395 Administrative personnel and services fee 408,779 Custodian fees 26,550 Transfer and dividend disbursing agent fees and expenses 131,671 Directors'/Trustees' fees 4,632 Auditing fees 12,135 Legal fees 18,238 Portfolio accounting fees 107,038 Distribution services fee-Cash Series Shares 1,211,281 Shareholder services fee-Institutional Shares 749,642 Shareholder services fee-Cash Series Shares 605,640 Share registration costs 69,228 Printing and postage 32,247 Insurance premiums 39,556 Miscellaneous 3,306 Total Expenses 5,588,338 WAIVERS: Waiver of investment advisory fee $ (1,379,144) Waiver of distribution services fee-Cash Series Shares (605,640) Waiver of shareholder services fee-Institutional Shares (749,642) Total Waivers (2,734,426) Net expenses 2,853,912 Net investment income $ 17,164,545
See Notes which are an integral part of the Financial Statements STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED OCTOBER 31 1998 1997 INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income $ 17,164,545 $ 14,244,131 DISTRIBUTIONS TO SHAREHOLDERS: Distributions from net investment income Institutional Shares (10,155,213) (7,772,322) Cash Series Shares (7,009,332) (6,471,809) Change In Net Assets Resulting From Distributions To Shareholders (17,164,545) (14,244,131) SHARE TRANSACTIONS: Proceeds from sale of shares 1,392,083,828 1,220,304,237 Net asset value of shares issued to shareholders in payment of distributions declared 7,214,822 6,706,186 Cost of shares redeemed (1,292,784,856) (1,250,475,198) Change in net assets resulting from share transactions 106,513,794 (23,464,775) Change in net assets 106,513,794 (23,464,775) NET ASSETS: Beginning of period 429,592,418 453,057,193 End of period $ 536,106,212 $ 429,592,418
See Notes which are an integral part of the Financial Statements Notes To Financial Statements October 31, 1998 ORGANIZATION Federated Municipal Trust (the "Trust") is registered under the Investment Company Act of 1940, as amended (the "Act") as an open-end, management investment company. The Trust consists of 17 portfolios. The financial statements included herein are only those of Minnesota Municipal Cash Trust (the "Fund"). The financial statements of the other portfolios are presented separately. The assets of each portfolio are segregated and a shareholder's interest is limited to the portfolio in which shares are held. The Fund offers two classes of shares: Institutional Shares and Cash Series Shares. The investment objective of the Fund is current income exempt from federal regular income tax and the regular personal income taxes imposed by the State of Minnesota consistent with stability of principal. 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. 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. RESTRICTED SECURITIES Restricted securities are securities that may only be resold upon registration under federal securities laws or in transactions exempt from such registration. Many restricted securities may be resold in the secondary market in transactions exempt from registration. In some cases, the restricted securities may be resold without registration upon exercise of a demand feature. Such restricted securities may be determined to be liquid under criteria established by the Board of Trustees (the "Trustees"). The Fund will not incur any registration costs upon such resales. Restricted securities are valued at amortized cost in accordance with Rule 2a-7 under the Investment Company Act of 1940. Additional information on each restricted security held at October 31, 1998, is as follows: ACQUISITION ACQUISITION SECURITY DATE COST Commonwealth of Puerto Rico (Series 1992A) P-Floats PT-140 2/12/1998 $ 5,000,000 Minneapolis/St. Paul MN Housing Finance Board, SFM Revenue Bonds, MERLOTS (Series D) 10/1/1998 3,160,000 Dakota County, Washington County & Anoka City, MN Housing & Redevelopment Authority, MERLOTS (Series H) 9/1/1998 3,000,000 Dakota County & Washington County MN Housing & Redevelopment Authority, MERLOTS (Series J) 9/1/1998 10,745,000 USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts of assets, liabilities, expenses and revenues reported in the financial statements. Actual results could differ from those estimated. OTHER Investment transactions are accounted for on the trade date. SHARES OF BENEFICIAL INTEREST The Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest (without par value) for each class of shares. At October 31, 1998, capital paid-in aggregated $536,106,212. Transactions in shares were as follows:
YEAR ENDED OCTOBER 31 1998 1997 INSTITUTIONAL SHARES: Shares sold 743,424,803 596,921,325 Shares issued to shareholders in payment of distributions declared 363,132 323,548 Shares redeemed (623,646,203) (606,322,424) Net Change Resulting From Institutional Share Transactions 120,141,732 (9,077,551) YEAR ENDED OCTOBER 31 1998 1997 CASH SERIES SHARES: Shares sold 648,659,025 623,382,912 Shares issued to shareholders in payment of distributions declared 6,851,690 6,382,638 Shares redeemed (669,138,653) (644,152,774) Net Change Resulting From Cash Series Share Transactions (13,627,938) (14,387,224) Net Change Resulting From Share Transactions 106,513,794 (23,464,775)
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES INVESTMENT ADVISORY FEE Federated Management, 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. DISTRIBUTION SERVICES FEE The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b- 1 under the Act. Under the terms of the Plan, the Fund will compensate Federated Securities Corp.("FSC"), the principal distributor, from the net assets of the Fund to finance activities intended to result in the sale of the Fund's Cash Series Shares. The Plan provides that the Fund may incur distribution expenses up to 0.50% of the average daily net assets of the Cash Series, annually, to compensate FSC. FSC may voluntarily choose to waive any portion of its fee. FSC can modify or terminate this voluntary waiver at any time at its sole discretion. SHAREHOLDER SERVICES FEE Under the terms of a Shareholder Services Agreement with Federated Shareholder Services ("FSS"), the Fund will pay Federated Shareholder Services up to 0.25% of average daily net assets of the Fund shares for the period. The fee paid to FSS is used to finance certain services for shareholders and to maintain shareholder accounts. FSS may voluntarily choose to waive any portion of its fee. FSS can modify or terminate this voluntary waiver at any time at its sole discretion. 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. INTERFUND TRANSACTIONS During the period ended October 31, 1998, the Fund engaged in purchase and sale transactions with funds that have a common investment adviser (or affiliated investment advisers), common Directors/Trustees, and/or common Officers. These purchase and sale transactions were made at current market value pursuant to Rule 17a-7 under the Act amounting to $767,167,340 and $706,792,340, respectively. GENERAL Certain of the Officers and Trustees of the Trust are Officers and Directors or Trustees of the above companies. CONCENTRATION OF CREDIT RISK Since the Fund invests a substantial portion of its assets in issuers located in one state, it will be more susceptible to factors adversely affecting issuers of that state than would be a comparable tax-exempt mutual fund that invests nationally. In order to reduce the credit risk associated with such factors, at October 31, 1998, 51.3% of the securities in the portfolio of investments are backed by letters of credit or bond insurance of various financial institutions and financial guaranty assurance agencies. The percentage of investments insured by or supported (backed) by a letter of credit from any one institution or agency did not exceed 11.2% of total investments. 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 Board Of Trustees Of Federated Municipal Trust And Shareholders Of Minnesota Municipal Cash Trust: We have audited the accompanying statement of assets and liabilities of Minnesota Municipal Cash Trust (an investment portfolio of Federated Municipal Trust, a Massachusetts business trust), including the schedule of portfolio investments, as of October 31, 1998, the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for the periods presented. These financial statements and financial highlights are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the 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 October 31, 1998, by correspondence with the custodian. 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 Minnesota Municipal Cash Trust (an investment portfolio of Federated Municipal Trust) as of October 31, 1998, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and its financial highlights for the periods presented, in conformity with generally accepted accounting principles. Arthur Andersen LLP Boston, Massachusetts December 23, 1998 [Graphic] PROSPECTUS Minnesota Municipal Cash Trust A Portfolio of Federated Municipal Trust INSTITUTIONAL SHARES December 31, 1998 A Statement of Additional Information (SAI) dated December 31, 1998, is incorporated by reference into this prospectus. To obtain the SAI 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] Federated Minnesota Municipal Cash 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. 811-5911 Cusip 314229402 0082715A-IS (12/98) [Graphic] STATEMENT OF ADDITIONAL INFORMATION Minnesota Municipal Cash Trust A Portfolio of Federated Municipal Trust INSTITUTIONAL SHARES CASH SERIES SHARES This Statement of Additional Information (SAI) is not a prospectus. Read this SAI in conjunction with the prospectuses for Minnesota Municipal Cash Trust dated December 31, 1998. Obtain the prospectuses without charge by calling 1- 800-341-7400. CONTENTS How is the Fund Organized? Securities in Which the Fund Invests How is the Fund Sold? Subaccounting Services Redemption in Kind Massachusetts Partnership Law Account and Share Information Tax Information Who Manages and Provides Services to the Fund? How Does the Fund Measure Performance? Who is Federated Investors, Inc.? Investment Ratings Addresses STATEMENT DATED DECEMBER 31, 1998 [Federated Investors Logo] Federated Securities Corp., Distributor, subsidiary of Federated Investors, Inc. Cusip 314229402 Cusip 314229873 0082715B (12/98) How is the Fund Organized? The Fund is a diversified portfolio of Federated Municipal Trust (Trust). The Trust is an open-end, management investment company that was established under the laws of the Commonwealth of Massachusetts on September 1, 1989. The Trust may offer separate series of shares representing interests in separate portfolios of securities. The Board of Trustees (the Board) has established two classes of shares of the Fund, known as Institutional Shares and Cash Series Shares (Shares). This SAI relates to both of the classes of the above-mentioned Shares. Securities in Which the Fund Invests SECURITIES DESCRIPTIONS AND TECHNIQUES In pursuing its investment strategy, the Fund may invest in the following tax- exempt securities for any purpose that is consistent with its investment objective. General Obligation Bonds General obligation bonds are supported by the issuer's full faith and credit. The issuer must levy and collect taxes sufficient to pay principal and interest on the bonds. However, the issuer's authority to levy additional taxes may be limited by its charter or state law. Special Revenue Bonds Special revenue bonds are payable solely from specific revenues received by the issuer. The revenues may consist of specific taxes, assessments, tolls, fees or other types of municipal revenues. For example, a municipality may issue bonds to build a toll road, and pledge the tolls to repay the bonds. Bondholders could not collect from the municipality's general taxes or revenues. Therefore, any shortfall in the tolls could result in a default on the bonds. Private Activity Bonds Private activity bonds are special revenue bonds used to finance private entities. For example, a municipality may issue bonds to finance a new factory to improve its local economy. The municipality would lend the proceeds to the company using the factory, and the company would agree make loan payments sufficient to repay the bonds. The bonds would be payable solely from the company's loan payments, not from any other revenues of the municipality. Therefore, any default on the loan normally would result in a default on the bonds. Municipal Leases Municipalities may enter into leases for equipment or facilities. In order to comply with state public financing laws, these leases are typically subject to annual appropriation. In other words, a municipality may end a lease, without penalty, by not providing for the lease payments in its annual budget. After the lease ends, the lessor (the Fund) can resell the equipment or facility but the Fund may lose money on the sale. The Fund may invest in securities supported by pools of municipal leases. The most common type of lease backed securities are certificates of participation (COPs). However, the Fund may also invest directly in individual leases. Credit Enhancement Common types of credit enhancement include guarantees, letters of credit, bond insurance and surety bonds. Credit enhancement also includes arrangements where securities or other liquid assets secure payment of a fixed income security. If a default occurs these assets may be sold and the proceeds paid to a security's holders. Either form of credit enhancement reduces credit risks by providing another source of payment for a fixed income security. Investment Ratings A rating service'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 (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 IBCA, 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 rating service can be treated as being in one of the two highest short-term rating categories; currently, such securities must be rated by two rating services in one of their two highest rating categories. See "Regulatory Compliance." INVESTMENT RISKS There are many factors which may effect an investment in the Fund. The fund's principal risks fund are described in its prospectus. An additional risk factor is outlined below. Tax Risk In order for the interest income from the securities to be exempt from federal regular income tax ("tax-exempt") tax-exempt securities must meet certain legal requirements. Failure to meet such requirements may cause the interest received and distributed by the Fund to shareholders to be taxable. FUNDAMENTAL INVESTMENT POLICIES The Fund invests in tax-exempt securities so that at least 80% of the Fund's annual interest income is exempt from federal regular income tax and Minnesota regular personal income tax (exempt interest dividends). The Fund invests its assets so that at least 95% of the exempt interest dividends that the Fund pays to its shareholders will derive from interest income from Minnesota municipal obligations. This policy is fundamental and cannot be changed without shareholder approval. 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 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 non-publicly issued Minnesota tax-exempt securities or temporary investments or enter into repurchase agreements, in accordance with its investment objective, policies, limitations, or its Declaration of Trust. 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 or real estate 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. Investing in Restricted Securities The Fund will not invest more than 10% of the value of its net assets in securities subject to restrictions on resale under federal securities law, except for certain restricted securities which meet the criteria for liquidity established by the Board. 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 (including instruments issued by a U.S. branch of a domestic bank or savings and loan having capital, surplus, and undivided profits in excess of $100,000,000 at the time of Investment), 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 unless authorized by the "vote of a majojrity of its outstanding voting securtiies," 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 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 Board and repurchase agreements providing for settlement in more than seven days after notice. 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 nationally recognized rating services, 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 Board has 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 Board 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 Board 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 Board 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. 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. RULE 12B-1 PLAN (CASH SERIES SHARES) As a compensation-type plan, the Rule 12b-1 Plan is designed to pay the Distributor (who may then pay investment professionals such as banks, broker/dealers, trust departments of banks, and registered investment advisers) for marketing activities (such as advertising, printing and distributing prospectuses, and providing incentives to investment professionals) to promote sales of Shares so that overall Fund assets are maintained or increased. This helps the Fund achieve economies of scale, reduce per Share expenses, and provide cash for orderly portfolio management and Share redemptions. Also, the Fund's service providers that receive asset-based fees also benefit from stable or increasing Fund assets. The Fund may compensate the Distributor more or less than its actual marketing expenses. In no event will the Fund pay for any expenses of the Distributor that exceed the maximum Rule 12b-1 Plan fee. For some classes of shares, the maximum Rule 12b-1 Plan fee that can be paid in any one year may not be sufficient to cover the marketing related expenses the Distributor has incurred. Therefore, it may take the Distributor a number of years to recoup these expenses. SHAREHOLDER SERVICES The Fund may pay Federated Shareholder Services Company, a subsidiary of Federated Investors, Inc. (Federated), for providing shareholder services and maintaining shareholder accounts. Federated Shareholder Services Company may select others to perform these services for their customers and may pay them fees. SUPPLEMENTAL PAYMENTS Investment professionals may be paid fees out of the assets of the Distributor and/or Federated Shareholder Services Compnay (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 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. 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. 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 Trust have equal voting rights, except that in matters affecting only a particular Fund or class, only Shares of that Fund or class are entitled to vote. Trustees may be removed by the Board or by shareholders at a special meeting. A special meeting of shareholders will be called by the Board upon the written request of shareholders who own at least 10% of the Trust's outstanding shares of all series entitled to vote. As of December 8, 1998, the following shareholders owned of record, beneficially, or both, 5% or more of the outstanding Institutional Shares: Firmad & Co., Milwaukee, Wisconsin, owned approximately 17,453,769 shares (5.27%); Resource Bank & Trust Co., Minneapolis, Minnesota, owned approximately 58,053,087 shares (17.54%) and VAR & Co., St. Paul, Minnesota, owned approximately 208,436,158 shares (62.98%). As of December 8, 1998, the following shareholders owned of record, beneficially, or both, 5% or more of the outstanding Cash Series Shares: Primevest Financial Services, Inc., St. Cloud, Minnesota, owned approximately 14,491,755 shares (5.85%); MJK Clearing Omnibus Account, Minneapolis, Minnesota, owned approximately 24,106,108 shares (9.73%); Dain Rauscher Incorporated, Minneapolis, Minnesota, owned approximately 25,613,858 shares (10.33%); Piper Jaffray, Inc. (special custody account for the exclusive benefit of its customers), Minneapolis, Minnesota, owned approximately 33,988,618 shares (13.71%); FBS Investment Services, Inc. (for the exclusive benefit of its customers), Minneapolis, Minnesota, owned approximately 59,795,590 shares (24.12%); and Norwest Investment Services, Inc., Minneapolis, Minnesota, owned approximately31,132,140 shares (24.66%). Shareholders owning 25% or more of outstanding Shares may be in control and be able to affect the outcome of certain matters presented for a vote of shareholders. Tax Information FEDERAL INCOME TAX The Fund intends to meet the requirements of Subchapter M of the Internal Revenue Code applicable to regulated investment companies. If these requirements are not met, it will not receive the special tax treatment and will pay federal income tax. The Fund will be treated as a single, separate entity for federal income tax purposes so that income earned and capital gains and losses realized by the Trust's other portfolios will be separate from those realized by the Fund. STATE TAXES Under existing Minnesota laws, distributions made by the Fund will be exempt from Minnesota regular personal income taxes provided that such distributions qualify as exempt-interest dividends under the Internal Revenue Code, and provided further that 95% of such distributions are derived from interest on obligations issued by the State of Minnesota or any of its political or governmental subdivisions, municipalities, or governmental agencies or instrumentalities. Distributions made by the Fund will also be exempt to the extent that they are derived from interest on federal obligations and are reported federally as dividend income by shareholders. Conversely, to the extent that distributions made by the Fund are derived from other types of obligations, such distributions will be subject to Minnesota regular personal income taxes. Dividends of the Fund are not exempt from Minnesota corporate income taxes. Who Manages and Provides Services to the Fund? BOARD OF TRUSTEES The Board is responsible for managing the Trust's business affairs and for exercising all the Trust's powers except those reserved for the shareholders. Information about each Board member is provided below and includes the following data: name, address, birthdate, present position(s) held with the Trust, principal occupations for the past five years and other notable positions held, total compensation received as a Trustee from the Trust for its most recent fiscal year, and the total compensation received from the Federated Fund Complex for the most recent calendar year. The Trust is comprised of 17 Funds and the Federated Fund Complex is comprised of 56 investment companies, whose investment advisers are affiliated with the Fund's Adviser. As of December 8, 1998, 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.
Total Name Compensation Birthdate Aggregate From Trust Address Principal Occupations Compensation and Fund Position With Trust for Past 5 Years From Trust Complex - --------------------------------- ---------------------------------------------------------------------- - ------------ ------------- John F. Donahue##* Chief Executive Officer and Director or Trustee of the Federated $ 0 $0 for the Birthdate: July 28, 1924 Fund Complex. Chairman and Director, Federated Investors, Inc.; Trust and 56 Federated Investors Tower Chairman and Trustee, Federated Advisers, Federated Management, and other 1001 Liberty Avenue Federated Research; Chairman and Director, Federated Research Corp., investment Pittsburgh, PA and Federated Global Research Corp.; Chairman, Passport Research, companies in CHAIRMAN and TRUSTEE Ltd. the Fund Complex Thomas G. Bigley Director or Trustee of the Federated Fund Complex; Director, Member $4,076.31 $111,222 for Birthdate: February 3, 1934 of Executive Committee, Children's Hospital of Pittsburgh; formerly: the Trust 15 Old Timber Trail Senior Partner, Ernst & Young LLP; Director, MED 3000 Group, Inc.; and 56 other Pittsburgh, PA Director, Member of Executive Committee, University of Pittsburgh. investment TRUSTEE companies in the Fund Complex John T. Conroy, Jr. Director or Trustee of the Federated Fund Complex; President, $4,484.62 $122,362 for Birthdate: June 23, 1937 Investment Properties Corporation; Senior Vice President, John R. the Trust Wood/IPC Commercial Dept. Wood and Associates, Inc., Realtors; Partner or Trustee in private and 56 other John R. Wood and Associates, Inc. real estate ventures in Southwest Florida; formerly: President, investment Realtors Naples Property Management, Inc. and Northgate Village Development companies in 3255 Tamiami Trail North Naples, Corporation. the Fund FL Complex TRUSTEE William J. Copeland Director or Trustee of the Federated Fund Complex; Director and $4,484.62 $122,362 for Birthdate: July 4, 1918 Member of the Executive Committee, Michael Baker, Inc.; formerly: the Trust One PNC Plaza-23rd Floor Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp.; and 56 other Pittsburgh, PA Director, Ryan Homes, Inc. investment TRUSTEE companies in Retired: Director, United Refinery; Director, Forbes Fund; Chairman, the Fund Pittsburgh Foundation; Chairman, Pittsburgh Civic Light Opera. Complex James E. Dowd, Esq. Director or Trustee of the Federated Fund Complex; Attorney-at-law; $4,484.62 $122,362 for Birthdate: May 18, 1922 Director, The Emerging Germany Fund, Inc. the Trust 571 Hayward Mill Road and 56 other Concord, MA Retired: President, Boston Stock Exchange, Inc.; Regional investment TRUSTEE Administrator, United States Securities and Exchange Commission. companies in the Fund Complex Lawrence D. Ellis, M.D.* Director or Trustee of the Federated Fund Complex; Professor of $4,076.31 $111,222 for Birthdate: October 11, 1932 Medicine, University of Pittsburgh; Medical Director, University of the Trust 3471 Fifth Avenue Pittsburgh Medical Center Downtown; Hematologist, Oncologist, and and 56 other Suite 1111 Internist, Presbyterian and Montefiore Hospitals; Member, National investment Pittsburgh, PA Board of Trustees, Leukemia Society of America. companies in TRUSTEE the Fund Complex Edward L. Flaherty, Jr., Esq.# Director or Trustee of the Federated Fund Complex; Attorney, of $4,484.62 $122,362 for Birthdate: June 18, 1924 Counsel, Miller, Ament, Henny & Kochuba; Director, Eat'N Park the Trust Miller, Ament, Henny & Kochuba Restaurants, Inc.; formerly: Counsel, Horizon Financial, F.A., and 56 other 205 Ross Street Western Region; Partner, Meyer and Flaherty. investment Pittsburgh, PA companies in TRUSTEE the Fund Complex Peter E. Madden Director or Trustee of the Federated Fund Complex; formerly: $4,076.31 $111,222 for Birthdate: March 16, 1942 Representative, Commonwealth of Massachusetts General Court; the Trust One Royal Palm Way President, State Street Bank and Trust Company and State Street and 56 other 100 Royal Palm Way Corporation. investment Palm Beach, FL companies in TRUSTEE Retired: Director, VISA USA and VISA International; Chairman and the Fund Director, Massachusetts Bankers Association; Director, Depository Complex Trust Corporation. John E. Murray, Jr., J.D., S.J.D. Director or Trustee of the Federated Fund Complex; President, Law $4,076.31 $111,222 for Birthdate: December 20, 1932 Professor, Duquesne University; Consulting Partner, Mollica & Murray. the Trust President, Duquesne University and 56 other Pittsburgh, PA Retired: Dean and Professor of Law, University of Pittsburgh School investment TRUSTEE of Law; Dean and Professor of Law, Villanova University School of companies in Law. the Fund Complex Wesley W. Posvar Director or Trustee of the Federated Fund Complex; President, World $4,076.31 $111,222 for Birthdate: September 14, 1925 Society of Ekistics, Athens; Professor, International Politics; the Trust 1202 Cathedral of Learning Management Consultant; Trustee, Carnegie Endowment for International and 56 other University of Pittsburgh Peace, RAND Corporation, Online Computer Library Center, Inc., investment Pittsburgh, PA National Defense University and U.S. Space Foundation; President companies in TRUSTEE Emeritus, University of Pittsburgh; Founding Chairman, National the Fund Advisory Council for Environmental Policy and Technology, Federal Complex Emergency Management Advisory Board and Czech Management Center, Prague. Retired: Professor, United States Military Academy; Professor, United States Air Force Academy. Marjorie P. Smuts Director or Trustee of the Federated Fund Complex; Public $4,076.31 $111,222 for Birthdate: June 21, 1935 Relations/Marketing/Conference Planning. the Trust 4905 Bayard Street and 56 other Pittsburgh, PA Retired: National Spokesperson, Aluminum Company of America; investment TRUSTEE business owner. companies in the Fund Complex Glen R. Johnson* Trustee, Federated Investors, Inc.; staff member, Federated $ 0 $0 for the Birthdate: May 2, 1929 Securities Corp. Trust and 8 Federated Investors Tower other 1001 Liberty Avenue investment Pittsburgh, PA companies in PRESIDENT and TRUSTEE the Fund Complex J. Christopher Donahue##* President or Executive Vice President of the Federated Fund Complex; $ 0 $0 for the Birthdate: April 11, 1949 Director or Trustee of some of the Funds in the Federated Fund Trust and 18 Federated Investors Tower Complex; President and Director, Federated Investors, Inc.; other 1001 Liberty Avenue President and Trustee, Federated Advisers, Federated Management, and investment Pittsburgh, PA Federated Research; President and Director, Federated Research Corp. companies in EXECUTIVE VICE PRESDIENT and Federated Global Research Corp.; President, Passport Research, the Fund Ltd.; Trustee, Federated Shareholder Services Company; Director, Complex Federated Services Company. Edward C. Gonzales* Trustee or Director of some of the Funds in the Federated Fund $ 0 $0 for the Birthdate: October 22, 1930 Complex; President, Executive Vice President and Treasurer of some Trust and 1 Federated Investors Tower of the Funds in the Federated Fund Complex; Vice Chairman, Federated other 1001 Liberty Avenue Investors, Inc.; Vice President, Federated Advisers, Federated investment Pittsburgh, PA Management, Federated Research, Federated Research Corp., Federated companies in EXECUTIVE VICE PRESIDENT Global Research Corp. and Passport Research, Ltd.; Executive Vice the Fund President and Director, Federated Securities Corp.; Trustee, Complex Federated Shareholder Services Company. John W. McGonigle Executive Vice President and Secretary of the Federated Fund $ 0 $0 for the Birthdate: October 26, 1938 Complex; Executive Vice President, Secretary, and Director, Trust and 56 Federated Investors Tower Federated Investors, Inc.; Trustee, Federated Advisers, Federated other 1001 Liberty Avenue Management, and Federated Research; Director, Federated Research investment Pittsburgh, PA Corp. and Federated Global Research Corp.; Director, Federated companies in EXECUTIVE VICE PRESIDENT and Services Company; Director, Federated Securities Corp. the Fund SECRETARY Complex Richard J. Thomas Treasurer of the Federated Fund Complex; Vice President - Funds $ 0 $0 for the Birthdate: June 17, 1954 Financial Services Division, Federated Investors, Inc.; Formerly: Trust and 56 Federated Investors Tower various management positions within Funds Financial Services other 1001 Liberty Avenue Division of Federated Investors, Inc. investment Pittsburgh, PA companies in TREASURER the Fund Complex Richard B. Fisher* President or Vice President of some of the Funds in the Federated $ 0 $0 for the Birthdate: May 17, 1923 Fund Complex; Director or Trustee of some of the Funds in the Trust and 6 Federated Investors Tower Federated Fund Complex; Executive Vice President, Federated other 1001 Liberty Avenue Investors, Inc.; Chairman and Director, Federated Securities Corp. investment Pittsburgh, PA companies in VICE PRESIDENT the Fund Complex William D. Dawson, III Chief Investment Officer of this Fund and various other Funds in the $ 0 $0 for the Birthdate: March 3, 1949 Federated Fund Complex; Executive Vice President, Federated Trust and 41 Federated Investors Tower Investment Counseling, Federated Global Research Corp., Federated other 1001 Liberty Avenue Advisers, Federated Management, Federated Research, and Passport investment Pittsburgh, PA Research, Ltd.; Registered Representative, Federated Securities companies in CHIEF INVESTMENT OFFICER Corp.; Portfolio Manager, Federated Administrative Services; Vice the Fund President, Federated Investors, Inc.; Formerly: Executive Vice Complex 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. Mary Jo Ochson Senior Portfolio Manager and Vice President of eight investment $ 0 $0 for the Birthdate: September 12, 1953 companies in the Federated Fund Complex; Senior Vice President, Trust and 7 Federated Investors Tower Federated Investment Counseling, Federated Advisers, Federated other 1001 Liberty Avenue Global Research Corp., Federated Management, Federated Research, investment Pittsburgh, PA Federated Research Corp. and Passport Research, Ltd.; Formerly: Vice companies in SENIOR PORTFOLIO MANAGER/VICE President, Federated Advisers, Federated Management, Federated the Fund PRESIDENT Research, Federated Research Corp. , Passport Research, Ltd. and Complex Federated Global Research Corp. Jeff A. Kozemchak Senior Portfolio Manager and Vice President of four investment $ 0 $0 for the Birthdate: January 15, 1960 companies in the Federated Fund Complex; Vice President, Federated Trust and 3 Federated Investors Tower Investment Counseling, Federated Advisers, Federated Global Research other 1001 Liberty Avenue Corp., Federated Management, Federated Research, Federated Research investment Pittsburgh, PA Corp. and Passport Research, Ltd.; Formerly: Assistant Vice companies in SENIOR PORTFOLIO MANAGER/VICE President and Investment Analyst, Federated Research Corp. and the Fund PRESIDENT Passport Research, Ltd. ; Assistant Vice President, Federated Complex Advisers, Federated Management and Federated Research.
## Mr. Donahue is the father of J. Christopher Donahue, Executive Vice President of the Trust. 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 Trust, 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 Trust. 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: Maximum Average Aggregate Daily Administrative Fee Net Assets of the Federated Funds - ------------------------------------------------------------------- 0.150 of 1% on the first $250 million 0.125 of 1% on the next $250 million 0.100 of 1% on the next $250 million 0.075 of 1% on assets in excess of $750 million The administrative fee received during any fiscal year shall be at least $125,000 per portfolio and $30,000 per each additional class of shares. Federated Services Company may voluntarily waive a portion of its fee and may reimburse the Fund for expenses. Federated Services Company also provides certain accounting and recordkeeping services with respect to the Fund's portfolio investments for a fee based on Fund assets plus out-of-pocket expenses. CUSTODIAN State Street Bank and Trust Company, Boston, Massachusetts, is custodian for the securities and cash of the Fund. Foreign instruments purchased by the Fund are held by foreign banks participating in a network coordinated by State Street Bank. TRANSFER AGENT AND DIVIDEND DISBURSING AGENT Federated Services Company, through its registered transfer agent subsidiary, Federated Shareholder Services Company, maintains all necessary shareholder records. The Fund pays the transfer agent a fee based on the size, type, and number of accounts and transactions made by shareholders. INDEPENDENT PUBLIC ACCOUNTANTS Arthur Andersen LLP is the independent public accountant for the Fund. FEES PAID BY THE FUND FOR SERVICES For the Year Ended October 31, 1998 1997 1996 - ----------------------------------------------------------------------------- Advisory Fee Earned $2,168,395 $1,795,783 $1,616,197 Advisory Fee Reduction 1,379,144 1,181,776 1,058,480 Brokerage Commissions 0 0 0 Administrative Fee 408,779 338,975 305,489 12b-1 Fee Cash Series Shares 605,641 --- --- Shareholder Services Fee Institutional Shares 0 --- --- Cash Series Shares 605,640 --- --- Fees are allocated among Classes based on their pro rata share of Fund assets, except for marketing (Rule 12b-1) fees and shareholder services fees, which are borne only by the applicable Class of Shares. If the Fund's expenses are capped at a particular level, the cap does not include reimbursement to the Fund of any expenses incurred by shareholders who use the transfer agent's subaccounting facilities. How does the Fund Measure Performance? The Fund may advertise Share performance by using the Securities and Exchange Commission's (SEC) standard method for calculating performance applicable to all mutual funds. The SEC also permits this standard performance information to be accompanied by non-standard performance information. Unless otherwise stated, any quoted Share performance reflects the effect of non-recurring charges, such as maximum sales charges, which, if excluded, would increase the total return and yield. The performance of Shares depends upon such variables as: portfolio quality; average portfolio maturity; type and value of portfolio securities; changes in interest rates; changes or differences in the Fund's or any class of Shares' expenses; and various other factors. Share performance fluctuates on a daily basis largely because net earnings and offering price per Share 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-years and since inception periods ended October 31, 1998. Yield, Effective Yield and Tax-Equivalent Yield given for the 7-day period ended October 31, 1998.
Share Class 7-Day Period 1 Year 5 Years Since Inception on Institutional Shares September 10, 1990 - -------------------------------------------------------------------------------------------------- Total Return -- 3.44% 3.36% 3.47% Yield 3.09% -- -- -- Effective Yield 3.14% -- -- -- Tax-Equivalent Yield 6.05% -- -- -- - -------------------------------------------------------------------------------------------------- Share Class 7-Day Period 1 Year 5 Years Since Inception on Cash Series Shares January 7, 1991 - -------------------------------------------------------------------------------------------------- Total Return -- 2.93% 2.89% 2.92% Yield 2.59% -- -- -- Effective Yield 2.63% -- -- -- Tax-Equivalent Yield 5.07% -- -- -- - --------------------------------------------------------------------------------------------------
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. The tax- equivalent yield of Shares is calculated similarly to the yield, but is adjusted to reflect the taxable yield that Shares would have had to earn to equal the actual yield, assuming a specific tax rate. 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. TAX EQUIVALENCY TABLE Set forth below is a sample of a tax-equivalency table that may be used in advertising and sales literature. This table is for illustrative purposes only and is not representative of past or future performance of the Fund. The interest earned by the tax-exempt securities owned by the Fund generally remains free from federal regular income tax and is often free from state and local taxes as well. However, some of the Fund's income may be subject to the federal alternative minimum tax and state and/or local taxes.
TAXABLE YIELD EQUIVALENT FOR 1998 STATE OF MINNESOTA - -------------------------------------------------------------------------------- COMBINED FEDERAL AND STATE INCOME TAX BRACKET: 23.00% 36.50% 39.50% 44.50% 48.10% - -------------------------------------------------------------------------------- JOINT $1- $42,351- $102,301- $155,951- OVER RETURN 42,350 102,300 155,950 278,450 $278,450 SINGLE $1- $25,351- $ 61,401- $128,101- OVER RETURN 25,350 61,400 128,100 278,450 $278,450 - -------------------------------------------------------------------------------- TAX-EXEMPT YIELD TAXABLE YIELD EQUIVALENT - -------------------------------------------------------------------------------- 1.50% 1.95% 2.36% 2.48% 2.70% 2.89% 2.00% 2.60% 3.15% 3.31% 3.60% 3.85% 2.50% 3.25% 3.94% 4.13% 4.50% 4.82% 3.00% 3.90% 4.72% 4.96% 5.41% 5.78% 3.50% 4.55% 5.51% 5.79% 6.31% 6.74% 4.00% 5.19% 6.30% 6.61% 7.21% 7.71% 4.50% 5.84% 7.09% 7.44% 8.11% 8.67% 5.00% 6.49% 7.87% 8.26% 9.01% 9.63% 5.50% 7.14% 8.66% 9.09% 9.91% 10.60% 6.00% 7.79% 9.45% 9.92% 10.81% 11.56%
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. 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. 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 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 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, 1997, Federated managed 11 bond funds with approximately $2.1 billion in assets and 22 money market funds with approximately $10.9 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 tax-exempt 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 27 years' experience. As of December 31, 1997, Federated managed 29 equity funds totaling approximately $11.7 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, 1997, Federated managed 11 money market funds and 16 bond funds with assets approximating $17.1 billion and $5.6 billion, respectively. Federated's corporate bond decision making--based on intensive, diligent credit analysis--is backed by over 22 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 $200 billion. Government Funds In the government sector, as of December 31, 1997, Federated manages 9 mortgage- backed, 6 government/ agency and 18 government money market mutual funds, with assets approximating $5.9 billion, $1.5 billion and $35 billion, respectively. Federated trades approximately $400 million in U.S. government and mortgage- backed securities daily and places approximately $23 billion in repurchase agreements each day. Federated introduced the first U.S. government fund to invest in U.S. government bond securities in 1969. Federated has been a major force in the short- and intermediate-term government markets since 1982 and currently manages approximately $36 billion in government funds within these maturity ranges. 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, 1997, Federated managed more than $63.1 billion in assets across 51 money market funds, including 18 government, 11 prime and 22 municipal with assets approximating $35 billion, $17.1 billion and $10.9 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 $4 trillion to the more than 6,700 funds available, according to the Investment Company Institute. Federated distributes mutual funds through its subsidiaries for a variety of investment purposes. Specific markets include: FEDERATED CLIENTS OVERVIEW 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. Investment Ratings APPENDIX STANDARD & POOR'S SHORT-TERM MUNICIPAL OBLIGATION RATINGS A Standard & Poor's (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-1+, 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 rated 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. MOODY'S 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 SERVICE, L.P. 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. Addresses MINNESOTA MUNICIPAL CASH TRUST Institutional Shares Cash Series Shares Federated Investors Funds 5800 Corporate Drive Pittsburgh, PA 15237-7000 Distributor Federated Securities Corp. Federated Investors Tower 1001 Liberty Avenue, Pittsburgh, PA 15222-3779 Investment Adviser Federated Management Federated Investors Tower 1001 Liberty Avenue, Pittsburgh, PA 15222-3779 Custodian State Street Bank and Trust Company P.O. Box 8600 Boston, MA 02266-8600 Transfer Agent and Dividend Disbursing Agent Federated Shareholder Services Company P.O. Box 8600 Boston, MA 02266-8600 Independent Public Accountants Arthur Andersen LLP 225 Franklin Street Boston, MA 02110-2812 PROSPECTUS North Carolina Municipal Cash Trust A Portfolio of Federated Municipal Trust A money market mutual fund seeking to provide current income exempt from federal regular income tax and the income tax imposed by the State of North Carolina. 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. December 31, 1998 CONTENTS Risk/Return Summary 1 What are the Fund's Fees and Expenses? 2 What are the Fund's Investment Strategies? 3 What are the Principal Securities in Which the Fund Invests? 3 What are the Specific Risks of Investing in the Fund? 4 What do Shares Cost? 5 How is the Fund Sold? 5 How to Purchase Shares 5 How to Redeem Shares 7 Account and Share Information 9 Who Manages the Fund? 10 Financial Information 11 Report of Independent Public Accountants 24 Risk/Return Summary WHAT IS THE FUND'S INVESTMENT OBJECTIVE? The Fund is a money market fund which seeks to maintain a stable net asset value of $1.00. The Fund's investment objective is to provide current income exempt from federal regular income tax and the income tax imposed by the State of North Carolina consistent with stability of principal. 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 tax-exempt securities so that the Fund's annual interest income is exempt from federal regular income tax and North Carolina state income tax. Interest from the Fund's investments may be subject to the federal alternative minimum tax for individuals and corporations. WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND? Because the Fund may invest a significant portion of its assets in securities of a single issuer, an investment in the Fund may involve additional risks compared to a fully diversified money market 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 representation omitted. Please see Appendix B4.] Historically the Fund has maintained a constant $1.00 net asset value per share. The bar chart shows the variability of the Fund's total returns on a yearly basis. The Fund's Shares are not sold subject to a sales charge (load). The total returns displayed above are based upon net asset value. The Fund's Shares year-to-date total return as of the most recent calendar quarter of September 30, 1998 was 2.34%. Within the period shown in the Chart, the Fund's highest quarterly return was 0.93% (quarter ended June 30, 1995). Its lowest quarterly return was 0.55% (quarter ended March 31, 1994). The Fund's Seven-Day Net Yield as of 12/31/97 was 3.52%. The following table represents the Fund's Average Annual Total Return through 12/31/97. CALENDAR PERIOD FUND 1 Year 3.27% Start of Performance 1 3.15% 1 The Fund's start of performance date was December 31, 1993. Investors may call the Fund at 1-800-341-7400 to acquire the Seven-Day Net Yield. 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? NORTH CAROLINA MUNICIPAL CASH TRUST FEES AND EXPENSES This table describes the fees and expenses that you may pay if you buy, hold and redeem Shares of the Fund.
SHAREHOLDER FEES 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 a percentage of average net assets) Management Fee 2 0.50% Distribution (12b-1) Fee None Shareholder Services Fee 0.25% Other Expenses 0.19% Total Annual Fund Operating Expenses 0.94% 1 Although not contractually obligated to do so, the Adviser and shareholder services provider waived certain amounts. These are shown below along with the net expenses the Fund actually paid for the fiscal year ended October 31, 1998. Waiver of Fund Expenses 0.35% Total Actual Annual Operating Expenses (after waivers) 0.59% 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 0.15% for the year ended October 31, 1998.
EXAMPLE The following Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund 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 operating expenses are BEFORE WAIVERS as shown above and remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be: 1 YEAR 3 YEARS 5 YEARS 10 YEARS Expenses assuming no redemption $96 $300 $520 $1,155 What are the Fund's Investment Strategies? The Fund invests in a portfolio of high-quality tax-exempt securities maturing in 13 months or less. The average maturity of the Fund's portfolio, computed on a dollar-weighted basis, will be 90 days or less. The Fund's Adviser performs a fundamental credit analysis to develop an approved list of issuers and securities that meet the Adviser's minimum credit standards. The Adviser targets an average portfolio maturity based upon its interest rate outlook and the tax-exempt securities available. The Adviser structures the portfolio by combining variable rate demand instruments and municipal notes. Depending on the supply of tax-exempt securities, the Adviser generally shortens the portfolio's maturity when it expects interest rates to rise and extends the maturity when it expects interest rates to fall. TEMPORARY DEFENSIVE INVESTMENTS During adverse market conditions the Fund may temporarily depart from its principal investment strategies by investing in securities subject to federal regular income tax and the State of North Carolina income tax. Temporary investments will be of comparable quality to other securities in which the Fund invests. This may cause the Fund to give up greater investment returns to maintain the safety of principal. This also may cause the Fund to receive and distribute taxable income to investors. What are the Principal Securities in Which the Fund Invests? TAX-EXEMPT SECURITIES Tax-exempt securities are fixed income securities that pay interest exempt from regular federal income taxes. States, counties, cities and other political subdivisions and authorities typically issue tax exempt securities. Tax-exempt securities are generally differentiated by their source of repayment. FIXED INCOME SECURITIES Fixed income 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. VARIABLE RATE DEMAND INSTRUMENTS Variable rate demand instruments are tax-exempt securities that require the issuer or a third party, such as a dealer or bank, to repurchase the security for its face value upon demand. The securities also bear interest at a variable rate intended to cause the securities to trade at their face value. The Fund treats demand instruments as short-term securities, even though their stated maturity may extend beyond thirteen months. MUNICIPAL NOTES Municipal notes are short-term tax-exempt securities. Many municipalities issue such notes to fund their current operations before collecting taxes or other municipal revenues. Municipalities may also issue notes to fund capital projects prior to issuing long-term bonds. The issuers typically repay the notes at the end of their fiscal year, either with taxes, other revenues or proceeds from newly issued notes or bonds. INVESTMENT 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 rating services or be of comparable quality to securities having such ratings. CREDIT ENHANCEMENT Credit enhancement consists of an arrangement in which a company agrees to pay amounts due on a fixed income security if the issuer defaults. In some cases the company providing credit enhancement makes all payments directly to the security holders and receives reimbursement from the issuer. Normally, the credit enhancer has greater financial resources and liquidity than the issuer. For this reason, the Adviser usually evaluates the credit risk of a fixed income security based solely upon its credit enhancement. What are the Specific Risks of Investing in the Fund? Although there are many factors which may affect an investment in the Fund, the principal risks of investing in a tax-exempt money market fund are described below. CREDIT RISK Credit risk is the possibility that an issuer or a credit enhancer will default (fails to repay interest and principal when due). If an issuer or credit enhancer defaults, the Fund will lose money. Money market funds try to minimize this risk by purchasing higher quality securities. Many fixed income securities receive credit ratings from companies such as Standard & Poor's and Moody's Investor Services. Fixed income securities receive different credit ratings depending on the rating company's assessment of the likelihood of default by the issuer. The lower the credit rating, the greater the credit risk. If the security is unrated, greater reliance is placed on the Adviser's credit assessment. 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. SECTOR RISK Most of the Fund's securities will be invested in issuers located in North Carolina. In addition, a substantial part of the Fund's portfolio may be comprised of tax-exempt securities issued or credit enhanced by companies in similar businesses or with other similar characteristics. As a result, the Fund will be more susceptible to any economic, business, political, or other developments which generally affect these issuers. 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 determined net asset value (NAV). The Fund does not charge a sales charge. NAV is determined at 12:00 noon and 1:00 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 $10,000. There is no required minimum subsequent investment amount. An account may be opened with a smaller minimum amount as long as the $10,000 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 institutions acting in an agency or fiduciary capacity or to individuals directly or through investment professionals. The Fund may not be a suitable investment for retirement plans or non-North Carolina taxpayers because it invests in North Carolina tax-exempt securities. 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 1:00 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 on the day 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 SYSTEMATIC INVESTMENT PROGRAM Once you have opened an account, you may automatically purchase additional Shares on a regular basis by completing the Systematic Investment Program (SIP) section of the New Account Form or by contacting the Fund or your investment professional. The minimum investment amount for SIPs is $50. BY AUTOMATED CLEARINGHOUSE (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 12:00 noon (Eastern time), your redemption will be wired to you the same day. You will not receive that day's dividend. This amount will be wired to you the same day. If you call after 12:00 noon (Eastern time), your redemption will be wired to you the following business day. You will receive that day's dividend. Under limited circumstances, arrangements may be made with the Distributor for same-day payment of redemption proceeds, without that day's dividend, for redemption requests received before 2:00 p.m. (Eastern time). 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 30 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. SYSTEMATIC WITHDRAWAL PROGRAM You may automatically redeem Shares in a minimum amount of $100 on a regular basis. Complete the appropriate section of the New Account Form or an Account Service Options Form or contact your investment professional or the Fund. Your account value must meet the minimum initial investment amount at the time the program is established. This program may reduce, and eventually deplete, your account. Payments should not be considered yield or income. CHECKWRITING You may request checks to redeem your Fund Shares. Your account will continue to receive the daily dividend declared on the Shares being redeemed until a check is presented for payment. DEBIT CARD You may request a debit card account that allows you to redeem Shares. There is an annual fee for this service that the Fund will automatically deduct from your account. 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 CONFIRMATIONS AND ACCOUNT STATEMENTS You will receive confirmation of purchases and redemptions. In addition, you will receive periodic statements reporting all account activity, including systematic transactions, 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, 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. It is anticipated that Fund distributions will be primarily dividends that are exempt from federal income tax, although a portion of the Fund's dividends may not be exempt. Dividends may be subject to state and local taxes, although the Fund's dividends will be exempt from North Carolina state personal income tax to the extent they are derived from interest on obligations exempt from North Carolina personal income taxes. Capital gains and non-exempt dividends are taxable whether paid in cash or reinvested in the Fund. 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 Management. 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 and/or provide administrative services to more than 300 mutual funds and private accounts, which totaled over $120 billion in assets as of December 31, 1997. Federated was established in 1955 and is one of the largest mutual fund investment managers in the United States with more than 2,000 employees. Over 4,000 investment professionals make Federated Funds available to their customers. ADVISORY FEES The Adviser receives an annual investment advisory fee of 0.50% 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 affect 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 24.
YEAR ENDED OCTOBER 31 1998 1997 1996 1995 1994 1 NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 INCOME FROM INVESTMENT OPERATIONS: Net investment income 0.03 0.03 0.03 0.04 0.02 LESS DISTRIBUTIONS: Distributions from net investment income (0.03) (0.03) (0.03) (0.04) ( 0.02) NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 TOTAL RETURN 2 3.17% 3.24% 3.23% 3.51% 2.06% RATIOS TO AVERAGE NET ASSETS: Expenses 0.59% 0.59% 0.59% 0.59% 0.49 % 3 Net investment income 3.09% 3.19% 3.17% 3.46% 2.54 % 3 Expense waiver/reimbursement 4 0.35% 0.40% 0.42% 0.40% 0.44 % 3 SUPPLEMENTAL DATA: Net assets, end of period (000 omitted) $212,111 $172,636 $137,749 $97,602 $85,249
1 Reflects operations for the period from December 31, 1993 (date of initial public investment) to October 31, 1994. For the period from November 29, 1993 (start of business) to December 31, 1993, the Fund had no investment activity. 2 Based on net asset value, which does not reflect the sales charge or contingent deferred sales charge, if applicable. 3 Computed on an annualized basis. 4 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 October 31, 1998
PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-99.3% 1 NORTH CAROLINA-96.5% $ 1,755,000 Alamance County, NC Industrial Facilities & Pollution Control Financing Authority, (Series B) Weekly VRDNs (Culp, Inc.)/(Wachovia Bank of NC, N.A., Winston-Salem LOC) $ 1,755,000 6,000,000 Alexander County, NC Industrial Facilities & Pollution Control Financing Authority, (Series 1997) Weekly VRDNs (Mitchell Gold Company, Inc.)/(SouthTrust Bank of Alabama, Birmingham LOC) 6,000,000 1,600,000 Buncombe County, NC Industrial Facilities & Pollution Control Financing Authority, (Series 1991) Weekly VRDNs (Rich Mount, Inc.)/(Bank of Tokyo-Mitsubishi Ltd. LOC) 1,600,000 975,000 Burke County, NC Industrial Facilities & Pollution Control Financing Authority Weekly VRDNs (Norwalk Furniture Corp & Hickory Furniture)/(Branch Banking & Trust Co, Wilson LOC) 975,000 640,000 Catawba County, NC Industrial Facilities & Pollution Control Financing Authority, (Series 1992) Weekly VRDNs (WSMP, Inc.)/(Nationsbank, N.A., Charlotte LOC) 640,000 4,600,000 Catawba County, NC Industrial Facilities & Pollution Control Financing Authority, (Series 1994) Weekly VRDNs (Ethan Allen Inc Project)/(Bankers Trust Co., New York LOC) 4,600,000 4,000,000 Catawba County, NC Industrial Facilities & Pollution Control Financing Authority, (Series 1998) Weekly VRDNs (Centro Inc.)/(Norwest Bank Minnesota, N.A. LOC) 4,000,000 525,000 Charlotte, NC, Water & Sewer, 5.25% Bonds, 4/1/1999 528,367 3,115,000 Cleveland County, NC Industrial Facilities and Pollution Control Financing Authority, IDRB (Series 1990) Weekly VRDNs (MetalsAmerica, Inc. Project)/(BankBoston, N.A. LOC) 3,115,000 1,370,000 Cleveland County, NC Industrial Facilities and Pollution Control Financing Authority, Pollution Control Revenue Bonds (Series 1995) Weekly VRDNs (Grover Industries, Inc. Project)/(Bank of America, IL LOC) 1,370,000 2,200,000 Clipper, NC Tax-Exempt Trust Weekly VRDNs (North Carolina State)/(State Street Bank and Trust Co. LIQ) 2,200,000 6,000,000 Gaston County, NC Industrial Facilities and Pollution Control Financing Authority, (Series 1997) Weekly VRDNs (Thermoform Plastic, Inc.)/(Norwest Bank Minnesota, N.A. LOC) 6,000,000 950,000 Gaston County, NC, UT GO, 4.70% Bonds (FGIC INS), 3/1/1999 953,335 2,430,000 Guilford County, NC Industrial Facilities & PCFA, (Series 1996) Weekly VRDNs (South/Win Ltd.)/(Branch Banking & Trust Co, Wilson LOC) 2,430,000 8,075,000 Halifax County, NC Industrial Facilities & PCFA Weekly VRDNs (Flambeau Airmold Project)/(Norwest Bank Minnesota, N.A. LOC) 8,075,000 600,000 Iredell County, NC Industrial Facilities & Pollution Control Financing Authority, Industrial Revenue Bonds Weekly VRDNs (Jet Corr, Inc. Project)/(National Bank of Canada, Montreal LOC) 600,000 1,000,000 Johnson County, NC Industrial Facilities & Pollution Control Financing Authority, (Series 1996) Weekly VRDNs (Inolex Chemical Company Project)/(PNC Bank, N.A. LOC) 1,000,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 NORTH CAROLINA-CONTINUED $ 1,800,000 Lincoln County, NC Industrial Facilities & Pollution Control Financing Authority, Industrial Revenue Bonds Weekly VRDNs (Leucadia, Inc Project)/(National Bank of Canada, Montreal LOC) $ 1,800,000 15,700,000 Martin County, NC IFA, (Series 1993) Weekly VRDNs (Weyerhaeuser Co.) 15,700,000 5,000,000 McDowell County, NC Industrial Facilities and Pollution Control Financing Authority, (Series 1997) Weekly VRDNs (Parker Hosiery, Inc.)/(First Union National Bank, Charlotte, NC LOC) 5,000,000 2,500,000 Mecklenberg County, NC Industrial Facilities and Pollution Control Financing Authority, (Series 1996) Weekly VRDNs (SteriGenics International Project)/(Comerica Bank, Detroit, MI LOC) 2,500,000 3,680,000 Mecklenberg County, NC Industrial Facility & PCFA, (Series 1988) Weekly VRDNs (Florida Steel Corp.)/(Bankers Trust Co., New York LOC) 3,680,000 900,000 Mecklenburg County, NC, (Series 1996) Weekly VRDNs (YMCA of Greater Charlotte Project)/(Wachovia Bank of NC, N.A., Winston-Salem LOC) 900,000 1,000,000 Mecklenburg County, NC, UT GO, 6.60% Bonds, 4/1/1999 1,014,259 2,765,000 New Hanover County, NC PCFA Weekly VRDNs (Efson, Inc.)/ (Branch Banking & Trust Co, Wilson LOC) 2,765,000 9,000,000 New Hanover County, NC PCFA, (Series 1984) Weekly VRDNs (American Hoist & Derrick Co. Project)/(BankBoston, N.A. LOC) 9,000,000 1,225,000 New Hanover County, NC PCFA, (Series 1990) Weekly VRDNs (Wilmington Machinery, Inc. Project)/(Branch Banking & Trust Co, Wilson LOC) 1,225,000 2,250,000 New Hanover County, NC, GO School Bonds, (Series 1995) Weekly VRDNs (Wachovia Bank of NC, N.A., Winston-Salem LIQ) 2,250,000 2,250,000 New Hanover County, NC, GO School Bonds, (Series 1995) Weekly VRDNs (Wachovia Bank of NC, N.A., Winston-Salem LIQ) 2,250,000 2,600,000 North Carolina Agricultural Finance Authority, (Series 1996) Weekly VRDNs (Coastal Carolina Gin L.L.C. Project)/(Branch Banking & Trust Co, Wilson LOC) 2,600,000 6,500,000 North Carolina Eastern Municipal Power Agency, 3.50% CP (Canadian Imperial Bank of Commerce, Toronto LOC), Mandatory Tender 1/14/1999 6,500,000 6,060,000 North Carolina Eastern Municipal Power Agency, PA -171 (Series 1996A) Weekly VRDNs (MBIA Insurance Corporation INS)/(Merrill Lynch Capital Services, Inc. LIQ) 6,060,000 17,165,000 North Carolina Eastern Municipal Power Agency, PT-132 Weekly VRDNs (MBIA INS)/(Credit Suisse First Boston LIQ) 17,165,000 1,800,000 North Carolina Educational Facilities Finance Agency, (Series 1990) Weekly VRDNs (Bowman Gray School of Medicine)/ (Wachovia Bank of NC, N.A., Winston-Salem LOC) 1,800,000 12,000,000 North Carolina HFA, Variable Rate Certificates (Series 1998L), 3.80% TOBs (Bank of America NT and SA, San Francisco LIQ), Optional Tender 7/15/1999 12,000,000 4,000,000 North Carolina Medical Care Commission, (Series 1996) Weekly VRDNs (Adult Communities Total Services, Inc)/(Lasalle National Bank, Chicago LOC) 4,000,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 NORTH CAROLINA-CONTINUED $ 2,300,000 North Carolina Medical Care Commission, (Series 1996) Weekly VRDNs (North Carolina Baptist) $ 2,300,000 7,500,000 North Carolina Medical Care Commission, (Series 1998) Weekly VRDNs (Cornelia Nixon Davis Nursing Home, Inc.)/(Wachovia Bank of NC, N.A., Winston-Salem LOC) 7,500,000 12,000,000 North Carolina Municipal Power Agency No. 1, (Series A), 3.55% CP (Morgan Guaranty Trust Co., New York and UBS AG LOCs), Mandatory Tender 12/11/1998 12,000,000 2,500,000 North Carolina State, (Series 1998A) PA-342 Weekly VRDNs (Merrill Lynch Capital Services Inc. LIQ) 2,500,000 4,000,000 Onslow County, NC Industrial Facilities & Pollution Control Financing Authority Weekly VRDNs (Mine Safety Appliances Co.)/(Sanwa Bank Ltd., Osaka LOC) 4,000,000 3,280,000 Orange County, NC Industrial Facilities & Pollution Control Financing Authority Weekly VRDNs (Mebane Packaging Corp)/ (First Union National Bank, Charlotte, NC LOC) 3,280,000 1,300,000 Piedmont, NC Airport Authority Weekly VRDNs (Triad International Maintenance Corp.)/(Mellon Bank N.A., Pittsburgh LOC) 1,300,000 1,500,000 Randolph County, NC IDA, (Series 1990) Weekly VRDNs (Wayne Steel, Inc.)/(BancOne, Ohio, N.A. LOC) 1,500,000 1,200,000 Rutherford County, NC, Industrial Facilities Pollution Control Financing Authority Weekly VRDNs (Spring-Ford Knitting Co.)/(Branch Banking & Trust Co, Wilson LOC) 1,200,000 1,500,000 Sampson County, NC Industrial Facilities and Pollution Control Financing Authority, (Series 1997) Weekly VRDNs (DuBose Strapping, Inc.)/(First Union National Bank, Charlotte, NC LOC) 1,500,000 4,000,000 Wake County, NC Industrial Facilities & PCFA, (Series 1990A), 3.00% CP (Carolina Power & Light Co.)/(First National Bank of Chicago LOC), Mandatory Tender 2/12/1999 4,000,000 5,000,000 Wake County, NC Industrial Facilities & PCFA, (Series 1990B), 3.10% CP (Carolina Power & Light Co.)/(Bank of New York, LOC), Mandatory Tender 3/11/1999 5,000,000 4,000,000 Wake County, NC, 4.40% Bonds, 3/1/1999 4,010,288 2,832,866 Wayne County, NC PCFA Weekly VRDNs (Cooper Industries, Inc.)/(Sanwa Bank Ltd., Osaka LOC) 2,832,866 7,600,000 Wilson County, NC PCA, (Series 1994) Weekly VRDNs (Granutec, Inc.)/(Branch Banking & Trust Co, Wilson LOC) 7,600,000 Total 204,574,115 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 PUERTO RICO-2.8% $ 2,000,000 Puerto Rico Industrial, Medical & Environmental PCA, (1983 Series A), 4.00% TOBs (Merck & Co., Inc.), Optional Tender 12/1/1998 $ 2,000,319 3,000,000 Puerto Rico Industrial, Medical & Environmental PCA, (Series 1983A), 3.60% TOBs (Reynolds Metals Co.)/(ABN AMRO Bank N.V., Amsterdam LOC), Optional Tender 9/1/1999 3,000,000 1,000,000 Puerto Rico Industrial, Medical & Environmental PCA, Pollution Control Facilities Financing Authority (Series 1983 A), 3.75% TOBs (Schering Plough Corp.)/(Morgan Guaranty Trust Co., New York LOC), Optional Tender 12/1/1998 1,000,000 Total 6,000,319 Total Investments (at amortized cost) 2 $ 210,574,434
Securities that are subject to Alternative Minimum Tax represent 38.9% of the portfolio as calculated based upon total portfolio market value. 1 The Fund may only invest in securities rated in one of the two highest short-term rating categories by nationally recognized statistical rating organizations ('NRSROs') or unrated securities of comparable quality. 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, MIG-1 or MIG-2 by Moody's Investors Service, Inc., or F-1+, F-1, or F-2 by Fitch IBCA, Inc. are all considered rated in one of the two highest short-term rating categories. Securities rated in the highest short-term rating category (and unrated securities of comparable quality) are identified as First Tier securities. Securities rated in the second highest short-term rating category (and unrated securities of comparable quality) are identified as Second Tier securities. The Fund follows applicable regulations in determining whether a security is rated and whether a security rated by multiple NRSROs in different rating categories should be identified as a First or Second Tier security. At October 31, 1998, the portfolio securities were rated as follows: Tier Rating Based on Total Market Value (Unaudited) FIRST TIER Second Tier 100.00% 0.00% 2 Also represents cost for federal tax purposes. Note: The categories of investments are shown as a percentage of net assets ($212,110,703) at October 31, 1998. The following acronyms are used throughout this portfolio: CP -Commercial Paper FGIC -Financial Guaranty Insurance Company GO -General Obligation HFA -Housing Finance Authority IDA -Industrial Development Authority IDRB -Industrial Development Revenue Bond IFA -Industrial Finance Authority INS -Insured LIQ -Liquidity Agreement LOCs -Letter(s) of Credit LOC -Letter of Credit MBIA -Municipal Bond Investors Assurance PCA -Pollution Control Authority PCFA -Pollution Control Finance Authority SA -Support Agreement TOBs -Tender Option Bonds UT -Unlimited Tax VRDNs-Variable Rate Demand Notes See Notes which are an integral part of the Financial Statements STATEMENT OF ASSETS AND LIABILITIES October 31, 1998
ASSETS: Total investments in securities, at amortized cost and value $ 210,574,434 Cash 311,367 Income receivable 1,258,438 Receivable for shares sold 97,956 Prepaid expenses 3,908 Deferred organizational costs 1,442 Other assets 981 Total assets 212,248,526 LIABILITIES: Payable for shares redeemed $ 4,269 Income distribution payable 63,020 Accrued expenses 70,534 Total liabilities 137,823 Net Assets for 212,110,703 shares outstanding $ 212,110,703 NET ASSETS CONSIST OF: NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE: $212,110,703 / 212,110,703 shares outstanding $1.00
See Notes which are an integral part of the Financial Statements STATEMENT OF OPERATIONS Year Ended October 31, 1998
INVESTMENT INCOME: Interest $ 6,673,495 EXPENSES: Investment advisory fee $ 899,911 Administrative personnel and services fee 135,722 Custodian fees 4,601 Transfer and dividend disbursing agent fees and expenses 64,510 Directors'/Trustees' fees 1,533 Auditing fees 12,000 Legal fees 9,585 Portfolio accounting fees 46,947 Shareholder services fee 449,956 Share registration costs 24,822 Printing and postage 16,279 Insurance premiums 13,315 Miscellaneous 19,966 Total expenses 1,699,147 WAIVER: Waiver of investment advisory fee (629,332) Net expenses 1,069,815 Net investment income $ 5,603,680
See Notes which are an integral part of the Financial Statements STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED OCTOBER 31 1998 1997 INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income $ 5,603,680 $ 4,504,130 DISTRIBUTIONS TO SHAREHOLDERS: Distributions from net investment income (5,603,680) (4,504,130) SHARE TRANSACTIONS: Proceeds from sale of shares 1,078,743,485 898,803,747 Net asset value of shares issued to shareholders in payment of distributions declared 4,634,347 3,808,923 Cost of shares redeemed (1,043,902,913) (867,725,411) Change in net assets resulting from share transactions 39,474,919 34,887,259 Change in net assets 39,474,919 34,887,259 NET ASSETS: Beginning of period 172,635,784 137,748,525 End of period $ 212,110,703 $ 172,635,784
See Notes which are an integral part of the Financial Statements NOTES TO FINANCIAL STATEMENTS October 31, 1998 ORGANIZATION Federated Municipal Trust (the "Trust") is registered under the Investment Company Act of 1940, as amended (the "Act") as an open-end, management investment company. The Trust consists of 17 portfolios. The financial statements included herein are only those of North Carolina Municipal Cash Trust (the "Fund"). The financial statements of the other portfolios are presented separately. The assets of each portfolio are segregated and a shareholder's interest is limited to the portfolio in which shares are held. The investment objective of the Fund is to provide current income exempt from federal regular income tax and the income tax imposed by the State of North Carolina consistent with stability of principal. 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. 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 October 31, 1998, capital paid-in aggregated $212,110,703. Transactions in shares were as follows:
YEAR ENDED OCTOBER 31 1998 1997 Shares sold 1,078,743,485 898,803,747 Shares issued to shareholders in payment of distributions declared 4,634,347 3,808,923 Shares redeemed (1,043,902,913) (867,725,411) Net change resulting from share transactions 39,474,919 34,887,259
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES INVESTMENT ADVISORY FEE Federated Management, the Fund's investment adviser (the "Adviser"), receives for its services an annual investment advisory fee equal to 0.50% 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 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 ("FSS"), the Fund will pay FSS up to 0.25% of average daily net assets of the Fund for the period. The fee paid to FSS is used to finance certain services for shareholders and to maintain shareholder accounts. TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES FServ, through its subsidiary, Federated Shareholder Services Company ("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. ORGANIZATIONAL EXPENSES Organizational expenses of $53,386 were borne initially by the Adviser. The Fund has reimbursed the Adviser for these expenses. These expenses have been deferred and are being amortized over the five year period following the Fund's effective date. INTERFUND TRANSACTIONS During the period ended October 31, 1998, the Fund engaged in purchase and sale transactions with funds that have a common investment adviser (or affiliated investment advisers), common Directors/Trustees, and/or common Officers. These purchase and sale transactions were made at current market value pursuant to Rule 17a-7 under the Act amounting to $501,035,000 and $436,105,000, respectively. GENERAL Certain of the Officers and Trustees of the Trust are Officers and Directors or Trustees of the above companies. CONCENTRATION OF CREDIT RISK Since the Fund invests a substantial portion of its assets in issuers located in one state, it will be more susceptible to factors adversely affecting issuers of that state than would be a comparable tax-exempt mutual fund that invests nationally. In order to reduce the credit risk associated with such factors, at October 31, 1998, 77.8% of the securities in the portfolio of investments are backed by letters of credit or bond insurance of various financial institutions and financial guaranty assurance agencies. The percentage of investments insured by or supported (backed) by a letter of credit from any one institution or agency did not exceed 9.0% of total investments. 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 BOARD OF TRUSTEES OF FEDERATED MUNICIPAL TRUST AND SHAREHOLDERS OF NORTH CAROLINA MUNICIPAL CASH TRUST: We have audited the accompanying statement of assets and liabilities of North Carolina Municipal Cash Trust (an investment portfolio of Federated Municipal Trust, a Massachusetts business trust), including the schedule of portfolio investments, as of October 31, 1998, the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for the periods presented. These financial statements and financial highlights are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the 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 October 31, 1998, by correspondence with the custodian. 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 North Carolina Municipal Cash Trust (an investment portfolio of Federated Municipal Trust) as of October 31, 1998, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and its financial highlights for the periods presented, in conformity with generally accepted accounting principles. Arthur Andersen LLP Boston, Massachusetts December 23, 1998 [Graphic] PROSPECTUS North Carolina Municipal Cash Trust A Portfolio of Federated Municipal Trust December 31, 1998 A Statement of Additional Information (SAI) dated December 31, 1998, is incorporated by reference into this prospectus. To obtain the SAI 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] North Carolina Municipal Cash 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. 811-5911 Cusip 314229782 3090803A (12/98) [Graphic] STATEMENT OF ADDITIONAL INFORMATION North Carolina Municipal Cash Trust A Portfolio of Federated Municipal Trust This Statement of Additional Information (SAI) is not a prospectus. Read this SAI in conjunction with the prospectus for North Carolina Municipal Cash Trust dated December 31, 1998. Obtain the prospectus without charge by calling 1-800- 341-7400. CONTENTS How is the Fund Organized? Securities in Which the Fund Invests How is the Fund Sold? Subaccounting Services Redemption in Kind Massachusetts Partnership Law Account and Share Information Tax Information Who Manages and Provides Services to the Fund? How Does the Fund Measure Performance? Who is Federated Investors, Inc.? Investment Ratings Addresses DECEMBER 31, 1998 [Federated Investors Logo] Federated Securities Corp., Distributor, subsidiary of Federated Investors, Inc. Cusip 3142229782 3090803B (12/98) How is the Fund Organized? The Fund is a diversified portfolio of Federated Municipal Trust (Trust). The Trust is an open-end, management investment company that was established under the laws of the Commonwealth of Massachusetts on September 1, 1989. The Trust may offer separate series of shares representing interests in separate portfolios of securities. The Board of Trustees (the Board) has established one class of shares of the Fund (Shares). Securities in Which the Fund Invests SECURITIES DESCRIPTIONS AND TECHNIQUES In pursuing its investment strategy, the Fund may invest in the following tax- exempt securities for any purpose that is consistent with its investment objective. General Obligation Bonds General obligation bonds are supported by the issuer's full faith and credit. The issuer must levy and collect taxes sufficient to pay principal and interest on the bonds. However, the issuer's authority to levy additional taxes may be limited by its charter or state law. Special Revenue Bonds Special revenue bonds are payable solely from specific revenues received by the issuer. The revenues may consist of specific taxes, assessments, tolls, fees or other types of municipal revenues. For example, a municipality may issue bonds to build a toll road, and pledge the tolls to repay the bonds. Bondholders could not collect from the municipality's general taxes or revenues. Therefore, any shortfall in the tolls normally could result in a default on the bonds. Private Activity Bonds Private activity bonds are special revenue bonds used to finance private entities. For example, a municipality may issue bonds to finance a new factory to improve its local economy. The municipality would lend the proceeds to the company using the factory, and the company would agree make loan payments sufficient to repay the bonds. The bonds would be payable solely from the company's loan payments, not from any other revenues of the municipality. Therefore, any default on the loan normally would result in a default on the bonds. Municipal Leases Municipalities may enter into leases for equipment or facilities. In order to comply with state public financing laws, these leases are typically subject to annual appropriation. In other words, a municipality may end a lease, without penalty, by not providing for the lease payments in its annual budget. After the lease ends, the lessor (the Fund) can resell the equipment or facility but the Fund may lose money on the sale. The Fund may invest in securities supported by pools of municipal leases. The most common type of lease backed securities are certificates of participation (COPs). However, the Fund may also invest directly in individual leases. Credit Enhancement Common types of credit enhancement include guarantees, letters of credit, bond insurance and surety bonds. Credit enhancement also includes arrangements where securities or other liquid assets secure payment of a fixed income security. If a default occurs, these assets may be sold and the proceeds paid to a security's holders. Either form of credit enhancement reduces credit risks by providing another source of payment for a fixed income security. Investment Ratings A nationally recognized rating service'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 (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 IBCA, 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 rating service can be treated as being in one of the two highest short-term rating categories; currently, such securities must be rated by two rating services in one of their two highest rating categories. See "Regulatory Compliance." INVESTMENT RISKS There are many factors which may effect an investment in the Fund. The Fund's principal risks are described in its prospectus. An additional risk factor is outlined below. Tax Risk In order for the interest income from the securities to be exempt from federal regular income tax ("tax-exempt"), tax-exempt securities must meet certain legal requirements. Failure to meet such requirements may cause the interest received and distributed by the Fund to shareholders to be taxable. FUNDAMENTAL INVESTMENT POLICIES The Fund invests so that at least 80% of the Fund's annual interest income is exempt from federal regular income tax and North Carolina state income tax or at least 80% of its net assets will be invested in obligations, the interest income from which is exempt from federal regular and North Carolina state income tax. This policy is fundamental and cannot be changed without shareholder approval. 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 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 net 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 its total assets are outstanding. Pledging Assets The Fund will not mortgage, pledge, or hypothecate any assets except 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 its 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 North Carolina 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 Real Estate The Fund will not purchase or sell real estate or real estate limited partnerships, 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 unless authorized by the "vote of a majority of its outstanding voting securities," as defined by the Investment Company Act. The following investment 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 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 Board and repurchase agreements providing for settlement in more than seven days after notice. 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 a nationally recognized rating service, 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 Board has 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 Board 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 Board 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 Board 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. 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 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. 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. 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 Trust have equal voting rights, except that in matters affecting only a particular Fund or class, only Shares of that Fund or class are entitled to vote. Trustees may be removed by the Board or by shareholders at a special meeting. A special meeting of shareholders will be called by the Board upon the written request of shareholders who own at least 10% of the Trust's outstanding shares of all series entitled to vote. As of December 8, 1998, the following shareholders owned of record, beneficially, or both, 5% or more of the outstanding Shares: First Union Capital Markets Corp., Charlotte, North Carolina, owned approximately 23,477,693 Shares (10.80%); BHC Securities Inc., Philadelphia, Pennsylvania, owned approximately 13,407,070 Shares (6.17%); B. Fernandez & Hermanos, Inc., San Juan, Puerto Rico, owned approximately 11,523,576 Shares (5.30%); The Shelton Companies, Charlotte, North Carolina, owned approximately 12,133,686 Shares (5.58%); and Scott & Stringfellow, Inc., Richmond, Virginia, owned approximately 13,101,926 Shares (6.03%). Tax Information FEDERAL INCOME TAX The Fund intends to meet the requirements of Subchapter M of the Internal Revenue Code applicable to regulated investment companies. If these requirements are not met, it will not receive the special tax treatment and will pay federal income tax. The Fund will be treated as a single, separate entity for federal income tax purposes so that income earned and capital gains and losses realized by the Trust's other portfolios will be separate from those realized by the Fund. STATE TAXES Under existing North Carolina laws, distributions made by the Fund will not be subject to North Carolina income taxes to the extent that such distributions qualify as exempt-interest dividends under the Internal Revenue Code, and represent (i) interest on obligations of the state of North Carolina or any of its political subdivisions; or (ii) interest on obligations of the United States or its possessions. Conversely, to the extent that distributions made by the Fund are derived from other types of obligations, such distributions will be subject to North Carolina income taxes. Who Manages and Provides Services to the Fund? BOARD OF TRUSTEES The Board is responsible for managing the Trust's business affairs and for exercising all the Trust's powers except those reserved for the shareholders. Information about each Board member is provided below and includes the following data: name, address, birthdate, present position(s) held with the Trust, principal occupations for the past five years and other notable positions held, total compensation received as a Trustee from the Trust for its most recent fiscal year, and the total compensation received from the Federated Fund Complex for the most recent calendar year. The Trust is comprised of 17 Funds and the Federated Fund Complex is comprised of 56 investment companies, whose investment advisers are affiliated with the Fund's Adviser. As of December 8, 1998, 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.
Total Name Compensation Birthdate Aggregate From Trust Address Principal Occupations Compensation and Fund Position With Trust for Past 5 Years From Trust Complex John F. Donahue##* Chief Executive Officer and Director or Trustee of the Federated $ 0 $0 for the Birthdate: July 28, 1924 Fund Complex. Chairman and Director, Federated Investors, Inc.; Trust and 56 Federated Investors Tower Chairman and Trustee, Federated Advisers, Federated Management, and other 1001 Liberty Avenue Federated Research; Chairman and Director, Federated Research Corp., investment Pittsburgh, PA and Federated Global Research Corp.; Chairman, Passport Research, companies in CHAIRMAN and TRUSTEE Ltd. the Fund Complex Thomas G. Bigley Director or Trustee of the Federated Fund Complex; Director, Member $4,076.31 $111,222 for Birthdate: February 3, 1934 of Executive Committee, Children's Hospital of Pittsburgh; formerly: the Trust 15 Old Timber Trail Senior Partner, Ernst & Young LLP; Director, MED 3000 Group, Inc.; and 56 other Pittsburgh, PA Director, Member of Executive Committee, University of Pittsburgh. investment TRUSTEE companies in the Fund Complex John T. Conroy, Jr. Director or Trustee of the Federated Fund Complex; President, $4,484.62 $122,362 for Birthdate: June 23, 1937 Investment Properties Corporation; Senior Vice President, John R. the Trust Wood/IPC Commercial Dept. Wood and Associates, Inc., Realtors; Partner or Trustee in private and 56 other John R. Wood and Associates, Inc. real estate ventures in Southwest Florida; formerly: President, investment Realtors Naples Property Management, Inc. and Northgate Village Development companies in 3255 Tamiami Trail North Naples, Corporation. the Fund FL Complex TRUSTEE William J. Copeland Director or Trustee of the Federated Fund Complex; Director and $4,484.62 $122,362 for Birthdate: July 4, 1918 Member of the Executive Committee, Michael Baker, Inc.; formerly: the Trust One PNC Plaza-23rd Floor Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp.; and 56 other Pittsburgh, PA Director, Ryan Homes, Inc. investment TRUSTEE companies in Retired: Director, United Refinery; Director, Forbes Fund; Chairman, the Fund Pittsburgh Foundation; Chairman, Pittsburgh Civic Light Opera. Complex James E. Dowd, Esq. Director or Trustee of the Federated Fund Complex; Attorney-at-law; $4,484.62 $122,362 for Birthdate: May 18, 1922 Director, The Emerging Germany Fund, Inc. the Trust 571 Hayward Mill Road and 56 other Concord, MA Retired: President, Boston Stock Exchange, Inc.; Regional investment TRUSTEE Administrator, United States Securities and Exchange Commission. companies in the Fund Complex Lawrence D. Ellis, M.D.* Director or Trustee of the Federated Fund Complex; Professor of $4,076.31 $111,222 for Birthdate: October 11, 1932 Medicine, University of Pittsburgh; Medical Director, University of the Trust 3471 Fifth Avenue Pittsburgh Medical Center Downtown; Hematologist, Oncologist, and and 56 other Suite 1111 Internist, Presbyterian and Montefiore Hospitals; Member, National investment Pittsburgh, PA Board of Trustees, Leukemia Society of America. companies in TRUSTEE the Fund Complex Edward L. Flaherty, Jr., Esq. # Director or Trustee of the Federated Fund Complex; Attorney, of $4,484.62 $122,362 for Birthdate: June 18, 1924 Counsel, Miller, Ament, Henny & Kochuba; Director, Eat'N Park the Trust Miller, Ament, Henny & Kochuba Restaurants, Inc.; formerly: Counsel, Horizon Financial, F.A., and 56 other 205 Ross Street Western Region; Partner, Meyer and Flaherty. investment Pittsburgh, PA companies in TRUSTEE the Fund Complex Peter E. Madden Director or Trustee of the Federated Fund Complex; formerly: $4,076.31 $111,222 for Birthdate: March 16, 1942 Representative, Commonwealth of Massachusetts General Court; the Trust One Royal Palm Way President, State Street Bank and Trust Company and State Street and 56 other 100 Royal Palm Way Corporation. investment Palm Beach, FL companies in TRUSTEE Retired: Director, VISA USA and VISA International; Chairman and the Fund Director, Massachusetts Bankers Association; Director, Depository Complex Trust Corporation. John E. Murray, Jr., J.D., S.J.D. Director or Trustee of the Federated Fund Complex; President, Law $4,076.31 $111,222 for Birthdate: December 20, 1932 Professor, Duquesne University; Consulting Partner, Mollica & Murray. the Trust President, Duquesne University and 56 other Pittsburgh, PA Retired: Dean and Professor of Law, University of Pittsburgh School investment TRUSTEE of Law; Dean and Professor of Law, Villanova University School of companies in Law. the Fund Complex Wesley W. Posvar Director or Trustee of the Federated Fund Complex; President, World $4,076.31 $111,222 for Birthdate: September 14, 1925 Society of Ekistics, Athens; Professor, International Politics; the Trust 1202 Cathedral of Learning Management Consultant; Trustee, Carnegie Endowment for International and 56 other University of Pittsburgh Peace, RAND Corporation, Online Computer Library Center, Inc., investment Pittsburgh, PA National Defense University and U.S. Space Foundation; President companies in TRUSTEE Emeritus, University of Pittsburgh; Founding Chairman, National the Fund Advisory Council for Environmental Policy and Technology, Federal Complex Emergency Management Advisory Board and Czech Management Center, Prague. Retired: Professor, United States Military Academy; Professor, United States Air Force Academy. Marjorie P. Smuts Director or Trustee of the Federated Fund Complex; Public $4,076.31 $111,222 for Birthdate: June 21, 1935 Relations/Marketing/Conference Planning. the Trust 4905 Bayard Street and 56 other Pittsburgh, PA Retired: National Spokesperson, Aluminum Company of America; investment TRUSTEE business owner. companies in the Fund Complex Glen R. Johnson* Trustee, Federated Investors, Inc.; staff member, Federated $ 0 $0 for the Birthdate: May 2, 1929 Securities Corp. Trust and 8 Federated Investors Tower other 1001 Liberty Avenue investment Pittsburgh, PA companies in PRESIDENT and TRUSTEE the Fund Complex J. Christopher Donahue##* President or Executive Vice President of the Federated Fund Complex; $ 0 $0 for the Birthdate: April 11, 1949 Director or Trustee of some of the Funds in the Federated Fund Trust and 18 Federated Investors Tower Complex; President and Director, Federated Investors, Inc.; other 1001 Liberty Avenue President and Trustee, Federated Advisers, Federated Management, and investment Pittsburgh, PA Federated Research; President and Director, Federated Research Corp. companies in EXECUTIVE VICE PRESDIENT and Federated Global Research Corp.; President, Passport Research, the Fund Ltd.; Trustee, Federated Shareholder Services Company; Director, Complex Federated Services Company. Edward C. Gonzales* Trustee or Director of some of the Funds in the Federated Fund $ 0 $0 for the Birthdate: October 22, 1930 Complex; President, Executive Vice President and Treasurer of some Trust and 1 Federated Investors Tower of the Funds in the Federated Fund Complex; Vice Chairman, Federated other 1001 Liberty Avenue Investors, Inc.; Vice President, Federated Advisers, Federated investment Pittsburgh, PA Management, Federated Research, Federated Research Corp., Federated companies in EXECUTIVE VICE PRESIDENT Global Research Corp. and Passport Research, Ltd.; Executive Vice the Fund President and Director, Federated Securities Corp.; Trustee, Complex Federated Shareholder Services Company. John W. McGonigle Executive Vice President and Secretary of the Federated Fund $ 0 $0 for the Birthdate: October 26, 1938 Complex; Executive Vice President, Secretary, and Director, Trust and 56 Federated Investors Tower Federated Investors, Inc.; Trustee, Federated Advisers, Federated other 1001 Liberty Avenue Management, and Federated Research; Director, Federated Research investment Pittsburgh, PA Corp. and Federated Global Research Corp.; Director, Federated companies in EXECUTIVE VICE PRESIDENT and Services Company; Director, Federated Securities Corp. the Fund SECRETARY Complex Richard J. Thomas Treasurer of the Federated Fund Complex; Vice President - Funds $ 0 $0 for the Birthdate: June 17, 1954 Financial Services Division, Federated Investors, Inc.; Formerly: Trust and 56 Federated Investors Tower various management positions within Funds Financial Services other 1001 Liberty Avenue Division of Federated Investors, Inc. investment Pittsburgh, PA companies in TREASURER the Fund Complex Richard B. Fisher* President or Vice President of some of the Funds in the Federated $ 0 $0 for the Birthdate: May 17, 1923 Fund Complex; Director or Trustee of some of the Funds in the Trust and 6 Federated Investors Tower Federated Fund Complex; Executive Vice President, Federated other 1001 Liberty Avenue Investors, Inc.; Chairman and Director, Federated Securities Corp. investment Pittsburgh, PA companies in VICE PRESIDENT the Fund Complex William D. Dawson, III Chief Investment Officer of this Fund and various other Funds in the $ 0 $0 for the Birthdate: March 3, 1949 Federated Fund Complex; Executive Vice President, Federated Trust and 41 Federated Investors Tower Investment Counseling, Federated Global Research Corp., Federated other 1001 Liberty Avenue Advisers, Federated Management, Federated Research, and Passport investment Pittsburgh, PA Research, Ltd.; Registered Representative, Federated Securities companies in CHIEF INVESTMENT OFFICER Corp.; Portfolio Manager, Federated Administrative Services; Vice the Fund President, Federated Investors, Inc.; Formerly: Executive Vice Complex 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. Mary Jo Ochson Senior Portfolio Manager and Vice President of eight investment $ 0 $0 for the Birthdate: September 12, 1953 companies in the Federated Fund Complex; Senior Vice President, Trust and 7 Federated Investors Tower Federated Investment Counseling, Federated Advisers, Federated other 1001 Liberty Avenue Global Research Corp., Federated Management, Federated Research, investment Pittsburgh, PA Federated Research Corp. and Passport Research, Ltd.; Formerly: Vice companies in SENIOR PORTFOLIO MANAGER/VICE President, Federated Advisers, Federated Management, Federated the Fund PRESIDENT Research, Federated Research Corp. , Passport Research, Ltd. and Complex Federated Global Research Corp. Jeff A. Kozemchak Senior Portfolio Manager and Vice President of four investment $ 0 $0 for the Birthdate: January 15, 1960 companies in the Federated Fund Complex; Vice President, Federated Trust and 3 Federated Investors Tower Investment Counseling, Federated Advisers, Federated Global Research other 1001 Liberty Avenue Corp., Federated Management, Federated Research, Federated Research investment Pittsburgh, PA Corp. and Passport Research, Ltd.; Formerly: Assistant Vice companies in SENIOR PORTFOLIO MANAGER/VICE President and Investment Analyst, Federated Research Corp. and the Fund PRESIDENT Passport Research, Ltd. ; Assistant Vice President, Federated Complex Advisers, Federated Management and Federated Research.
## Mr. Donahue is the father of J. Christopher Donahue, Executive Vice President of the Trust. 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 Trust, 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 Trust. 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: Maximum Average Aggregate Daily Administrative Fee Net Assets of the Federated Funds - --------------------------------------------------------------------- 0.150 of 1% on the first $250 million 0.125 of 1% on the next $250 million 0.100 of 1% on the next $250 million 0.075 of 1% on assets in excess of $750 million The administrative fee received during any fiscal year shall be at least $125,000 per portfolio and $30,000 per each additional class of shares. Federated Services Company may voluntarily waive a portion of its fee and may reimburse the Fund for expenses. Federated Services Company also provides certain accounting and recordkeeping services with respect to the Fund's portfolio investments for a fee based on Fund assets plus out-of-pocket expenses. CUSTODIAN State Street Bank and Trust Company, Boston, Massachusetts, is custodian for the securities and cash of the Fund. Foreign instruments purchased by the Fund are held by foreign banks participating in a network coordinated by State Street Bank. TRANSFER AGENT AND DIVIDEND DISBURSING AGENT Federated Services Company, through its registered transfer agent subsidiary, Federated Shareholder Services Company, maintains all necessary shareholder records. The Fund pays the transfer agent a fee based on the size, type, and number of accounts and transactions made by shareholders. INDEPENDENT PUBLIC ACCOUNTANTS Arthur Andersen LLP is the independent public accountant for the Fund. FEES PAID BY THE FUND FOR SERVICES For the Year Ended October 31, 1998 1997 1996 - ------------------------------------------------------------------------- Advisory Fee Earned $899,911 $707,395 $582,818 - ------------------------------------------------------------------------- Advisory Fee Reduction 629,332 559,422 487,687 - ------------------------------------------------------------------------- Brokerage Commissions 0 0 0 - ------------------------------------------------------------------------- Administrative Fee 135,722 126,345 125,000 - ------------------------------------------------------------------------- Shareholder Services Fee 449,956 ---- ---- - ------------------------------------------------------------------------- If the Fund's expenses are capped at a particular level, the cap does not include reimbursement to the Fund of any expenses incurred by shareholders who use the transfer agent's subaccounting facilities. How does the Fund Measure Performance? The Fund may advertise Share performance by using the Securities and Exchange Commission's (SEC) standard method for calculating performance applicable to all mutual funds. The SEC also permits this standard performance information to be accompanied by non-standard performance information. Unless otherwise stated, any quoted Share performance reflects the effect of non-recurring charges, such as maximum sales charges, which, if excluded, would increase the total return and yield. The performance of Shares depends upon such variables as: portfolio quality; average portfolio maturity; type and value of portfolio securities; changes in interest rates; changes or differences in the Fund's or any class of Shares' expenses; and various other factors. Share performance fluctuates on a daily basis largely because net earnings and offering price per Share 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-, and since inception periods ended October 31, 1998. Yield, Effective Yield and Tax-Equivalent Yield given for the 7-day period ended October 31, 1998. Share Class 7-Day Period 1 Year Since Inception on December 31, 1993 - ------------------------------------------------------------------------------ Total Return -- 3.17% 3.15% Yield 2.81% -- -- Effective Yield 2.85% -- -- Tax-Equivalent Yield 5.41% -- -- - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ 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. The tax-equivalent yield of Shares is calculated similarly to the yield, but is adjusted to reflect the taxable yield that Shares would have had to earn to equal the actual yield, assuming a specific tax rate. 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. TAX EQUIVALENCY TABLE Set forth below is a sample of a tax-equivalency table that may be used in advertising and sales literature. This table is for illustrative purposes only and is not representative of past or future performance of the Fund. The interest earned by the tax-exempt securities owned by the Fund generally remains free from federal regular income tax and is often free from state and local taxes as well. However, some of the Fund's income may be subject to the federal alternative minimum tax and state and/or local taxes.
TAXABLE YIELD EQUIVALENT FOR 1998 STATE OF NORTH CAROLINA - -------------------------------------------------------------------------------- TAX BRACKET: FEDERAL: 15.00% 28.00% 31.00% 36.00% 39.60% COMBINED FEDERAL AND STATE: 22.00% 35.00% 38.75% 43.75% 47.35% - -------------------------------------------------------------------------------- JOINT $1- $42,351- $102,301- $155,951- OVER RETURN 42,350 102,300 155,950 278,450 $278,450 SINGLE $1- $25,351- $61,401- $128,101- OVER RETURN 25,350 61,400 128,100 278,450 $278,450 - -------------------------------------------------------------------------------- Tax-Exempt Yield Taxable Yield Equivalent - -------------------------------------------------------------------------------- 1.50% 1.92% 2.31% 2.45% 2.67% 2.85% 2.00% 2.56% 3.08% 3.27% 3.56% 3.80% 2.50% 3.21% 3.85% 4.08% 4.44% 4.75% 3.00% 3.85% 4.62% 4.90% 5.33% 5.70% 3.50% 4.49% 5.38% 5.71% 6.22% 6.65% 4.00% 5.13% 6.15% 6.53% 7.11% 7.60% 4.50% 5.77% 6.92% 7.35% 8.00% 8.55% 5.00% 6.41% 7.69% 8.16% 8.89% 9.50% 5.50% 7.05% 8.46% 8.98% 9.78% 10.45% 6.00% 7.69% 9.23% 9.80% 10.67% 11.40%
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. 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., 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 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, 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, 1997, Federated managed 11 bond funds with approximately $2.1 billion in assets and 22 money market funds with approximately $10.9 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 tax-exempt 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 27 years' experience. As of December 31, 1997, Federated managed 29 equity funds totaling approximately $11.7 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, 1997, Federated managed 11 money market funds and 16 bond funds with assets approximating $17.1 billion and $5.6 billion, respectively. Federated's corporate bond decision making--based on intensive, diligent credit analysis--is backed by over 22 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 $200 billion. Government Funds In the government sector, as of December 31, 1997, Federated manages 9 mortgage- backed, 6 government/ agency and 18 government money market mutual funds, with assets approximating $5.9 billion, $1.5 billion and $35 billion, respectively. Federated trades approximately $400 million in U.S. government and mortgage- backed securities daily and places approximately $23 billion in repurchase agreements each day. Federated introduced the first U.S. government fund to invest in U.S. government bond securities in 1969. Federated has been a major force in the short- and intermediate-term government markets since 1982 and currently manages approximately $36 billion in government funds within these maturity ranges. 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, 1997, Federated managed more than $63.1 billion in assets across 51 money market funds, including 18 government, 11 prime and 22 municipal with assets approximating $35 billion, $17.1 billion and $10.9 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 $4 trillion to the more than 6,700 funds available, according to the Investment Company Institute. Federated distributes mutual funds through its subsidiaries for a variety of investment purposes. Specific markets include: FEDERATED CLIENTS OVERVIEW 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. Investment Ratings APPENDIX STANDARD & POOR'S SHORT-TERM MUNICIPAL OBLIGATION RATINGS A Standard & Poor's 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-1+, 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 rated 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. MOODY'S INVESTORS SERVICE, INC., SHORT-TERM MUNICIPAL OBLIGATION RATINGS Moody's Investor Service, Inc. 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 IBCA, 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. Addresses NORTH CAROLINA MUNICIPAL CASH 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 Management Federated Investors Tower 1001 Liberty Avenue, Pittsburgh, PA 15222-3779 Custodian State Street Bank and Trust Company P.O. Box 8600 Boston, MA 02266-8600 Transfer Agent and Dividend Disbursing Agent Federated Shareholder Services Company P.O. Box 8600 Boston, MA 02266-8600 Independent Public Accountants Arthur Andersen LLP 225 Franklin Street Boston MA 02110-2812 PROSPECTUS New Jersey Municipal Cash Trust A Portfolio of Federated Municipal Trust INSTITUTIONAL SHARES A money market mutual fund seeking to provide current income exempt from federal regular income tax and New Jersey state income tax. 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. December 31, 1998 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? 6 How is the Fund Sold? 6 How to Purchase Shares 7 How to Redeem Shares 8 Account and Share Information 10 Who Manages the Fund? 11 Financial Information 11 Report of Independent Public Accountants 24 Risk/Return Summary WHAT IS THE FUND'S INVESTMENT OBJECTIVE? The Fund is a money market fund which seeks to maintain a stable net asset value of $1.00. The Fund's investment objective is to provide current income which is exempt from federal regular income tax and New Jersey state income tax imposed upon non-corporate taxpayers consistent with stability of principal. 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 tax-exempt securities so that the Fund's annual interest income is exempt from federal regular income tax and New Jersey state income tax. Interest from the Fund's investment may be subject to the federal alternative minimum tax for individuals and corporations. WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND? Because the Fund may invest a significant portion of its assets in securities of a single issuer, an investment in the Fund may involve additional risks compared to a fully diversified money market 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 representation omitted. Please see Appendix B5.] Historically, the Fund has maintained a constant $1.00 net asset value per share. The bar chart shows the variability of the Fund's Institutional Shares total returns on a yearly basis. The Fund's Institutional Shares are not sold subject to a sales charge (load). The total returns displayed above are based upon net asset value. The Fund's Institutional Shares year-to-date total return as of the most recent calendar quarter of September 30, 1998, was 2.30%. Within the period shown in the Chart, the Fund's highest quarterly return was 1.02% (quarter ended June 30, 1991). Its lowest quarterly return was 0.47% (quarter ended March 31, 1994). The Fund's Institutional Shares Seven-Day Net Yield as of 12/31/1997, was 3.47%. The following table represents the Fund's Institutional Shares Average Annual Total Return through 12/31/1997.
CALENDAR PERIOD FUND 1 Year 3.23% 5 Years 2.89% Start of Performance 1 3.07%
1 The Fund's start of performance date was December 12, 1990. Investors may call the Fund at 1-800-341-7400 to acquire the Seven-Day Net Yield. 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? NEW JERSEY MUNICIPAL CASH TRUST FEES AND EXPENSES This table describes the fees and expenses that you may pay if you buy, hold, and redeem Shares of the Fund's Institutional Shares.
SHAREHOLDER FEES 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 a percentage of average net assets) Management Fee 2 0.40% Distribution (12b-1) Fee None Shareholder Services Fee 3 0.25% Other Expenses 0.18% Total Annual Fund Operating Expenses 0.83% 1 Although not contractually obligated to do so, the Adviser and shareholder service provider waived certain amounts. These are shown below along with the net expenses the Fund actually paid for the fiscal year ended October 31, 1998. Waiver of Fund Expenses 0.28% Total Actual Annual Fund Operating Expenses (after waivers) 0.55% 2 The Adviser has 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 0.32% for the year ended October 31, 1998. 3 The shareholder services fee for Institutional Shares 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 October 31, 1998.
EXAMPLE The following Example is intended to help you compare the cost of investing in the Fund's Institutional Shares with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund's Institutional 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 Institutional Shares operating expenses are BEFORE WAIVERS as shown above and remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS Expenses assuming no redemption $85 $265 $460 $1,025
What are the Fund's Investment Strategies? The Fund invests in a portfolio of high-quality tax-exempt securities maturing in 13 months or less. The average maturity of the Fund's portfolio, computed on a dollar-weighted basis, will be 90 days or less. The Fund's Adviser performs a fundamental credit analysis to develop an approved list of issuers and securities that meet the Adviser's minimum credit standards. The Adviser targets an average portfolio maturity based upon its interest rate outlook and the tax-exempt securities available. The Adviser structures the portfolio by combining variable rate demand instruments and municipal notes. Depending on the supply of tax-exempt securities, the Adviser generally shortens the portfolio's maturity when it expects interest rates to rise and extends the maturity when it expects interest rates to fall. TEMPORARY DEFENSIVE INVESTMENTS During adverse market conditions the Fund may temporarily depart from its principal investment strategies by investing in securities subject to federal regular income tax and New Jersey state income tax. Temporary investments will be of comparable quality to other securities in which the Fund invests. This may cause the Fund to give up greater investment returns to maintain the safety of principal. This also may cause the Fund to receive and distribute taxable income to investors. What are the Principal Securities in Which the Fund Invests? TAX-EXEMPT SECURITIES Tax-exempt securities are fixed income securities that pay interest exempt from regular federal income taxes. States, counties, cities and other political subdivisions and authorities typically issue tax-exempt securities. Tax-exempt securities are generally differentiated by their source of repayment. FIXED INCOME SECURITIES Fixed income 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. VARIABLE RATE DEMAND INSTRUMENTS Variable rate demand instruments are tax-exempt securities that require the issuer or a third party, such as a dealer or bank, to repurchase the security for its face value upon demand. The securities also bear interest at a variable rate intended to cause the securities to trade at their face value. The Fund treats demand instruments as short-term securities, even though their stated maturity may extend beyond 13 months. MUNICIPAL NOTES Municipal notes are short-term tax-exempt securities. Many municipalities issue such notes to fund their current operations before collecting taxes or other municipal revenues. Municipalities may also issue notes to fund capital projects prior to issuing long-term bonds. The issuers typically repay the notes at the end of their fiscal year, either with taxes, other revenues or proceeds from newly issued notes or bonds. INVESTMENT 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 rating services or be of comparable quality to securities having such ratings. CREDIT ENHANCEMENT Credit enhancement consists of an arrangement in which a company agrees to pay amounts due on a fixed income security if the issuer defaults. In some cases the company providing credit enhancement makes all payments directly to the security holders and receives reimbursement from the issuer. Normally, the credit enhancer has greater financial resources and liquidity than the issuer. For this reason, the Adviser usually evaluates the credit risk of a fixed income security based solely upon its credit enhancement. What are the Specific Risks of Investing in the Fund? Although there are many factors which may affect an investment in the Fund, the principal risks of investing in a tax-exempt money market fund are described below. CREDIT RISK Credit risk is the possibility that an issuer or a credit enhancer will default (fails to repay interest and principal when due). If an issuer or credit enhancer defaults, the Fund will lose money. Money market funds try to minimize this risk by purchasing higher quality securities. Many fixed income securities receive credit ratings from companies such as Standard & Poor's and Moody's Investor Services. Fixed income securities receive different credit ratings depending on the rating company's assessment of the likelihood of default by the issuer. The lower the credit rating, the greater the credit risk. If the security is unrated, greater reliance is placed on the Adviser's credit assessment. 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. SECTOR RISK Most of the Fund's securities will be invested in issuers located in New Jersey. In addition, a substantial part of the Fund's portfolio may be comprised of tax-exempt securities issued or credit enhanced by companies in similar businesses or with other similar characteristics. As a result, the Fund will be more susceptible to any economic, business, political, or other developments which generally affect these issuers. 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 determined net asset value (NAV). The Fund does not charge a sales charge. NAV is determined at 12:00 noon and 1:00 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 minimum 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 offers two share classes: Institutional Shares and Institutional Service Shares, each representing interests in a single portfolio of securities. This prospectus relates only to Institutional Shares. Each share class has different sales charges and other expenses, which affect their performance. Contact your investment professional or call 1-800-341-7400 for more information concerning the other class. The Fund's distributor markets the Shares described in this prospectus to institutions acting in an agency or fiduciary capacity or to individuals directly or through investment professionals. The Fund may not be a suitable investment for retirement plans or non-New Jersey taxpayers because it invests in New Jersey tax-exempt securities. 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 1:00 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 on the day 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 CLEARINGHOUSE (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 12:00 noon (Eastern time), your redemption will be wired to you the same day. You will not receive that day's dividend. If you call after 12:00 noon (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 30 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 CONFIRMATIONS AND ACCOUNT STATEMENTS You will receive confirmation of purchases and redemptions. In addition, you will receive periodic statements reporting all account activity, including systematic transactions, 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, 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. It is anticipated that Fund distributions will be primarily dividends that are exempt from federal income tax, although a portion of the Fund's dividends may not be exempt. Dividends may be subject to state and local taxes, although the Fund's dividends will be exempt from New Jersey state personal income tax to the extent they are derived from interest on obligations exempt from New Jersey personal income taxes. Capital gains and non-exempt dividends are taxable whether paid in cash or reinvested in the Fund. 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 Management. 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 and/or provide administrative services to more than 300 mutual funds and private accounts, which totaled over $120 billion in assets as of December 31, 1997. Federated was established in 1955 and is one of the largest mutual fund investment managers in the United States with more than 2,000 employees. Over 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 affect 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-Institutional Shares (For a share outstanding throughout each period) Reference is made to the Report of Independent Public Accountants on page 24.
YEAR ENDED OCTOBER 31 1998 1997 1996 1995 1994 NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 INCOME FROM INVESTMENT OPERATIONS: Net investment income 0.03 0.03 0.03 0.03 0.02 LESS DISTRIBUTIONS: Distributions from net investment income (0.03) (0.03) (0.03) (0.03) (0.02) NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 TOTAL RETURN 1 3.12 % 3.18% 3.17 % 3.46 % 2.26 % RATIOS TO AVERAGE NET ASSETS: Expenses 0.55 % 0.55% 0.55 % 0.55 % 0.54 % Net investment income 3.07 % 3.13% 3.13 % 3.41 % 2.22 % Expense waiver/reimbursement 2 0.28 % 0.31% 0.37 % 0.41 % 0.39 % SUPPLEMENTAL DATA: Net assets, end of period (000 omitted) $106,032 $112,407 $115,722 $86,944 $62,984
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 October 31, 1998
PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-99.3% 1 NEW JERSEY-98.0% $ 700,000 Atlantic County, NJ Improvement Authority Weekly VRDNs (Marine Midland Bank N.A., Buffalo, NY LOC) $ 700,000 1,700,000 Atlantic Highlands, NJ, 4.00% BANs, 8/20/1999 1,703,928 3,756,000 Bloomingdale Borough, NJ, 3.85% BANs, 3/12/1999 3,757,941 1,645,000 Camden County, NJ Improvement Authority, (Series 1995) Weekly VRDNs (Jewish Federation of Southern Jersey, Inc.)/ (National Westminster Bank, PLC, London LOC) 1,645,000 900,000 Camden County, NJ Improvement Authority, (Series 1996) Weekly VRDNs (Parkview Redevelopment Housing Project)/ (General Electric Capital Corp. LOC) 900,000 4,600,000 Clipper, New Jersey Tax-Exempt Trust, (Series 1996-2) Weekly VRDNs (New Jersey Housing & Mortgage Financing Authority)/ (MBIA INS)/(State Street Bank and Trust Co. LIQ) 4,600,000 2,154,750 Flemington Borough, NJ, 4.00% BANs, 8/26/1999 2,159,830 5,116,503 High Bridge Borough, NJ, 3.60% BANs, 9/3/1999 5,118,471 2,917,838 Hopewell Township, NJ, 3.875% BANs, 1/8/1999 2,919,025 1,200,000 Jackson Township, NJ, 4.25% BANs, 12/15/1998 1,200,515 3,172,788 Lakewood Township, NJ, 3.875% BANs, 4/15/1999 3,175,198 3,000,000 Lakewood Township, NJ, 4.00% BANs, 1/22/1999 3,001,946 3,003,750 Lavallette Borough, NJ, 4.00% BANs, 2/26/1999 3,006,531 3,040,000 Lumberton Township, NJ, 3.84% BANs, 9/23/1999 3,046,289 6,000,000 Maple Shade Township, NJ, 3.75% BANs, 12/15/1998 6,001,409 1,500,000 Middlesex County, NJ PCFA Weekly VRDNs (FMC Gold Co.)/ (Wachovia Bank of NC, N.A. Winston-Salem LOC) 1,500,000 5,968,323 Monroe Township, NJ, 3.50% BANs, 3/15/1999 5,972,666 2,885,616 Monroe Township, NJ, 3.80% BANs, 2/23/1999 2,886,917 1,900,000 Montclair Township, NJ, 4.00% BANs, 1/22/1999 1,901,648 5,373,000 New Jersey EDA Weekly VRDNs (Meridan Health Care)/(First National Bank of Maryland, Baltimore LOC) 5,373,000 2,400,000 New Jersey EDA Weekly VRDNs (U.S. Golf Association)/(PNC Bank, N.A. LOC) 2,400,000 1,720,000 New Jersey EDA, (1994 Series A), 4.20% TOBs (A.F.L. Quality, Inc.)/(Fleet Bank N.A. LOC), Optional Tender 7/1/1999 1,720,000 385,000 New Jersey EDA, (1994 Series B), 4.20% TOBs (Two Univac, L.L.C.)/(Fleet Bank N.A. LOC), Optional Tender 7/1/1999 385,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 NEW JERSEY-CONTINUED $ 4,100,000 New Jersey EDA, (Series 1985) Weekly VRDNs (Seton Co.)/ (First Union National Bank, Charlotte, N.C. LOC) $ 4,100,000 3,900,000 New Jersey EDA, (Series 1986) Weekly VRDNs (Ridgefield Associates)/(Bank of New York, New York LOC) 3,900,000 300,000 New Jersey EDA, (Series 1987G) Weekly VRDNs (W.Y. Urban Renewal)/(National Westminster Bank, PLC, London LOC) 300,000 2,300,000 New Jersey EDA, (Series 1990) Weekly VRDNs (Genlyte Camden County)/(Bank of America NT and SA, San Francisco LOC) 2,300,000 955,000 New Jersey EDA, (Series 1992D-1) Weekly VRDNs (Danlin Corp.)/(Banque Nationale de Paris LOC) 955,000 1,301,000 New Jersey EDA, (Series 1995) Weekly VRDNs (Filtra Corporation Project)/(Chase Manhattan Bank N.A., New York LOC) 1,301,000 2,145,000 New Jersey EDA, (Series 1995) Weekly VRDNs (International Vitamin Corporation Project)/(National Westminster Bank, PLC, London LOC) 2,145,000 4,395,000 New Jersey EDA, (Series 1996) Weekly VRDNs (R. Realty Company)/(First Union National Bank, Charlotte, N.C. LOC) 4,395,000 2,325,000 New Jersey EDA, (Series 1997) Weekly VRDNs (Lauffer Building Associates, Ltd.)/(Credit Suisse First Boston LOC) 2,325,000 1,775,000 New Jersey EDA, (Series 1997) Weekly VRDNs (Oakland Building Associates, Ltd.)/(Credit Suisse First Boston LOC) 1,775,000 1,800,000 New Jersey EDA, (Series 1997) Weekly VRDNs (Oakland Industrial Associates, Ltd.)/(Credit Suisse First Boston LOC) 1,800,000 2,500,000 New Jersey EDA, (Series 1997) Weekly VRDNs (Okner Parkway Associates Ltd. Partnership)/(Credit Suisse First Boston LOC) 2,500,000 3,500,000 New Jersey EDA, (Series 1997) Weekly VRDNs (Phoenix Realty Partners)/(Corestates Bank N.A., Philadelphia, PA LOC) 3,500,000 1,600,000 New Jersey EDA, (Series 1997) Weekly VRDNs (UJA Federation of Bergen County and North Hudson, Inc.)/(Bank of New York, New York LOC) 1,600,000 2,500,000 New Jersey EDA, (Series 1997) Weekly VRDNs (Wood Hollow Associates, L.L.C.)/(Corestates Bank N.A., Philadelphia, PA LOC) 2,500,000 1,300,000 New Jersey EDA, (Series 1998) Weekly VRDNs (St. James Preparatory School & St. James Social Service Corp.)/(First Union National Bank, Charlotte, N.C. LOC) 1,300,000 1,500,000 New Jersey EDA, (Series 1998B) Weekly VRDNs (New Jersey Natural Gas Co.)/ (AMBAC INS)/(Bank of New York, New York LIQ) 1,500,000 1,120,000 New Jersey EDA, (Series A) Weekly VRDNs (325 Midland Avenue, LLC & Wearbest Sil-Tex, Ltd.)/(Bank of New York, New York LOC) 1,120,000 420,000 New Jersey EDA, (Series B) Weekly VRDNs (325 Midland Avenue, LLC & Wearbest Sil-Tex, Ltd.)/(Bank of New York, New York LOC) 420,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 NEW JERSEY-CONTINUED $ 920,000 New Jersey EDA, (Series B) Weekly VRDNs (Greater Trenton CMHC, Inc.)/(Corestates N.J. National Bank, Ewing Township LOC) $ 920,000 900,000 New Jersey EDA, (Series D-1) Weekly VRDNs (The Hibbert Company)/(Corestates N.J. National Bank, Ewing Township LOC) 900,000 560,000 New Jersey EDA, (Series W) Weekly VRDNs (Datatec Industries, Inc.)/(Banque Nationale de Paris LOC) 560,000 2,815,000 New Jersey EDA, Economic Development Bonds Weekly VRDNs (Atlantic States Cast Iron Pipe Co.)/(Amsouth Bank N.A., Birmingham LOC) 2,815,000 3,000,000 New Jersey EDA, Newark Recycling & Composting Co. (Series 1997), 3.95% TOBs (Societe Generale, Paris), Mandatory Tender 12/15/1998 3,000,000 1,300,000 New Jersey EDA, Port Facility Revenue Bonds (Series 1983) Weekly VRDNs (Trailer Marine Transport Corp.)/(Chase Manhattan Bank N.A., New York LOC) 1,300,000 2,500,000 New Jersey EDA, Trust Receipts (Series 1998 FR/RI-34) Weekly VRDNs (New Jersey-American Water Co., Inc.)/(FGIC INS)/(Bank of New York, New York LIQ) 2,500,000 3,100,000 New Jersey Health Care Facilities Financing Authority, (Series 1997) Weekly VRDNs (Christian Health Care Center)/ (Valley National Bank, Passaic, NJ LOC) 3,100,000 245,000 New Jersey Housing & Mortgage Financing Authority, CDC Municipal Products Class A Certificates (Series 1996B) Weekly VRDNs (MBIA INS)/(CDC Municipal Products, Inc. LIQ) 245,000 3,000,000 New Jersey State Educational Facilities Authority, (Series 1998) FR/RI-A33 Trust Receipts Weekly VRDNs (AMBAC INS)/ (National Westminster Bank, PLC, London LIQ) 3,000,000 3,960,000 New Jersey State, (CDC Series 1997L) Weekly VRDNs (CDC Municipal Products, Inc. LIQ) 3,960,000 2,800,000 New Jersey State, PA-265 Weekly VRDNs (Merrill Lynch Capital Services, Inc. LIQ) 2,800,000 1,000,000 New Jersey State, Trust Receipts (Series 1998 FR/RI-A8) Weekly VRDNs (Bayerische Hypotheken-Und Wechsel-Bank AG LIQ) 1,000,000 3,000,000 New Jersey State, UT GO Bonds, 7.20% Bonds, 4/15/1999 3,050,126 1,250,000 North Brunswick Township, NJ, 4.00% BANs, 12/30/1998 1,250,592 2,453,950 Pine Hill Borough, NJ, 3.84% BANs, 8/6/1999 2,455,542 10,000,000 Port Authority of New York and New Jersey, (Series 1991-4) Weekly VRDNs 10,000,000 1,685,000 Seaside Heights Borough, NJ, (Series B), 4.25% BANs, 11/5/ 1998 1,685,081 2,727,500 Union Beach, NJ, 4.00% BANs, 1/21/1999 2,729,872 3,200,000 Union County, NJ Utilities Authority, Trust Receipts FR/RI- 38 Weekly VRDNs (Ogden Martin Systems Of Union Inc.)/(AMBAC INS)/(Bank of New York, New York LIQ) 3,200,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 NEW JERSEY-CONTINUED $ 4,100,000 Wall Township, NJ, 4.00% BANs, 3/19/1999 $ 4,104,334 4,421,802 Washington Borough, NJ, 4.25% BANs, 12/11/1998 4,423,430 2,900,000 Washington Township, NJ, 4.25% BANs, 1/15/1999 2,904,374 1,000,000 Washington Township, NJ, 4.00% BANs, 8/6/1999 1,001,828 Total 167,716,493 PUERTO RICO-1.3% 2,294,762 Commonwealth of Puerto Rico Municipal Revenues Collection Center, 1997A LeaseTOPS Trust Weekly VRDNs (ABN AMRO Bank N.V., Amsterdam LIQ)/(State Street Bank and Trust Co. LOC) 2,294,762 Total Investments (at amortized cost) 2 $ 170,011,255
Securities that are subject to Alternative Minimum Tax represent 26.5% of the portfolio as calculated based upon total portfolio market value. 1 The Fund may only invest in securities rated in one of the two highest short-term rating categories by nationally recognized statistical rating organizations ("NRSROs") or unrated securities of comparable quality. 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, MIG-1, or MIG-2 by Moody's Investors Service, Inc., F-1+, F-1 and F-2 by Fitch IBCA, Inc. are all considered rated in one of the two highest short-term rating categories. Securities rated in the highest short-term rating category (and unrated securities of comparable quality) are identified as First Tier securities. Securities rated in the second highest short-term rating category (and unrated securities of comparable quality) are identified as Second Tier securities. The Fund follows applicable regulations in determining whether a security is rated and whether a security rated by multiple NRSROs in different rating categories should be identified as a First or Second Tier security. At October 31, 1998, the portfolio securities were rated as follows: Tier Rating Based on Total Market Value (Unaudited)
FIRST TIER SECOND TIER 96.90% 3.10%
2 Also represents cost for federal tax purposes. Note: The categories of investments are shown as a percentage of net assets ($171,272,885) at October 31, 1998. The following acronyms are used throughout this portfolio:
AMBAC -American Municipal Bond Assurance Corporation BANs -Bond Anticipation Notes EDA -Economic Development Authority FGIC -Financial Guaranty Insurance Company GO -General Obligation INS -Insured LIQ -Liquidity Agreement LLC -Limited Liability Corporation LOC -Letter of Credit MBIA -Municipal Bond Investors Assurance PCFA -Pollution Control Finance Authority PLC -Public Limited Company SA -Support Agreement TOBs -Tender Option Bonds UT -Unlimited Tax VRDNs -Variable Rate Demand Notes
See Notes which are an integral part of the Financial Statements Statement of Assets and Liabilities October 31, 1998
ASSETS: Total investments in securities, at amortized cost and value $ 170,011,255 Income receivable 1,358,113 Receivable for shares sold 800,000 Receivable for investments sold 5,373,000 Total assets 177,542,368 LIABILITIES: Payable for investments purchased $ 5,387,007 Income distribution payable 306,191 Payable to Bank 536,200 Accrued expenses 40,085 Total liabilities 6,269,483 Net Assets for 171,272,885 shares outstanding $ 171,272,885 NET ASSET VALUE, OFFERING PRICE, AND REDEMPTION PROCEEDS PER SHARE INSTITUTIONAL SHARES: $106,032,438 / 106,032,438 shares outstanding $1.00 INSTITUTIONAL SERVICE SHARES: $65,240,447 / 65,240,447 shares outstanding $1.00
See Notes which are an integral part of the Financial Statements Statement of Operations Year Ended October 31, 1998
INVESTMENT INCOME: Interest $ 7,523,204 EXPENSES: Investment advisory fee $ 831,577 Administrative personnel and services fee 155,000 Custodian fees 9,425 Transfer and dividend disbursing agent fees and expenses 51,841 Directors'/Trustees' fees 1,878 Auditing fees 12,692 Legal fees 13,798 Portfolio accounting fees 64,338 Distribution services fee-Institutional Service Shares 66,126 Shareholder services fee-Institutional Shares 354,422 Shareholder services fee-Institutional Service Shares 165,314 Share registration costs 32,181 Printing and postage 20,723 Insurance premiums 15,931 Miscellaneous 1,785 Total expenses 1,797,031 WAIVERS: Waiver of investment advisory fee $ (162,550) Waiver of distribution services fee-Institutional Service Shares (66,126) Waiver of shareholder services fee-Institutional Shares (283,538) Waiver of shareholder services fee-Institutional Service Shares (66,126) Total waivers (578,340) Net expenses 1,218,691 Net investment income $ 6,304,513
See Notes which are an integral part of the Financial Statements Statement of Changes in Net Assets
YEAR ENDED OCTOBER 31, 1998 1997 INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income $ 6,304,513 $ 5,218,833 DISTRIBUTIONS TO SHAREHOLDERS: Distributions from net investment income Institutional Shares (4,351,312) (4,020,737) Institutional Service Shares (1,953,201) (1,198,096) Change in net assets resulting from distributions to shareholders (6,304,513) (5,218,833) SHARE TRANSACTIONS: Proceeds from sale of shares 670,567,607 561,976,671 Net asset value of shares issued to shareholders in payment of distributions declared 1,275,927 1,135,725 Cost of shares redeemed (667,515,788) (540,696,148) Change in net assets resulting from share transactions 4,327,746 22,416,248 Change in net assets 4,327,746 22,416,248 NET ASSETS: Beginning of period 166,945,139 144,528,891 End of period $ 171,272,885 $ 166,945,139
See Notes which are an integral part of the Financial Statements Notes to Financial Statements October 31, 1998 ORGANIZATION Federated Municipal Trust (the "Trust") is registered under the Investment Company Act of 1940, as amended (the "Act") as an open-end, management investment company. The Trust consists of 17 portfolios. The financial statements included herein are only those of New Jersey Municipal Cash Trust (the "Fund"), a non-diversified portfolio. The financial statements of the other portfolios are presented separately. The assets of each portfolio are segregated and a shareholder's interest is limited to the portfolio in which shares are held. The Fund offers two classes of shares: Institutional Shares and Institutional Service Shares. The investment objective of the Fund is to provide current income which is exempt from federal regular income tax and New Jersey state income tax imposed upon non-corporate taxpayers consistent with stability of principal. 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. 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) for each class of shares. At October 31, 1998, capital paid-in aggregated $171,272,885. Transactions in shares were as follows:
YEAR ENDED OCTOBER 31 1998 1997 INSTITUTIONAL SHARES: Shares sold 453,405,235 385,242,860 Shares issued to shareholders in payment of distributions declared 43,111 321,415 Shares redeemed (459,822,649) (388,879,537) Net change resulting from Institutional Share transactions (6,374,303) (3,315,262) YEAR ENDED OCTOBER 31 1998 1997 INSTITUTIONAL SERVICE SHARES: Shares sold 217,162,372 176,733,811 Shares issued to shareholders in payment of distributions declared 1,232,816 814,310 Shares redeemed (207,693,139) (151,816,611) Net change resulting from Institutional Service Share transactions 10,702,049 25,731,510 Net change resulting from share transactions 4,327,746 22,416,248
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES INVESTMENT ADVISORY FEE Federated Management, 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. DISTRIBUTION SERVICES FEE The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b- 1 under the Act. Under the terms of the Plan, the Fund will compensate Federated Securities Corp. ("FSC"), the principal distributor, from the net assets of the Fund to finance activities intended to result in the sale of the Fund's Institutional Service Shares. The Plan provides that the Fund may incur distribution expenses up to 0.10% of the daily average net assets of the Institutional Service Shares, annually, to compensate FSC. FSC can modify or terminate this voluntary waiver at any time at its sole discretion. SHAREHOLDER SERVICES FEE Under the terms of a Shareholder Services Agreement with Federated Shareholder Services ("FSS"), the Fund will pay FSS up to 0.25% of average daily net assets of the Fund for the period. The fee paid to FSS is used to finance certain services for shareholders and to maintain shareholder accounts. FSS may voluntarily choose to waive any portion of its fee. FSS can modify or terminate this voluntary waiver at any time at its sole discretion. 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. INTERFUND TRANSACTIONS During the period ended October 31, 1998, the Fund engaged in purchase and sale transactions with funds that have a common investment adviser (of affiliated investment advisers), common Directors/Trustees, and/or common Officers. These purchase and sale transactions were made at current market value pursuant to Rule 17a-7 under the Act amounting to $267,281,098 and $313,625,000, respectively. GENERAL Certain of the Officers and Trustees of the Trust are Officers and Directors or Trustees of the above companies. CONCENTRATION OF CREDIT RISK Since the Fund invests a substantial portion of its assets in issuers located in one state, it will be more susceptible to factors adversely affecting issuers of that state than would be a comparable tax-exempt mutual fund that invests nationally. In order to reduce the credit risk associated with such factors, at October 31, 1998, 46.9% of the securities in the portfolio of investments are backed by letters of credit or bond insurance of various financial institutions and financial guaranty assurance agencies. The percentage of investments insured by or supported (backed) by a letter of credit from any one institution or agency did not exceed 5.8% of total investments. 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 NEW JERSEY MUNICIPAL CASH TRUST: We have audited the accompanying statement of assets and liabilities of New Jersey Municipal Cash Trust (an investment portfolio of Federated Municipal Trust, a Massachusetts business trust), including the schedule of portfolio investments, as of October 31, 1998, the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for the periods presented. These financial statements and financial highlights are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the 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 October 31, 1998, by correspondence with the custodian and the broker. As to the security purchased but not received we requested confirmations from the broker and, when the reply was not received, we carried out 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 New Jersey Municipal Cash Trust (an investment portfolio of Federated Municipal Trust) as of October 31, 1998, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and its financial highlights for the periods presented, in conformity with generally accepted accounting principles. Arthur Andersen LLP Boston, Massachusetts December 23, 1998 [Graphic] PROSPECTUS New Jersey Municipal Cash Trust A Portfolio of Federated Municipal Trust INSTITUTIONAL SHARES December 31, 1998 A Statement of Additional Information (SAI) dated May 31, 1998, is incorporated by reference into this prospectus. To obtain the SAI 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] New Jersey Municipal Cash 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. 811-5911 Cusip 314229600 0100802A-IS (12/98) [Graphic] PROSPECTUS New Jersey Municipal Cash Trust A Portfolio of Federated Municipal Trust INSTITUTIONAL SERVICE SHARES A money market mutual fund seeking to provide current income exempt from federal regular income tax and New Jersey state income tax. 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. December 31, 1998 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? 6 How is the Fund Sold? 6 How to Purchase Shares 7 How to Redeem Shares 8 Account and Share Information 10 Who Manages the Fund? 11 Financial Information 12 Report of Independent Public Accountants 25 Risk/Return Summary WHAT IS THE FUND'S INVESTMENT OBJECTIVE? The Fund is a money market fund which seeks to maintain a stable net asset value of $1.00. The Fund's investment objective is to provide current income which is exempt from federal regular income tax and New Jersey state income tax imposed upon non-corporate taxpayers consistent with stability of principal. 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 tax-exempt securities so that the Fund's annual interest income is exempt from federal regular income tax and New Jersey state income tax. Interest from the Fund's investment may be subject to the federal alternative minimum tax for individuals and corporations. WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND? Because the Fund may invest a significant portion of its assets in securities of a single issuer, an investment in the Fund may involve additional risks compared to a fully diversified money market 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 representation omitted. Please see Appendix B6.] Historically, the Fund has maintained a constant $1.00 net asset value per share. The bar chart shows the variability of the Fund's Institutional Service Shares total returns on a yearly basis. The Fund's Institutional Service Shares are not sold subject to a sales charge (load). The total returns displayed above are based upon net asset value. The Fund's Institutional Service Shares year-to-date total return as of the most recent calendar quarter of September 30, 1998 was 2.22%. Within the period shown in the Chart, the Fund's highest quarterly return was 1.01% (quarter ended June 30, 1991). Its lowest quarterly return was 0.44% (quarter ended March 31, 1994). The Fund's Institutional Service Shares Seven-Day Net Yield as of 12/31/ 1997, was 3.37%. The following table represents the Fund's Institutional Service Shares Average Annual Total Return through 12/31/1997.
CALENDAR PERIOD FUND 1 Year 3.12% 5 Years 2.79% Start of Performance 1 2.98%
1 The Fund's start of performance date was December 12, 1990. Investors may call the Fund at 1-800-341-7400 to acquire the Seven-Day Net Yield. 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? NEW JERSEY MUNICIPAL CASH TRUST FEES AND EXPENSES This table describes the fees and expenses that you may pay if you buy, hold, and redeem Shares of the Fund's Institutional Service Shares.
SHAREHOLDER FEES 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 a percentage of average net assets) Management Fee 2 0.40% Distribution (12b-1) Fee 3 0.10% Shareholder Services Fee 4 0.25% Other Expenses 0.18% Total Annual Fund Operating Expenses 0.93% 1 Although not contractually obligated to do so, the Adviser, distributor and shareholder services provider waived certain amounts. These are shown below along with the net expenses the Fund actually paid for the fiscal year ended October 31, 1998. Waiver of Fund Expenses 0.28% Total Actual Annual Fund Operating Expenses (after waivers) 0.65% 2 The Adviser has 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 0.32% for the year ended October 31, 1998. 3 The distribution (12b-1) fee has been voluntarily waived. This voluntary waiver can be terminated at any time. There was no distribution (12b-1) fee paid by the Fund (after the voluntarily waiver) for the year ended October 31, 1998. 4 The shareholder services fee for Institutional Service Shares 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 0.15% for the year ended October 31, 1998.
EXAMPLE The following Example is intended to help you compare the cost of investing in the Fund's Institutional Service Shares with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund's Institutional Service 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 Institutional Service Shares operating expenses are BEFORE WAIVERS as shown above and remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS Expenses assuming no redemption $95 $296 $515 $1,143
What are the Fund's Investment Strategies? The Fund invests in a portfolio of high-quality tax-exempt securities maturing in 13 months or less. The average maturity of the Fund's portfolio, computed on a dollar-weighted basis, will be 90 days or less. The Fund's Adviser performs a fundamental credit analysis to develop an approved list of issuers and securities that meet the Adviser's minimum credit standards. The Adviser targets an average portfolio maturity based upon its interest rate outlook and the tax-exempt securities available. The Adviser structures the portfolio by combining variable rate demand instruments and municipal notes. Depending on the supply of tax-exempt securities, the Adviser generally shortens the portfolio's maturity when it expects interest rates to rise and extends the maturity when it expects interest rates to fall. TEMPORARY DEFENSIVE INVESTMENTS During adverse market conditions the Fund may temporarily depart from its principal investment strategies by investing in securities subject to federal regular income tax and New Jersey state income tax. Temporary investments will be of comparable quality to other securities in which the Fund invests. This may cause the Fund to give up greater investment returns to maintain the safety of principal. This also may cause the Fund to receive and distribute taxable income to investors. What are the Principal Securities in Which the Fund Invests? TAX-EXEMPT SECURITIES Tax-exempt securities are fixed income securities that pay interest exempt from regular federal income taxes. States, counties, cities and other political subdivisions and authorities typically issue tax-exempt securities. Tax-exempt securities are generally differentiated by their source of repayment. FIXED INCOME SECURITIES Fixed income 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. VARIABLE RATE DEMAND INSTRUMENTS Variable rate demand instruments are tax-exempt securities that require the issuer or a third party, such as a dealer or bank, to repurchase the security for its face value upon demand. The securities also bear interest at a variable rate intended to cause the securities to trade at their face value. The Fund treats demand instruments as short-term securities, even though their stated maturity may extend beyond 13 months. MUNICIPAL NOTES Municipal notes are short-term tax-exempt securities. Many municipalities issue such notes to fund their current operations before collecting taxes or other municipal revenues. Municipalities may also issue notes to fund capital projects prior to issuing long-term bonds. The issuers typically repay the notes at the end of their fiscal year, either with taxes, other revenues or proceeds from newly issued notes or bonds. INVESTMENT 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 rating services or be of comparable quality to securities having such ratings. CREDIT ENHANCEMENT Credit enhancement consists of an arrangement in which a company agrees to pay amounts due on a fixed income security if the issuer defaults. In some cases the company providing credit enhancement makes all payments directly to the security holders and receives reimbursement from the issuer. Normally, the credit enhancer has greater financial resources and liquidity than the issuer. For this reason, the Adviser usually evaluates the credit risk of a fixed income security based solely upon its credit enhancement. What are the Specific Risks of Investing in the Fund? Although there are many factors which may affect an investment in the Fund, the principal risks of investing in a tax-exempt money market fund are described below. CREDIT RISK Credit risk is the possibility that an issuer or a credit enhancer will default (fails to repay interest and principal when due). If an issuer or credit enhancer defaults, the Fund will lose money. Money market funds try to minimize this risk by purchasing higher quality securities. Many fixed income securities receive credit ratings from companies such as Standard & Poor's and Moody's Investor Services. Fixed income securities receive different credit ratings depending on the rating company's assessment of the likelihood of default by the issuer. The lower the credit rating, the greater the credit risk. If the security is unrated, greater reliance is placed on the Adviser's credit assessment. 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. SECTOR RISK Most of the Fund's securities will be invested in issuers located in New Jersey. In addition, a substantial part of the Fund's portfolio may be comprised of tax-exempt securities issued or credit enhanced by companies in similar businesses or with other similar characteristics. As a result, the Fund will be more susceptible to any economic, business, political, or other developments which generally affect these issuers. 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 determined net asset value (NAV). The Fund does not charge a sales charge. NAV is determined at 12:00 noon and 1:00 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 minimum 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 offers two share classes: Institutional Shares and Institutional Service Shares, each representing interests in a single portfolio of securities. This prospectus relates only to Institutional Service Shares. Each share class has different sales charges and other expenses, which affect their performance. Contact your investment professional or call 1-800-341-7400 for more information concerning the other class. The Fund's distributor markets the Shares described in this prospectus to institutions acting in an agency or fiduciary capacity or to individuals directly or through investment professionals. The Fund may not be a suitable investment for retirement plans or non-New Jersey taxpayers because it invests in New Jersey tax-exempt securities. When the Distributor receives marketing fees, it may pay some or all of them to investment professionals. The Distributor and its affiliates may pay out of their assets other amounts (including items of material value) to investment professionals for marketing and servicing Shares. The Distributor is a subsidiary of Federated Investors, Inc. (Federated). RULE 12B-1 PLAN The Fund has adopted a Rule 12b-1 Plan, which allows it to pay marketing fees to the Distributor and investment professionals for the sale, distribution, and customer servicing of the Fund's Institutional Service Shares. Because these Shares pay marketing fees on an ongoing basis, your investment cost may be higher over time than other shares with different sales charges and marketing fees. 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 1:00 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 on the day 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 SYSTEMATIC INVESTMENT PROGRAM Once you have opened an account, you may automatically purchase additional Shares on a regular basis by completing the Systematic Investment Program (SIP) section of the New Account Form or by contacting the Fund or your investment professional. The minimum investment amount for SIPs is $50. BY AUTOMATED CLEARINGHOUSE (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 12:00 noon (Eastern time), your redemption will be wired to you the same day. You will not receive that day's dividend. If you call after 12:00 noon (Eastern time), your redemption will be wired to you the following business day. You will receive that day's dividends. Under limited circumstances, arrangements may be made with the Distributor for same-day payment of redemption proceeds, without that day's dividend, for redemption requests received before 2:00 p.m. (Eastern time). 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 30 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 prior to redeeming Shares: * 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. SYSTEMATIC WITHDRAWAL PROGRAM You may automatically redeem Shares in a minimum amount of $100 on a regular basis. Complete the appropriate section of the New Account Form or an Account Service Options Form or contact your investment professional or the Fund. Your account value must meet the minimum initial investment amount at the time the program is established. This program may reduce, and eventually deplete, your account. Payments should not be considered yield or income. CHECKWRITING You may request checks to redeem your Fund Shares. Your account will continue to receive the daily dividend declared on the Shares being redeemed until a check is presented for payment. DEBIT CARD You may request a debit card account that allows you to redeem Shares. There is an annual fee for this service that the Fund will automatically deduct from your account. 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 CONFIRMATIONS AND ACCOUNT STATEMENTS You will receive confirmation of purchases and redemptions. In addition, you will receive periodic statements reporting all account activity, including systematic transactions, 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 in Shares, 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, 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. It is anticipated that Fund distributions will be primarily dividends that are exempt from federal income tax, although a portion of the Fund's dividends may not be exempt. Dividends may be subject to state and local taxes, although the Fund's dividends will be exempt from New Jersey state personal income tax to the extent they are derived from interest on obligations exempt from New Jersey personal income taxes. Capital gains and non-exempt dividends are taxable whether paid in cash or reinvested in the Fund. 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 Management. 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 and/or provide administrative services to more than 300 mutual funds and private accounts, which totaled over $120 billion in assets as of December 31, 1997. Federated was established in 1955 and is one of the largest mutual fund investment managers in the United States with more than 2,000 employees. Over 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 affect 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-Institutional Service Shares (For a share outstanding throughout each period) Reference is made to the Report of Independent Public Accountants on page 25.
YEAR ENDED OCTOBER 31 1998 1997 1996 1995 1994 NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 INCOME FROM INVESTMENT OPERATIONS: Net investment income 0.03 0.03 0.03 0.03 0.02 LESS DISTRIBUTIONS: Distributions from net investment income (0.03) (0.03) (0.03) (0.03) (0.02) NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 TOTAL RETURN 1 3.01% 3.08% 3.07% 3.36% 2.16% RATIOS TO AVERAGE NET ASSETS: Expenses 0.65% 0.65% 0.65% 0.65% 0.65% Net investment income 2.95% 3.08% 3.03% 3.28% 2.19% Expense waiver/reimbursement 2 0.28% 0.31% 0.37% 0.41% 0.41% SUPPLEMENTAL DATA Net assets, end of period (000 omitted) $65,240 $54,538 $28,807 $29,817 $36,704
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 October 31, 1998
PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-99.3% 1 NEW JERSEY-98.0% $ 700,000 Atlantic County, NJ Improvement Authority Weekly VRDNs (Marine Midland Bank N.A., Buffalo, NY LOC) $ 700,000 1,700,000 Atlantic Highlands, NJ, 4.00% BANs, 8/20/1999 1,703,928 3,756,000 Bloomingdale Borough, NJ, 3.85% BANs, 3/12/1999 3,757,941 1,645,000 Camden County, NJ Improvement Authority, (Series 1995) Weekly VRDNs (Jewish Federation of Southern Jersey, Inc.)/ (National Westminster Bank, PLC, London LOC) 1,645,000 900,000 Camden County, NJ Improvement Authority, (Series 1996) Weekly VRDNs (Parkview Redevelopment Housing Project)/ (General Electric Capital Corp. LOC) 900,000 4,600,000 Clipper, New Jersey Tax-Exempt Trust, (Series 1996-2) Weekly VRDNs (New Jersey Housing & Mortgage Financing Authority)/ (MBIA INS)/(State Street Bank and Trust Co. LIQ) 4,600,000 2,154,750 Flemington Borough, NJ, 4.00% BANs, 8/26/1999 2,159,830 5,116,503 High Bridge Borough, NJ, 3.60% BANs, 9/3/1999 5,118,471 2,917,838 Hopewell Township, NJ, 3.875% BANs, 1/8/1999 2,919,025 1,200,000 Jackson Township, NJ, 4.25% BANs, 12/15/1998 1,200,515 3,172,788 Lakewood Township, NJ, 3.875% BANs, 4/15/1999 3,175,198 3,000,000 Lakewood Township, NJ, 4.00% BANs, 1/22/1999 3,001,946 3,003,750 Lavallette Borough, NJ, 4.00% BANs, 2/26/1999 3,006,531 3,040,000 Lumberton Township, NJ, 3.84% BANs, 9/23/1999 3,046,289 6,000,000 Maple Shade Township, NJ, 3.75% BANs, 12/15/1998 6,001,409 1,500,000 Middlesex County, NJ PCFA Weekly VRDNs (FMC Gold Co.)/ (Wachovia Bank of NC, N.A. Winston-Salem LOC) 1,500,000 5,968,323 Monroe Township, NJ, 3.50% BANs, 3/15/1999 5,972,666 2,885,616 Monroe Township, NJ, 3.80% BANs, 2/23/1999 2,886,917 1,900,000 Montclair Township, NJ, 4.00% BANs, 1/22/1999 1,901,648 5,373,000 New Jersey EDA Weekly VRDNs (Meridan Health Care)/(First National Bank of Maryland, Baltimore LOC) 5,373,000 2,400,000 New Jersey EDA Weekly VRDNs (U.S. Golf Association)/(PNC Bank, N.A. LOC) 2,400,000 1,720,000 New Jersey EDA, (1994 Series A), 4.20% TOBs (A.F.L. Quality, Inc.)/(Fleet Bank N.A. LOC), Optional Tender 7/1/1999 1,720,000 385,000 New Jersey EDA, (1994 Series B), 4.20% TOBs (Two Univac, L.L.C.)/(Fleet Bank N.A. LOC), Optional Tender 7/1/1999 385,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 NEW JERSEY-CONTINUED $ 4,100,000 New Jersey EDA, (Series 1985) Weekly VRDNs (Seton Co.)/ (First Union National Bank, Charlotte, N.C. LOC) $ 4,100,000 3,900,000 New Jersey EDA, (Series 1986) Weekly VRDNs (Ridgefield Associates)/(Bank of New York, New York LOC) 3,900,000 300,000 New Jersey EDA, (Series 1987G) Weekly VRDNs (W.Y. Urban Renewal)/(National Westminster Bank, PLC, London LOC) 300,000 2,300,000 New Jersey EDA, (Series 1990) Weekly VRDNs (Genlyte Camden County)/(Bank of America NT and SA, San Francisco LOC) 2,300,000 955,000 New Jersey EDA, (Series 1992D-1) Weekly VRDNs (Danlin Corp.)/(Banque Nationale de Paris LOC) 955,000 1,301,000 New Jersey EDA, (Series 1995) Weekly VRDNs (Filtra Corporation Project)/(Chase Manhattan Bank N.A., New York LOC) 1,301,000 2,145,000 New Jersey EDA, (Series 1995) Weekly VRDNs (International Vitamin Corporation Project)/(National Westminster Bank, PLC, London LOC) 2,145,000 4,395,000 New Jersey EDA, (Series 1996) Weekly VRDNs (R. Realty Company)/(First Union National Bank, Charlotte, N.C. LOC) 4,395,000 2,325,000 New Jersey EDA, (Series 1997) Weekly VRDNs (Lauffer Building Associates, Ltd.)/(Credit Suisse First Boston LOC) 2,325,000 1,775,000 New Jersey EDA, (Series 1997) Weekly VRDNs (Oakland Building Associates, Ltd.)/(Credit Suisse First Boston LOC) 1,775,000 1,800,000 New Jersey EDA, (Series 1997) Weekly VRDNs (Oakland Industrial Associates, Ltd.)/(Credit Suisse First Boston LOC) 1,800,000 2,500,000 New Jersey EDA, (Series 1997) Weekly VRDNs (Okner Parkway Associates Ltd. Partnership)/(Credit Suisse First Boston LOC) 2,500,000 3,500,000 New Jersey EDA, (Series 1997) Weekly VRDNs (Phoenix Realty Partners)/(Corestates Bank N.A., Philadelphia, PA LOC) 3,500,000 1,600,000 New Jersey EDA, (Series 1997) Weekly VRDNs (UJA Federation of Bergen County and North Hudson, Inc.)/(Bank of New York, New York LOC) 1,600,000 2,500,000 New Jersey EDA, (Series 1997) Weekly VRDNs (Wood Hollow Associates, L.L.C.)/(Corestates Bank N.A., Philadelphia, PA LOC) 2,500,000 1,300,000 New Jersey EDA, (Series 1998) Weekly VRDNs (St. James Preparatory School & St. James Social Service Corp.)/(First Union National Bank, Charlotte, N.C. LOC) 1,300,000 1,500,000 New Jersey EDA, (Series 1998B) Weekly VRDNs (New Jersey Natural Gas Co.)/ (AMBAC INS)/(Bank of New York, New York LIQ) 1,500,000 1,120,000 New Jersey EDA, (Series A) Weekly VRDNs (325 Midland Avenue, LLC & Wearbest Sil-Tex, Ltd.)/(Bank of New York, New York LOC) 1,120,000 420,000 New Jersey EDA, (Series B) Weekly VRDNs (325 Midland Avenue, LLC & Wearbest Sil-Tex, Ltd.)/(Bank of New York, New York LOC) 420,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 NEW JERSEY-CONTINUED $ 920,000 New Jersey EDA, (Series B) Weekly VRDNs (Greater Trenton CMHC, Inc.)/(Corestates N.J. National Bank, Ewing Township LOC) $ 920,000 900,000 New Jersey EDA, (Series D-1) Weekly VRDNs (The Hibbert Company)/(Corestates N.J. National Bank, Ewing Township LOC) 900,000 560,000 New Jersey EDA, (Series W) Weekly VRDNs (Datatec Industries, Inc.)/(Banque Nationale de Paris LOC) 560,000 2,815,000 New Jersey EDA, Economic Development Bonds Weekly VRDNs (Atlantic States Cast Iron Pipe Co.)/(Amsouth Bank N.A., Birmingham LOC) 2,815,000 3,000,000 New Jersey EDA, Newark Recycling & Composting Co. (Series 1997), 3.95% TOBs (Societe Generale, Paris), Mandatory Tender 12/15/1998 3,000,000 1,300,000 New Jersey EDA, Port Facility Revenue Bonds (Series 1983) Weekly VRDNs (Trailer Marine Transport Corp.)/(Chase Manhattan Bank N.A., New York LOC) 1,300,000 2,500,000 New Jersey EDA, Trust Receipts (Series 1998 FR/RI-34) Weekly VRDNs (New Jersey-American Water Co., Inc.)/(FGIC INS)/(Bank of New York, New York LIQ) 2,500,000 3,100,000 New Jersey Health Care Facilities Financing Authority, (Series 1997) Weekly VRDNs (Christian Health Care Center)/ (Valley National Bank, Passaic, NJ LOC) 3,100,000 245,000 New Jersey Housing & Mortgage Financing Authority, CDC Municipal Products Class A Certificates (Series 1996B) Weekly VRDNs (MBIA INS)/(CDC Municipal Products, Inc. LIQ) 245,000 3,000,000 New Jersey State Educational Facilities Authority, (Series 1998) FR/RI-A33 Trust Receipts Weekly VRDNs (AMBAC INS)/ (National Westminster Bank, PLC, London LIQ) 3,000,000 3,960,000 New Jersey State, (CDC Series 1997L) Weekly VRDNs (CDC Municipal Products, Inc. LIQ) 3,960,000 2,800,000 New Jersey State, PA-265 Weekly VRDNs (Merrill Lynch Capital Services, Inc. LIQ) 2,800,000 1,000,000 New Jersey State, Trust Receipts (Series 1998 FR/RI-A8) Weekly VRDNs (Bayerische Hypotheken-Und Wechsel-Bank AG LIQ) 1,000,000 3,000,000 New Jersey State, UT GO Bonds, 7.20% Bonds, 4/15/1999 3,050,126 1,250,000 North Brunswick Township, NJ, 4.00% BANs, 12/30/1998 1,250,592 2,453,950 Pine Hill Borough, NJ, 3.84% BANs, 8/6/1999 2,455,542 10,000,000 Port Authority of New York and New Jersey, (Series 1991-4) Weekly VRDNs 10,000,000 1,685,000 Seaside Heights Borough, NJ, (Series B), 4.25% BANs, 11/5/ 1998 1,685,081 2,727,500 Union Beach, NJ, 4.00% BANs, 1/21/1999 2,729,872 3,200,000 Union County, NJ Utilities Authority, Trust Receipts FR/RI- 38 Weekly VRDNs (Ogden Martin Systems Of Union Inc.)/(AMBAC INS)/(Bank of New York, New York LIQ) 3,200,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 NEW JERSEY-CONTINUED $ 4,100,000 Wall Township, NJ, 4.00% BANs, 3/19/1999 $ 4,104,334 4,421,802 Washington Borough, NJ, 4.25% BANs, 12/11/1998 4,423,430 2,900,000 Washington Township, NJ, 4.25% BANs, 1/15/1999 2,904,374 1,000,000 Washington Township, NJ, 4.00% BANs, 8/6/1999 1,001,828 Total 167,716,493 PUERTO RICO-1.3% 2,294,762 Commonwealth of Puerto Rico Municipal Revenues Collection Center, 1997A LeaseTOPS Trust Weekly VRDNs (ABN AMRO Bank N.V., Amsterdam LIQ)/(State Street Bank and Trust Co. LOC) 2,294,762 Total Investments (at amortized cost) 2 $ 170,011,255
Securities that are subject to Alternative Minimum Tax represent 26.5% of the portfolio as calculated based upon total portfolio market value. 1 The Fund may only invest in securities rated in one of the two highest short-term rating categories by nationally recognized statistical rating organizations ("NRSROs") or unrated securities of comparable quality. 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, MIG-1, or MIG-2 by Moody's Investors Service, Inc., F-1+, F-1 and F-2 by Fitch IBCA, Inc. are all considered rated in one of the two highest short-term rating categories. Securities rated in the highest short-term rating category (and unrated securities of comparable quality) are identified as First Tier securities. Securities rated in the second highest short-term rating category (and unrated securities of comparable quality) are identified as Second Tier securities. The Fund follows applicable regulations in determining whether a security is rated and whether a security rated by multiple NRSROs in different rating categories should be identified as a First or Second Tier security. At October 31, 1998, the portfolio securities were rated as follows: Tier Rating Based on Total Market Value (Unaudited)
FIRST TIER SECOND TIER 96.90% 3.10%
2 Also represents cost for federal tax purposes. Note: The categories of investments are shown as a percentage of net assets ($171,272,885) at October 31, 1998. The following acronyms are used throughout this portfolio:
AMBAC -American Municipal Bond Assurance Corporation BANs -Bond Anticipation Notes EDA -Economic Development Authority FGIC -Financial Guaranty Insurance Company GO -General Obligation INS -Insured LIQ -Liquidity Agreement LLC -Limited Liability Corporation LOC -Letter of Credit MBIA -Municipal Bond Investors Assurance PCFA -Pollution Control Finance Authority PLC -Public Limited Company SA -Support Agreement TOBs -Tender Option Bonds UT -Unlimited Tax VRDNs -Variable Rate Demand Notes
See Notes which are an integral part of the Financial Statements Statement of Assets and Liabilities October 31, 1998
ASSETS: Total investments in securities, at amortized cost and value $ 170,011,255 Income receivable 1,358,113 Receivable for shares sold 800,000 Receivable for investments sold 5,373,000 Total assets 177,542,368 LIABILITIES: Payable for investments purchased $ 5,387,007 Income distribution payable 306,191 Payable to Bank 536,200 Accrued expenses 40,085 Total liabilities 6,269,483 Net Assets for 171,272,885 shares outstanding $ 171,272,885 NET ASSET VALUE, OFFERING PRICE, AND REDEMPTION PROCEEDS PER SHARE INSTITUTIONAL SHARES: $106,032,438 / 106,032,438 shares outstanding $1.00 INSTITUTIONAL SERVICE SHARES: $65,240,447 / 65,240,447 shares outstanding $1.00
See Notes which are an integral part of the Financial Statements Statement of Operations Year Ended October 31, 1998
INVESTMENT INCOME: Interest $ 7,523,204 EXPENSES: Investment advisory fee $ 831,577 Administrative personnel and services fee 155,000 Custodian fees 9,425 Transfer and dividend disbursing agent fees and expenses 51,841 Directors'/Trustees' fees 1,878 Auditing fees 12,692 Legal fees 13,798 Portfolio accounting fees 64,338 Distribution services fee-Institutional Service Shares 66,126 Shareholder services fee-Institutional Shares 354,422 Shareholder services fee-Institutional Service Shares 165,314 Share registration costs 32,181 Printing and postage 20,723 Insurance premiums 15,931 Miscellaneous 1,785 Total expenses 1,797,031 WAIVERS: Waiver of investment advisory fee $ (162,550) Waiver of distribution services fee-Institutional Service Shares (66,126) Waiver of shareholder services fee-Institutional Shares (283,538) Waiver of shareholder services fee-Institutional Service Shares (66,126) Total waivers (578,340) Net expenses 1,218,691 Net investment income $ 6,304,513
See Notes which are an integral part of the Financial Statements Statement of Changes in Net Assets
YEAR ENDED OCTOBER 31, 1998 1997 INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income $ 6,304,513 $ 5,218,833 DISTRIBUTIONS TO SHAREHOLDERS: Distributions from net investment income Institutional Shares (4,351,312) (4,020,737) Institutional Service Shares (1,953,201) (1,198,096) Change in net assets resulting from distributions to shareholders (6,304,513) (5,218,833) SHARE TRANSACTIONS: Proceeds from sale of shares 670,567,607 561,976,671 Net asset value of shares issued to shareholders in payment of distributions declared 1,275,927 1,135,725 Cost of shares redeemed (667,515,788) (540,696,148) Change in net assets resulting from share transactions 4,327,746 22,416,248 Change in net assets 4,327,746 22,416,248 NET ASSETS: Beginning of period 166,945,139 144,528,891 End of period $ 171,272,885 $ 166,945,139
See Notes which are an integral part of the Financial Statements Notes to Financial Statements October 31, 1998 ORGANIZATION Federated Municipal Trust (the "Trust") is registered under the Investment Company Act of 1940, as amended (the "Act") as an open-end, management investment company. The Trust consists of 17 portfolios. The financial statements included herein are only those of New Jersey Municipal Cash Trust (the "Fund"), a non-diversified portfolio. The financial statements of the other portfolios are presented separately. The assets of each portfolio are segregated and a shareholder's interest is limited to the portfolio in which shares are held. The Fund offers two classes of shares: Institutional Shares and Institutional Service Shares. The investment objective of the Fund is to provide current income which is exempt from federal regular income tax and New Jersey state income tax imposed upon non-corporate taxpayers consistent with stability of principal. 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. 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) for each class of shares. At October 31, 1998, capital paid-in aggregated $171,272,885. Transactions in shares were as follows:
YEAR ENDED OCTOBER 31 1998 1997 INSTITUTIONAL SERVICE SHARES: Shares sold 217,162,372 176,733,811 Shares issued to shareholders in payment of distributions declared 1,232,816 814,310 Shares redeemed (207,693,139) (151,816,611) Net change resulting from Institutional Service Share transactions 10,702,049 25,731,510 YEAR ENDED OCTOBER 31 1998 1997 INSTITUTIONAL SHARES: Shares sold 453,405,235 385,242,860 Shares issued to shareholders in payment of distributions declared 43,111 321,415 Shares redeemed (459,822,649) (388,879,537) Net change resulting from Institutional Share transactions (6,374,303) (3,315,262) Net change resulting from share transactions 4,327,746 22,416,248
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES INVESTMENT ADVISORY FEE Federated Management, 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. DISTRIBUTION SERVICES FEE The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b- 1 under the Act. Under the terms of the Plan, the Fund will compensate Federated Securities Corp. ("FSC"), the principal distributor, from the net assets of the Fund to finance activities intended to result in the sale of the Fund's Institutional Service Shares. The Plan provides that the Fund may incur distribution expenses up to 0.10% of the daily average net assets of the Institutional Service Shares, annually, to compensate FSC. FSC can modify or terminate this voluntary waiver at any time at its sole discretion. SHAREHOLDER SERVICES FEE Under the terms of a Shareholder Services Agreement with Federated Shareholder Services ("FSS"), the Fund will pay FSS up to 0.25% of average daily net assets of the Fund for the period. The fee paid to FSS is used to finance certain services for shareholders and to maintain shareholder accounts. FSS may voluntarily choose to waive any portion of its fee. FSS can modify or terminate this voluntary waiver at any time at its sole discretion. 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. INTERFUND TRANSACTIONS During the period ended October 31, 1998, the Fund engaged in purchase and sale transactions with funds that have a common investment adviser (of affiliated investment advisers), common Directors/Trustees, and/or common Officers. These purchase and sale transactions were made at current market value pursuant to Rule 17a-7 under the Act amounting to $267,281,098 and $313,625,000, respectively. GENERAL Certain of the Officers and Trustees of the Trust are Officers and Directors or Trustees of the above companies. CONCENTRATION OF CREDIT RISK Since the Fund invests a substantial portion of its assets in issuers located in one state, it will be more susceptible to factors adversely affecting issuers of that state than would be a comparable tax-exempt mutual fund that invests nationally. In order to reduce the credit risk associated with such factors, at October 31, 1998, 46.9% of the securities in the portfolio of investments are backed by letters of credit or bond insurance of various financial institutions and financial guaranty assurance agencies. The percentage of investments insured by or supported (backed) by a letter of credit from any one institution or agency did not exceed 5.8% of total investments. 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 NEW JERSEY MUNICIPAL CASH TRUST: We have audited the accompanying statement of assets and liabilities of New Jersey Municipal Cash Trust (an investment portfolio of Federated Municipal Trust, a Massachusetts business trust), including the schedule of portfolio investments, as of October 31, 1998, the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for the periods presented. These financial statements and financial highlights are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the 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 October 31, 1998, by correspondence with the custodian and the broker. As to the security purchased but not received we requested confirmation from the broker and, when the reply was not received, we carried out 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 New Jersey Municipal Cash Trust (an investment portfolio of Federated Municipal Trust) as of October 31, 1998, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and its financial highlights for the periods presented, in conformity with generally accepted accounting principles. Arthur Andersen LLP Boston, Massachusetts December 23, 1998 [Graphic] PROSPECTUS New Jersey Municipal Cash Trust A Portfolio of Federated Municipal Trust INSTITUTIONAL SERVICE SHARES December 31, 1998 A Statement of Additional Information (SAI) dated December 31, 1998, is incorporated by reference into this prospectus. To obtain the SAI 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] New Jersey Municipal Cash 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. 811-5911 Cusip 314229709 0100802A-SS (12/98) [Graphic] STATEMENT OF ADDITIONAL INFORMATION New Jersey Municipal Cash Trust A Portfolio of Federated Municipal Trust INSTITUTIONAL SHARES INSTITUTIONAL SERVICE SHARES This Statement of Additional Information (SAI) is not a prospectus. Read this SAI in conjunction with the prospectuses for New Jersey Municipal Cash Trust dated December 31, 1998. Obtain the prospectus without charge by calling 1-800- 341-7400. CONTENTS How is the Fund Organized? Securities in Which the Fund Invests How is the Fund Sold? Subaccounting Services Redemption in Kind Massachusetts Partnership Law Account and Share Information Tax Information Who Manages and Provides Services to the Fund? How Does the Fund Measure Performance? Who is Federated Investors, Inc.? Investment Ratings Addresses DECEMBER 31, 1998 [Federated Investors Logo] Federated Securities Corp., Distributor, subsidiary of Federated Investors, Inc. Cusip 314229709 0100802B (12/98) How is the Fund Organized? The Fund is a diversified portfolio of Federated Municipal Trust (Trust). The Trust is an open-end, management investment company that was established under the laws of the Commonwealth of Massachusetts on September 1, 1989. The Trust may offer separate series of shares representing interests in separate portfolios of securities. The Board of Trustees (the Board) has established two classes of shares of the Fund, known as Institutional Shares and Institutional Service Shares (Shares). This SAI relates to both of the classes of the above-mentioned Shares. Securities in Which the Fund Invests SECURITIES DESCRIPTIONS AND TECHNIQUES In pursuing its investment strategy, the Fund may invest in the following tax- exempt securities for any purpose that is consistent with its investment objective. General Obligation Bonds General obligation bonds are supported by the issuer's full faith and credit. The issuer must levy and collect taxes sufficient to pay principal and interest on the bonds. However, the issuer's authority to levy additional taxes may be limited by its charter or state law. Special Revenue Bonds Special revenue bonds are payable solely from specific revenues received by the issuer. The revenues may consist of specific taxes, assessments, tolls, fees or other types of municipal revenues. For example, a municipality may issue bonds to build a toll road, and pledge the tolls to repay the bonds. Bondholders could not collect from the municipality's general taxes or revenues. Therefore, any shortfall in the tolls normally could result in a default on the bonds. Private Activity Bonds Private activity bonds are special revenue bonds used to finance private entities. For example, a municipality may issue bonds to finance a new factory to improve its local economy. The municipality would lend the proceeds to the company using the factory, and the company would agree make loan payments sufficient to repay the bonds. The bonds would be payable solely from the company's loan payments, not from any other revenues of the municipality. Therefore, any default on the loan normally would result in a default on the bonds. Municipal Leases Municipalities may enter into leases for equipment or facilities. In order to comply with state public financing laws, these leases are typically subject to annual appropriation. In other words, a municipality may end a lease, without penalty, by not providing for the lease payments in its annual budget. After the lease ends, the lessor (the Fund) can resell the equipment or facility but the Fund may lose money on the sale. The Fund may invest in securities supported by pools of municipal leases. The most common type of lease backed securities are certificates of participation (COPs). However, the Fund may also invest directly in individual leases. Credit Enhancement Common types of credit enhancement include guarantees, letters of credit, bond insurance and surety bonds. Credit enhancement also includes arrangements where securities or other liquid assets secure payment of a fixed income security. If a default occurs, these assets may be sold and the proceeds paid to a security's holders. Either form of credit enhancement reduces credit risks by providing another source of payment for a fixed income security. Investment Ratings A nationally recognized rating service'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 (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 IBCA, 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 rating service can be treated as being in one of the two highest short-term rating categories; currently, such securities must be rated by two rating services in one of their two highest rating categories. See "Regulatory Compliance." INVESTMENT RISKS There are many factors which may effect an investment in the Fund. The Fund's principal risks are described in its prospectus. An additional risk factor is outlined below. Tax Risk In order for the interest income from the securities to be exempt from federal regular income tax ("tax-exempt"), tax-exempt securities must meet certain legal requirements. Failure to meet such requirements may cause the interest received and distributed by the Fund to shareholders to be taxable. FUNDAMENTAL INVESTMENT POLICIES The Fund invests so that at least 80% of the Fund's annual interest income is exempt from federal regular income tax and New Jersey state income tax imposed upon non-corporate taxpayers. This policy is fundamental and cannot be changed without shareholder approval. 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 its total assets are outstanding. 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 non-publicly issued New Jersey 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 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, except for certain restricted securities which meet the criteria for liquidity as established by the Board of Trustees. 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 limited partnerships, 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 (including instruments issued by a U.S. branch of a domestic bank or savings and loan having capital, surplus, and undivided profits in excess of $100,000,000 at the time of investment), 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 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 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 Board and repurchase agreements providing for settlement in more than seven days notice. 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 a nationally recognized rating service, 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 Board has 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 Board 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 Board 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 Board 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. 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. RULE 12B-1 PLAN (INSTITUTIONAL SERVICE SHARES) As a compensation-type plan, the Rule 12b-1 Plan is designed to pay the Distributor (who may then pay investment professionals such as banks, broker/dealers, trust departments of banks, and registered investment advisers) for marketing activities (such as advertising, printing and distributing prospectuses, and providing incentives to investment professionals) to promote sales of Shares so that overall Fund assets are maintained or increased. This helps the Fund achieve economies of scale, reduce per Share expenses, and provide cash for orderly portfolio management and Share redemptions. Also, the Fund's service providers that receive asset-based fees also benefit from stable or increasing Fund assets. The Fund may compensate the Distributor more or less than its actual marketing expenses. In no event will the Fund pay for any expenses of the Distributor that exceed the maximum Rule 12b-1 Plan fee. For some classes of Shares, the maximum Rule 12b-1 Plan fee that can be paid in any one year may not be sufficient to cover the marketing related expenses the Distributor has incurred. Therefore, it may take the Distributor a number of years to recoup these expenses. SHAREHOLDER SERVICES The Fund may pay Federated Shareholder Services Company, a subsidiary of Federated Investors, Inc. (Federated), for providing shareholder services and maintaining shareholder accounts. Federated Shareholder Services Company may select others to perform these services for their customers and may pay them fees. SUPPLEMENTAL PAYMENTS Investment professionals may be paid fees out of the assets of the Distributor and/or Federated Shareholder Services Company (but not out of Fund assets). The Distributor and/or Federated Shareholder Services Company may be reimbursed by the Adviser or its affiliates. Investment professionals receive such fees for providing distribution-related or shareholder services such as sponsoring sales, providing sales literature, conducting training seminars for employees, and engineering sales-related computer software programs and systems. Also, investment professionals may be paid cash or promotional incentives, such as reimbursement of certain expenses relating to attendance at informational meetings about the Fund or other special events at recreational-type facilities, or items of material value. These payments will be based upon the amount of Shares the investment professional sells or may sell and/or upon the type and nature of sales or marketing support furnished by the investment professional. 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 to 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 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. 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. 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 Trust have equal voting rights, except that in matters affecting only a particular Fund or class, only Shares of that Fund or class are entitled to vote. Trustees may be removed by the Board or by shareholders at a special meeting. A special meeting of shareholders will be called by the Board upon the written request of shareholders who own at least 10% of the Trust's outstanding shares of all series entitled to vote. As of December 8, 1998, the following shareholders owned of record, beneficially, or both, 5% or more of the outstanding Institutional Shares: Fleet Securities Corp., Rochester, New York, owned approximately 35,746,806 Shares (32.08%); First Union National Bank, Charlotte, North Carolina, owned approximately 21,153,246 Shares (18.99%); United National Bank, Bridgewater, New Jersey, owned approximately 18,720,088 Shares (16.80%); and The Bopac Company, Valley National Bank, Clifton, New Jersey, owned approximately 6,894,944 Shares (6.19%). As of December 8, 1998, the following shareholders owned of record, beneficially, or both, 5% or more of the outstanding Institutional Service Shares: First Union Capital Markets Corp, Charlotte, North Carolina, owned approximately 21,606,669 Shares (25.75%); Fiduciary Tr Co. International, New York, New York, owned approximately 13,814,500 Shares (16.47%); and Tellson & Co., Gladstone, New Jersey, owned approximately 11,587,208 Shares (13.81%). Shareholders owning 25% or more of outstanding Shares may be in control and be able to affect the outcome of certain matters presented for a vote of shareholders. Tax Information FEDERAL INCOME TAX The Fund intends to meet the requirements of Subchapter M of the Internal Revenue Code applicable to regulated investment companies. If these requirements are not met, it will not receive the special tax treatment and will pay federal income tax. The Fund will be treated as a single, separate entity for federal income tax purposes so that income earned and capital gains and losses realized by the Trust's other portfolios will be separate from those realized by the Fund. STATE TAXES Under existing New Jersey laws, distributions made by the Fund will not be subject to New Jersey income taxes to the extent that such distributions qualify as exempt-interest dividends under the Internal Revenue Code, and represent (i) interest or gain from obligations issued by or on behalf of the State of New Jersey or any county, municipality, school or other district, agency, authority, commission, instrumentality, public corporation, body corporate and politic or political subdivision of New Jersey; or (ii) interest or gain from obligations (such as obligations of the United States) that are statutorily free from New Jersey taxation under federal or New Jersey state laws. Conversely, to the extent that distributions by the Fund are attributable to other types of obligations, such distributions will be subject to New Jersey income taxes. Distributions received by a corporate shareholder from the Fund will not be exempt from New Jersey Corporation Business Tax or New Jersey Corporation Income Tax. Who Manages and Provides Services to the Fund? BOARD OF TRUSTEES The Board is responsible for managing the Trust's business affairs and for exercising all the Trust's powers except those reserved for the shareholders. Information about each Board member is provided below and includes the following data: name, address, birthdate, present position(s) held with the Trust, principal occupations for the past five years and other positions held, total compensation received as a Trustee from the Trust for its most recent fiscal year, and the total compensation received from the Federated Fund Complex for the most recent calendar year. The Trust is comprised of 17 Funds and the Federated Fund Complex is comprised of 56 investment companies, whose investment advisers are affiliated with the Fund's Adviser. As of December 8, 1998, 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.
Total Name Compensation Birthdate Aggregate From Trust Address Principal Occupations Compensation and Fund Position With Trust for Past 5 Years From Trust Complex John F. Donahue##* Chief Executive Officer and Director or Trustee of the Federated $ 0 $0 for the Birthdate: July 28, 1924 Fund Complex. Chairman and Director, Federated Investors, Inc.; Trust and 56 Federated Investors Tower Chairman and Trustee, Federated Advisers, Federated Management, and other 1001 Liberty Avenue Federated Research; Chairman and Director, Federated Research Corp., investment Pittsburgh, PA and Federated Global Research Corp.; Chairman, Passport Research, companies in CHAIRMAN and TRUSTEE Ltd. the Fund Complex Thomas G. Bigley Director or Trustee of the Federated Fund Complex; Director, Member $4,076.31 $111,222 for Birthdate: February 3, 1934 of Executive Committee, Children's Hospital of Pittsburgh; formerly: the Trust 15 Old Timber Trail Senior Partner, Ernst & Young LLP; Director, MED 3000 Group, Inc.; and 56 other Pittsburgh, PA Director, Member of Executive Committee, University of Pittsburgh. investment TRUSTEE companies in the Fund Complex John T. Conroy, Jr. Director or Trustee of the Federated Fund Complex; President, $4,484.62 $122,362 for Birthdate: June 23, 1937 Investment Properties Corporation; Senior Vice President, John R. the Trust Wood/IPC Commercial Dept. Wood and Associates, Inc., Realtors; Partner or Trustee in private and 56 other John R. Wood and Associates, Inc. real estate ventures in Southwest Florida; formerly: President, investment Realtors Naples Property Management, Inc. and Northgate Village Development companies in 3255 Tamiami Trail North Naples, Corporation. the Fund FL Complex TRUSTEE William J. Copeland Director or Trustee of the Federated Fund Complex; Director and $4,484.62 $122,362 for Birthdate: July 4, 1918 Member of the Executive Committee, Michael Baker, Inc.; formerly: the Trust One PNC Plaza-23rd Floor Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp.; and 56 other Pittsburgh, PA Director, Ryan Homes, Inc. investment TRUSTEE companies in Retired: Director, United Refinery; Director, Forbes Fund; Chairman, the Fund Pittsburgh Foundation; Chairman, Pittsburgh Civic Light Opera. Complex James E. Dowd, Esq. Director or Trustee of the Federated Fund Complex; Attorney-at-law; $4,484.62 $122,362 for Birthdate: May 18, 1922 Director, The Emerging Germany Fund, Inc. the Trust 571 Hayward Mill Road and 56 other Concord, MA Retired: President, Boston Stock Exchange, Inc.; Regional investment TRUSTEE Administrator, United States Securities and Exchange Commission. companies in the Fund Complex Lawrence D. Ellis, M.D.* Director or Trustee of the Federated Fund Complex; Professor of $4,076.31 $111,222 for Birthdate: October 11, 1932 Medicine, University of Pittsburgh; Medical Director, University of the Trust 3471 Fifth Avenue Pittsburgh Medical Center Downtown; Hematologist, Oncologist, and and 56 other Suite 1111 Internist, Presbyterian and Montefiore Hospitals; Member, National investment Pittsburgh, PA Board of Trustees, Leukemia Society of America. companies in TRUSTEE the Fund Complex Edward L. Flaherty, Jr., Esq. # Director or Trustee of the Federated Fund Complex; Attorney, of $4,484.62 $122,362 for Birthdate: June 18, 1924 Counsel, Miller, Ament, Henny & Kochuba; Director, Eat'N Park the Trust Miller, Ament, Henny & Kochuba Restaurants, Inc.; formerly: Counsel, Horizon Financial, F.A., and 56 other 205 Ross Street Western Region; Partner, Meyer and Flaherty. investment Pittsburgh, PA companies in TRUSTEE the Fund Complex Peter E. Madden Director or Trustee of the Federated Fund Complex; formerly: $4,076.31 $111,222 for Birthdate: March 16, 1942 Representative, Commonwealth of Massachusetts General Court; the Trust One Royal Palm Way President, State Street Bank and Trust Company and State Street and 56 other 100 Royal Palm Way Corporation. investment Palm Beach, FL companies in TRUSTEE Retired: Director, VISA USA and VISA International; Chairman and the Fund Director, Massachusetts Bankers Association; Director, Depository Complex Trust Corporation. John E. Murray, Jr., J.D., S.J.D. Director or Trustee of the Federated Fund Complex; President, Law $4,076.31 $111,222 for Birthdate: December 20, 1932 Professor, Duquesne University; Consulting Partner, Mollica & Murray. the Trust President, Duquesne University and 56 other Pittsburgh, PA Retired: Dean and Professor of Law, University of Pittsburgh School investment TRUSTEE of Law; Dean and Professor of Law, Villanova University School of companies in Law. the Fund Complex Wesley W. Posvar Director or Trustee of the Federated Fund Complex; President, World $4,076.31 $111,222 for Birthdate: September 14, 1925 Society of Ekistics, Athens; Professor, International Politics; the Trust 1202 Cathedral of Learning Management Consultant; Trustee, Carnegie Endowment for International and 56 other University of Pittsburgh Peace, RAND Corporation, Online Computer Library Center, Inc., investment Pittsburgh, PA National Defense University and U.S. Space Foundation; President companies in TRUSTEE Emeritus, University of Pittsburgh; Founding Chairman, National the Fund Advisory Council for Environmental Policy and Technology, Federal Complex Emergency Management Advisory Board and Czech Management Center, Prague. Retired: Professor, United States Military Academy; Professor, United States Air Force Academy. Marjorie P. Smuts Director or Trustee of the Federated Fund Complex; Public $4,076.31 $111,222 for Birthdate: June 21, 1935 Relations/Marketing/Conference Planning. the Trust 4905 Bayard Street and 56 other Pittsburgh, PA Retired: National Spokesperson, Aluminum Company of America; investment TRUSTEE business owner. companies in the Fund Complex Glen R. Johnson* Trustee, Federated Investors, Inc.; staff member, Federated $ 0 $0 for the Birthdate: May 2, 1929 Securities Corp. Trust and 8 Federated Investors Tower other 1001 Liberty Avenue investment Pittsburgh, PA companies in PRESIDENT and TRUSTEE the Fund Complex J. Christopher Donahue##* President or Executive Vice President of the Federated Fund Complex; $ 0 $0 for the Birthdate: April 11, 1949 Director or Trustee of some of the Funds in the Federated Fund Trust and 18 Federated Investors Tower Complex; President and Director, Federated Investors, Inc.; other 1001 Liberty Avenue President and Trustee, Federated Advisers, Federated Management, and investment Pittsburgh, PA Federated Research; President and Director, Federated Research Corp. companies in EXECUTIVE VICE PRESDIENT and Federated Global Research Corp.; President, Passport Research, the Fund Ltd.; Trustee, Federated Shareholder Services Company; Director, Complex Federated Services Company. Edward C. Gonzales* Trustee or Director of some of the Funds in the Federated Fund $ 0 $0 for the Birthdate: October 22, 1930 Complex; President, Executive Vice President and Treasurer of some Trust and 1 Federated Investors Tower of the Funds in the Federated Fund Complex; Vice Chairman, Federated other 1001 Liberty Avenue Investors, Inc.; Vice President, Federated Advisers, Federated investment Pittsburgh, PA Management, Federated Research, Federated Research Corp., Federated companies in EXECUTIVE VICE PRESIDENT Global Research Corp. and Passport Research, Ltd.; Executive Vice the Fund President and Director, Federated Securities Corp.; Trustee, Complex Federated Shareholder Services Company. John W. McGonigle Executive Vice President and Secretary of the Federated Fund $ 0 $0 for the Birthdate: October 26, 1938 Complex; Executive Vice President, Secretary, and Director, Trust and 56 Federated Investors Tower Federated Investors, Inc.; Trustee, Federated Advisers, Federated other 1001 Liberty Avenue Management, and Federated Research; Director, Federated Research investment Pittsburgh, PA Corp. and Federated Global Research Corp.; Director, Federated companies in EXECUTIVE VICE PRESIDENT and Services Company; Director, Federated Securities Corp. the Fund SECRETARY Complex Richard J. Thomas Treasurer of the Federated Fund Complex; Vice President - Funds $0 $0 for the Birthdate: June 17, 1954 Financial Services Division, Federated Investors, Inc.; Formerly: Trust and 56 Federated Investors Tower various management positions within Funds Financial Services other 1001 Liberty Avenue Division of Federated Investors, Inc. investment Pittsburgh, PA companies in TREASURER the Fund Complex Richard B. Fisher* President or Vice President of some of the Funds in the Federated $ 0 $0 for the Birthdate: May 17, 1923 Fund Complex; Director or Trustee of some of the Funds in the Trust and 6 Federated Investors Tower Federated Fund Complex; Executive Vice President, Federated other 1001 Liberty Avenue Investors, Inc.; Chairman and Director, Federated Securities Corp. investment Pittsburgh, PA companies in VICE PRESIDENT the Fund Complex William D. Dawson, III Chief Investment Officer of this Fund and various other Funds in the $ 0 $0 for the Birthdate: March 3, 1949 Federated Fund Fomplex; Executive Vice President, Federated Trust and 41 Federated Investors Tower Investment Counseling, Federated Global Research Corp., Federated other 1001 Liberty Avenue Advisers, Federated Management, Federated Research, and Passport investment Pittsburgh, PA Research, Ltd.; Registered Representative, Federated Securities companies in Chief Investment Officer Corp.; Portfolio Manager, Federated Administrative Services; Vice the Fund President, Federated Investors, Inc.; Formerly: Executive Vice Complex 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. Mary Jo Ochson Senior Portfolio Manager and Vice President of eight investment $ 0 $0 for the Birthdate: September 12, 1953 companies in the Federated Fund Complex; Senior Vice President, Trust and 7 Federated Investors Tower Federated Investment Counseling, Federated Advisers, Federated other 1001 Liberty Avenue Global Research Corp., Federated Management, Federated Research, investment Pittsburgh, PA Federated Research Corp. and Passport Research, Ltd.; Formerly: Vice companies in SENIOR PORTFOLIO MANAGER/VICE President, Federated Advisers, Federated Management, Federated the Fund PRESIDENT Research, Federated Research Corp. , Passport Research, Ltd. and Complex Federated Global Research Corp. Jeff A. Kozemchak Senior Portfolio Manager and Vice President of four investment $ 0 $0 for the Birthdate: January 15, 1960 companies in the Federated Fund Complex; Vice President, Federated Trust and 3 Federated Investors Tower Investment Counseling, Federated Advisers, Federated Global Research other 1001 Liberty Avenue Corp., Federated Management, Federated Research, Federated Research investment Pittsburgh, PA Corp. and Passport Research, Ltd.; Formerly: Assistant Vice companies in SENIOR PORTFOLIO MANAGER/VICE President and Investment Analyst, Federated Research Corp. and the Fund PRESIDENT Passport Research, Ltd. ; Assistant Vice President, Federated Complex Advisers, Federated Management and Federated Research.
## Mr. Donahue is the father of J. Christopher Donahue, Executive Vice President of the Trust. 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 Trust, 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 Trust. 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: Maximum Average Aggregate Daily Administrative Fee Net Assets of the Federated Funds - -------------------------------------------------------------------- 0.150 of 1% on the first $250 million 0.125 of 1% on the next $250 million 0.100 of 1% on the next $250 million 0.075 of 1% on assets in excess of $750 million The administrative fee received during any fiscal year shall be at least $125,000 per portfolio and $30,000 per each additional class of shares. Federated Services Company may voluntarily waive a portion of its fee and may reimburse the Fund for expenses. Federated Services Company also provides certain accounting and recordkeeping services with respect to the Fund's portfolio investments for a fee based on Fund assets plus out-of-pocket expenses. CUSTODIAN State Street Bank and Trust Company, Boston, Massachusetts, is custodian for the securities and cash of the Fund. Foreign instruments purchased by the Fund are held by foreign banks participating in a network coordinated by State Street Bank. TRANSFER AGENT AND DIVIDEND DISBURSING AGENT Federated Services Company, through its registered transfer agent subsidiary, Federated Shareholder Services Company, maintains all necessary shareholder records. The Fund pays the transfer agent a fee based on the size, type, and number of accounts and transactions made by shareholders. INDEPENDENT PUBLIC ACCOUNTANTS Arthur Andersen LLP is the independent public accountant for the Fund. FEES PAID BY THE FUND FOR SERVICES For the Year Ended October 31, 1998 1997 1996 - -------------------------------------------------------------------------------- Advisory Fee Earned $831,577 $669,639 $501,943 Advisory Fee Reduction 162,550 176,158 215,343 Brokerage Commissions 0 0 0 Administrative Fee 155,000 155,000 155,108 12b-1 Fee Institutional Service 0 ---- ---- Shares Shareholder Services Fee Institutional Shares 70,884 ---- ---- Institutional Service 99,188 ---- ---- Shares Fees are allocated among Classes based on their pro rata share of Fund assets, except for marketing (Rule 12b-1) fees and shareholder services fees, which are borne only by the applicable Class of Shares. If the Fund's expenses are capped at a particular level, the cap does not include reimbursement to the Fund of any expenses incurred by shareholders who use the transfer agent's subaccounting facilities. How does the Fund Measure Performance? The Fund may advertise Share performance by using the Securities and Exchange Commission's (SEC) standard method for calculating performance applicable to all mutual funds. The SEC also permits this standard performance information to be accompanied by non-standard performance information. Unless otherwise stated, any quoted Share performance reflects the effect of non-recurring charges, such as maximum sales charges, which, if excluded, would increase the total return and yield. The performance of Shares depends upon such variables as: portfolio quality; average portfolio maturity; type and value of portfolio securities; changes in interest rates; changes or differences in the Fund's or any class of Shares' expenses; and various other factors. Share performance fluctuates on a daily basis largely because net earnings and offering price per Share fluctuate daily. Both net earnings and offering price per Share are factors in the computation of yield and total return. AVERAGE ANNUAL TOTAL RETURNS AND YIELD Total returns given for the one-, five- and since inception periods ended October 31, 1998. Yield, Effective Yield and Tax-Equivalent Yield given for the 7-day period ended October 31, 1998.
Share Class 7-Day Period 1 Year 5 Years Since Inception on Institutional Shares December 13, 1990 - ---------------------------------------------------------------------------------------------- Total Return -- 3.12% 3.04% 3.07% Yield 2.76% -- -- -- Effective Yield 2.80% -- -- -- Tax-Equivalent Yield 5.18% -- -- -- - ---------------------------------------------------------------------------------------------- Share Class 7-Day Period 1 Year 5 Years Since Inception on Institutional Service Shares December 13, 1990 - ---------------------------------------------------------------------------------------------- Total Return -- 3.01% 2.94% 2.98% Yield 2.66% -- -- -- Effective Yield 2.70% -- -- -- Tax-Equivalent Yield 5.00% -- -- -- - ---------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------
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. The tax- equivalent yield of Shares is calculated similarly to the yield, but is adjusted to reflect the taxable yield that Shares would have had to earn to equal the actual yield, assuming a specific tax rate. 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. TAX EQUIVALENCY TABLE Set forth below is a sample of a tax-equivalency table that may be used in advertising and sales literature. This table is for illustrative purposes only and is not representative of past or future performance of the Fund. The interest earned by the tax-exempt securities owned by the Fund generally remains free from federal regular income tax and is often free from state and local taxes as well. However, some of the Fund's income may be subject to the federal alternative minimum tax and state and/or local taxes.
TAXABLE YIELD EQUIVALENT FOR 1998 STATE OF NEW JERSERY SINGLE RETURN - ------------------------------------------------------------------------------------ TAX BRACKET: FEDERAL 15.00% 28.00% 31.00% 36.00% 39.60% COMBINED FEDERAL AND STATE 16.75% 33.53% 37.37% 42.37% 45.97% - ------------------------------------------------------------------------------------ SINGLE $1- $25,351- $61,401- $128,101- OVER RETURN 25,350 61,400 128,100 278,450 $278,450 - ------------------------------------------------------------------------------------ TAX-EXEMPT YIELD TAXABLE YIELD EQUIVALENT - ------------------------------------------------------------------------------------ 1.50% 1.80% 2.26% 2.40% 2.60% 2.78% 2.00% 2.40% 3.01% 3.19% 3.47% 3.70% 2.50% 3.00% 3.76% 3.99% 4.34% 4.63% 3.00% 3.60% 4.51% 4.79% 5.21% 5.55% 3.50% 4.20% 5.27% 5.59% 6.07% 6.48% 4.00% 4.80% 6.02% 6.39% 6.94% 7.40% 4.50% 5.41% 6.77% 7.19% 7.81% 8.33% 5.00% 6.01% 7.52% 7.98% 8.68% 9.25% 5.50% 6.61% 8.27% 8.78% 9.54% 10.18% 6.00% 7.21% 9.03% 9.58% 10.41% 11.10%
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.
TAXABLE YIELD EQUIVALENT FOR 1998 STATE OF NEW JERSERY MARRIED FILING JOINT - ------------------------------------------------------------------------------------ TAX BRACKET: FEDERAL 15.00% 28.00% 31.00% 36.00% 39.60% COMBINED FEDERAL AND STATE 16.75% 33.53% 37.37% 42.37% 45.97% - ------------------------------------------------------------------------------------ JOINT $1- $42,351- $102,301- $155,951- OVER RETURN 42,350 102,300 155,950 278,450 $278,450 - ------------------------------------------------------------------------------------ TAX-EXEMPT YIELD TAXABLE YIELD EQUIVALENT - ------------------------------------------------------------------------------------ 1.50% 1.80% 2.26% 2.40% 2.60% 2.78% 2.00% 2.40% 3.01% 3.19% 3.47% 3.70% 2.50% 3.00% 3.76% 3.99% 4.34% 4.63% 3.00% 3.60% 4.51% 4.79% 5.21% 5.55% 3.50% 4.20% 5.27% 5.59% 6.07% 6.48% 4.00% 4.80% 6.02% 6.39% 6.94% 7.40% 4.50% 5.41% 6.77% 7.19% 7.81% 8.33% 5.00% 6.01% 7.52% 7.98% 8.68% 9.25% 5.50% 6.61% 8.27% 8.78% 9.54% 10.18% 6.00% 7.21% 9.03% 9.58% 10.41% 11.10%
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. 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., 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 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, 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, 1997, Federated managed 11 bond funds with approximately $2.1 billion in assets and 22 money market funds with approximately $10.9 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 tax-exempt 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 27 years' experience. As of December 31, 1997, Federated managed 29 equity funds totaling approximately $11.7 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, 1997, Federated managed 11 money market funds and 16 bond funds with assets approximating $17.1 billion and $5.6 billion, respectively. Federated's corporate bond decision making--based on intensive, diligent credit analysis--is backed by over 22 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 $200 billion. Government Funds In the government sector, as of December 31, 1997, Federated manages 9 mortgage- backed, 6 government/ agency and 18 government money market mutual funds, with assets approximating $5.9 billion, $1.5 billion and $35 billion, respectively. Federated trades approximately $400 million in U.S. government and mortgage- backed securities daily and places approximately $23 billion in repurchase agreements each day. Federated introduced the first U.S. government fund to invest in U.S. government bond securities in 1969. Federated has been a major force in the short- and intermediate-term government markets since 1982 and currently manages approximately $36 billion in government funds within these maturity ranges. 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, 1997, Federated managed more than $63.1 billion in assets across 51 money market funds, including 18 government, 11 prime and 22 municipal with assets approximating $35 billion, $17.1 billion and $10.9 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 $4 trillion to the more than 6,700 funds available, according to the Investment Company Institute. Federated distributes mutual funds through its subsidiaries for a variety of investment purposes. Specific markets include: FEDERATED CLIENTS OVERVIEW 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. Investment Ratings APPENDIX STANDARD & POOR'S SHORT-TERM MUNICIPAL OBLIGATION RATINGS A Standard & Poor's 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-1+, 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 rated 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. MOODY'S INVESTORS SERVICE, INC., SHORT-TERM MUNICIPAL OBLIGATION RATINGS Moody's Investor Service, Inc. 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 IBCA, 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. Addresses NEW JERSEY MUNICIPAL CASH TRUST INSTITUTIONAL SHARES INSTITUTIONAL SERVICE SHARES Federated Investors Funds 5800 Corporate Drive Pittsburgh, PA 15237-7000 Distributor Federated Securities Corp. Federated Investors Tower 1001 Liberty Avenue, Pittsburgh, PA 15222-3779 Investment Adviser Federated Management Federated Investors Tower 1001 Liberty Avenue, Pittsburgh, PA 15222-3779 Custodian State Street Bank and Trust Company P.O. Box 8600 Boston, MA 02266-8600 Transfer Agent and Dividend Disbursing Agent Federated Shareholder Services Company P.O. Box 8600 Boston, MA 02266-8600 Independent Public Accountants Arthur Andersen LLP 225 Franklin Street Boston, MA 02110-2812 PROSPECTUS New York Municipal Cash Trust A Portfolio of Federated Municipal Trust CASH II SHARES A money market mutual fund seeking to provide current income exempt from federal regular income tax and the personal income taxes imposed by New York State and New York municipalities. 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. December 31, 1998 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? 6 How is the Fund Sold? 6 How to Purchase Shares 6 How to Redeem Shares 8 Account and Share Information 10 Who Manages the Fund? 11 Financial Information 12 Report of Independent Public Accountants 28 Risk/Return Summary WHAT IS THE FUND'S INVESTMENT OBJECTIVE? The Fund is a money market fund which seeks to maintain a stable net asset value of $1.00. The Fund's investment objective is current income exempt from federal regular income tax and the personal income taxes imposed by New York State and New York municipalities consistent with stability of principal. 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 tax-exempt securities so that the Fund's annual interest income is exempt from federal regular income tax and the personal income taxes imposed by New York State and New York municipalities. Interest from the Fund's investments may be subject to the federal alternative minimum tax for individuals and corporations. WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND? Because the Fund may invest a significant portion of its assets in securities of a single issuer, an investment in the Fund may involve additional risks compared to a fully diversified money market 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] - See Appendix C-6 Historically, the Fund has maintained a constant $1.00 net asset value per share. The bar chart shows the variability of the Fund's Cash II Shares total returns on a yearly basis. The Fund's Cash II Shares are not sold subject to a sales charge (load). The total returns displayed above are based upon net asset value. The Fund's Cash II Shares year-to-date total return as of the most recent calendar quarter of September 30, 1998, was 2.22%. Within the period shown in the Chart, the Fund's Cash II Shares highest quarterly return was 0.88% (quarter ended June 30, 1995). Its lowest quarterly return was 0.45% (quarter ended March 31, 1994). The Fund's Cash II Shares Seven-Day Net Yield as of 12/31/97 was 3.39%. The following table represents the Fund's Cash II Shares Average Total Return through 12/31/97. CALENDAR PERIOD FUND 1 Year 3.12% 5 Years 2.76% Start of Performance 1 2.88% 1 The Fund's Cash II Shares start of performance date was April 25, 1991. Investors may call the Fund at 1-800-341-7400 to acquire the current Seven- Day Net Yield. 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? NEW YORK MUNICIPAL CASH TRUST FEES AND EXPENSES This table describes the fees and expenses that you may pay if you buy, hold and redeem shares of the Fund's Cash II Shares.
SHAREHOLDER FEES 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 a percentage of average net assets) Management Fee 2 0.40% Distribution (12b-1) Fee 3 0.25% Shareholder Services Fee 0.25% Other Expenses 0.15% Total Annual Fund Operating Expenses 1.05% 1 Although not contractually obligated to do so, the adviser and distributor waived certain amounts. These are shown below along with the net expenses the Fund actually paid for the fiscal year ended October 31, 1998. Waiver of Fund Expenses 0.34% Total Actual Annual Fund Operating Expenses (after waivers) 0.71% 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 0.31% for the year ended October 31, 1998. 3 The distribution (12b-1) fee has been voluntarily waived. This voluntary waiver can be terminated at any time. There was no distribution (12b-1) fee paid by the Fund (after the voluntary reduction) for the year ended October 31, 1998.
EXAMPLE The following Example is intended to help you compare the cost of investing in the Fund's Cash II Shares with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund's Cash II 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 Cash II Shares' operating expenses are BEFORE WAIVERS as shown above and remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be: 1 YEAR 3 YEARS 5 YEARS 10 YEARS Expenses assuming no redemption $107 $334 $579 $1,283 What are the Fund's Investment Strategies? The Fund invests in a portfolio of high-quality tax-exempt securities maturing in 13 months or less. The average maturity of the Fund's portfolio, computed on a dollar-weighted basis, will be 90 days or less. The Fund's Adviser performs a fundamental credit analysis to develop an approved list of issuers and securities that meet the Adviser's minimum credit standards. The Adviser targets an average portfolio maturity based upon its interest rate outlook and the tax-exempt securities available. The Adviser structures the portfolio by combining variable rate demand instruments and municipal notes. Depending on the supply of tax-exempt securities, the Adviser generally shortens the portfolio's maturity when it expects interest rates to rise and extends the maturity when it expects interest rates to fall. TEMPORARY DEFENSIVE INVESTMENTS During adverse market conditions the Fund may temporarily depart from its principal investment strategies by investing in securities subject to federal regular income tax and the personal income taxes imposed by New York State and New York municipalities. Temporary investments will be of comparable quality to other securities in which the Fund invests. This may cause the Fund to give up greater investment returns to maintain the safety of principal. This also may cause the Fund to receive and distribute taxable income to investors. What are the Principal Securities in Which the Fund Invests? TAX-EXEMPT SECURITIES Tax-exempt securities are fixed income securities that pay interest exempt from regular federal income taxes. States, counties, cities and other political subdivisions and authorities typically issue tax-exempt securities. Tax-exempt securities are generally differentiated by their source of repayment. FIXED INCOME SECURITIES Fixed income 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. VARIABLE RATE DEMAND INSTRUMENTS Variable rate demand instruments are tax-exempt securities that require the issuer or a third party, such as a dealer or bank, to repurchase the security for its face value upon demand. The securities also bear interest at a variable rate intended to cause the securities to trade at their face value. The Fund treats demand instruments as short-term securities, even though their stated maturity may extend beyond 13 months. MUNICIPAL NOTES Municipal notes are short-term tax-exempt securities. Many municipalities issue such notes to fund their current operations before collecting taxes or other municipal revenues. Municipalities may also issue notes to fund capital projects prior to issuing long-term bonds. The issuers typically repay the notes at the end of their fiscal year, either with taxes, other revenues or proceeds from newly issued notes or bonds. INVESTMENT 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 rating services or be of comparable quality to securities having such ratings. CREDIT ENHANCEMENT Credit enhancement consists of an arrangement in which a company agrees to pay amounts due on a fixed income security if the issuer defaults. In some cases the company providing credit enhancement makes all payments directly to the security holders and receives reimbursement from the issuer. Normally, the credit enhancer has greater financial resources and liquidity than the issuer. For this reason, the Adviser usually evaluates the credit risk of a fixed income security based solely upon its credit enhancement. What are the Specific Risks of Investing in the Fund? Although there are many factors which may affect an investment in the Fund, the principal risks of investing in tax-exempt money market fund are described below. CREDIT RISK Credit risk is the possibility that an issuer or a credit enhancer will default (fails to repay interest and principal when due). If an issuer or credit enhancer defaults, the Fund will lose money. Money market funds try to minimize this risk by purchasing higher quality securities. Many fixed income securities receive credit ratings from companies such as Standard & Poor's and Moody's Investor Services. Fixed income securities receive different credit ratings depending on the rating company's assessment of the likelihood of default by the issuer. The lower the credit rating, the greater the credit risk. If the security is unrated, greater reliance is placed on the Adviser's credit assessment. 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. SECTOR RISK Most of the Fund's securities will be invested in issuers located in New York. In addition, a substantial part of the Fund's portfolio may be comprised of tax-exempt securities issued or credit enhanced by companies in similar businesses or with other similar characteristics. As a result, the Fund will be more susceptible to any economic, business, political, or other developments which generally affect these issuers. 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 determined net asset value (NAV). The Fund does not charge a 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. 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 offers two share classes: Institutional Service Shares and Cash II Shares, each representing interests in a single portfolio of securities. This prospectus relates only to Cash II Shares. Each share class has different expenses, which affect their performance. Contact your investment professional or call 1-800-341-7400 for more information concerning the other class. The Fund's distributor markets the Shares described in this prospectus to institutions or to individuals directly or through investment professionals. The Fund may not be a suitable investment for retirement plans or for non-New York taxpayers because it invests in New York tax- exempt securities. When the Distributor receives marketing fees, it may pay some or all of them to 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 1:00 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 on the day 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 SYSTEMATIC INVESTMENT PROGRAM Once you have opened an account, you may automatically purchase additional Shares on a regular basis by completing the Systematic Investment Program (SIP) section of the New Account Form or by contacting the Fund or your investment professional. The minimum investment amount for SIPs is $50. BY AUTOMATED CLEARINGHOUSE (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 12:00 noon (Eastern time), your redemption will be wired to you the same day. You will not receive that day's dividend. If you call after 12:00 noon (Eastern time), your redemption will be wired to you the following business day. You will receive that day's dividend. Under limited circumstances, arrangements may be made with the Distributor for same-day payment of redemption proceeds, without that day's dividend, for redemption requests received before 2:00 p.m. (Eastern time). 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 30 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. SYSTEMATIC WITHDRAWAL PROGRAM You may automatically redeem Shares in a minimum amount of $100 on a regular basis. Complete the appropriate section of the New Account Form or an Account Service Options Form or contact your investment professional or the Fund. Your account value must meet the minimum initial investment amount at the time the program is established. This program may reduce, and eventually deplete, your account. Payments should not be considered yield or income. CHECKWRITING You may request checks to redeem your Fund Shares. Your account will continue to receive the daily dividend declared on the Shares being redeemed until a check is presented for payment. DEBIT CARD You may request a debit card account which will permit you to redeem Shares for purchases. A fee will be charged to your account for this service. 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 CONFIRMATIONS AND ACCOUNT STATEMENTS You will receive confirmation of purchase and redemptions (except for systematic transactions). In addition, you will receive periodic statements reporting all account activity, including systematic transactions, 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, 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. It is anticipated that Fund distributions will be primarily dividends that are exempt from federal income tax, although a portion of the Fund's dividends may not be exempt. Dividends may be subject to state and local taxes, although the Fund's dividends will be exempt from New York state personal income tax to the extent they are derived from interest on obligations exempt from New York personal income taxes. Capital gains and non-exempt dividends are taxable whether paid in cash or reinvested in the Fund. 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 Management. 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 and/or provide administrative services to more than 300 mutual funds and private accounts, which totaled over $120 billion in assets as of December 31, 1997. Federated was established in 1955 and is one of the largest mutual fund investment managers in the United States with more than 2,000 employees. Over 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 affect 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-CASH II SHARES (For a share outstanding throughout each period) Reference is made to the Report of Independent Public Accountants on page 28.
YEAR ENDED OCTOBER 31 1998 1997 1996 1995 1994 NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 INCOME FROM INVESTMENT OPERATIONS: Net investment income 0.03 0.03 0.03 0.03 0.02 LESS DISTRIBUTIONS: Distributions from net investment income (0.03) (0.03) (0.03) (0.03) (0.02) NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 TOTAL RETURN 1 3.02% 3.07% 3.05% 3.37% 2.15% RATIOS TO AVERAGE NET ASSETS: Expenses 0.71% 0.71% 0.71% 0.71% 0.71% Net investment income 2.98% 3.01% 3.02% 3.20% 2.19% Expense waiver/reimbursement 2 0.34% 0.34% 0.36% 0.36% 0.21% SUPPLEMENTAL DATA: Net assets, end of period (000 omitted) $43,957 $21,402 $25,571 $14,439 $134,051
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 October 31, 1998
PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-99.1% 1 NEW YORK-98.4% $ 4,760,000 Albany City School District, NY, 4.00% TANs, 11/30/1998 $ 4,761,463 9,195,000 Albany County Airport Authority, NY, Trust Receipts (Series 1997 FR/RI-7) Weekly VRDNs (FSA INS)/(Bank of New York, New York LIQ) 9,195,000 5,000,000 Allegany-Limestone, NY Central School District, 4.05% BANs, 12/30/1998 5,001,010 9,000,000 Broadalbin-Perth, NY Central School District, 3.80% BANs, 2/ 24/1999 9,004,083 3,500,000 Cayuga County, NY IDA, (Series 1998) Weekly VRDNs (NFR Northeast, Inc.)/(KeyBank, N.A. LOC) 3,500,000 950,000 Chautauqua County, NY IDA Weekly VRDNs (Cliffstar Corp.)/ (KeyBank, N.A. LOC) 950,000 3,900,000 Chautauqua County, NY IDA Weekly VRDNs (Mogen David Wine Corp.)/(Wells Fargo Bank, N.A. LOC) 3,900,000 900,000 Colonie, NY IDA Weekly VRDNs (Herbert S. Ellis)/(Marine Midland Bank N.A., Buffalo, NY LOC) 900,000 655,000 Colonie, NY IDA, (Series 1988) Weekly VRDNs (Specialty Retailers, Inc.)/(Marine Midland Bank N.A., Buffalo, NY LOC) 655,000 3,100,000 Colonie, NY IDA, 4.00% TOBs (800 North Pearl Associates)/ (Fleet Bank N.A. LOC), Optional Tender 12/1/1998 3,100,000 2,500,000 Columbia County, NY IDA, (Series 1998A) Weekly VRDNs (Empire Homes, LLC)/(KeyBank, N.A. LOC) 2,500,000 4,720,000 Corinth, NY IDA, Solid Waste Disposal Revenue Bonds (Series A), 3.80% TOBs (International Paper Co.), Optional Tender 3/ 1/1999 4,720,000 1,200,000 Dutchess County, NY IDA, Series 1995 Weekly VRDNs (Laerdal Medical Corp.)/(Bank of New York, New York LOC) 1,200,000 2,140,000 Erie County, NY IDA, (Series A) Weekly VRDNs (Gemcor)/ (Marine Midland Bank N.A., Buffalo, NY LOC) 2,140,000 5,000,000 Erie County, NY IDA, IDRB (Series 1994) Weekly VRDNs (Servotronics, Inc. Project)/(Fleet Bank N.A. LOC) 5,000,000 1,800,000 Franklin County, NY IDA, (Series 1991A) Weekly VRDNs (KES Chateaugay)/(Bank of Tokyo-Mitsubishi Ltd. LOC) 1,800,000 725,000 Fulton County, NY IDA, 4.05% TOBs (Gates Mills Inc.)/(Fleet Bank N.A. LOC), Optional Tender 12/1/1998 725,000 3,510,000 Fulton County, NY, 4.00% BANs, 4/30/1999 3,513,333 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 NEW YORK-CONTINUED $ 1,300,000 Guilderland, NY IDA, (Series 1993A) Weekly VRDNs (Northeastern Industrial Park, Inc.)/(Fleet Bank N.A. LOC) $ 1,300,000 3,740,000 Herkimer County, NY IDA, 1994 IDRB Weekly VRDNs (Granny's Kitchen)/(Bank of New York, New York LOC) 3,740,000 5,000,000 Levittown Union Free School District, NY, 3.80% TANs, 6/23/ 1999 5,003,062 3,850,000 Liverpool Central School District, NY, 4.00% RANs, 8/3/1999 3,860,904 6,985,000 Livonia, NY Central School District, 3.75% BANs, 3/30/1999 6,988,023 1,745,000 Madison County, NY IDA, (Series 1989A) Weekly VRDNs (Madison, NY Upstate Metals)/(Fleet Bank N.A. LOC) 1,745,000 4,400,000 Madison County, NY IDA, (Series A) Weekly VRDNs (Owl Wire and Cable)/ (KeyBank, N.A. LOC) 4,400,000 7,000,000 Madrid-Waddington, NY Central School District, 3.40% BANs, 10/29/1999 7,004,651 12,393,873 Marine Midland, NY, Premium Tax-Exempt Bond & Loan Trust Weekly VRDNs (Marine Midland New York Trust)/(Marine Midland Bank N.A., Buffalo, NY LOC) 12,393,873 6,000,000 Mayfield, NY Central School District, 3.45% BANs, 10/15/1999 6,002,746 34,395,000 Metropolitan Transportation Authority, New York, MERLOTs (Series 1997 C-2) Weekly VRDNs (Corestates Bank N.A., Philadelphia, PA LIQ)/(FGIC LOC) 34,395,000 4,265,000 Metropolitan Transportation Authority, New York, Trust Receipts (Series 1997 FR/RI-9) Weekly VRDNs (FGIC INS)/(Bank of New York, New York LIQ) 4,265,000 2,170,000 Miller Place, NY Union Free School District, 3.80% TANs, 6/ 30/1999 2,171,793 3,300,000 Monroe County, NY Airport Authority, (PT-98) Weekly VRDNs (Greater Rochester International Airport)/(MBIA Insurance Corporation INS)/(Merrill Lynch Capital Services, Inc. LIQ) 3,300,000 12,000,000 New Paltz, NY Central School District, 3.95% BANs, 6/15/1999 12,010,699 4,900,000 New York City Housing Development Corp., Municipal Securities Trust Receipts (Series 1996-CMC1A) Weekly VRDNs (Chase Manhattan Corp. LIQ) 4,900,000 4,900,000 New York City Housing Development Corp., Municipal Securities Trust Receipts (Series 1996-CMC1B) Weekly VRDNs (Chase Manhattan Corp. LIQ) 4,900,000 13,090,000 2 New York City Municipal Water Finance Authority, Floater Certificates (Series 1998-5), 3.30%, 6/15/2005 TOBs (Morgan Stanley, Dean Witter Municipal Funding, Inc. LIQ)/(United States Treasury PRF), Mandatory Tender 12/24/1998 13,090,000 83,334 New York City, NY IDA Weekly VRDNs (David Rosen Bakers Supply)/(Ford Motor Credit Corp. LIQ)/(Chase Manhattan Bank N.A., New York LOC) 83,334 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 NEW YORK-CONTINUED $ 7,075,000 New York City, NY IDA, CDC 1997H - Class A Certificates Weekly VRDNs (Japan Airlines Co.)/(FSA INS)/(CDC Municipal Products, Inc. LIQ) $ 7,075,000 8,570,000 New York City, NY IDA, CDC Municipal Products (Series 1998D) Weekly VRDNs (Japan Airlines Co.)/(FSA INS)/(CDC Municipal Products, Inc. LIQ) 8,570,000 3,500,000 New York City, NY IDA, CDC Municipal Products, Inc. (Series 1996H) Weekly VRDNs (Japan Airlines Co.)/(FSA INS)/(CDC Municipal Products, Inc. LIQ) 3,500,000 9,010,000 New York City, NY IDA, Class A Certificates (Series CDC- 1997E) Weekly VRDNs (Japan Airlines Co.)/(FSA INS)/(CDC Municipal Products, Inc. LIQ) 9,010,000 16,595,000 New York City, NY Transitional Finance Authority, PT-1047 Weekly VRDNs (Merrill Lynch Capital Services, Inc. LIQ) 16,595,000 17,300,000 New York City, NY, (PA-156) Weekly VRDNs (Merrill Lynch Capital Services, Inc. LIQ)/(Merrill Lynch Capital Services, Inc. LOC) 17,300,000 11,445,000 New York City, NY, UT GO (Series A), 4.25% Bonds, 8/1/1999 11,490,531 6,000,000 New York City, NY, UT GO (Series G), 3.90% Bonds, 8/1/1999 6,004,344 5,475,000 New York State Dormitory Authority, PA-60 (Series 1993) Weekly VRDNs (Rochester General Hospital)/(FHA INS)/(Merrill Lynch Capital Services, Inc. LIQ) 5,475,000 6,245,000 2 New York State Dormitory Authority, PT-128 (Series 1997), 3.90% TOBs (Rosalind & Joseph Gurwin Jewish Geriatric Center of Long Island, Inc.)/(AMBAC INS)/(Credit Suisse First Boston LIQ), Optional Tender 8/5/1999 6,245,000 5,980,000 New York State Dormitory Authority, PT-130 (Series 1997) Weekly VRDNs (United Health Services Hospitals, Inc.)/(AMBAC INS)/(Credit Suisse First Boston LIQ) 5,980,000 5,445,000 New York State Energy Research & Development Authority, (PA- 144) Weekly VRDNs (Long Island Lighting Co.)/(Merrill Lynch Capital Services, Inc. LIQ)/(Merrill Lynch Capital Services, Inc. LOC) 5,445,000 10,000,000 New York State Energy Research & Development Authority, (Series 1985A), 3.58% TOBs (Long Island Lighting Co.)/ (Deutsche Bank, AG LOC), Optional Tender 3/1/1999 10,000,000 3,000,000 New York State Energy Research & Development Authority, (Series 1993A) Weekly VRDNs (Long Island Lighting Co.)/ (Toronto-Dominion Bank LOC) 3,000,000 25,970,000 2 New York State Energy Research & Development Authority, PT- 219, 3.75% TOBs (Consolidated Edison Co.)/(AMBAC INS)/ (Bayerische Vereinsbank AG, Munich LIQ), Mandatory Tender 4/ 15/1999 25,970,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 NEW YORK-CONTINUED $ 12,200,000 New York State Environmental Facilities Corp., Trust Receipts (Series 1997 FR/RI-4) Weekly VRDNs (New York City Municipal Water Finance Authority)/(Bank of New York, New York LIQ) $ 12,200,000 2,500,000 New York State HFA, Health Facilities Revenue Bonds (PA-143) Weekly VRDNs (New York City, NY)/(Merrill Lynch Capital Services, Inc. LOC) 2,500,000 4,290,000 New York State Job Development Authority, Weekly VRDNs (New York State GTD)/(Bayerische Landesbank Girozentrale and Morgan Guaranty Trust Co., New York LOCs) 4,290,000 2,575,000 New York State Job Development Authority, (Series C-1) 3.60%, 3/01/2000 Monthly VRDNs (New York State GTD)/ (Bayerische Landesbank Girozentrale and Morgan Guaranty Trust Co., New York LOCs) 2,575,000 730,000 New York State Job Development Authority, (Series D-1) 3.50%, 3/01/1999 Monthly VRDNs (New York State GTD)/ (Bayerische Landesbank Girozentrale and Morgan Guaranty Trust Co., New York LOCs) 730,000 3,215,000 New York State Job Development Authority, (Series E-1) 3.50%, 3/01/1999 Monthly VRDNs (New York State GTD)/ (Bayerische Landesbank Girozentrale and Morgan Guaranty Trust Co., New York LOCs) 3,215,000 4,400,000 New York State Medical Care Facilities Finance Agency, Hospital & Nursing Home Mortgage Revenue Bonds (1994 Series C) (PA-89) Weekly VRDNs (FHA INS)/(Merrill Lynch Capital Services, Inc. LIQ) 4,400,000 3,160,000 New York State Medical Care Facilities Finance Agency, Hospital Insured Mortgage Revenue Bonds (PT-154) Weekly VRDNs (FHA INS)/(Banco Santander SA LIQ) 3,160,000 3,700,000 New York State Mortgage Agency, (Series PA-29) Weekly VRDNs (Merrill Lynch Capital Services, Inc. LIQ) 3,700,000 3,220,000 New York State Mortgage Agency, Homeowner Mortgage Revenue Bonds (PA-87) Weekly VRDNs (Merrill Lynch Capital Services, Inc. LIQ) 3,220,000 4,085,000 New York State Mortgage Agency, Homeowner Mortgage Revenue Bonds (Series PT-15B) Weekly VRDNs (Commerzbank AG, Frankfurt LIQ) 4,085,000 8,645,000 New York State Mortgage Agency, PA-406 Weekly VRDNs (Merrill Lynch Capital Services, Inc. LIQ) 8,645,000 5,000,000 2 New York State Mortgage Agency, PT-164, 3.675% TOBs (Banque Nationale de Paris LIQ), Optional Tender 3/18/1999 5,000,000 6,500,000 New York State Thruway Authority, (PA-172) Weekly VRDNs (Merrill Lynch Capital Services, Inc. LIQ)/(Merrill Lynch Capital Services, Inc. LOC) 6,500,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 NEW YORK-CONTINUED $ 18,000,000 2 New York State Thruway Authority, Trust Receipts (Series 1998 FR/RI-A61), 3.45% TOBs (FGIC INS)/(Bank of New York, New York LIQ), Optional Tender 2/1/1999 $ 18,000,000 8,400,000 New York State Urban Development Corp., Municipal SecuritiesTrust Receipts (Series 1996-CMC6) Weekly VRDNs (Chase Manhattan Corp. LIQ) 8,400,000 4,100,000 Niagara County, NY IDA, Solid Waste Disposal Facility Revenue Bonds (Series 1994C) Weekly VRDNs (American Ref-Fuel Co.)/(Wachovia Bank of NC, N.A., Winston-Salem LOC) 4,100,000 190,000 Onondaga County, NY IDA Weekly VRDNs (Beverage Corp.)/ (Marine Midland Bank N.A., Buffalo, NY LOC) 190,000 1,200,000 Onondaga County, NY IDA, (Series 1997) Weekly VRDNs (General Super Plating Co., Inc.)/(KeyBank, N.A. LOC) 1,200,000 1,725,000 Onondaga County, NY Weekly VRDNs (Grainger (W.W.), Inc.) 1,725,000 1,300,000 Ontario, NY IDA Weekly VRDNs (Hillcrest Enterprises/Buckeye Corrugated)/(National City Bank, Ohio LOC) 1,300,000 5,700,000 Oswego County, NY IDA Weekly VRDNs (Copperweld Corp.)/ (Credit Lyonnais, Paris LOC) 5,700,000 9,900,000 Perry Central School District, NY, 3.80% BANs, 6/15/1999 9,907,663 15,000,000 Port Authority of New York and New Jersey Weekly VRDNs 15,000,000 15,000,000 Port Authority of New York and New Jersey Weekly VRDNs 15,000,000 3,000,000 Portville, NY Central School District, 3.50% BANs, 10/20/1999 3,002,785 4,500,000 Riverhead, NY IDA, IDRB (Series 1998) Weekly VRDNs (Altaire Pharmaceuticals, Inc.)/(Mellon Bank NA, Pittsburgh LOC) 4,500,000 1,000,000 Rotterdam, NY IDA, (Series 1993A) Weekly VRDNs (Rotterdam Industrial Park)/(Fleet Bank N.A. LOC) 1,000,000 151,931 Schenectady, NY IDA Weekly VRDNs (McClellan Street Associates)/(Ford Motor Credit Corp. LIQ)/(Chase Manhattan Bank N.A., New York LOC) 151,931 1,485,000 Schenectady, NY IDA, IDRB (Series 1995A) Weekly VRDNs (Fortitech Holding Corporation Project)/(Fleet Bank N.A. LOC) 1,485,000 7,510,000 Sherburne-Earlville Central School District, NY, 3.75% BANs, 3/18/1999 7,512,988 1,332,500 Solvay, NY, (Series A), 3.40% BANs, 10/14/1999 1,333,111 3,997,500 Solvay, NY, (Series B), 3.45% BANs, 10/14/1999 3,999,334 2,880,000 Southeast, NY IDA, IDRB (Series 1995) Weekly VRDNs (Dairy Conveyor Corp. Project)/(Chase Manhattan Bank N.A., New York LOC) 2,880,000 3,540,000 Southeast, NY IDA, Variable Rate IDRB 1996 Weekly VRDNs (The Rawplug Company, Inc.)/(Bank of New York, New York LOC) 3,540,000 1,200,000 Suffolk County, NY IDA Weekly VRDNs (C & J Realty Corp.)/ (Ford Motor Credit Corp. LIQ)/(Chase Manhattan Bank N.A., New York LOC) 1,200,000 800,000 Suffolk County, NY IDA Weekly VRDNs (YM-YWHA of Suffolk)/ (European American Bank, New York LOC) 800,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 NEW YORK-CONTINUED $ 6,665,000 Suffolk County, NY IDA, (Series 1997B) Weekly VRDNs (Maryhaven Center of Hope)/(KeyBank, N.A. LOC) $ 6,665,000 5,000,000 Suffolk County, NY IDA, (Series 1998A) Weekly VRDNs (Episcopal Health Services, Inc. Civic Facility)/(Paribas, Paris LOC) 5,000,000 1,800,000 Suffolk County, NY IDA, 5.525% TOBs (Grainger (W.W.), Inc.), Optional Tender 12/1/1998 1,800,000 6,300,000 Triborough Bridge & Tunnel Authority, NY, Trust Receipts (Series 1998 FR/RI-A1) Weekly VRDNs (Bayerische Hypotheken- Und Wechsel-Bank Ag LIQ) 6,300,000 2,400,000 United Nations, NY Development Corp., (PA-155) Weekly VRDNs (Merrill Lynch Capital Services, Inc. LIQ)/(Merrill Lynch Capital Services, Inc. LOC) 2,400,000 2,000,000 VRDC/IVRC Trust, (Series 1993G) Weekly VRDNs (St. Lukes Roosevelt Hospital Center)/(FHA INS)/(Hong Kong & Shanghai Banking Corp. LIQ) 2,000,000 7,500,000 Walden Village, NY IDA, IDRB (Series 1994) Weekly VRDNs (Spence Engineering Co.)/(First Union National Bank, Charlotte, N.C. LOC) 7,500,000 4,470,000 Warren & Washington Counties, NY IDA Weekly VRDNs (Sandy Hill Corp.)/ (First Union National Bank, Charlotte, N.C. LOC) 4,470,000 Total 548,061,660 PUERTO RICO-0.7% 4,001,821 Commonwealth of Puerto Rico Municipal Revenues Collection Center, 1997A LeaseTOPS Trust Weekly VRDNs (ABN AMRO Bank N.V., Amsterdam LIQ)/(State Street Bank and Trust Co. LOC) 4,001,821 Total Investments (at amortized cost) 3 $ 552,063,482
Securities that are subject to Alternative Minimum Tax represent 32.5% of the portfolio as calculated based upon total portfolio market value. 1 The Fund may only invest in securities rated in one of the two highest short-term rating categories by nationally recognized statistical rating organizations ("NRSROs") or unrated securities of comparable quality. 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, MIG-1 or MIG-2 by Moody's Investors Service, Inc., or F-1+, F-1, or F-2 by Fitch IBCA, Inc. are all considered rated in one of the two highest short-term rating categories. Securities rated in the highest short-term rating category (and unrated securities of comparable quality) are identified as First Tier securities. Securities rated in the second highest short-term rating category (and unrated securities of comparable quality) are identfied as Second Tier securities. The Fund follows applicable regulations in determining whether a security is rated and whether a security rated by multiple NRSROs in different rating categories should be identified as a First or Second Tier security. At October 31, 1998, the portfolio securities were rated as follows: Tier Rating Based on Total Market Value (Unaudited) FIRST TIER SECOND TIER 93.15% 6.85% 2 Denotes a restricted security which is subject to restrictions on resale under Federal Securities laws. At October 31, 1998, these securities amounted to $68,305,000 which represents 12.3% of net assets. 3 Also represents cost for federal tax purposes. Note: The categories of investments are shown as a percentage of net assets ($556,968,156) at October 31, 1998. The following acronyms are used throughout this portfolio: AMBAC -American Municipal Bond Assurance Corporation BANs -Bond Anticipation Notes FGIC -Financial Guaranty Insurance Company FHA -Federal Housing Administration FSA -Financial Security Assurance GO -General Obligation GTD -Guaranty HFA -Housing Finance Authority IDA -Industrial Development Authority IDRB -Industrial Development Revenue Bond INS -Insured LIQ -Liquidity Agreement LLC -Limited Liability Corporation LOCs -Letter(s) of Credit LOC -Letter of Credit MBIA -Municipal Bond Investors Assurance MERLOTS -Municipal Exempt Receipts - Liquidity Optional Tender Series PRF -Prerefunded RANs -Revenue Anticipation Notes SA -Support Agreement TANs -Tax Anticipation Notes TOBs -Tender Option Bonds UT -Unlimited Tax VRDNs -Variable Rate Demand Notes See Notes which are an integral part of the Financial Statements STATEMENT OF ASSETS AND LIABILITIES October 31, 1998
ASSETS: Total investments in securities, at amortized cost and value $ 552,063,482 Cash 112,995 Income receivable 4,777,943 Receivable for shares sold 1,082,111 Total assets 558,036,531 LIABILITIES: Payable for shares redeemed $ 10,756 Income distribution payable 940,915 Accrued expenses 116,704 Total liabilities 1,068,375 Net Assets for 556,968,156 shares outstanding $ 556,968,156 NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE: INSTITUTIONAL SERVICE SHARES: $513,011,465 / 513,011,465 shares outstanding $1.00 CASH II SHARES: $43,956,691 / 43,956,691 shares outstanding $1.00
See Notes which are an integral part of the Financial Statements STATEMENT OF OPERATIONS Year Ended October 31, 1998
INVESTMENT INCOME: Interest $ 20,643,421 EXPENSES: Investment advisory fee $ 2,250,094 Administrative personnel and services fee 424,181 Custodian fees 23,218 Transfer and dividend disbursing agent fees and expenses 126,021 Directors'/Trustees' fees 4,680 Auditing fees 12,500 Legal fees 17,114 Portfolio accounting fees 111,614 Distribution services fee-Institutional Service Shares 1,331,251 Distribution services fee-Cash II Shares 75,058 Shareholder services fee-Institutional Service Shares 1,331,251 Shareholder services fee-Cash II Shares 75,058 Share registration costs 45,514 Printing and postage 31,991 Insurance premiums 37,315 Miscellaneous 3,266 Total expenses 5,900,126 WAIVERS: Waiver of investment advisory fee $ (500,559) Waiver of distribution services fee-Institutional Service Shares (1,331,251) Waiver of distribution services fee-Cash II Shares (75,058) Waiver of shareholder services fee-Institutional Service Shares (875,361) Total waivers (2,782,229) Net expenses 3,117,897 Net investment income $ 17,525,524
See Notes which are an integral part of the Financial Statements STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED OCTOBER 31 1998 1997 INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income $ 17,525,524 $ 14,299,081 DISTRIBUTIONS TO SHAREHOLDERS: Distributions from net investment income Institutional Service Shares (16,632,253) (13,606,648) Cash II Shares (893,271) (692,433) Change in net assets resulting from distributions to shareholders (17,525,524) (14,299,081) SHARE TRANSACTIONS: Proceeds from sale of shares 2,229,397,824 1,611,371,202 Net asset value of shares issued to shareholders in payment of distributions declared 7,306,584 5,353,288 Cost of shares redeemed (2,125,311,852) (1,502,253,158) Change in net assets resulting from share transactions 111,392,556 114,471,332 Change in net assets 111,392,556 114,471,332 NET ASSETS: Beginning of period 445,575,600 331,104,268 End of period $ 556,968,156 $ 445,575,600
See Notes which are an integral part of the Financial Statements NOTES TO FINANCIAL STATEMENTS October 31, 1998 ORGANIZATION Federated Municipal Trust (the "Trust") is registered under the Investment Company Act of 1940, as amended (the "Act") as an open-end, management investment company. The Trust consists of 17 portfolios. The financial statements included herein are only those of New York Municipal Cash Trust (the "Fund"). The financial statements of the other portfolios are presented separately. The assets of each portfolio are segregated and a shareholder's interest is limited to the portfolio in which shares are held. The investment objective of the Fund is current income exempt from federal regular income tax, the personal income taxes imposed by the New York State and New York municipalities consistent with stability of principal. The Fund offers two classes of shares: Institutional Service Shares and Cash II shares. 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. 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. RESTRICTED SECURITIES Restricted securities are securities that may only be resold upon registration under federal securities laws or in transactions exempt from such registration. Many restricted securities may be resold in the secondary market in transactions exempt from registration. In some cases, the restricted securities may be resold without registration upon exercise of a demand feature. Such restricted securities may be determined to be liquid under criteria established by the Board of Trustees ("Trustees"). The Fund will not incur any registration costs upon such resales. Restricted securities are valued at amortized cost in accordance with Rule 2a-7 under the Investment Company Act of 1940. Additional information on each restricted security held at October 31, 1998, is as follows:
ACQUISITION ACQUISITION SECURITY DATE COST New York Municipal Water Finance Authority, (Series 1998-5) 10/08/1998 $ 13,090,000 New York State Dormitory Authority PT-128 (Series 1997) 9/3/1998 6,245,000 New York State Energy Research & Development Authority, (Series PT-219) 7/24/1998 25,970,000 New York State Thruway Authority, (Series 1998 FR/RI-A61) 9/30/1998 18,000,000 New York State Mortgage Agency PT-164 3/25/1998 5,000,000
USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts of assets, liabilities, expenses and revenues reported in the financial statements. Actual results could differ from those estimated. OTHER Investment transactions are accounted for on the trade date. SHARES OF BENEFICIAL INTEREST The Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest (without par value) for each class of shares. At October 31, 1998, capital paid-in aggregated $556,968,156. Transactions in shares were as follows:
YEAR ENDED OCTOBER 31 1998 1997 CASH II SHARES Shares sold 164,753,848 108,671,749 Shares issued to shareholders in payment of distributions declared 719,604 525,148 Shares redeemed (142,918,616) (113,365,882) Net change resulting from Cash II Share transactions 22,554,836 (4,168,985) YEAR ENDED OCTOBER 31 1998 1997 INSTITUTIONAL SERVICE SHARES: Shares sold 2,064,643,976 1,502,699,453 Shares issued to shareholders in payment of distributions declared 6,586,980 4,828,140 Shares redeemed (1,982,393,236) (1,388,887,276) Net change resulting from Institutional Service Share transactions 88,837,720 118,640,317 Net change resulting from share transactions 111,392,556 114,471,332
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES INVESTMENT ADVISORY FEE Federated Management, 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. DISTRIBUTION SERVICES FEE The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b- 1 under the Act. Under the terms of the Plan, the Fund will reimburse Federated Securities Corp. ("FSC"), the principal distributor, from the net assets of the Fund to finance activities intended to result in the sale of the Fund's Institutional Service Shares and Cash II Shares. The Plan provides that the Fund may incur distribution expenses up to 0.25% of the average daily net assets of the Institutional Service Shares and Cash II Shares, annually, to reimburse FSC. The distributor may voluntarily choose to waive any portion of its fee. The distributor can modify or terminate this voluntary waiver at any time at its sole discretion. SHAREHOLDER SERVICES FEE Under the terms of a Shareholder Services Agreement with Federated Shareholder Services ("FSS"), the Fund will pay FSS up to 0.25% of average daily net assets of the Fund shares for the period. The fee paid to FSS is used to finance certain services for shareholders and to maintain shareholder accounts. FSS may voluntarily choose to waive any portion of its fee. FSS can modify or terminate this voluntary waiver at any time at its sole discretion. TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES FServ, through its subsidiary, Federated Shareholder Services Company ("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. INTERFUND TRANSACTIONS During the period ended October 31, 1998, the Fund engaged in purchase and sale transactions with funds that have a common investment adviser (or affiliated investment advisers), common Directors/Trustees, and/or common Officers. These purchase and sale transactions were made at current market value pursuant to Rule 17a-7 under the Act amounting to $796,328,283 and $830,441,098, respectively. GENERAL Certain of the Officers and Trustees of the Trust are Officers and Directors or Trustees of the above companies. CONCENTRATION OF CREDIT RISK Since the Fund invests a substantial portion of its assets in issuers located in one state, it will be more susceptible to factors adversely affecting issuers of that state than would be a comparable tax-exempt mutual fund that invests nationally. In order to reduce the credit risk associated with such factors, at October 31, 1998, 56.0% of the securities in the portfolio of investments are backed by letters of credit or bond insurance of various financial institutions and financial guaranty assurance agencies. The percentage of investments insured by or supported (backed) by a letter of credit from any one institution or agency did not exceed 10.3% of total investments. 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 BOARD OF TRUSTEES OF FEDERATED MUNICIPAL TRUST AND SHAREHOLDERS OF NEW YORK MUNICIPAL CASH TRUST: We have audited the accompanying statement of assets and liabilities of New York Municipal Cash Trust (an investment portfolio of Federated Municipal Trust, a Massachusetts business trust), including the schedule of portfolio investments, as of October 31, 1998, the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for the periods presented. These financial statements and financial highlights are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the 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 of October 31, 1998, by correspondence with the custodian. 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 New York Municipal Cash Trust (an investment portfolio of Federated Municipal Trust) as of of October 31, 1998, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and its financial highlights for the periods presented, in conformity with generally accepted accounting principles. Arthur Andersen LLP Boston, Massachusetts December 23, 1998 [Graphic] PROSPECTUS New York Municipal Cash Trust A Portfolio of Federated Municipal Trust CASH II SHARES December 31, 1998 A Statement of Additional Information (SAI) dated December 31, 1998, is incorporated by reference into this prospectus. To obtain the SAI 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] New York Municipal Cash 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. 811-5911 Cusip 314229733 G00208-02 (12/98) [Graphic] PROSPECTUS New York Municipal Cash Trust A Portfolio of Federated Municipal Trust INSTITUTIONAL SERVICE SHARES A money market mutual fund seeking to provide current income exempt from federal regular income tax and the personal income taxes imposed by New York State and New York municipalities. 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. December 31, 1998 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? 6 How is the Fund Sold? 6 How to Purchase Shares 7 How to Redeem Shares 8 Account and Share Information 10 Who Manages the Fund? 11 Financial Information 12 Report of Independent Public Accountants 28 Risk/Return Summary WHAT IS THE FUND'S INVESTMENT OBJECTIVE? The Fund is a money market fund which seeks to maintain a stable net asset value of $1.00. The Fund's investment objective is current income exempt from federal regular income tax and the personal income taxes imposed by New York State and New York municipalities consistent with stability of principal. 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 tax-exempt securities so that the Fund's annual interest income is exempt from federal regular income tax and the personal income taxes imposed by New York State and New York municipalities. Interest from the Fund's investments may be subject to the federal alternative minimum tax for individuals and corporations. WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND? Because the Fund may invest a significant portion of its assets in securities of a single issuer, an investment in the Fund may involve additional risks compared to a fully diversified money market 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] - See Appendix C-7 Historically, the Fund has maintained a constant $1.00 net asset value per share. The bar chart shows the variability of the Fund's Institutional Service Shares total returns on a yearly basis. The Fund's Institutional Service Shares are not sold subject to a sales charge (load). The total returns displayed above are based upon net asset value. The Fund's Institutional Service Shares year-to-date total return as of the most recent calendar quarter of Septmember 30, 1998, was 2.35% Within the period shown in the Chart, the Fund's highest quarterly return was 1.41% (quarter ended December 31, 1990). Its lowest quarterly return was 0.49% (quarter ended March 31, 1994). The Fund's Institutional Service Shares Seven-Day Net Yield as of 12/31/97 was 3.57%. The following table represents the Fund's Institutional Service Shares Average Total Return through 12/31/97. CALENDAR PERIOD FUND 1 Year 3.30% 5 Years 2.95% 10 Years 3.77% Start of Performance 1 2.88% 1 The Fund's Institutional Service Shares start of performance date was November 24, 1982. Investors may call the Fund at 1-800-341-7400 to acquire the current Seven- Day Net Yield. 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? NEW YORK MUNICIPAL CASH TRUST FEES AND EXPENSES This table describes the fees and expenses that you may pay if you buy, hold and redeem shares of the Fund's Institutional Service Shares.
SHAREHOLDER FEES 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) Expenses That are Deducted From Fund Assets (as a percentage of average net assets) Management Fee 2 0.40% Distribution (12b-1) Fee 3 0.25% Shareholder Services Fee 4 0.25% Other Expenses 0.15% Total Annual Fund Operating Expenses 1.05% 1 Although not contractually obligated to do so, the adviser, distributor and shareholder service provider waived certain amounts. These are shown below along with the net expenses the Fund actually paid for the fiscal year ended October 31, 1998. Waiver of Fund Expenses 0.50% Total Actual Annual Fund Operating Expenses (after waivers) 0.55% 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 0.31% for the year ended October 31, 1998. 3 The distribution (12b-1) fee has been voluntarily waived. This voluntary waiver can be terminated at any time. There was no distribution (12b-1) fee paid by the Fund (after the voluntary waiver) for the year ended October 31, 1998. 4 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 0.09% for the year ended October 31, 1998.
EXAMPLE The following Example is intended to help you compare the cost of investing in the Fund's Institutional Service Shares with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund's Institutional Service 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 Institutional Service Shares' operating expenses are BEFORE WAIVERS as estimated above and remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be: 1 YEAR 3 YEARS 5 YEARS 10 YEARS Expenses assuming no redemption $107 $334 $579 $1,283 What are the Fund's Investment Strategies? The Fund invests in a portfolio of high-quality tax-exempt securities maturing in 13 months or less. The average maturity of the Fund's portfolio, computed on a dollar-weighted basis, will be 90 days or less. The Fund's Adviser performs a fundamental credit analysis to develop an approved list of issuers and securities that meet the Adviser's minimum credit standards. The Adviser targets an average portfolio maturity based upon its interest rate outlook and the tax-exempt securities available. The Adviser structures the portfolio by combining variable rate demand instruments and municipal notes. Depending on the supply of tax-exempt securities, the Adviser generally shortens the portfolio's maturity when it expects interest rates to rise and extends the maturity when it expects interest rates to fall. TEMPORARY DEFENSIVE INVESTMENTS During adverse market conditions the Fund may temporarily depart from its principal investment strategies by investing in securities subject to federal regular income tax and the personal income taxes imposed by New York State and New York municipalities. Temporary investments will be of comparable quality to other securities in which the Fund invests. This may cause the Fund to give up greater investment returns to maintain the safety of principal. This also may cause the Fund to receive and distribute taxable income to investors. What are the Principal Securities in Which the Fund Invests? TAX-EXEMPT SECURITIES Tax-exempt securities are fixed income securities that pay interest exempt from regular federal income taxes. States, counties, cities and other political subdivisions and authorities typically issue tax-exempt securities. Tax-exempt securities are generally differentiated by their source of repayment. FIXED INCOME SECURITIES Fixed income 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. VARIABLE RATE DEMAND INSTRUMENTS Variable rate demand instruments are tax-exempt securities that require the issuer or a third party, such as a dealer or bank, to repurchase the security for its face value upon demand. The securities also bear interest at a variable rate intended to cause the securities to trade at their face value. The Fund treats demand instruments as short-term securities, even though their stated maturity may extend beyond 13 months. MUNICIPAL NOTES Municipal notes are short-term tax-exempt securities. Many municipalities issue such notes to fund their current operations before collecting taxes or other municipal revenues. Municipalities may also issue notes to fund capital projects prior to issuing long-term bonds. The issuers typically repay the notes at the end of their fiscal year, either with taxes, other revenues or proceeds from newly issued notes or bonds. INVESTMENT 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 rating services or be of comparable quality to securities having such ratings. CREDIT ENHANCEMENT Credit enhancement consists of an arrangement in which a company agrees to pay amounts due on a fixed income security if the issuer defaults. In some cases the company providing credit enhancement makes all payments directly to the security holders and receives reimbursement from the issuer. Normally, the credit enhancer has greater financial resources and liquidity than the issuer. For this reason, the Adviser usually evaluates the credit risk of a fixed income security based solely upon its credit enhancement. What are the Specific Risks of Investing in the Fund? Although there are many factors which may affect an investment in the Fund, the principal risks of investing in a tax-exempt money market fund are described below. CREDIT RISK Credit risk is the possibility that an issuer or a credit enhancer will default (fails to repay interest and principal when due). If an issuer or credit enhancer defaults, the Fund will lose money. Money market funds try to minimize this risk by purchasing higher quality securities. Many fixed income securities receive credit ratings from companies such as Standard & Poor's and Moody's Investor Services. Fixed income securities receive different credit ratings depending on the rating company's assessment of the likelihood of default by the issuer. The lower the credit rating, the greater the credit risk. If the security is unrated, greater reliance is placed on the Adviser's credit assessment. 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. SECTOR RISK Most of the Fund's securities will be invested in issuers located in New York. In addition, a substantial part of the Fund's portfolio may be comprised of tax-exempt securities issued or credit enhanced by companies in similar businesses or with other similar characteristics. As a result, the Fund will be more susceptible to any economic, business, political, or other developments which generally affect these issuers. 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 determined net asset value (NAV). The Fund does not charge a 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 offers two share classes: Institutional Service Shares and Cash II Shares each representing interests in a single portfolio of securities. This prospectus relates only to Institutional Service Shares. Each share class has different expenses, which affect their performance. Contact your investment professional or call 1-800-341-7400 for more information concerning the other class. The Fund's distributor markets the Shares described in this prospectus to institutions acting in an agency or fiduciary capacity or to individuals directly or through investment professionals. The Fund may not be a suitable investment for retirement plans or for non-New York taxpayers because it invests in New York tax-exempt securities. When the Distributor receives marketing fees, it may pay some or all of them to 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). RULE 12B-1 PLAN The Fund has adopted a Rule 12b-1 Plan, which allows it to pay marketing fees to the Distributor and investment professionals for the sale, distribution and customer servicing of the Fund's Institutional Service Shares. Because these Shares pay marketing fees on an ongoing basis, your investment cost may be higher over time than other shares with different sales charges and marketing fees. 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 1:00 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 on the day 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 SYSTEMATIC INVESTMENT PROGRAM Once you have opened an account, you may automatically purchase additional Shares on a regular basis by completing the Systematic Investment Program (SIP) section of the New Account Form or by contacting the Fund or your investment professional. The minimum investment amount for SIPs is $50. BY AUTOMATED CLEARINGHOUSE (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 12:00 noon (Eastern time), your redemption will be wired to you the same day. You will not receive that day's dividend. If you call after 12:00 noon (Eastern time), your redemption will be wired to you the following business day. You will receive that day's dividend. Under limited circumstances, arrangements may be made with the Distributor for same-day payment of redemption proceeds, without that day's dividend, for redemption requests received before 2:00 p.m. (Eastern time). BY MAIL You may redeem Shares by mailing a written request to the Fund. Your redemption request will be procesed 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 30 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 securites 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. SYSTEMATIC WITHDRAWAL PROGRAM You may automatically redeem Shares in a minimum amount of $100 on a regular basis. Complete the appropriate section of the New Account Form or an Account Service Options Form or contact your investment professional or the Fund. Your account value must meet the minimum initial investment amount at the time the program is established. This program may reduce, and eventually deplete, your account. Payments should not be considered yield or income. CHECKWRITING You may request a checking account to redeem your Fund Shares. Your account will continue to receive the daily dividend declared on the Shares to be redeemed until the check is presented for payment. Checks may be made payable only to third-parties and may not be used to redeem Shares or to close your account. DEBIT CARD You may request a debit card account that allows you to redeem Shares. There is an annual fee for this service that the Fund will automatically deduct from your account. 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 CONFIRMATIONS AND ACCOUNT STATEMENTS You will receive confirmation of purchases and redemptions (except for systematic transactions). In addition, you will receive periodic statements reporting all account activity, including systematic transactions, 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, 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. It is anticipated that Fund distributions will be primarily dividends that are exempt from federal income tax, although a portion of the Fund's dividends may not be exempt. Dividends may be subject to state and local taxes, although the Fund's dividends will be exempt from New York state personal income tax to the extent they are derived from interest on obligations exempt from New York personal income taxes. Capital gains and non-exempt dividends are taxable whether paid in cash or reinvested in the Fund. Redemptions are taxable sales. Please consult your tax preparer 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 Management. 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 and/or provide administrative services to more than 300 mutual funds and private accounts, which totaled over $120 billion in assets as of December 31, 1997. Federated was established in 1955 and is one of the largest mutual fund investment managers in the United States with more than 2,000 employees. Over 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 affect 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-Institutional Service Shares (For a share outstanding throughout each period) Reference is made to the Report of Independent Public Accountants on page 28.
YEAR ENDED OCTOBER 31 1998 1997 1996 1995 1994 NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 INCOME FROM INVESTMENT OPERATIONS: Net investment income 0.03 0.03 0.03 0.04 0.02 LESS DISTRIBUTIONS: Distributions from net investment income (0.03) (0.03) (0.03) (0.04) (0.02) NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 TOTAL RETURN 1 3.19% 3.26% 3.24% 3.56% 2.35% RATIOS TO AVERAGE NET ASSETS: Expenses 0.55% 0.53% 0.53% 0.54% 0.52% Net investment income 3.12% 3.21% 3.18% 3.49% 2.31% Expense waiver/reimbursement 2 50% 0.52% 0.54% 0.53% 0.13% SUPPLEMENTAL DATA: Net assets, end of period (000 omitted) $513,011 $424,174 $305,533 $276,149 $236,580
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 October 31, 1998
PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-99.1% 1 NEW YORK-98.4% $ 4,760,000 Albany City School District, NY, 4.00% TANs, 11/30/1998 $ 4,761,463 9,195,000 Albany County Airport Authority, NY, Trust Receipts (Series 1997 FR/RI-7) Weekly VRDNs (FSA INS)/(Bank of New York, New York LIQ) 9,195,000 5,000,000 Allegany-Limestone, NY Central School District, 4.05% BANs, 12/30/1998 5,001,010 9,000,000 Broadalbin-Perth, NY Central School District, 3.80% BANs, 2/24/1999 9,004,083 3,500,000 Cayuga County, NY IDA, (Series 1998) Weekly VRDNs (NFR Northeast, Inc.)/(KeyBank, N.A. LOC) 3,500,000 950,000 Chautauqua County, NY IDA Weekly VRDNs (Cliffstar Corp.)/ (KeyBank, N.A. LOC) 950,000 3,900,000 Chautauqua County, NY IDA Weekly VRDNs (Mogen David Wine Corp.)/(Wells Fargo Bank, N.A. LOC) 3,900,000 900,000 Colonie, NY IDA Weekly VRDNs (Herbert S. Ellis)/(Marine Midland Bank N.A., Buffalo, NY LOC) 900,000 655,000 Colonie, NY IDA, (Series 1988) Weekly VRDNs (Specialty Retailers, Inc.)/(Marine Midland Bank N.A., Buffalo, NY LOC) 655,000 3,100,000 Colonie, NY IDA, 4.00% TOBs (800 North Pearl Associates)/ (Fleet Bank N.A. LOC), Optional Tender 12/1/1998 3,100,000 2,500,000 Columbia County, NY IDA, (Series 1998A) Weekly VRDNs (Empire Homes, LLC)/(KeyBank, N.A. LOC) 2,500,000 4,720,000 Corinth, NY IDA, Solid Waste Disposal Revenue Bonds (Series A), 3.80% TOBs (International Paper Co.), Optional Tender 3/1/1999 4,720,000 1,200,000 Dutchess County, NY IDA, Series 1995 Weekly VRDNs (Laerdal Medical Corp.)/(Bank of New York, New York LOC) 1,200,000 2,140,000 Erie County, NY IDA, (Series A) Weekly VRDNs (Gemcor)/ (Marine Midland Bank N.A., Buffalo, NY LOC) 2,140,000 5,000,000 Erie County, NY IDA, IDRB (Series 1994) Weekly VRDNs (Servotronics, Inc. Project)/(Fleet Bank N.A. LOC) 5,000,000 1,800,000 Franklin County, NY IDA, (Series 1991A) Weekly VRDNs (KES Chateaugay)/(Bank of Tokyo-Mitsubishi Ltd. LOC) 1,800,000 725,000 Fulton County, NY IDA, 4.05% TOBs (Gates Mills Inc.)/(Fleet Bank N.A. LOC), Optional Tender 12/1/1998 725,000 3,510,000 Fulton County, NY, 4.00% BANs, 4/30/1999 3,513,333 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 NEW YORK-CONTINUED $ 1,300,000 Guilderland, NY IDA, (Series 1993A) Weekly VRDNs (Northeastern Industrial Park, Inc.)/(Fleet Bank N.A. LOC) $ 1,300,000 3,740,000 Herkimer County, NY IDA, 1994 IDRB Weekly VRDNs (Granny's Kitchen)/(Bank of New York, New York LOC) 3,740,000 5,000,000 Levittown Union Free School District, NY, 3.80% TANs, 6/23/ 1999 5,003,062 3,850,000 Liverpool Central School District, NY, 4.00% RANs, 8/3/1999 3,860,904 6,985,000 Livonia, NY Central School District, 3.75% BANs, 3/30/1999 6,988,023 1,745,000 Madison County, NY IDA, (Series 1989A) Weekly VRDNs (Madison, NY Upstate Metals)/(Fleet Bank N.A. LOC) 1,745,000 4,400,000 Madison County, NY IDA, (Series A) Weekly VRDNs (Owl Wire and Cable)/ (KeyBank, N.A. LOC) 4,400,000 7,000,000 Madrid-Waddington, NY Central School District, 3.40% BANs, 10/29/1999 7,004,651 12,393,873 Marine Midland, NY, Premium Tax-Exempt Bond & Loan Trust Weekly VRDNs (Marine Midland New York Trust)/(Marine Midland Bank N.A., Buffalo, NY LOC) 12,393,873 6,000,000 Mayfield, NY Central School District, 3.45% BANs, 10/15/1999 6,002,746 34,395,000 Metropolitan Transportation Authority, New York, MERLOTs (Series 1997 C-2) Weekly VRDNs (Corestates Bank N.A., Philadelphia, PA LIQ)/(FGIC LOC) 34,395,000 4,265,000 Metropolitan Transportation Authority, New York, Trust Receipts (Series 1997 FR/RI-9) Weekly VRDNs (FGIC INS)/(Bank of New York, New York LIQ) 4,265,000 2,170,000 Miller Place, NY Union Free School District, 3.80% TANs, 6/ 30/1999 2,171,793 3,300,000 Monroe County, NY Airport Authority, (PT-98) Weekly VRDNs (Greater Rochester International Airport)/(MBIA Insurance Corporation INS)/(Merrill Lynch Capital Services, Inc. LIQ) 3,300,000 12,000,000 New Paltz, NY Central School District, 3.95% BANs, 6/15/1999 12,010,699 4,900,000 New York City Housing Development Corp., Municipal Securities Trust Receipts (Series 1996-CMC1A) Weekly VRDNs (Chase Manhattan Corp. LIQ) 4,900,000 4,900,000 New York City Housing Development Corp., Municipal Securities Trust Receipts (Series 1996-CMC1B) Weekly VRDNs (Chase Manhattan Corp. LIQ) 4,900,000 13,090,000 2 New York City Municipal Water Finance Authority, Floater Certificates (Series 1998-5), 3.30%, 6/15/2005 TOBs (Morgan Stanley, Dean Witter Municipal Funding, Inc. LIQ)/(United States Treasury PRF), Mandatory Tender 12/24/1998 13,090,000 83,334 New York City, NY IDA Weekly VRDNs (David Rosen Bakers Supply)/(Ford Motor Credit Corp. LIQ)/(Chase Manhattan Bank N.A., New York LOC) 83,334 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 NEW YORK-CONTINUED $ 7,075,000 New York City, NY IDA, CDC 1997H - Class A Certificates Weekly VRDNs (Japan Airlines Co.)/(FSA INS)/(CDC Municipal Products, Inc. LIQ) $ 7,075,000 8,570,000 New York City, NY IDA, CDC Municipal Products (Series 1998D) Weekly VRDNs (Japan Airlines Co.)/(FSA INS)/(CDC Municipal Products, Inc. LIQ) 8,570,000 3,500,000 New York City, NY IDA, CDC Municipal Products, Inc. (Series 1996H) Weekly VRDNs (Japan Airlines Co.)/(FSA INS)/(CDC Municipal Products, Inc. LIQ) 3,500,000 9,010,000 New York City, NY IDA, Class A Certificates (Series CDC- 1997E) Weekly VRDNs (Japan Airlines Co.)/(FSA INS)/(CDC Municipal Products, Inc. LIQ) 9,010,000 16,595,000 New York City, NY Transitional Finance Authority, PT-1047 Weekly VRDNs (Merrill Lynch Capital Services, Inc. LIQ) 16,595,000 17,300,000 New York City, NY, (PA-156) Weekly VRDNs (Merrill Lynch Capital Services, Inc. LIQ)/(Merrill Lynch Capital Services, Inc. LOC) 17,300,000 11,445,000 New York City, NY, UT GO (Series A), 4.25% Bonds, 8/1/1999 11,490,531 6,000,000 New York City, NY, UT GO (Series G), 3.90% Bonds, 8/1/1999 6,004,344 5,475,000 New York State Dormitory Authority, PA-60 (Series 1993) Weekly VRDNs (Rochester General Hospital)/(FHA INS)/(Merrill Lynch Capital Services, Inc. LIQ) 5,475,000 6,245,000 2 New York State Dormitory Authority, PT-128 (Series 1997), 3.90% TOBs (Rosalind & Joseph Gurwin Jewish Geriatric Center of Long Island, Inc.)/(AMBAC INS)/(Credit Suisse First Boston LIQ), Optional Tender 8/5/1999 6,245,000 5,980,000 New York State Dormitory Authority, PT-130 (Series 1997) Weekly VRDNs (United Health Services Hospitals, Inc.)/(AMBAC INS)/(Credit Suisse First Boston LIQ) 5,980,000 5,445,000 New York State Energy Research & Development Authority, (PA- 144) Weekly VRDNs (Long Island Lighting Co.)/(Merrill Lynch Capital Services, Inc. LIQ)/(Merrill Lynch Capital Services, Inc. LOC) 5,445,000 10,000,000 New York State Energy Research & Development Authority, (Series 1985A), 3.58% TOBs (Long Island Lighting Co.)/ (Deutsche Bank, AG LOC), Optional Tender 3/1/1999 10,000,000 3,000,000 New York State Energy Research & Development Authority, (Series 1993A) Weekly VRDNs (Long Island Lighting Co.)/ (Toronto-Dominion Bank LOC) 3,000,000 25,970,000 2 New York State Energy Research & Development Authority, PT- 219, 3.75% TOBs (Consolidated Edison Co.)/(AMBAC INS)/ (Bayerische Vereinsbank AG, Munich LIQ), Mandatory Tender 4/ 15/1999 25,970,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 NEW YORK-CONTINUED $ 12,200,000 New York State Environmental Facilities Corp., Trust Receipts (Series 1997 FR/RI-4) Weekly VRDNs (New York City Municipal Water Finance Authority)/(Bank of New York, New York LIQ) $ 12,200,000 2,500,000 New York State HFA, Health Facilities Revenue Bonds (PA-143) Weekly VRDNs (New York City, NY)/(Merrill Lynch Capital Services, Inc. LOC) 2,500,000 4,290,000 New York State Job Development Authority, Weekly VRDNs (New York State GTD)/(Bayerische Landesbank Girozentrale and Morgan Guaranty Trust Co., New York LOCs) 4,290,000 2,575,000 New York State Job Development Authority, (Series C-1) 3.60%, 3/01/2000 Monthly VRDNs (New York State GTD)/ (Bayerische Landesbank Girozentrale and Morgan Guaranty Trust Co., New York LOCs) 2,575,000 730,000 New York State Job Development Authority, (Series D-1) 3.50%, 3/01/1999 Monthly VRDNs (New York State GTD)/ (Bayerische Landesbank Girozentrale and Morgan Guaranty Trust Co., New York LOCs) 730,000 3,215,000 New York State Job Development Authority, (Series E-1) 3.50%, 3/01/1999 Monthly VRDNs (New York State GTD)/ (Bayerische Landesbank Girozentrale and Morgan Guaranty Trust Co., New York LOCs) 3,215,000 4,400,000 New York State Medical Care Facilities Finance Agency, Hospital & Nursing Home Mortgage Revenue Bonds (1994 Series C) (PA-89) Weekly VRDNs (FHA INS)/(Merrill Lynch Capital Services, Inc. LIQ) 4,400,000 3,160,000 New York State Medical Care Facilities Finance Agency, Hospital Insured Mortgage Revenue Bonds (PT-154) Weekly VRDNs (FHA INS)/(Banco Santander SA LIQ) 3,160,000 3,700,000 New York State Mortgage Agency, (Series PA-29) Weekly VRDNs (Merrill Lynch Capital Services, Inc. LIQ) 3,700,000 3,220,000 New York State Mortgage Agency, Homeowner Mortgage Revenue Bonds (PA-87) Weekly VRDNs (Merrill Lynch Capital Services, Inc. LIQ) 3,220,000 4,085,000 New York State Mortgage Agency, Homeowner Mortgage Revenue Bonds (Series PT-15B) Weekly VRDNs (Commerzbank AG, Frankfurt LIQ) 4,085,000 8,645,000 New York State Mortgage Agency, PA-406 Weekly VRDNs (Merrill Lynch Capital Services, Inc. LIQ) 8,645,000 5,000,000 2 New York State Mortgage Agency, PT-164, 3.675% TOBs (Banque Nationale de Paris LIQ), Optional Tender 3/18/1999 5,000,000 6,500,000 New York State Thruway Authority, (PA-172) Weekly VRDNs (Merrill Lynch Capital Services, Inc. LIQ)/(Merrill Lynch Capital Services, Inc. LOC) 6,500,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 NEW YORK-CONTINUED $ 18,000,000 2 New York State Thruway Authority, Trust Receipts (Series 1998 FR/RI-A61), 3.45% TOBs (FGIC INS)/(Bank of New York, New York LIQ), Optional Tender 2/1/1999 $ 18,000,000 8,400,000 New York State Urban Development Corp., Municipal SecuritiesTrust Receipts (Series 1996-CMC6) Weekly VRDNs (Chase Manhattan Corp. LIQ) 8,400,000 4,100,000 Niagara County, NY IDA, Solid Waste Disposal Facility Revenue Bonds (Series 1994C) Weekly VRDNs (American Ref-Fuel Co.)/(Wachovia Bank of NC, N.A., Winston-Salem LOC) 4,100,000 190,000 Onondaga County, NY IDA Weekly VRDNs (Beverage Corp.)/ (Marine Midland Bank N.A., Buffalo, NY LOC) 190,000 1,200,000 Onondaga County, NY IDA, (Series 1997) Weekly VRDNs (General Super Plating Co., Inc.)/(KeyBank, N.A. LOC) 1,200,000 1,725,000 Onondaga County, NY Weekly VRDNs (Grainger (W.W.), Inc.) 1,725,000 1,300,000 Ontario, NY IDA Weekly VRDNs (Hillcrest Enterprises/Buckeye Corrugated)/(National City Bank, Ohio LOC) 1,300,000 5,700,000 Oswego County, NY IDA Weekly VRDNs (Copperweld Corp.)/ (Credit Lyonnais, Paris LOC) 5,700,000 9,900,000 Perry Central School District, NY, 3.80% BANs, 6/15/1999 9,907,663 15,000,000 Port Authority of New York and New Jersey Weekly VRDNs 15,000,000 15,000,000 Port Authority of New York and New Jersey Weekly VRDNs 15,000,000 3,000,000 Portville, NY Central School District, 3.50% BANs, 10/20/ 1999 3,002,785 4,500,000 Riverhead, NY IDA, IDRB (Series 1998) Weekly VRDNs (Altaire Pharmaceuticals, Inc.)/(Mellon Bank NA, Pittsburgh LOC) 4,500,000 1,000,000 Rotterdam, NY IDA, (Series 1993A) Weekly VRDNs (Rotterdam Industrial Park)/(Fleet Bank N.A. LOC) 1,000,000 151,931 Schenectady, NY IDA Weekly VRDNs (McClellan Street Associates)/(Ford Motor Credit Corp. LIQ)/(Chase Manhattan Bank N.A., New York LOC) 151,931 1,485,000 Schenectady, NY IDA, IDRB (Series 1995A) Weekly VRDNs (Fortitech Holding Corporation Project)/(Fleet Bank N.A. LOC) 1,485,000 7,510,000 Sherburne-Earlville Central School District, NY, 3.75% BANs, 3/18/1999 7,512,988 1,332,500 Solvay, NY, (Series A), 3.40% BANs, 10/14/1999 1,333,111 3,997,500 Solvay, NY, (Series B), 3.45% BANs, 10/14/1999 3,999,334 2,880,000 Southeast, NY IDA, IDRB (Series 1995) Weekly VRDNs (Dairy Conveyor Corp. Project)/(Chase Manhattan Bank N.A., New York LOC) 2,880,000 3,540,000 Southeast, NY IDA, Variable Rate IDRB 1996 Weekly VRDNs (The Rawplug Company, Inc.)/(Bank of New York, New York LOC) 3,540,000 1,200,000 Suffolk County, NY IDA Weekly VRDNs (C & J Realty Corp.)/ (Ford Motor Credit Corp. LIQ)/(Chase Manhattan Bank N.A., New York LOC) 1,200,000 800,000 Suffolk County, NY IDA Weekly VRDNs (YM-YWHA of Suffolk)/ (European American Bank, New York LOC) 800,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 NEW YORK-CONTINUED $ 6,665,000 Suffolk County, NY IDA, (Series 1997B) Weekly VRDNs (Maryhaven Center of Hope)/(KeyBank, N.A. LOC) $ 6,665,000 5,000,000 Suffolk County, NY IDA, (Series 1998A) Weekly VRDNs (Episcopal Health Services, Inc. Civic Facility)/(Paribas, Paris LOC) 5,000,000 1,800,000 Suffolk County, NY IDA, 5.525% TOBs (Grainger (W.W.), Inc.), Optional Tender 12/1/1998 1,800,000 6,300,000 Triborough Bridge & Tunnel Authority, NY, Trust Receipts (Series 1998 FR/RI-A1) Weekly VRDNs (Bayerische Hypotheken- Und Wechsel-Bank Ag LIQ) 6,300,000 2,400,000 United Nations, NY Development Corp., (PA-155) Weekly VRDNs (Merrill Lynch Capital Services, Inc. LIQ)/(Merrill Lynch Capital Services, Inc. LOC) 2,400,000 2,000,000 VRDC/IVRC Trust, (Series 1993G) Weekly VRDNs (St. Lukes Roosevelt Hospital Center)/(FHA INS)/(Hong Kong & Shanghai Banking Corp. LIQ) 2,000,000 7,500,000 Walden Village, NY IDA, IDRB (Series 1994) Weekly VRDNs (Spence Engineering Co.)/(First Union National Bank, Charlotte, N.C. LOC) 7,500,000 4,470,000 Warren & Washington Counties, NY IDA Weekly VRDNs (Sandy Hill Corp.)/ (First Union National Bank, Charlotte, N.C. LOC) 4,470,000 Total 548,061,660 PUERTO RICO-0.7% 4,001,821 Commonwealth of Puerto Rico Municipal Revenues Collection Center, 1997A LeaseTOPS Trust Weekly VRDNs (ABN AMRO Bank N.V., Amsterdam LIQ)/ (State Street Bank and Trust Co. LOC) 4,001,821 Total Investments (at amortized cost) 3 $ 552,063,482
Securities that are subject to Alternative Minimum Tax represent 32.5% of the portfolio as calculated based upon total portfolio market value. 1 The Fund may only invest in securities rated in one of the two highest short-term rating categories by nationally recognized statistical rating organizations ("NRSROs") or unrated securities of comparable quality. 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, MIG-1 or MIG-2 by Moody's Investors Service, Inc., or F-1+, F-1, or F-2 by Fitch IBCA, Inc. are all considered rated in one of the two highest short-term rating categories. Securities rated in the highest short-term rating category (and unrated securities of comparable quality) are identified as First Tier securities. Securities rated in the second highest short-term rating category (and unrated securities of comparable quality) are identified as Second Tier securities. The Fund follows applicable regulations in determining whether a security is rated and whether a security rated by multiple NRSROs in different rating categories should be identified as a First or Second Tier security. At October 31, 1998, the portfolio securities were rated as follows: Tier Rating Based on Total Market Value (Unaudited) FIRST TIER SECOND TIER 93.15% 6.85% 2 Denotes a restricted security which is subject to restrictions on resale under Federal Securities laws. At October 31, 1998, these securities amounted to $68,305,000 which represents 12.3% of net assets. 3 Also represents cost for federal tax purposes. Note: The categories of investments are shown as a percentage of net assets ($556,968,156) at October 31, 1998. The following acronyms are used throughout this portfolio: AMBAC -American Municipal Bond Assurance Corporation BANs -Bond Anticipation Notes FGIC -Financial Guaranty Insurance Company FHA -Federal Housing Administration FSA -Financial Security Assurance GO -General Obligation GTD -Guaranty HFA -Housing Finance Authority IDA -Industrial Development Authority IDRB -Industrial Development Revenue Bond INS -Insured LIQ -Liquidity Agreement LLC -Limited Liability Corporation LOCs -Letter(s) of Credit LOC -Letter of Credit MBIA -Municipal Bond Investors Assurance MERLOTS -Municipal Exempt Receipts - Liquidity Optional Tender Series PRF -Prerefunded RANs -Revenue Anticipation Notes SA -Support Agreement TANs -Tax Anticipation Notes TOBs -Tender Option Bonds UT -Unlimited Tax VRDNs -Variable Rate Demand Notes See Notes which are an integral part of the Financial Statements Statement of Assets and Liabilities October 31, 1998 ASSETS: Total investments in securities, at amortized cost and value $ 552,063,482 Cash 112,995 Income receivable 4,777,943 Receivable for shares sold 1,082,111 Total assets 558,036,531 LIABILITIES: Payable for shares redeemed $ 10,756 Income distribution payable 940,915 Accrued expenses 116,704 Total liabilities 1,068,375 Net Assets for 556,968,156 shares outstanding $ 556,968,156 NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE: INSTITUTIONAL SERVICE SHARES: $513,011,465 / 513,011,465 shares outstanding $1.00 CASH II SHARES: $43,956,691 / 43,956,691 shares outstanding $1.00
See Notes which are an integral part of the Financial Statements Statement of Operations Year Ended October 31, 1998
INVESTMENT INCOME: Interest $ 20,643,421 EXPENSES: Investment advisory fee $ 2,250,094 Administrative personnel and services fee 424,181 Custodian fees 23,218 Transfer and dividend disbursing agent fees and expenses 126,021 Directors'/Trustees' fees 4,680 Auditing fees 12,500 Legal fees 17,114 Portfolio accounting fees 111,614 Distribution services fee-Institutional Service Shares 1,331,251 Distribution services fee-Cash II Shares 75,058 Shareholder services fee-Institutional Service Shares 1,331,251 Shareholder services fee-Cash II Shares 75,058 Share registration costs 45,514 Printing and postage 31,991 Insurance premiums 37,315 Miscellaneous 3,266 Total expenses 5,900,126 WAIVERS: Waiver of investment advisory fee $ (500,559) Waiver of distribution services fee-Institutional Service Shares (1,331,251) Waiver of distribution services fee-Cash II Shares (75,058) Waiver of shareholder services fee-Institutional Service Shares (875,361) Total waivers (2,782,229) Net expenses 3,117,897 Net investment income $ 17,525,524
See Notes which are an integral part of the Financial Statements Statement of Changes in Net Assets
YEAR ENDED OCTOBER 31 1998 1997 INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income $ 17,525,524 $ 14,299,081 DISTRIBUTIONS TO SHAREHOLDERS: Distributions from net investment income Institutional Service Shares (16,632,253) (13,606,648) Cash II Shares (893,271) (692,433) Change in net assets resulting from distributions to shareholders (17,525,524) (14,299,081) SHARE TRANSACTIONS: Proceeds from sale of shares 2,229,397,824 1,611,371,202 Net asset value of shares issued to shareholders in payment of distributions declared 7,306,584 5,353,288 Cost of shares redeemed (2,125,311,852) (1,502,253,158) Change in net assets resulting from share transactions 111,392,556 114,471,332 Change in net assets 111,392,556 114,471,332 NET ASSETS: Beginning of period 445,575,600 331,104,268 End of period $ 556,968,156 $ 445,575,600
See Notes which are an integral part of the Financial Statements Notes to Financial Statements October 31, 1998 ORGANIZATION Federated Municipal Trust (the "Trust") is registered under the Investment Company Act of 1940, as amended (the "Act") as an open-end, management investment company. The Trust consists of 17 portfolios. The financial statements included herein are only those of New York Municipal Cash Trust (the "Fund"). The financial statements of the other portfolios are presented separately. The assets of each portfolio are segregated and a shareholder's interest is limited to the portfolio in which shares are held. The investment objective of the Fund is current income exempt from federal regular income tax, the personal income taxes imposed by the New York State and New York municipalities consistent with stability of principal. The Fund offers two classes of shares: Institutional Service Shares and Cash II shares. 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. 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. RESTRICTED SECURITIES Restricted securities are securities that may only be resold upon registration under federal securities laws or in transactions exempt from such registration. Many restricted securities may be resold in the secondary market in transactions exempt from registration. In some cases, the restricted securities may be resold without registration upon exercise of a demand feature. Such restricted securities may be determined to be liquid under criteria established by the Board of Trustees ("Trustees"). The Fund will not incur any registration costs upon such resales. Restricted securities are valued at amortized cost in accordance with Rule 2a-7 under the Investment Company Act of 1940. Additional information on each restricted security held at October 31, 1998, is as follows:
ACQUISITION ACQUISITION SECURITY DATE COST New York Municipal Water Finance Authority, (Series 1998-5) 10/08/1998 $ 13,090,000 New York State Dormitory Authority PT-128 (Series 1997) 9/3/1998 6,245,000 New York State Energy Research & Development Authority, (Series PT-219) 7/24/1998 25,970,000 New York State Thruway Authority, (Series 1998 FR/RI-A61) 9/30/1998 18,000,000 New York State Mortgage Agency PT-164 3/25/1998 5,000,000
USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts of assets, liabilities, expenses and revenues reported in the financial statements. Actual results could differ from those estimated. OTHER Investment transactions are accounted for on the trade date. SHARES OF BENEFICIAL INTEREST The Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest (without par value) for each class of shares. At October 31, 1998, capital paid-in aggregated $556,968,156. Transactions in shares were as follows:
YEAR ENDED OCTOBER 31 1998 1997 INSTITUTIONAL SERVICE SHARES: Shares sold 2,064,643,976 1,502,699,453 Shares issued to shareholders in payment of distributions declared 6,586,980 4,828,140 Shares redeemed (1,982,393,236) (1,388,887,276) NET CHANGE RESULTING FROM INSTITUTIONAL SERVICE SHARE TRANSACTIONS 88,837,720 118,640,317 YEAR ENDED OCTOBER 31 1998 1997 CASH II SHARES Shares sold 164,753,848 108,671,749 Shares issued to shareholders in payment of distributions declared 719,604 525,148 Shares redeemed (142,918,616) (113,365,882) NET CHANGE RESULTING FROM CASH II SHARE TRANSACTIONS 22,554,836 (4,168,985) NET CHANGE RESULTING FROM SHARE TRANSACTIONS 111,392,556 114,471,332
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES INVESTMENT ADVISORY FEE Federated Management, 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. DISTRIBUTION SERVICES FEE The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the Act. Under the terms of the Plan, the Fund will reimburse Federated Securities Corp. ("FSC"), the principal distributor, from the net assets of the Fund to finance activities intended to result in the sale of the Fund's Institutional Service Shares and Cash II Shares. The Plan provides that the Fund may incur distribution expenses up to 0.25% of the average daily net assets of the Institutional Service Shares and Cash II Shares, annually, to reimburse FSC. The distributor may voluntarily choose to waive any portion of its fee. The distributor can modify or terminate this voluntary waiver at any time at its sole discretion. SHAREHOLDER SERVICES FEE Under the terms of a Shareholder Services Agreement with Federated Shareholder Services ("FSS"), the Fund will pay FSS up to 0.25% of average daily net assets of the Fund shares for the period. The fee paid to FSS is used to finance certain services for shareholders and to maintain shareholder accounts. FSS may voluntarily choose to waive any portion of its fee. FSS can modify or terminate this voluntary waiver at any time at its sole discretion. TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES FServ, through its subsidiary, Federated Shareholder Services Company ("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. INTERFUND TRANSACTIONS During the period ended October 31, 1998, the Fund engaged in purchase and sale transactions with funds that have a common investment adviser (or affiliated investment advisers), common Directors/Trustees, and/or common Officers. These purchase and sale transactions were made at current market value pursuant to Rule 17a-7 under the Act amounting to $796,328,283 and $830,441,098, respectively. GENERAL Certain of the Officers and Trustees of the Trust are Officers and Directors or Trustees of the above companies. CONCENTRATION OF CREDIT RISK Since the Fund invests a substantial portion of its assets in issuers located in one state, it will be more susceptible to factors adversely affecting issuers of that state than would be a comparable tax-exempt mutual fund that invests nationally. In order to reduce the credit risk associated with such factors, at October 31, 1998, 56.0% of the securities in the portfolio of investments are backed by letters of credit or bond insurance of various financial institutions and financial guaranty assurance agencies. The percentage of investments insured by or supported (backed) by a letter of credit from any one institution or agency did not exceed 10.3% of total investments. 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 BOARD OF TRUSTEES OF FEDERATED MUNICIPAL TRUST AND SHAREHOLDERS OF NEW YORK MUNICIPAL CASH TRUST: We have audited the accompanying statement of assets and liabilities of New York Municipal Cash Trust (an investment portfolio of Federated Municipal Trust, a Massachusetts business trust), including the schedule of portfolio investments, as of October 31, 1998, the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for the periods presented. These financial statements and financial highlights are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the 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 October 31, 1998, by correspondence with the custodian. 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 New York Municipal Cash Trust (an investment portfolio of Federated Municipal Trust) as of October 31, 1998, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and its financial highlights for the periods presented, in conformity with generally accepted accounting principles. Arthur Andersen LLP Boston, Massachusetts December 23, 1998 [Graphic] PROSPECTUS New York Municipal Cash Trust A Portfolio of Federated Municipal Trust INSTITUTIONAL SERVICE SHARES December 31, 1998 A Statement of Additional Information (SAI) dated December 31, 1998, is incorporated by reference into this prospectus. To obtain the SAI 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] New York Municipal Cash 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. 811-5911 Cusip 314229741 G00208-01 (12/98) [Graphic] STATEMENT OF ADDITIONAL INFORMATION New York Municipal Cash Trust A Portfolio of Federated Municipal Trust INSTITUTIONAL SERVICE SHARES CASH II SHARES This Statement of Additional Information (SAI) is not a prospectus. Read this SAI in conjunction with the prospectuses for New York Municipal Cash Trust, dated December 31, 1998. Obtain the prospectuses without charge by calling 1- 800-341-7400. CONTENTS How is the Fund Organized? Securities in Which the Fund Invests How is the Fund Sold? Subaccounting Services Redemption in Kind Massachusetts Partnership Law Account and Share Information Tax Information Who Manages and Provides Services to the Fund? How Does the Fund Measure Performance? Who is Federated Investors, Inc.? Investment Ratings Addresses STATEMENT DATED DECEMBER 31, 1998 [Federated Investors Logo] Federated Securities Corp., Distributor, subsidiary of Federated Investors, Inc. Cusip 314229741 Cusip 314229733 8120103B (12/98) How is the Fund Organized? The Fund is a diversified portfolio of Federated Municipal Trust (Trust). The Trust is an open-end, management investment company that was established under the laws of the Commonwealth of Massachusetts on September 1, 1989. The Trust may offer separate series of shares representing interests in separate portfolios of securities. The Board of Trustees (the Board) has established two classes of shares of the Fund, known as Institutional Service Shares and Cash II Shares (Shares). This SAI relates to all of the classes of the above-mentioned Shares. Securities in Which the Fund Invests SECURITIES DESCRIPTIONS AND TECHNIQUES In pursuing its investment strategy, the Fund may invest in the following tax- exempt securities for any purpose that is consistent with its investment objective. General Obligation Bonds General obligation bonds are supported by the issuer's full faith and credit. The issuer must levy and collect taxes sufficient to pay principal and interest on the bonds. However, the issuer's authority to levy additional taxes may be limited by its charter or state law. Special Revenue Bonds Special revenue bonds are payable solely from specific revenues received by the issuer. The revenues may consist of specific taxes, assessments, tolls, fees or other types of municipal revenues. For example, a municipality may issue bonds to build a toll road, and pledge the tolls to repay the bonds. Bondholders could not collect from the municipality's general taxes or revenues. Therefore, any shortfall in the tolls could result in a default on the bonds. Private Activity Bonds Private activity bonds are special revenue bonds used to finance private entities. For example, a municipality may issue bonds to finance a new factory to improve its local economy. The municipality would lend the proceeds to the company using the factory, and the company would agree make loan payments sufficient to repay the bonds. The bonds would be payable solely from the company's loan payments, not from any other revenues of the municipality. Therefore, any default on the loan normally would result in a default on the bonds. Municipal Leases Municipalities may enter into leases for equipment or facilities. In order to comply with state public financing laws, these leases are typically subject to annual appropriation. In other words, a municipality may end a lease, without penalty, by not providing for the lease payments in its annual budget. After the lease ends, the lessor (the Fund) can resell the equipment or facility but the Fund may lose money on the sale. The Fund may invest in securities supported by pools of municipal leases. The most common type of lease backed securities are certificates of participation (COPs). However, the Fund may also invest directly in individual leases. Credit Enhancement Common types of credit enhancement include guarantees, letters of credit, bond insurance and surety bonds. Credit enhancement also includes arrangements where securities or other liquid assets secure payment of a fixed income security. If a default occurs, these assets may be sold and the proceeds paid to a security's holders. Either form of credit enhancement reduces credit risks by providing another source of payment for a fixed income security. INVESTMENT RATINGS A nationally recognized rating service'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 ("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 IBCA, 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 rating service can be treated as being in one of the two highest short-term rating categories; currently, such securities must be rated by two rating services in one of their two highest rating categories. See "Regulatory Compliance." INVESTMENT RISKS There are many factors which may effect an investment in the Fund. The Fund's principal risks are described in its prospectus. An additional risk factor is outlined below. Tax Risk In order for the interest income from the securities to be exempt from federal regular income tax ("tax-exempt"), tax-exempt securities must meet certain legal requirements. Failure to meet such requirements may cause the interest received and distributed by the fund to shareholders to be taxable. FUNDAMENTAL INVESTMENT POLICIES The Fund invests in tax-exempt securities so that at least 80% of the Fund's annual interest income is exempt from federal regular income tax and the personal income taxes imposed by New York State and New York municipalities or so that at least 80% of its net assets is invested in obligations, the interest income from which is exempt from federal regular income tax and the personal income taxes imposed by New York State and New York municipalities. This policy is fundamental and cannot be changed without shareholder approval. 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 transactions. Borrowing Money The Fund will not borrow money except as a temporary measure for extraordinary or emergency purposes and then only in amounts not in excess of 5% of 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. This borrowing provision is not for investment leverage but solely to facilitate management of the portfolio by enabling the Fund to meet redemption requests when the liquidation of portfolio securities is deemed to be inconvenient or disadvantageous. Interest paid on borrowed funds will serve to reduce the Fund's income. The Fund will liquidate any such borrowings as soon as possible and may not purchase any portfolio instruments while any borrowings are outstanding. 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 10% of the value of its total assets at the time of the pledge. Investing in Real Estate The Fund will not purchase or sell real estate, although it may invest in New York tax-exempt securities secured by real estate or interests in real estate. Investing in Commodities and Minerals The Fund will not purchase or sell commodities, commodity contracts, or oil, gas, or other mineral exploration or development programs. 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. Making Loans The Fund will not make loans except that it may acquire publicly or non-publicly issued New York tax-exempt securities, in accordance with its investment objective, policies, and limitations, and the Trust's Declaration of Trust. Acquiring Securities The Fund will not acquire the voting securities of any issuer, except as part of a merger, consolidation, reorganization, or acquisition of assets. Investing in Securities of Other Investment Companies The Fund will not invest in securities issued by any other investment company or investment trust. Investments in Any One Issuer With respect to securities comprising 75% of its assets, the Fund will not invest more than 10% of its total assets in the securities of any one issuer. Under this limitation, each governmental subdivision, including states, territories, possessions of the United States, or their political subdivisions, agencies, authorities, instrumentalities, or similar entities, will be considered a separate issuer if its assets and revenues are separate from those of the government body creating it and the security is backed only by its own assets and revenues. Industrial development bonds backed only by the assets and revenues of a nongovernmental user are considered to be issued solely by that user. If in the case of an industrial development bond or government issued security, a governmental or other entity guarantees the security, such guarantee would be considered a separate security issued by the guarantor, as well as the other issuer, subject to limited exclusions allowed by the Investment Company Act of 1940. Investing in New Issuers The Fund will not invest more than 5% of the value of its total assets in securities of issuers (or in the alternative, guarantors, where applicable) which have records of less than three years of continuous operations, including the operation of any predecessor. Investing in Issuers Whose Securities Are Owned by Officers and Trustees of the Trust The Fund will not purchase or retain the securities of any issuer if the Officers and Trustees of the Trust or its investment adviser, owning individually more than 0.5% of 1% of the issuer's securities, together own more than 5% of the issuer's securities. Investing in Options The Fund will not purchase or sell puts, calls, straddles, spreads, or any combination of them, except that the Fund may purchase tax-exempt securities accompanied by agreements of sellers to repurchase them at the Fund's option. Investing in Illiquid Securities The Fund will not invest more than 10% of the value of its total assets in illiquid securities, including repurchase agreements maturing in more than seven days. Issuing Senior Securities The Fund will not issue senior securities, except as permitted by the investment objective and policies and limitations of the Fund. The above limitations cannot be changed unless authorized by the "vote of a majority of its outstanding voting securities," as defined by the Investment Company Act. Shareholders will be notified before any material change in these limitations becomes effective. 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 nationally recognized rating services, 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 Board has 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 Board 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 Board 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 Board 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. 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. RULE 12B-1 PLAN (CASH SERIES SHARES) As a compensation-type plan, the Rule 12b-1 Plan is designed to pay the Distributor (who may then pay investment professionals such as banks, broker/dealers, trust departments of banks, and registered investment advisers) for marketing activities (such as advertising, printing and distributing prospectuses, and providing incentives to investment professionals) to promote sales of Shares so that overall Fund assets are maintained or increased. This helps the Fund achieve economies of scale, reduce per Share expenses, and provide cash for orderly portfolio management and Share redemptions. Also, the Fund's service providers that receive asset-based fees also benefit from stable or increasing Fund assets. The Fund may compensate the Distributor more or less than its actual marketing expenses. In no event will the Fund pay for any expenses of the Distributor that exceed the maximum Rule 12b-1 Plan fee. For some classes of Shares, the maximum Rule 12b-1 Plan fee that can be paid in any one year may not be sufficient to cover the marketing related expenses the Distributor has incurred. Therefore, it may take the Distributor a number of years to recoup these expenses. SHAREHOLDER SERVICES The Fund may pay Federated Shareholder Services Company, a subsidiary of Federated Investors, Inc. (Federated), for providing shareholder services and maintaining shareholder accounts. Federated Shareholder Services Company may select others to perform these services for their customers and may pay them fees. SUPPLEMENTAL PAYMENTS Investment professionals may be paid fees out of the assets of the Distributor and/or Federated Shareholder Services Company (but not out of Fund assets). The Distributor and/or Federated Shareholder Services Company may be reimbursed by the Adviser or its affiliates. Investment professionals receive such fees for providing distribution-related or shareholder services such as sponsoring sales, providing sales literature, conducting training seminars for employees, and engineering sales-related computer software programs and systems. Also, investment professionals may be paid cash or promotional incentives, such as reimbursement of certain expenses relating to attendance at informational meetings about the Fund or other special events at recreational-type facilities, or items of material value. These payments will be based upon the amount of Shares the investment professional sells or may sell and/or upon the type and nature of sales or marketing support furnished by the investment professional. 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 professionals 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 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. 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. 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 Trust have equal voting rights, except that in matters affecting only a particular Fund or class, only Shares of that Fund or class are entitled to vote. Trustees may be removed by the Board or by shareholders at a special meeting. A special meeting of shareholders will be called by the Board upon the written request of shareholders who own at least 10% of the Trust's outstanding shares of all series entitled to vote. As of December 9, 1998, the following shareholders owned of record, beneficially, or both, 5% or more of the outstanding Institutional Service Shares: Fiduciary Trust Co. International, New York, New York, owned approximately 113,414,400 shares (19.68%) and Fleet Securities Corp., Rochester, New York, owned approximately 78,301,022 shares (13.58%). As of December 9, 1998, the following shareholders owned of record, beneficially, or both, 5% or more of the outstanding Cash II Shares: Compass Investment Services Corp., Melville, New York, owned approximately 5,347,549 shares (11.07%); North Fork Bank, Mattituck, New York, owned approximately 4,867,570 shares (10.08%) and Barrons Educational Series, Inc., Hauppa, New York, owned approximately 3,667,532 shares (7.59%). Shareholders owning 25% or more of outstanding Shares may be in control and be able to affect the outcome of certain matters presented for a vote of shareholders. Tax Information FEDERAL INCOME TAX The Fund intends to meet the requirements of Subchapter M of the Internal Revenue Code applicable to regulated investment companies. If these requirements are not met, it will not receive the special tax treatment and will pay federal income tax. The Fund will be treated as a single, separate entity for federal income tax purposes so that income earned and capital gains and losses realized by the Trust's other portfolios will be separate from those realized by the Fund. STATE TAXES Under existing New York laws, distributions made by the Fund will not be subject to New York State or New York City personal income taxes to the extent that such distributions qualify as exempt-interest dividends under the Internal Revenue Code, and represent interest income attributable to obligations issued by the State of New York and its political subdivisions as well as certain other obligations, the interest on which is exempt from New York State and New York City personal income taxes, such as, for example, certain obligations of the Commonwealth of Puerto Rico. Conversely, to the extent that distributions made by the Fund are derived from other types of obligations, such distributions will be subject to New York State and New York City personal income taxes. The Fund cannot predict in advance the exact portion of its dividends that will be exempt from New York State and New York City personal income taxes. However, the Fund will report to shareholders at least annually what percentage of the dividends it actually paid is exempt from such taxes. Dividends paid by the Fund are exempt from the New York City unincorporated business taxes to the same extent that they are exempt from the New York City personal income taxes. Dividends paid by the Fund are not excluded from net income in determining New York State or New York City franchise taxes on corporations or financial institutions. Who Manages and Provides Services to the Fund? BOARD OF TRUSTEES The Board is responsible for managing the Trust's business affairs and for exercising all the Trust's powers except those reserved for the shareholders. Information about each Board member is provided below and includes the following data: name, address, birthdate, present position(s) held with the Trust, principal occupations for the past five years and other notable positions held, total compensation received as a Trustee from the Trust for its most recent fiscal year, and the total compensation received from the Federated Fund Complex for the most recent calendar year. The Trust is comprised of 17 Funds and the Federated Fund Complex is comprised of 56 investment companies, whose investment advisers are affiliated with the Fund's Adviser. As of December 9, 1998, 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.
Name Total Birthdate Aggregate Compensation Address Principal Occupations Compensation From Trust and Position With Trust for Past 5 Years From Trust Fund Complex - ------------------------------ --------------------------------------------------------- --------------- ------------------- John F. Donahue##* Chief Executive Officer and Director or Trustee of $0 $0 for the Trust Birthdate: July 28, 1924 the Federated Fund Complex. Chairman and Director, and 56 other Federated Investors Tower Federated Investors, Inc.; Chairman and Trustee, investment 1001 Liberty Avenue Federated Advisers, Federated Management, and companies in the Pittsburgh, PA Federated Research; Chairman and Director, Federated Fund Complex CHAIRMAN and TRUSTEE Research Corp., and Federated Global Research Corp.; Chairman, Passport Research, Ltd. Thomas G. Bigley Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: February 3, 1934 Director, Member of Executive Committee, Children's Trust and 15 Old Timber Trail Hospital of Pittsburgh; formerly: Senior Partner, 56 other Pittsburgh, PA Ernst & Young LLP; Director, MED 3000 Group, Inc.; investment TRUSTEE Director, Member of Executive Committee, University companies in the of Pittsburgh. Fund Complex John T. Conroy, Jr. Director or Trustee of the Federated Fund Complex; $4,484.62 $122,362 for the Birthdate: June 23, 1937 President, Investment Properties Corporation; Senior Trust and Wood/IPC Commercial Dept. Vice President, John R. Wood and Associates, Inc., 56 other John R. Wood and Realtors; Partner or Trustee in private real estate investment Associates, Inc. Realtors ventures in Southwest Florida; formerly: President, companies in the 3255 Tamiami Trail North Naples Property Management, Inc. and Northgate Fund Complex Naples, FL Village Development Corporation. TRUSTEE William J. Copeland Director or Trustee of the Federated Fund Complex; $4,484.62 $122,362 for the Birthdate: July 4, 1918 Director and Member of the Executive Committee, Trust and One PNC Plaza-23rd Floor Michael Baker, Inc.; formerly: Vice Chairman and 56 other Pittsburgh, PA Director, PNC Bank, N.A., and PNC Bank Corp.; investment TRUSTEE Director, Ryan Homes, Inc. companies in the Fund Complex Retired: Director, United Refinery; Director, Forbes Fund; Chairman, Pittsburgh Foundation; Chairman, Pittsburgh Civic Light Opera. James E. Dowd, Esq. Director or Trustee of the Federated Fund Complex; $4,484.62 $122,362 for the Birthdate: May 18, 1922 Attorney-at-law; Director, The Emerging Germany Fund, Trust and 571 Hayward Mill Road Inc. 56 other Concord, MA investment TRUSTEE Retired: President, Boston Stock Exchange, Inc.; companies in the Regional Administrator, United States Securities and Fund Complex Exchange Commission. Lawrence D. Ellis, M.D.* Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: October 11, 1932 Professor of Medicine, University of Pittsburgh; Trust and 3471 Fifth Avenue Medical Director, University of Pittsburgh Medical 56 other Suite 1111 Center - Downtown; Hematologist, Oncologist, and investment Pittsburgh, PA Internist, Presbyterian and Montefiore Hospitals; companies in the TRUSTEE Member, National Board of Trustees, Leukemia Society Fund Complex of America. Edward L. Flaherty, Jr., Director or Trustee of the Federated Fund Complex; $4,484.62 $122,362 for the Esq. # Attorney, of Counsel, Miller, Ament, Henny & Kochuba; Trust and Birthdate: June 18, 1924 Director, Eat'N Park Restaurants, Inc.; formerly: 56 other Miller, Ament, Henny & Counsel, Horizon Financial, F.A., Western Region; investment Kochuba Partner, Meyer and Flaherty. companies in the 205 Ross Street Fund Complex Pittsburgh, PA TRUSTEE Peter E. Madden Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: March 16, 1942 formerly: Representative, Commonwealth of Trust and One Royal Palm Way Massachusetts General Court; President, State Street 56 other 100 Royal Palm Way Bank and Trust Company and State Street Corporation. investment Palm Beach, FL companies in the TRUSTEE Retired: Director, VISA USA and VISA International; Fund Complex Chairman and Director, Massachusetts Bankers Association; Director, Depository Trust Corporation. John E. Murray, Jr., J.D., Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the S.J.D. President, Law Professor, Duquesne University; Trust and Birthdate: December 20, 1932 Consulting Partner, Mollica & Murray. 56 other President, Duquesne investment University Retired: Dean and Professor of Law, University of companies in the Pittsburgh, PA Pittsburgh School of Law; Dean and Professor of Law, Fund Complex TRUSTEE Villanova University School of Law. Wesley W. Posvar Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: September 14, President, World Society of Ekistics, Athens; Trust and 1925 Professor, International Politics; Management 56 other 1202 Cathedral of Learning Consultant; Trustee, Carnegie Endowment for investment University of Pittsburgh International Peace, RAND Corporation, Online companies in the Pittsburgh, PA Computer Library Center, Inc., National Defense Fund Complex TRUSTEE University and U.S. Space Foundation; President Emeritus, University of Pittsburgh; Founding Chairman, National Advisory Council for Environmental Policy and Technology, Federal Emergency Management Advisory Board and Czech Management Center, Prague. Retired: Professor, United States Military Academy; Professor, United States Air Force Academy. Marjorie P. Smuts Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: June 21, 1935 Public Relations/Marketing/Conference Planning. Trust and 4905 Bayard Street 56 other Pittsburgh, PA Retired: National Spokesperson, Aluminum Company of investment TRUSTEE America; business owner. companies in the Fund Complex Glen R. Johnson* Trustee, Federated Investors, Inc.; staff member, $0 $0 for the Trust Birthdate: May 2, 1929 Federated Securities Corp. and Federated Investors Tower 8 other investment 1001 Liberty Avenue companies in the Pittsburgh, PA Fund Complex PRESIDENT and TRUSTEE J. Christopher Donahue##* President or Executive Vice President of the $0 $0 for the Trust Birthdate: April 11, 1949 Federated Fund Complex; Director or Trustee of some and Federated Investors Tower of the Funds in the Federated Fund Complex; President 18 other 1001 Liberty Avenue and Director, Federated Investors, Inc.; President investment Pittsburgh, PA and Trustee, Federated Advisers, Federated companies in the EXECUTIVE VICE PRESIDENT Management, and Federated Research; President and Fund Complex Director, Federated Research Corp. and Federated Global Research Corp.; President, Passport Research, Ltd.; Trustee, Federated Shareholder Services Company; Director, Federated Services Company. Edward C. Gonzales* Trustee or Director of some of the Funds in the $0 $0 for the Trust Birthdate: October 22, 1930 Federated Fund Complex; President, Executive Vice and Federated Investors Tower President and Treasurer of some of the Funds in the 1 other investment 1001 Liberty Avenue Federated Fund Complex; Vice Chairman, Federated companies in the Pittsburgh, PA Investors, Inc.; Vice President, Federated Advisers, Fund Complex EXECUTIVE VICE PRESIDENT 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. John W. McGonigle Executive Vice President and Secretary of the $0 $0 for the Trust Birthdate: October 26, 1938 Federated Fund Complex; Executive Vice President, and Federated Investors Tower Secretary, and Director, Federated Investors, Inc.; 56 other 1001 Liberty Avenue Trustee, Federated Advisers, Federated Management, investment Pittsburgh, PA and Federated Research; Director, Federated Research companies in the EXECUTIVE VICE PRESIDENT Corp. and Federated Global Research Corp.; Director, Fund Complex and SECRETARY Federated Services Company; Director, Federated Securities Corp. Richard J. Thomas Treasurer of the Federated Fund Complex; Vice $0 $0 for the Trust Birthdate: June 17, 1954 President - Funds Financial Services Division, and Federated Investors Tower Federated Investors, Inc.; Formerly: various 56 other 1001 Liberty Avenue management positions within Funds Financial Services investment Pittsburgh, PA Division of Federated Investors, Inc. companies in the TREASURER Fund Complex Richard B. Fisher* President or Vice President of some of the Funds in $0 $0 for the Trust Birthdate: May 17, 1923 the Federated Fund Complex; Director or Trustee of and Federated Investors Tower some of the Funds in the Federated Fund Complex; 6 other investment 1001 Liberty Avenue Executive Vice President, Federated Investors, Inc.; companies in the Pittsburgh, PA Chairman and Director, Federated Securities Corp. Fund Complex VICE PRESIDENT William D. Dawson, III Chief Investment Officer of this Fund and various $0 $0 for the Trust Birthdate: March 3, 1949 other Funds in the Federated Fund Complex; Executive and Federated Investors Tower Vice President, Federated Investment Counseling, 41 other 1001 Liberty Avenue Federated Global Research Corp., Federated Advisers, investment Pittsburgh, PA Federated Management, Federated Research, and companies in the CHIEF INVESTMENT OFFICER Passport Research, Ltd.; Registered Representative, Fund Complex 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. Mary Jo Ochson Senior Portfolio Manager and Vice President of eight $0 $0 for the Birthdate: September 12, investment companies in the Federated Fund Complex; Trust and 1953 Senior Vice President, Federated Investment 7 other investment Federated Investors Tower Counseling, Federated Advisers, Federated Global companies 1001 Liberty Avenue Research Corp., Federated Management, Federated in the Fund Complex Pittsburgh, PA Research, Federated Research Corp. and Passport SENIOR PORTFOLIO Research, Ltd.; Formerly: Vice President, Federated MANAGER/VICE PRESIDENT Advisers, Federated Management, Federated Research, Federated Research Corp. , Passport Research, Ltd. and Federated Global Research Corp. Jeff A. Kozemchak Senior Portfolio Manager and Vice President of four $0 $0 for the Birthdate: January 15, 1960 investment companies in the Federated Fund Complex; Trust and Federated Investors Tower Vice President, Federated Investment Counseling, 3 other investment 1001 Liberty Avenue Federated Advisers, Federated Global Research Corp., companies Pittsburgh, PA Federated Management, Federated Research, Federated in the Fund Complex SENIOR PORTFOLIO Research Corp. and Passport Research, Ltd.; MANAGER/VICE PRESIDENT Formerly: Assistant Vice President and Investment Analyst, Federated Research Corp. and Passport Research, Ltd. ; Assistant Vice President, Federated Advisers, Federated Management and Federated Research.
## Mr. Donahue is the father of J. Christopher Donahue, Executive Vice President of the Trust. INVESTMENT ADVISER The Adviser conducts investment research and makes investment decisions for the Fund. The Adviser shall not be liable to the Trust, 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 Trust. 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:
Maximum Average Aggregate Daily Administrative Fee Net Assets of the Federated Funds - ----------------------------------------------------------- 0.150 of 1% on the first $250 million 0.125 of 1% on the next $250 million 0.100 of 1% on the next $250 million 0.075 of 1% on assets in excess of $750 million
The administrative fee received during any fiscal year shall be at least $125,000 per portfolio and $30,000 per each additional class of shares. Federated Services Company may voluntarily waive a portion of its fee and may reimburse the Fund for expenses. Federated Services Company also provides certain accounting and recordkeeping services with respect to the Fund's portfolio investments for a fee based on Fund assets plus out-of-pocket expenses. CUSTODIAN State Street Bank and Trust Company, Boston, Massachusetts, is custodian for the securities and cash of the Fund. Foreign instruments purchased by the Fund are held by foreign banks participating in a network coordinated by State Street Bank. TRANSFER AGENT AND DIVIDEND DISBURSING AGENT Federated Services Company, through its registered transfer agent subsidiary, Federated Shareholder Services Company, maintains all necessary shareholder records. The Fund pays the transfer agent a fee based on the size, type, and number of accounts and transactions made by shareholders. INDEPENDENT PUBLIC ACCOUNTANTS Arthur Andersen LLP is the independent public accountant for the Fund. FEES PAID BY THE FUND FOR SERVICES
For the Year Ended October 31, 1998 1997 1996 - ------------------------------------------------------------------------------------- Advisory Fee Earned $2,250,094 $1,787,405 $1,298,934 - ------------------------------------------------------------------------------------- Advisory Fee Reduction $ 500,559 $ 421,045 $ 351,948 - ------------------------------------------------------------------------------------- Brokerage Commissions $ 0 $ 0 $ 0 - ------------------------------------------------------------------------------------- Administrative Fee $ 424,181 $ 337,389 $ 245,547 - ------------------------------------------------------------------------------------- 12b-1 Fee - ------------------------------------------------------------------------------------- Institutional Service Shares $ 0 --- --- ----------------------------------------------------------------------------------- Cash II Shares $ 0 --- --- - ------------------------------------------------------------------------------------- Shareholder Services Fee - ------------------------------------------------------------------------------------- Institutional Service Shares $ 455,890 --- --- ----------------------------------------------------------------------------------- Cash II Shares $ 75,058 --- --- - -------------------------------------------------------------------------------------
Fees are allocated among Classes based on their pro rata share of Fund assets, except for marketing (Rule 12b-1) fees and shareholder services fees, which are borne only by the applicable Class of Shares. If the Fund's expenses are capped at a particular level, the cap does not include reimbursement to the Fund of any expenses incurred by shareholders who use the transfer agent's subaccounting facilities. How Does the Fund Measure Performance? The Fund may advertise Share performance by using the Securities and Exchange Commission's (SEC) standard method for calculating performance applicable to all mutual funds. The SEC also permits this standard performance information to be accompanied by non-standard performance information. Unless otherwise stated, any quoted Share performance reflects the effect of non-recurring charges, such as maximum sales charges, which, if excluded, would increase the total return and yield. The performance of Shares depends upon such variables as: portfolio quality; average portfolio maturity; type and value of portfolio securities; changes in interest rates; changes or differences in the Fund's or any class of Shares' expenses; and various other factors. Share performance fluctuates on a daily basis largely because net earnings and offering price per Share 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, ten-year and since inception periods ended October 31, 1998. Yield, Effective Yield and Tax-Equivalent Yield given for the Seven-day period ended October 31, 1998.
Share Class Seven-Day Period 1 Year 5 Years 10 Years Since Inception on November 28, 1982 Institutional Service Shares - ------------------------------------------------------------------------------------------------------------------------------ Total Return -- 3.19% 3.12% 3.65% 4.05% Yield 2.87% -- -- -- -- Effective Yield 2.91% -- -- -- -- Tax-Equivalent Yield 5.43% -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------
Share Class Seven-Day Period 1 Year 5 Years 10-Years Since Inception on April 25, 1991 Cash II Shares - ------------------------------------------------------------------------------------------------------------------------------ Total Return -- 3.02% 2.93% 2.89% Yield 2.71% -- -- -- -- Effective Yield 2.75% -- -- -- -- Tax-Equivalent Yield 5.14% -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------
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. The tax-equivalent yield of Shares is calculated similarly to the yield, but is adjusted to reflect the taxable yield that Shares would have had to earn to equal the actual yield, assuming a specific tax rate. 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. TAX EQUIVALENCY TABLE Set forth below is a sample of a tax-equivalency table that may be used in advertising and sales literature. This table is for illustrative purposes only and is not representative of past or future performance of the Fund. The interest earned by the tax-exempt securities owned by the Fund generally remains free from federal regular income tax and is often free from state and local taxes as well. However, some of the Fund's income may be subject to the federal alternative minimum tax and state and/or local taxes.
TAXABLE YIELD EQUIVALENT FOR 1998 STATE OF NEW YORK Federal Tax Bracket: 15.00% 28.00% 31.00% 36.00% 39.60% - ----------------------------------------------------------------------------------------------------------------------------------- Combined Federal and State Tax Bracket: 21.850% 34.850% 37.850% 42.850% 46.450% - ----------------------------------------------------------------------------------------------------------------------------------- Joint Return $1-42,350 $42,351-102,300 $102,301-155,950 $155,951-278,450 OVER $278,450 - ----------------------------------------------------------------------------------------------------------------------------------- Single Return $1-25,350 $25,351-61,400 $61,401-128,100 $128,101-278,450 OVER $278,450 - ----------------------------------------------------------------------------------------------------------------------------------- Tax-Exempt Yield Taxable Yield Equivalent - ----------------------------------------------------------------------------------------------------------------------------------- 1.50% 1.92% 2.30% 2.41% 2.62% 2.80% - ----------------------------------------------------------------------------------------------------------------------------------- 2.00% 2.56% 3.07% 3.22% 3.50% 3.73% - ----------------------------------------------------------------------------------------------------------------------------------- 2.50% 3.20% 3.84% 4.02% 4.37% 4.67% - ----------------------------------------------------------------------------------------------------------------------------------- 3.00% 3.84% 4.60% 4.83% 5.25% 5.60% - ----------------------------------------------------------------------------------------------------------------------------------- 3.50% 4.48% 5.37% 5.63% 6.12% 6.54% - ----------------------------------------------------------------------------------------------------------------------------------- 4.00% 5.12% 6.14% 6.44% 7.00% 7.47% - ----------------------------------------------------------------------------------------------------------------------------------- 4.50% 5.76% 6.91% 7.24% 7.87% 8.40% - ----------------------------------------------------------------------------------------------------------------------------------- 5.00% 6.40% 7.67% 8.05% 8.75% 9.34% - ----------------------------------------------------------------------------------------------------------------------------------- 5.50% 7.04% 8.44% 8.85% 9.62% 10.27% - ----------------------------------------------------------------------------------------------------------------------------------- 6.00% 7.68% 9.21% 9.65% 10.50% 11.20% - -----------------------------------------------------------------------------------------------------------------------------------
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. 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., 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 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 moneyfunds. 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, 1997, Federated managed 11 bond funds with approximately $2.1 billion in assets and 22 money market funds with approximately $10.9 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 tax-exempt 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 27 years' experience. As of December 31, 1997, Federated managed 29 equity funds totaling approximately $11.7 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, 1997, Federated managed 11 money market funds and 16 bond funds with assets approximating $17.1 billion and $5.6 billion, respectively. Federated's corporate bond decision making--based on intensive, diligent credit analysis--is backed by over 22 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 $200 billion. Government Funds In the government sector, as of December 31, 1997, Federated manages 9 mortgage- backed, 6 government/ agency and 18 government money market mutual funds, with assets approximating $5.9 billion, $1.5 billion and $35 billion, respectively. Federated trades approximately $400 million in U.S. government and mortgage- backed securities daily and places approximately $23 billion in repurchase agreements each day. Federated introduced the first U.S. government fund to invest in U.S. government bond securities in 1969. Federated has been a major force in the short- and intermediate-term government markets since 1982 and currently manages approximately $36 billion in government funds within these maturity ranges. 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, 1997, Federated managed more than $63.1 billion in assets across 51 money market funds, including 18 government, 11 prime and 22 municipal with assets approximating $35 billion, $17.1 billion and $10.9 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 $4 trillion to the more than 6,700 funds available, according to the Investment Company Institute. Federated distributes mutual funds through its subsidiaries for a variety of investment purposes. Specific markets include: FEDERATED CLIENTS OVERVIEW 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. Investment Ratings APPENDIX STANDARD & POOR'S SHORT-TERM MUNICIPAL OBLIGATION RATINGS A Standard & Poor's (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-1+, 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 rated 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. MOODY'S 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 SERVICE, L.P. 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. Addresses NEW YORK MUNICIPAL CASH TRUST Institutional Service Shares Cash II Shares Federated Investors Funds 5800 Corporate Drive Pittsburgh, PA 15237-7000 Distributor Federated Securities Corp. Federated Investors Tower 1001 Liberty Avenue, Pittsburgh, PA 15222-3779 Investment Adviser Federated Management Federated Investors Tower 1001 Liberty Avenue, Pittsburgh, PA 15222-3779 Custodian State Street Bank and Trust Company P.O. Box 8600 Boston, MA 02266-8600 Transfer Agent and Dividend Disbursing Agent Federated Shareholder Services Company P.O. Box 8600 Boston, MA 02266-8600 Independent Public Accountants Arthur Andersen LLP 225 Franklin Street Boston, MA 02110-2812 PROSPECTUS Ohio Municipal Cash Trust A Portfolio of Federated Municipal Trust CASH II SHARES A money market mutual fund seeking current income exempt from federal regular income tax and the personal income taxes imposed by the State of Ohio and Ohio municipalities. 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. December 31, 1998 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? 6 How is the Fund Sold? 6 How to Purchase Shares 7 How to Redeem Shares 8 Account and Share Information 10 Who Manages the Fund? 11 Financial Information 12 Last Meeting of Shareholders 12 Report of Independent Public Accountants 31 Risk/Return Summary WHAT IS THE FUND'S INVESTMENT OBJECTIVE? The Fund is a money market fund which seeks to maintain a stable net asset value of $1.00. The Fund's investment objective is current income which is exempt from federal regular income tax and the personal income taxes imposed by the State of Ohio and Ohio municipalities consistent with stability of principal. While there is no assurance that the Find 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 tax-exempt securities so that the Fund's annual interest income is exempt from federal regular income tax and Ohio state income taxes. Interest from the Fund's investments may be subject to the federal alternative minimum tax for individuals and corporations. WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND? Because the Fund may invest a significant portion of its assets in securities of a single issuer, an investment in the Fund may involve additional risks compared to a fully diversified money market 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] - See Appendix C-8 Historically, the Fund has maintained a constant $1.00 net asset value per share. The bar chart shows the variability of the Fund's Cash II Shares total return on a yearly basis. The Fund's Cash II Shares are not sold subject to a sales charge (load). The total returns displayed above are based upon the net asset value. The Fund's Cash II Shares year-to-date total return as of the most recent calendar quarter of September 30, 1998 was 2.15%. Within the period shown in the Chart, the Fund's Cash II Shares highest quarterly return was 0.87% (quarter ended June 30, 1995). Its lowest quarterly return was 0.44% (quarter ended March 31, 1994). The Fund's Cash II Shares Seven-Day Net Yield as of 12/31/97 was 3.31%. The following table represents the Fund's Cash II Shares Average Annual Total Return through 12/31/97. CALENDAR PERIOD FUND 1 Year 3.02% 5 Years 2.70% Start of Performance 1 2.85% 1 The Fund's Cash II Shares start of performance date was April 22, 1991. Investors may call the Fund at 1-800-341-7400 to acquire the current Seven- Day Net Yield. While 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? OHIO MUNICIPAL CASH TRUST FEES AND EXPENSES This table describes the fees and expenses that you may pay if you buy, hold and redeem shares of the Fund's Cash II Shares.
SHAREHOLDER FEES 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 a percentage of average net assets) Management Fee 2 0.40% Distribution (12b-1) Fee 3 0.30% Shareholder Services Fee 0.25% Other Expenses 0.20% Total Annual Fund Operating Expenses 1.15% 1 Although not contractually obligated to do so, the adviser and distributor waived certain amounts. These are shown below along with the net expenses the Fund would actually paid for the fiscal year ended October 31, 1998. Waiver of Fund Expenses 0.28% Total Actual Annual Operating Expenses (after waivers) 0.87% 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 0.17% for the year ended October 31, 1998. 3 The distribution (12b-i) fee for the Fund has been voluntarily reduced. This voluntary reduction can be terminated at any time. The distribution (12b-1) fee paid by the Fund (after the voluntary reduction) was 0.25% for the fiscal year ended October 31, 1998.
EXAMPLE The following Example is intended to help you compare the cost of investing in the Ohio Municipal Cash Trust's Cash II Shares with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund's Cash II 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 Ohio Municipal Cash Trust's Cash II Shares' operating expenses are BEFORE WAIVERS as estimated above and remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be: 1 YEAR 3 YEARS 5 YEARS 10 YEARS Expenses assuming no redemption $117 $365 $633 $1,398 What are the Fund's Investment Strategies? The Fund invests in a portfolio of high-quality tax-exempt securities maturing in 13 months or less. The average maturity of the Fund's portfolio, computed on a dollar-weighted basis, will be 90 days or less. The Fund's Adviser performs a fundamental credit analysis to develop an approved list of issuers and securities that meet the Adviser's minimum credit standards. The Adviser targets an average portfolio maturity based upon its interest rate outlook and the tax-exempt securities available. The Adviser structures the portfolio by combining variable rate demand instruments and municipal notes. Depending on the supply of tax-exempt securities, the Adviser generally shortens the portfolio's maturity when it expects interest rates to rise and extends the maturity when it expects interest rates to fall. TEMPORARY DEFENSIVE INVESTMENTS During adverse market conditions the Fund may temporarily depart from its principal investment strategies by investing in securities subject to federal regular income tax and the personal income taxes imposed by the State of Ohio and Ohio municipalities. Temporary investments will be of comparable quality to other securities in which the Fund invests. This may cause the Fund to give up greater investment returns to maintain the safety of principal. This also may cause the Fund to receive and distribute taxable income to investors. What are the Principal Securities in Which the Fund Invests? TAX-EXEMPT SECURITIES Tax-exempt securities are fixed income securities that pay interest exempt from regular federal income taxes. States, counties, cities and other political subdivisions and authorities typically issue tax-exempt securities. Tax-exempt securities are generally differentiated by their source of repayment. FIXED INCOME SECURITIES Fixed income 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. VARIABLE RATE DEMAND INSTRUMENTS Variable rate demand instruments are tax-exempt securities that require the issuer or a third party, such as a dealer or bank, to repurchase the security for its face value upon demand. The securities also bear interest at a variable rate intended to cause the securities to trade at their face value. The Fund treats demand instruments as short-term securities, even though their stated maturity may extend beyond 13 months. MUNICIPAL NOTES Municipal notes are short-term tax-exempt securities. Many municipalities issue such notes to fund their current operations before collecting taxes or other municipal revenues. Municipalities may also issue notes to fund capital projects prior to issuing long-term bonds. The issuers typically repay the notes at the end of their fiscal year, either with taxes, other revenues or proceeds from newly issued notes or bonds. INVESTMENT 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 rating services or be of comparable quality to securities having such ratings. CREDIT ENHANCEMENT Credit enhancement consists of an arrangement in which a company agrees to pay amounts due on a fixed income security if the issuer defaults. In some cases the company providing credit enhancement makes all payments directly to the security holders and receives reimbursement from the issuer. Normally, the credit enhancer has greater financial resources and liquidity than the issuer. For this reason, the Adviser usually evaluates the credit risk of a fixed income security based solely upon its credit enhancement. What are the Specific Risks of Investing in the Fund? Although there are many factors which may affect an investment in the Fund, the principal risks of investing in a tax-exempt money market fund are described below. CREDIT RISK Credit risk is the possibility that an issuer or a credit enhancer will default (fails to repay interest and principal when due). If an issuer or credit enhancer defaults, the Fund will lose money. Money market funds try to minimize this risk by purchasing higher quality securities. Many fixed income securities receive credit ratings from companies such as Standard & Poor's and Moody's Investor Services. Fixed income securities receive different credit ratings depending on the rating company's assessment of the likelihood of default by the issuer. The lower the credit rating, the greater the credit risk. If the security is unrated, greater reliance is placed on the Adviser's credit assessment. 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. SECTOR RISK Most of the Fund's securities will be invested in issuers located in Ohio. In addition, a substantial part of the Fund's portfolio may be comprised of tax-exempt securities issued or credit enhanced by companies in similar businesses or with other similar characteristics. As a result, the Fund will be more susceptible to any economic, business, political, or other developments which generally affect these issuers. 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 determined net asset value (NAV). The Fund does not charge a sales charge. NAV is determined at 12:00 noon and 1:00 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. 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 offers three share classes: Institutional Shares, Institutional Service Shares and Cash II Shares each representing interests in a single portfolio of securities. This prospectus relates only to Cash II Shares. Each share class has different expenses, which affect their performance. Contact your investment professional or call 1-800-341-7400 for more information concerning the other classes. The Fund's Distributor markets the Shares described in this prospectus to institutions or to individuals directly or through investment professionals. The Fund may not be a suitable investment for retirement plans or for non-Ohio taxpayers because it invests in Ohio tax-exempt securities. When the Distributor receives marketing fees, it may pay some or all of them to 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). RULE 12B-1 PLAN The Fund has adopted a Rule 12b-1 Plan, which allows it to pay marketing fees to the Distributor and investment professionals for the sale, distribution and customer servicing of the Fund's Class II Shares. Because these Shares pay marketing fees on an ongoing basis, your investment cost may be higher over time than other shares with different sales charges and marketing fees. 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 1:00 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 on the day 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 SYSTEMATIC INVESTMENT PROGRAM Once you have opened an account, you may automatically purchase additional Shares on a regular basis by completing the Systematic Investment Program (SIP) section of the New Account Form or by contacting the Fund or your investment professional. The minimum investment amount for SIPs is $50. BY AUTOMATED CLEARINGHOUSE (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 12:00 noon (Eastern time) your redemption will be wired to you the same day. You will not receive that day's dividend. If you call after 12:00 noon (Eastern time) your redemption will be wired to you the following business day. You will receive that day's dividend. Under limited circumstances, arrangements may be made with the Distributor for same-day payment of redemption proceeds, without that day's dividend, for redemption requests received before 2:00 p.m. (Eastern time). 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 30 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. SYSTEMATIC WITHDRAWAL PROGRAM You may automatically redeem Shares in a minimum amount of $100 on a regular basis. Complete the appropriate section of the New Account Form or an Account Service Options Form or contact your investment professional or the Fund. Your account value must meet the minimum initial investment amount at the time the program is established. This program may reduce, and eventually deplete, your account. Payments should not be considered yield or income. CHECKWRITING You may request checks to redeem your Fund Shares. Your account will continue to receive the daily dividend declared on the Shares being redeemed until a check is presented for payment. DEBIT CARD You may request a debit card account that allows you to redeem Shares. There is an annual fee for this service that the Fund will automatically deduct from your account. 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 CONFIRMATIONS AND ACCOUNT STATEMENTS You will receive confirmation of purchases and redemptions (except for systematic transactions). In addition, you will receive periodic statements reporting all account activity, including systematic transactions, 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, 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. It is anticipated that Fund distributions will be primarily dividends that are exempt from federal income tax, although a portion of the Fund's dividends may not be exempt. Dividends may be subject to state and local taxes, although the Fund's dividends will be exempt from Ohio state personal income tax to the extent they are derived from interest on obligations exempt from Ohio personal income taxes. Capital gains and non-exempt dividends are taxable whether paid in cash or reinvested in the Fund. 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 Management. 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 and/or provide administrative services to more than 300 mutual funds and private accounts, which totaled over $120 billion in assets as of December 31, 1997. Federated was established in 1955 and is one of the largest mutual fund investment managers in the United States with more than 2,000 employees. Over 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 affect on the Fund. Last Meeting of Shareholders A special meeting of shareholders of Ohio Municipal Cash Trust was held on May 21, 1998. On February 24, 1998, the record date for shareholders voting at the meeting, there were 407,796,744 total outstanding shares. The following items were considered by shareholders of the Fund and the results of their voting were as follows: AGENDA ITEM To approve or disapprove amending and changing from fundamental to an operating policy the Fund's ability to invest in restricted securities. The results of shareholders voting were as follows: SHARES VOTED SHARES VOTED SHARES BROKER FOR AGAINST ABSTAINED NON-VOTE 221,451,369 6,231,898 8,923,545 17,751 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-Cash II Shares (For a share outstanding throughout each period) Reference is made to the Report of Independent Public Accountants on page 31.
YEAR ENDED OCTOBER 31 1998 1997 1996 1995 1994 NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 INCOME FROM INVESTMENT OPERATIONS: Net investment income 0.03 0.03 0.03 0.03 0.02 LESS DISTRIBUTIONS: Distributions from net investment income (0.03) (0.03) (0.03) (0.03) (0.02) NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 TOTAL RETURN 1 2.91% 2.98% 2.96% 3.30% 2.10% RATIOS TO AVERAGE NET ASSETS: Expenses 0.87% 0.87% 0.87% 0.87% 0.85% Net investment income 2.86% 2.94% 2.92% 3.25% 2.09% Expense waiver/reimbursement 2 0.28% 0.28% 0.31% 0.29% 0.24% SUPPLEMENTAL DATA: Net assets, end of period (000 omitted) $342,946 $245,329 $206,149 $188,234 $156,051
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 October 31, 1998
PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-99.4% 1 OHIO-99.4% $ 2,250,000 Akron, Bath & Copley, OH Joint Township Weekly VRDNs (Visiting Nurses)/(National City Bank, Cleveland, OH LOC) $ 2,250,000 1,925,000 Akron, OH, Street Improvement Special Assessment Notes (Series 1997), 4.26% RANs, 12/18/1998 1,925,976 3,000,000 American Municipal Power-Ohio, Inc., Electric System Improvement Revenue Bonds, 3.85% BANs (Bryan, OH), 8/27/1999 3,000,000 2,425,000 Ashland County, OH Health Care Weekly VRDNs (Brethren Care, Inc.)/(National City Bank, Ohio LOC) 2,425,000 1,750,000 Ashland, OH, 3.95% TANs, 7/15/1999 1,752,954 28,560,000 Banc One Capital Higher Education Tax-Exempt Income Trust, (Series 2 Certificates of Ownership) Weekly VRDNs (Bank One, Kentucky LOC) 28,560,000 5,875,000 Belmont County, OH Weekly VRDNs (Lesco, Inc.)/(PNC Bank, N.A. LOC) 5,875,000 1,400,000 Belmont County, OH, 4.18% BANs, 12/1/1998 1,400,311 3,140,000 Bowling Green, OH, (Series 1998), 3.80% BANs, 6/17/1999 3,140,944 4,000,000 Brookville, OH, (Series 1988) Weekly VRDNs (Green Tokai)/ (Bank of Tokyo-Mitsubishi Ltd. LOC) 4,000,000 3,100,000 Butler County, OH, 3.50% BANs, 3/19/1999 3,104,654 1,500,000 Butler County, OH, 4.10% BANs, 8/5/1999 1,504,383 5,750,000 Clark County, OH, Multifamily Housing Revenue Bonds (Series 1997) Weekly VRDNs (Ohio Masonic Home)/(Huntington National Bank, Columbus, OH LOC) 5,750,000 6,900,000 Clermont County, OH, Variable Rate IDRB's (Series 1997) Weekly VRDNs (Buriot International, Inc.)/(KeyBank, N.A. LOC) 6,900,000 2,110,000 Cleveland, OH Airport System, Series C, 4.25% Bonds (FSA INS), 1/1/1999 2,111,516 2,000,000 Cleveland, OH IDA, (Series B), 4.50% BANs, 10/1/1999 2,019,618 2,335,000 2 Cleveland, OH Parking Facilities, PA-182 (Series 1996) Weekly VRDNs (MBIA INS)/(Merrill Lynch Capital Services, Inc. LIQ) 2,335,000 1,600,000 Clinton County, OH Hospital Authority Weekly VRDNs (Clinton Memorial Hospital)/(National City Bank, Columbus, OH LOC) 1,600,000 1,700,000 Columbiana County, OH, Industrial Development Revenue Bonds Weekly VRDNs (C & S Land Company Project)/(Bank One, Ohio, N.A. LOC) 1,700,000 5,000,000 Cuyahoga County, OH Hospital Authority, (Series 1998B) Weekly VRDNs (Cleveland Clinic)/(Chase Manhattan Bank N.A., New York LIQ) 5,000,000 2,000,000 Cuyahoga County, OH Hospital Authority, (Series C) Weekly VRDNs (Cleveland Clinic)/(Bank of America NT and SA, San Francisco LIQ) 2,000,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 OHIO-CONTINUED $ 500,000 Cuyahoga County, OH IDA Weekly VRDNs (Animal Protection League (Cuyahoga County))/(KeyBank, N.A. LOC) $ 500,000 1,350,000 Cuyahoga County, OH IDA Weekly VRDNs (East Park Community, Inc.)/ (KeyBank, N.A. LOC) 1,350,000 2,350,000 Cuyahoga County, OH IDA Weekly VRDNs (H.P. Parking Co.)/ (KeyBank, N.A. LOC) 2,350,000 260,000 Cuyahoga County, OH IDA Weekly VRDNs (Interstate Diesel Service, Inc.)/ (Huntington National Bank, Columbus, OH LOC) 260,000 850,000 Cuyahoga County, OH IDA Weekly VRDNs (Premier Manufacturing Corp.)/(National City Bank, Kentucky LOC) 850,000 2,600,000 Cuyahoga County, OH IDA, (Series 1988) Weekly VRDNs (Trebmal Landerhaven)/ (Star Bank, NA, Cincinnati LOC) 2,600,000 3,100,000 Cuyahoga County, OH IDA, (Series 1997) Weekly VRDNs (Northstar Plastics, Inc.)/ (Bank One, Ohio, N.A. LOC) 3,100,000 1,700,000 Cuyahoga County, OH IDA, IDRB (Series 1995) Weekly VRDNs (Avalon Precision Casting Co. Project)/(KeyBank, N.A. LOC) 1,700,000 3,500,000 Dayton, OH Department of Aviation, (Series 1998), 3.65% BANs, 6/15/1999 3,503,796 1,755,000 Delaware County, OH, (Street Improvement), 4.00% BANs, 7/28/ 1999 1,758,738 1,585,000 Delaware County, OH, IDRB (Series 1995) Weekly VRDNs (Air Waves, Inc. Project)/(KeyBank, N.A. LOC) 1,585,000 5,000,000 Dublin, OH, (Series 1998B), 3.75% BANs, 12/17/1998 5,000,302 8,500,000 Dublin, OH, Industrial Development Refunding Revenue Bonds (Series 1997) Weekly VRDNs (Witco Corp.)/(Fleet National Bank, Springfield, MA LOC) 8,500,000 5,055,000 Erie County, OH, Adjustable Rate Demand Health Care Facilities Bonds (Series 1996A) Weekly VRDNs (Providence Care Center)/(Fifth Third Bank of Northwestern OH LOC) 5,055,000 1,150,000 Fairfield County, OH, 4.45% BANs, 7/27/1999 1,156,105 1,750,000 Fairlawn City, OH, 3.90% BANs, 1/20/1999 1,750,933 7,000,000 Franklin County, OH Hospital Facility Authority, (Series 1992) Weekly VRDNs (Wesley Glenn, Inc.)/(Fifth Third Bank, Cincinnati LOC) 7,000,000 4,500,000 Franklin County, OH IDA Weekly VRDNs (Heekin Can, Inc.)/(PNC Bank, Ohio, N.A. LOC) 4,500,000 2,820,000 Franklin County, OH IDA Weekly VRDNs (Unicorn Leasing Corp.)/(Fifth Third Bank, Cincinnati LOC) 2,820,000 3,130,000 Franklin County, OH IDA, (Series 1995) Weekly VRDNs (Fabcon L.L.C. Project)/(Norwest Bank Minnesota, Minneapolis LOC) 3,130,000 4,900,000 Franklin County, OH IDA, Adjustable Rate Demand IDRB's (Series 1996A) Weekly VRDNs (Carams, Ltd.)/(Huntington National Bank, Columbus, OH LOC) 4,900,000 1,815,000 Franklin County, OH IDA, Adjustable Rate Demand IDRB's (Series 1996B) Weekly VRDNs (Carams, Ltd.)/(Huntington National Bank, Columbus, OH LOC) 1,815,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 OHIO-CONTINUED $ 1,810,000 Franklin County, OH, Adjustable Rate Demand Economic Development Revenue Refunding Bonds (Series 1996) Weekly VRDNs (CPM Investments)/(Huntington National Bank, Columbus, OH LOC) $ 1,810,000 4,500,000 Franklin County, OH, Adjustable Rate Demand Multifamily Housing Revenue Bonds (Series 1998), 3.85% TOBs (Jefferson Chase L.P.)/(Fifth Third Bank, Cincinnati LOC), Mandatory Tender 12/1/1998 4,500,000 1,350,000 Franklin County, OH, Health Care Facilities Revenue Bonds (Series 1994) Weekly VRDNs (Wesley Glenn, Inc.)/(Fifth Third Bank of Northwestern OH LOC) 1,350,000 21,300,000 Franklin County, OH, Hospital Revenue Bonds (Series 1995) Weekly VRDNs (Holy Cross Health System Corp.)/(Morgan Guaranty Trust Co., New York LIQ) 21,300,000 4,995,000 2 Franklin County, OH, PT156 (Series 1993A), 3.75% TOBs (Riverside United Methodist Hospital)/(AMBAC INS)/ (Bayerische Hypotheken-Und Wechsel-Bank Ag LIQ), Optional Tender 1/14/1999 4,995,000 1,000,000 Hamilton County, OH Health System Weekly VRDNs (West Park Community)/(Fifth Third Bank, Cincinnati LOC) 1,000,000 2,000,000 Hamilton, OH, (Issue I & IV), 3.75% BANs, 6/11/1999 2,000,000 1,305,000 Hamilton, OH, 3.49% BANs, 10/22/1999 1,307,329 7,500,000 Henry County, OH, Series 1996 Automatic Feed Project Weekly VRDNs (Huntington National Bank, Columbus, OH LOC) 7,500,000 3,600,000 Hilliard, OH, Adjustable Rate IDRB's (Series 1996) Weekly VRDNs (Medex, Inc.)/(Bank One, Ohio, N.A. LOC) 3,600,000 2,000,000 Holmes County, OH IDA Weekly VRDNs (Poultry Processing)/ (Rabobank Nederland, Utrecht LOC) 2,000,000 1,095,000 Huber Heights, OH, IDRB (Series 1994) Weekly VRDNs (Lasermike, Inc. Project)/(KeyBank, N.A. LOC) 1,095,000 1,723,000 Huber Heights, OH, Various Purpose Assessment, 3.74% BANs, 3/12/1999 1,723,235 1,700,000 Kent, OH, Adjustable Rate IDRB's (Series 1994) Weekly VRDNs (Raven's Metal Products, Inc. Project)/(FirstMerit Bank, N.A. LOC) 1,700,000 3,160,000 Lake County, OH, Adjustable Rate IDRB's (Series 1996) Weekly VRDNs (Apsco Properties, LTD.)/(FirstMerit Bank, N.A. LOC) 3,160,000 3,975,000 Lorain Port Authority, OH, (Series 1994) Weekly VRDNs (Spitzer Great Lakes Ltd., Inc.)/(Bank One, Ohio, N.A. LOC) 3,975,000 1,105,000 Lorain Port Authority, OH, Adjustable Rate Demand Port Development Refunding Revenue Bonds (Series 1996) Weekly VRDNs (Spitzer Project)/(Bank One, Ohio, N.A. LOC) 1,105,000 8,305,000 Lorain Port Authority, OH, IDRB (Series 1996) Weekly VRDNs (Brush Wellman, Inc.)/(National City Bank, Cleveland, OH LOC) 8,305,000 1,100,000 Louisville City, OH, 4.25% BANs, 5/3/1999 1,101,592 400,000 Lucas County, OH IDA Weekly VRDNs (Kuhlman Corp.)/(KeyBank, N.A. LOC) 400,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 OHIO-CONTINUED $ 1,510,000 Lucas County, OH, Hospital Facility Improvement Revenue Bonds (Series 93) Weekly VRDNs (Lott Industries, Inc.)/ (National City Bank, Cleveland, OH LOC) $ 1,510,000 220,000 Lucas County, OH, Hospital Improvement Revenue Weekly VRDNs (Sunshine Children's Home)/(National City Bank, Cleveland, OH LOC) 220,000 2,150,000 Lyndhurst, OH, 3.875% BANs, 3/17/1999 2,151,738 5,325,000 Mahoning County, OH Multifamily HFA Weekly VRDNs (International Towers, Inc.)/(PNC Bank, N.A. LOC) 5,325,000 5,360,000 Mahoning County, OH, Housing Revenue Bonds (Series 1995) Weekly VRDNs (Copeland Oaks Project)/(Bank One, Ohio, N.A. LOC) 5,360,000 310,000 Mansfield, OH, IDR Weekly VRDNs (Designed Metal Products, Inc.)/(Bank One, Ohio, N.A. LOC) 310,000 1,500,000 Marion County, OH Health Care Facilities Weekly VRDNs (Marion Area Counseling Center, Inc.)/(Huntington National Bank, Columbus, OH LOC) 1,500,000 1,135,000 Marion County, OH Hospital Authority, (Series 1991) Weekly VRDNs (Marion County, OH Pooled Hospital Program)/(Bank One, Ohio, N.A. LOC) 1,135,000 1,150,000 Mason City, OH, 3.95% BANs, 12/17/1998 1,150,209 3,500,000 Mayfield Village, OH IDA Weekly VRDNs (Beta Campus Co.)/ (KeyBank, N.A. LOC) 3,500,000 7,400,000 Medina County, OH, (Series 1997) Weekly VRDNs (Plaza 71 Associates Ltd.)/(Westdeutsche Landesbank Girozentrale LOC) 7,400,000 6,250,000 Medina County, OH, (Series 1998) Weekly VRDNs (Mack Industries)/(Huntington National Bank, Columbus, OH LOC) 6,250,000 3,000,000 Medina County, OH, (Series 1998) Weekly VRDNs (Michael Day Enterprises)/(KeyBank, N.A. LOC) 3,000,000 5,400,000 Medina County, OH, Solid Waste Disposal Revenue Bonds (Series 1995) Weekly VRDNs (Valley City Steel Company Project)/(KeyBank, N.A. LOC) 5,400,000 1,750,000 Mentor Village, OH School District, 3.95% BANs, 5/6/1999 1,750,599 3,280,000 Mentor, OH, Adjustable Rate IDRB's (Series 1997) Weekly VRDNs (Risch Investments/Roll Kraft, Inc.)/(Bank One, Ohio, N.A. LOC) 3,280,000 4,500,000 Miami County, OH, 3.90% BANs, 7/15/1999 4,506,696 4,675,000 Montgomery County, OH, Variable Rate Limited Obligation Revenue Bonds (Series 1996) Weekly VRDNs (Society of St. Vincent De Paul)/(National City Bank, Ohio LOC) 4,675,000 1,870,000 Montgomery, OH IDA Weekly VRDNs (Bethesda Two Limited Partnership)/(Huntington National Bank, Columbus, OH LOC) 1,870,000 10,000,000 New Albany, OH Community Authority, Adjustable Rate Multi- Purpose Infrastructure Improvement Bonds, (Series A) Weekly VRDNs (Huntington National Bank, Columbus, OH LOC) 10,000,000 730,000 North Olmsted, OH IDA, 3.95% TOBs (Therm-All)/(National City Bank, Ohio LOC), Optional Tender 2/1/1999 730,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 OHIO-CONTINUED $ 1,175,000 Ohio HFA Weekly VRDNs (Westchester Village)/(KeyBank, N.A. LOC) $ 1,175,000 7,775,000 2 Ohio HFA, (Series 1990-C) PT-239, 3.15% TOBs (GNMA COL)/ (Credit Suisse First Boston LIQ), Optional Tender 9/8/1999 7,775,000 6,835,000 Ohio HFA, 3.85% TOBs (Lincoln Park Associates)/(Bank One, Ohio, N.A. LOC), Optional Tender 11/1/1998 6,835,000 2,680,000 Ohio HFA, PT-122 Weekly VRDNs (GNMA COL)/(Banco Santander SA LIQ) 2,680,000 10,000,000 Ohio HFA, Residential Mortgage Revenue Notes (1998 Series A-2), 3.80% BANs, 3/1/1999 10,000,000 5,195,000 Ohio HFA, Single Family Mortgage (Series PT-71) Weekly VRDNs (GNMA COL)/(Commerzbank AG, Frankfurt LIQ) 5,195,000 8,880,000 Ohio HFA, Trust Receipts (Series 1996 FR/RI-6) Weekly VRDNs (GNMA COL)/(Bank of New York, New York LIQ) 8,880,000 3,300,000 Ohio HFA, Trust Receipts (Series 1997 FR/RI-14) Weekly VRDNs (GNMA GTD)/(Bank of New York, New York LIQ) 3,300,000 9,250,000 Ohio HFA, Trust Receipts, (Series 1996 FR/RI-5) Weekly VRDNs (GNMA COL)/(Bank of New York, New York LIQ) 9,250,000 20,000,000 2 Ohio HFA, Variable Rate Certificates (Series 1998Q), 3.75% TOBs (GNMA COL)/(Bank of America NT and SA, San Francisco LIQ), Optional Tender 8/4/1999 20,000,000 1,000,000 Ohio State Air Quality Development Authority Weekly VRDNs (Timken Co.)/(Credit Suisse First Boston LOC) 1,000,000 2,800,000 Ohio State Air Quality Development Authority, (Series 1988A) Weekly VRDNs (PPG Industries, Inc.) 2,800,000 3,000,000 Ohio State Air Quality Development Authority, (Series C), 4.20% TOBs (Ohio Edison Co.)/(Barclays Bank PLC, London LOC), Optional Tender 9/1/1999 3,008,826 7,600,000 Ohio State Air Quality Development Authority, Air Quality Development Revenue Bonds (1995 Series B) Weekly VRDNs (JMG Funding Limited Partnership)/(Societe Generale, Paris LOC) 7,600,000 1,565,000 Ohio State Higher Education Facility, Revenue Bonds Weekly VRDNs (Notre Dame College Project)/(National City Bank, Cleveland, OH LOC) 1,565,000 1,000,000 Ohio State Public Facilities Commission, (Series II A), 5.20% Bonds (AMBAC INS), 5/1/1999 1,008,923 4,400,000 Ohio State Public Facilities Commission, (Series II-1998A), 4.25% Bonds, 12/1/1998 4,402,260 5,000,000 Ohio State Public Facilities Commission, (Series II-B), 4.50% Bonds, 11/1/1998 5,000,000 3,200,000 Ohio State Public Facilities Commission, Higher Education Cap Facs (Series II-B), 5.00% Bonds, 11/1/1998 3,200,000 2,500,000 Ohio State Water Development Authority, Multimodal Water Development (Series 1993) Weekly VRDNs (Timken Co.)/ (Wachovia Bank of NC, N.A., Winston-Salem LOC) 2,500,000 5,000,000 Ohio State Water Development Authority, Ohio PCR Bonds (Series 1989) Weekly VRDNs (Duquesne Light Power Co.)/(First National Bank of Chicago LOC) 5,000,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 OHIO-CONTINUED $ 10,000,000 Ohio State Water Development Authority, PCR Refunding Bonds Weekly VRDNs (General Motors Corp.) $ 10,000,000 4,000,000 Ohio State Water Development Authority, PCR Bonds (Series 1988), 3.60% CP (Duquesne Light Power Co.)/(Toronto-Dominion Bank LOC), Mandatory Tender 11/12/1998 4,000,000 10,000,000 Ohio State Water Development Authority, Pollution Control Revenue Refunding Bonds (Series 1997) Weekly VRDNs (Philip Morris Cos., Inc.) 10,000,000 400,000 Ohio State Weekly VRDNs (John Carroll University, OH)/(PNC Bank, N.A. LOC) 400,000 4,350,000 Ohio State, Adjustable Rate Weekly VRDNs (General Motors Corp.) 4,350,000 5,000,000 Ohio State, Environmental Improvement Revenue Bonds (Series 1996) Weekly VRDNs (Newark Group Industries, Inc.)/(Chase Manhattan Bank N.A., New York LOC) 5,000,000 930,000 Ohio State, IDR (Series 1991) Weekly VRDNs (Standby Screw, Inc.)/(National City Bank, Columbus, OH LOC) 930,000 1,200,000 Ohio State, IDRB (Series 1994) Weekly VRDNs (Anomatic Corp.)/(National City Bank, Columbus, OH LOC) 1,200,000 4,840,000 Ohio Water Development Authority, PA-201 Weekly VRDNs (AMBAC INS)/(Merrill Lynch Capital Services, Inc. LIQ) 4,840,000 4,600,000 Oregon City, OH, (Series 1997-3), 4.00% BANs, 12/3/1998 4,600,581 1,000,000 Orrville, OH IDA Weekly VRDNs (O.S. Associates/Contours, Inc.)/(National City Bank, Cleveland, OH LOC) 1,000,000 2,000,000 Pickerington Local School District, OH, 4.04% BANs, 1/22/1999 2,001,487 35,000 Portage County, OH IDA Weekly VRDNs (D & W Associates)/(Bank One, Ohio, N.A. LOC) 35,000 5,000,000 Portage County, OH IDA, (Series 1998) Weekly VRDNs (Amweld Building Products, Inc.)/(First Union National Bank, Charlotte, N.C. LOC) 5,000,000 305,000 Portage County, OH IDA, 3.90% TOBs (Neidlinger)/(KeyBank, N.A. LOC), Optional Tender 3/1/1999 305,000 4,050,000 Portage County, OH IDA, Adjustable Rate IDRB's (Series 1996) Weekly VRDNs (Barnette Project)/(National City, Northeast LOC) 4,050,000 735,000 Portage County, OH IDA, Industries Revenue Bonds Weekly VRDNs (Lovejoy Industries)/(Star Bank, NA, Cincinnati LOC) 735,000 3,690,000 Preble Shawnee, OH Local Schools, 4.00% BANs, 3/31/1999 3,695,149 5,000,000 Rickenbacker, OH Port Authority, (Series 1992) Weekly VRDNs (Rickenbacker Holdings, Inc.)/(Bank One, Ohio, N.A. LOC) 5,000,000 4,275,000 Ross County, OH, Hospital Facilities Revenue Bonds (Series 1995) Weekly VRDNs (Medical Center Hospital Project)/(Fifth Third Bank, Cincinnati LOC) 4,275,000 2,000,000 Ross County, OH, Hospital Revenue Bonds Weekly VRDNs (Adena Health System)/(Fifth Third Bank, Cincinnati LOC) 2,000,000 5,200,000 Scioto County, OH Hospital Authority Weekly VRDNs (AMBAC INS)/(First National Bank of Chicago LIQ) 5,200,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 OHIO-CONTINUED $ 1,600,000 Seneca County, OH Hospital Facility Authority Weekly VRDNs (St. Francis Home)/(National City Bank, Cleveland, OH LOC) $ 1,600,000 2,000,000 Seven Hills City, OH, (Series 1998), 3.85% BANs, 8-1/2/1999 2,000,741 400,000 Solon, OH, IDR Weekly VRDNs (Graphic Laminating)/(KeyBank, N.A. LOC) 400,000 1,000,000 South Euclid, OH, Sewer System Improvements, 3.95% BANs, 4/ 7/1999 1,001,037 800,000 Stark County, OH IDR Weekly VRDNs (Sancap Abrasives, Inc.)/ (KeyBank, N.A. LOC) 800,000 6,600,000 Stark County, OH IDR Weekly VRDNs (Shearer's Foods, Inc.)/ (Bank One, Ohio, N.A. LOC) 6,600,000 1,945,000 Stark County, OH IDR, (Series 1994) Weekly VRDNs (Wilkof Morris)/(KeyBank, N.A. LOC) 1,945,000 1,210,000 Stark County, OH IDR, IDRB (Series 1996) Weekly VRDNs (Foundations Systems and Anchors, Inc. Project)/(Bank One, Ohio, N.A. LOC) 1,210,000 1,140,000 Strongsville, OH, IDRB (Series 1994) Weekly VRDNs (Nutro Machinery Corp., Project)/(Huntington National Bank, Columbus, OH LOC) 1,140,000 2,250,000 Summit County, OH IDR Weekly VRDNs (Maison Aine Limited Partnership)/(KeyBank, N.A. LOC) 2,250,000 4,500,000 Summit County, OH IDR, (Series 1994) Weekly VRDNs (Harry London Candies, Inc.)/(Bank One, Ohio, N.A. LOC) 4,500,000 1,300,000 Summit County, OH IDR, (Series 1997) Weekly VRDNs (Baker McMillen Co.)/(National City, Northeast LOC) 1,300,000 3,180,000 Summit County, OH IDR, (Series 1997) Weekly VRDNs (Malco Products, Inc.)/(Bank One, Ohio, N.A. LOC) 3,180,000 905,000 Summit County, OH IDR, 3.80% TOBs (Matech Machine Tool Co.)/ (Bank One, Ohio, N.A. LOC), Optional Tender 2/1/1999 905,000 745,000 Summit County, OH IDR, 3.80% TOBs (S.D. Meyers, Inc.)/(Bank One, Ohio, N.A. LOC), Optional Tender 2/15/1999 745,000 975,000 Summit County, OH IDR, 3.85% TOBs (Rogers Industrial Products, Inc.)/(Bank One, Ohio, N.A. LOC), Optional Tender 11/1/1998 975,000 590,000 Summit County, OH IDR, 3.90% TOBs (Bechmer-Boyce Project)/ (KeyBank, N.A. LOC), Optional Tender 1/15/1999 590,000 290,000 Summit County, OH IDR, 3.90% TOBs (Keltec Industries)/(Bank One, Ohio, N.A. LOC), Optional Tender 3/1/1999 290,000 690,000 Summit County, OH IDR, 3.90% TOBs (Universal Rack)/(National City Bank, Cleveland, OH LOC), Optional Tender 3/1/1999 690,000 1,325,000 Summit County, OH IDR, Adjustable Rate IDRB's (Series 1996) Weekly VRDNs (Fomo Products, Inc.)/(FirstMerit Bank, N.A. LOC) 1,325,000 755,000 Summit County, OH IDR, Bonds (Series 1994) Weekly VRDNs (Austin Printing Co., Inc.)/(Bank One, Ohio, N.A. LOC) 755,000 2,545,000 Summit County, OH IDR, IDRB (Series 1994B) Weekly VRDNs (Harry London Candies, Inc.)/(Bank One, Ohio, N.A. LOC) 2,545,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 OHIO-CONTINUED $ 745,000 Summit County, OH IDR, IDRB (Series 1995) Weekly VRDNs (Cardtech Project (OH))/(KeyBank, N.A. LOC) $ 745,000 1,215,000 Summit County, OH IDR, Industrial Development Bonds (Series 1996) Weekly VRDNs (Creative Screen Print Project)/(National City, Northeast LOC) 1,215,000 1,045,000 Summit County, OH IDR, Multi-Mode Variable Rate I Weekly VRDNs (Mastergraphics, Inc. Project)/(KeyBank, N.A. LOC) 1,045,000 2,155,000 Summit County, OH IDR, Variable Rate IDRB's (Series 1998A) Weekly VRDNs (Wintek Ltd.)/(FirstMerit Bank, N.A. LOC) 2,155,000 6,000,000 Summit County, OH, (Series A), 4.50% BANs, 6/3/1999 6,025,399 3,415,000 Summit County, OH, Adjustable Rate Healthcare Facilities Revenue Bonds (Series 1996) Weekly VRDNs (United Disability Services, Inc.)/(FirstMerit Bank, N.A. LOC) 3,415,000 3,200,000 Toledo, OH, Adjustable Rate City Services Special Assessment Notes (Services 1997) Weekly VRDNs (Canadian Imperial Bank of Commerce, Toronto LOC) 3,200,000 4,000,000 Toledo-Lucas County, OH Port Authority, Airport Development Revenue Bonds Series 1996-1) Weekly VRDNs (Burlington Air Express, Inc.)/(ABN AMRO Bank N.V., Amsterdam LOC) 4,000,000 1,000,000 Toledo-Lucas County, OH Port Authority, IDA Weekly VRDNs (Medusa Corp.)/(Bayerische Vereinsbank AG, Munich LOC) 1,000,000 2,100,000 Trumbull County, OH IDA, (Series 1989) Weekly VRDNs (McSonald Steel Corp.)/(PNC Bank, N.A. LOC) 2,100,000 1,270,000 Trumbull County, OH IDA, IDR Refunding Bonds (Series 1994) Weekly VRDNs (Churchill Downs, Inc.)/(Bank One, Ohio, N.A. LOC) 1,270,000 1,050,000 Tuscarawas County, OH, Adjustable Rate IDRB's (Series 1995) Weekly VRDNs (Primary Packaging, Inc.)/(FirstMerit Bank, N.A. LOC) 1,050,000 2,650,000 Williams County, OH, Multi-Mode Variable Rate IDRB's (Series 1996) Weekly VRDNs (Allied Moulded Products, Inc.)/(KeyBank, N.A. LOC) 2,650,000 1,030,000 Willoughby City, OH, IDR Refunding Bonds (Series 1995A) Weekly VRDNs (Pine Ridge Shopping Center Company Project)/ (Star Bank, NA, Cincinnati LOC) 1,030,000 1,095,000 Willoughby City, OH, IDR Revenue Bonds (Series 1995 B) Weekly VRDNs (Pine Ridge Shopping Center Company Project)/ (Star Bank, NA, Cincinnati LOC) 1,095,000 1,000,000 Wood County, OH Weekly VRDNs (Principle Business Enterprises)/(National City Bank, Cleveland, OH LOC) 1,000,000 2,030,000 Wood County, OH, EDRB Weekly VRDNs (Roe Inc. Project)/ (Huntington National Bank, Columbus, OH LOC) 2,030,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 OHIO-CONTINUED $ 1,000,000 Wood County, OH, Williams Industrial Service, Inc., Project Weekly VRDNs (Williams Industrial Service, Inc.)/(Huntington National Bank, Columbus, OH LOC) $ 1,000,000 3,950,000 Youngstown, OH, Adjustable Rate Demand IDRB's (Series 1996A) Weekly VRDNs (Cantar/Polyair Corp./Performa Corp.)/(Marine Midland Bank N.A., Buffalo, NY LOC) 3,950,000 Total Investments (at amortized cost) 3 $ 566,006,031
Securities that are subject to Alternative Minimum Tax represent 44.9% of the portfolio as calculated based upon total portfolio market value. 1 The Fund may only invest in securities rated in one of the two highest short-term rating categories by one or more nationally recognized statistical rating organizations ("NRSROs") or unrated securities of comparable quality. 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, MIG- 1 or MIG-2 by Moody's Investors Service, Inc., or F-1+, F-1, or F-2 by Fitch IBCA, Inc. are all considered rated in one of the two highest short-term rating categories. Securities rated in the highest short-term rating category (and unrated securities of comparable quality) are identified as First Tier securities. Securities rated in the second highest short-term rating category (and unrated securities of comparable quality) are identified as Second Tier securities. The Fund follows applicable regulations in determining whether a security is rated and whether a security rated by multiple NRSROs in different rating categories should be identified as a First or Second Tier security. At October 31, 1998, the portfolio securities were rated as follows: Tier Rating Percentage Based on Total Market Value (Unaudited) FIRST TIER SECOND TIER 96.0% 4.0% 2 Denotes a restricted security which is subject to restrictions on resale under Federal Securities laws. At October 31, 1998, these securities amounted to $35,105,000 which represents 6% of net assets. 3 Also represents cost for federal tax purposes. Note: The categories of investments are shown as a percentage of net assets ($569,237,375) at October 31, 1998. The following acronyms are used throughout this portfolio: AMBAC -American Municipal Bond Assurance Corporation BANs -Bond Anticipation Notes COL -Collateralized CP -Commercial Paper EDRB -Economic Development Revenue Bonds FSA -Financial Security Assurance GNMA -Government National Mortgage Association GTD -Guaranty HFA -Housing Finance Authority IDA -Industrial Development Authority IDR -Industrial Development Revenue IDRB -Industrial Development Revenue Bond INS -Insured LIQ -Liquidity Agreement LOC -Letter of Credit MBIA -Municipal Bond Investors Assurance PCR -Pollution Control Revenue PLC -Public Limited Company RANs -Revenue Anticipation Notes SA -Support Agreement TANs -Tax Anticipation Notes TOBs -Tender Option Bonds VRDNs -Variable Rate Demand Notes See Notes which are an integral part of the Financial Statements STATEMENT OF ASSETS AND LIABILITIES October 31, 1998
ASSETS: Total investments in securities, at amortized cost and value $ 566,006,031 Cash 361,802 Income receivable 3,658,143 Receivable for shares sold 3,212 Total assets 570,029,188 LIABILITIES: Payable for shares redeemed $ 18,618 Income distribution payable 530,528 Accrued expenses 242,667 Total liabilities 791,813 Net Assets for 569,237,375 shares outstanding $ 569,237,375 NET ASSET VALUE, OFFERING PRICE, AND REDEMPTION PROCEEDS PER SHARE: INSTITUTIONAL SERVICE SHARES: $94,895,944 / 94,895,944 shares outstanding $1.00 CASH II SHARES: $342,946,498 / 342,946,498 shares outstanding $1.00 INSTITUTIONAL SHARES: $131,394,933 / 131,394,933 shares outstanding $1.00
See Notes which are an integral part of the Financial Statements STATEMENT OF OPERATIONS Year Ended October 31, 1998
INVESTMENT INCOME: Interest $ 16,793,463 EXPENSES: Investment advisory fee $ 1,795,830 Administrative personnel and services fee 338,546 Custodian fees 15,476 Transfer and dividend disbursing agent fees and expenses 308,672 Directors'/Trustees' fees 2,258 Auditing fees 13,000 Legal fees 16,903 Portfolio accounting fees 110,848 Distribution services fee-Cash II Shares 847,854 Shareholder services fee-Institutional Service Shares 208,486 Shareholder services fee-Cash II Shares 706,545 Shareholder services fee-Institutional Shares 207,293 Share registration costs 47,435 Printing and postage 34,042 Insurance premiums 28,241 Miscellaneous 4,249 Total expenses 4,685,678 WAIVERS: Waiver of investment advisory fee $ (1,034,602) Waiver of distribution services fee-Cash II Shares (141,309) Waiver of shareholder services fee-Institutional Service Shares (41,697) Waiver of shareholder services fee-Institutional Shares (207,293) Total waivers (1,424,901) Net expenses 3,260,777 Net investment income $ 13,532,686
See Notes which are an integral part of the Financial Statements STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED OCTOBER 31 1998 1997 INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income $ 13,532,686 $ 11,151,320 DISTRIBUTIONS TO SHAREHOLDERS: Distributions from net investment income Institutional Service Shares (2,641,476) (2,309,907) Cash II Shares (8,076,502) (6,696,096) Institutional Shares (2,814,708) (2,145,317) Change in net assets resulting from distributions to shareholders (13,532,686) (11,151,320) SHARE TRANSACTIONS: Proceeds from sale of shares 2,158,852,726 1,714,819,513 Net asset value of shares issued to shareholders in payment of distributions declared 8,564,300 7,135,525 Cost of shares redeemed (1,979,838,390) (1,678,846,130) Change in net assets resulting from share transactions 187,578,636 43,108,908 Change in net assets 187,578,636 43,108,908 NET ASSETS: Beginning of period 381,658,739 338,549,831 End of period $ 569,237,375 $ 381,658,739
See Notes which are an integral part of the Financial Statements NOTES TO FINANCIAL STATEMENTS October 31, 1998 ORGANIZATION Federated Municipal Trust (the "Trust") is registered under the Investment Company Act of 1940, as amended (the "Act") as an open-end, management investment company. The Trust consists of 17 portfolios. The financial statements included herein are only those of Ohio Municipal Cash Trust (the "Fund"). The financial statements of the other portfolios are presented separately. The assets of each portfolio are segregated and a shareholder's interest is limited to the portfolio in which shares are held. The Fund offers three classes of shares: Institutional Service Shares, Cash II Shares, and Institutional Shares. The investment objective of the Fund is current income exempt from federal regular income tax and the personal income taxes imposed by the State of Ohio and Ohio municipalities consistent with stability of principal. 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. 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. RESTRICTED SECURITIES Restricted securities are securities that may only be resold upon registration under federal securities laws or in transactions exempt from such registration. Many restricted securities may be resold in the secondary market in transactions exempt from registration. In some cases, the restricted securities may be resold without registration upon exercise of a demand feature. Such restricted securities may be determined to be liquid under criteria established by the Board of Trustees. The Fund will not incur any registration costs upon such resales. Restricted securities are valued at amortized cost in accordance with Rule 2a-7 under the Investment Company Act of 1940. Additional information on each restricted security held at October 31, 1998 is as follows: SECURITY Acquisition Acquisition Date Cost Franklin County, OH, PT-156 (Series 1993A) 1/23/1998 4,995,000 Ohio HFA, PT-239 (Series 1990-C) 10/9/1998 7,775,000 Ohio HFA, Variable Rate Certificates (Series 1998Q) 8/25/1998 20,000,000 Cleveland, OH Parking Facilities, PA-182 (Series 1996) 10/10/1997 2,335,000 USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts of assets, liabilities, expenses and revenues reported in the financial statements. Actual results could differ from those estimated. OTHER Investment transactions are accounted for on the trade date. SHARES OF BENEFICIAL INTEREST The Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest (without par value) for each class of shares. At October 31, 1998, capital paid-in aggregated $569,237,375. Transactions in shares were as follows:
YEAR ENDED OCTOBER 31 1998 1997 CASH II SHARES: Shares sold 1,005,297,220 846,566,747 Shares issued to shareholders in payment of distributions declared 7,890,344 6,536,111 Shares redeemed (915,569,899) (813,922,799) Net change resulting from Cash II share transactions 97,617,665 39,180,059 YEAR ENDED OCTOBER 31 1998 1997 INSTITUTIONAL SERVICE SHARES: Shares sold 311,583,533 204,340,077 Shares issued to shareholders in payment of distributions declared 576,992 477,179 Shares redeemed (297,884,069) (183,918,781) Net change resulting from Institutional Service share transactions 14,276,456 20,898,475 YEAR ENDED OCTOBER 31 1998 1997 INSTITUTIONAL SHARES: Shares sold 841,971,973 663,912,689 Shares issued to shareholders in payment of distributions declared 96,964 122,235 Shares redeemed (766,384,422) (681,004,550) Net change resulting from Institutional share transactions 75,684,515 (16,969,626) Net change resulting from share transactions 187,578,636 43,108,908
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES INVESTMENT ADVISORY FEE Federated Management, 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. DISTRIBUTION SERVICES FEE The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b- 1 under the Act. Under the terms of the Plan, the Fund will compensate Federated Securities Corp. ("FSC"), the principal distributor, from the net assets of the Fund to finance activities intended to result in the sale of the Fund's Class II Shares. The Plan provides that the Fund may incur distribution expenses up to 0.30% of the average daily net assets of Cash II Shares, annually, to compensate FSC. The distributor may voluntarily choose to waive any portion of its fee. The distributor can modify or terminate this voluntary waiver at any time at its sole discretion. SHAREHOLDER SERVICES FEE Under the terms of a Shareholder Services Agreement with Federated Shareholder Services ("FSS"), the Fund will pay FSS up to 0.25% of average daily net assets of the Fund for the period. The fee paid to FSS is used to finance certain services for shareholders and to maintain shareholder accounts. FSS may voluntarily choose to waive any portion of its fee. FSS can modify or terminate this voluntary waiver at any time at its sole discretion. TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES FServ, through its subsidiary, Federated Shareholder Services Company ("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. INTERFUND TRANSACTIONS During the period ended October 31, 1998, the Fund engaged in purchase and sale transactions with funds that have a common investment adviser (or affiliated investment advisers), common Directors/Trustees, and/or common Officers. These purchase and sale transactions were made at current market value pursuant to Rule 17a-7 under the Act amounting to $700,580,000 and $652,664,786, respectively. GENERAL Certain of the Officers and Trustees of the Trust are Officers and Directors or Trustees of the above companies. CONCENTRATION OF CREDIT RISK Since the Fund invests a substantial portion of its assets in issuers located in one state, it will be more susceptible to factors adversely affecting issuers of that state than would be a comparable tax-exempt mutual fund that invests nationally. In order to reduce the credit risk associated with such factors, at October 31, 1998, 64.5% of the securities in the portfolio of investments are backed by letters of credit or bond insurance of various financial institutions and financial guaranty assurance agencies. The percentage of investments insured by or supported (backed) by a letter of credit from any one institution or agency did not exceed 15.4% of total investments. 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 BOARD OF TRUSTEES OF FEDERATED MUNICIPAL TRUST AND THE SHAREHOLDERS OF OHIO MUNICIPAL CASH TRUST: We have audited the accompanying statement of assets and liabilities of Ohio Municipal Cash Trust (an investment portfolio of Federated Municipal Trust, a Massachusetts business trust), including the schedule of portfolio investments, as of October 31, 1998, the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for the periods presented. These financial statements and financial highlights are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the 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 October 31, 1998, by correspondence with the custodian. 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 Ohio Municipal Cash Trust (an investment portfolio of Federated Municipal Trust) as of October 31, 1998, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and its financial highlights for the periods presented, in conformity with generally accepted accounting principles. Arthur Andersen LLP Boston, Massachusetts December 23, 1998 [Graphic] PROSPECTUS Ohio Municipal Cash Trust A Portfolio of Federated Municipal Trust CASH II SHARES December 31, 1998 A Statement of Additional Information (SAI) dated December 31, 1998, is incorporated by reference into this prospectus. To obtain the SAI 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] Ohio Municipal Cash 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. 811-5911 Cusip 314229840 1030105A-CII (12/98) [Graphic] PROSPECTUS Ohio Municipal Cash Trust A Portfolio of Federated Municipal Trust INSTITUTIONAL SHARES A money market mutual fund seeking current income exempt from federal regular income tax and the personal income taxes imposed by the State of Ohio and Ohio municipalities. 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. December 31, 1998 CONTENTS Risk/Return Summary 1 What are the Fund's Fees and Expenses? 2 What are the Fund's Investment Strategies? 3 What are the Principal Securities in Which the Fund Invests? 3 What are the Specific Risks of Investing in the Fund? 4 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 Last Meeting of Shareholders 10 Report of Independent Public Accountants 29 Risk/Return Summary WHAT IS THE FUND'S INVESTMENT OBJECTIVE? The Fund is a money market fund which seeks to maintain a stable net asset value of $1.00. The Fund's investment objective is current income which is exempt from federal regular income tax and the personal income taxes imposed by the State of Ohio and Ohio municipalities consistent with stability of principal. 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 tax-exempt securities so that the Fund's annual interest income is exempt from federal regular income tax and Ohio state income taxes. Interest from the Fund's investments may be subject to the federal alternative miminum tax for individuals and corporations. WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND? Because the Fund may invest a significant portion of its assets in securities of a single issuer, an investment in the Fund may involve additional risks compared to a fully diversified money market 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] - See Appendix C-9 Historically, the Fund has maintained a constant $1.00 net asset value per share. The bar chart shows the variability of the Fund's Institutional Shares total returns on a yearly basis. The Fund's Institutional Shares are not sold subject to a sales charge (load). The total returns displayed above are based upon net asset value. The Fund's Institutional Shares year-to-date total return as of the most recent calendar quarter of September 30, 1998 was 2.53%. Within the period shown in the Chart, the Fund's Institutional Shares highest quarterly return was 0.91% (quarter ended June 30, 1997). Its lowest quarterly return was 0.80% (quarter ended March 31, 1997). The Fund's Institutional Shares Shares Seven-Day Net Yield as of 12/31/97 was 3.81%. The following table represents the Fund's Institutional Shares Average Total Return through 12/31/1997. CALENDAR PERIOD FUND 1 Year 3.53% Start of Performance 1 3.48% 1 The Fund's Institutional Shares start of performance date was March 5, 1996. Investors may call the Fund at 1-800-341-7400 to acquire the current Seven- Day Net Yield. 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? OHIO MUNICIPAL CASH TRUST FEES AND EXPENSES This table describes the fees and expenses that you may pay if you buy, hold and redeem shares of the Fund's Institutional Shares. SHAREHOLDER FEES 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 a percentage of average net assets) Management Fee 2 0.40% Distribution (12b-1) Fee None Shareholder Services Fee 3 0.25% Other Expenses 0.21% Total Annual Fund Operating Expenses 0.86%
1 Although not contractually obligated to do so, the adviser and shareholder services provider waived certain amounts. These are shown below along with the net expenses the Fund actually paid for the fiscal year ended October 31, 1998. Waiver of Fund Expenses 0.48% Total Actual Annual Fund Operating Expenses (after waivers) 0.38%
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 0.17% for the year ended October 31, 1998. 3 The shareholder services fee has been voluntarily waived. This voluntary waiver can be terminated at any time. There was no shareholder services fee paid by the Fund (after the voluntary waiver) for the year ended October 31, 1998. EXAMPLE The following Example is intended to help you compare the cost of investing in the Ohio Municipal Cash Trust's Institutional Shares with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund's Institutional 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 Ohio Municipal Cash Trust's Institutional Shares operating expenses are BEFORE WAIVERS as shown above and remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS Expenses assuming no redemption $88 $274 $477 $1,061
What are the Fund's Investment Strategies? The Fund invests in a portfolio of high-quality tax-exempt securities maturing in 13 months or less. The average maturity of the Fund's portfolio, computed on a dollar-weighted basis, will be 90 days or less. The Fund's Adviser performs a fundamental credit analysis to develop an approved list of issuers and securities that meet the Adviser's minimum credit standards. The Adviser targets an average portfolio maturity based upon its interest rate outlook and the tax-exempt securities available. The Adviser structures the portfolio by combining variable rate demand instruments and municipal notes. Depending on the supply of tax-exempt securities, the Adviser generally shortens the portfolio's maturity when it expects interest rates to rise and extends the maturity when it expects interest rates to fall. TEMPORARY DEFENSIVE INVESTMENTS During adverse market conditions the Fund may temporarily depart from its principal investment strategies by investing in securities subject to federal regular income tax and the personal income taxes imposed by the State of Ohio and Ohio municipalities. Temporary investments will be of comparable quality to other securities in which the Fund invests. This may cause the Fund to give up greater investment returns to maintain the safety of principal. This also may cause the Fund to receive and distribute taxable income to investors. What are the Principal Securities in Which the Fund Invests? TAX-EXEMPT SECURITIES Tax-exempt securities are fixed income securities that pay interest exempt from regular federal income taxes. States, counties, cities and other political subdivisions and authorities typically issue tax-exempt securities. Tax-exempt securities are generally differentiated by their source of repayment. FIXED INCOME SECURITIES Fixed income 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. VARIABLE RATE DEMAND INSTRUMENTS Variable rate demand instruments are tax-exempt securities that require the issuer or a third party, such as a dealer or bank, to repurchase the security for its face value upon demand. The securities also bear interest at a variable rate intended to cause the securities to trade at their face value. The Fund treats demand instruments as short-term securities, even though their stated maturity may extend beyond 13 months. MUNICIPAL NOTES Municipal notes are short-term tax-exempt securities. Many municipalities issue such notes to fund their current operations before collecting taxes or other municipal revenues. Municipalities may also issue notes to fund capital projects prior to issuing long-term bonds. The issuers typically repay the notes at the end of their fiscal year, either with taxes, other revenues or proceeds from newly issued notes or bonds. INVESTMENT 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 rating services or be of comparable quality to securities having such ratings. CREDIT ENHANCEMENT Credit enhancement consists of an arrangement in which a company agrees to pay amounts due on a fixed income security if the issuer defaults. In some cases the company providing credit enhancement makes all payments directly to the security holders and receives reimbursement from the issuer. Normally, the credit enhancer has greater financial resources and liquidity than the issuer. For this reason, the Adviser usually evaluates the credit risk of a fixed income security based solely upon its credit enhancement. What are the Specific Risks of Investing in the Fund? Although there are many factors which may affect an investment in the Fund, the principal risks of investing in a tax-exempt money market fund are described below. CREDIT RISK Credit risk is the possibility that an issuer or a credit enhancer will default (fails to repay interest and principal when due). If an issuer or credit enhancer defaults, the Fund will lose money. Money market funds try to minimize this risk by purchasing higher quality securities. Many fixed income securities receive credit ratings from companies such as Standard & Poor's and Moody's Investor Services. Fixed income securities receive different credit ratings depending on the rating company's assessment of the likelihood of default by the issuer. The lower the credit rating, the greater the credit risk. If the security is unrated, greater reliance is placed on the Adviser's credit assessment. 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. SECTOR RISK Most of the Fund's securities will be invested in issuers located in Ohio. In addition, a substantial part of the Fund's portfolio may be comprised of tax-exempt securities issued or credit enhanced by companies in similar businesses or with other similar characteristics. As a result, the Fund will be more susceptible to any economic, business, political, or other developments which generally affect these issuers. 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 determined net asset value (NAV). The Fund does not charge a sales charge. NAV is determined at 12:00 noon and 1:00 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 offers three share classes: Institutional Shares, Institutional Service Shares and Cash II Shares each representing interests in a single portfolio of securities. This prospectus relates only to Institutional Shares. Each share class has different expenses, which affect their performance. Contact your investment professional or call 1-800-341-7400 for more information concerning the other classes. The Fund's Distributor markets the Shares described in this prospectus to institutions acting in an agent or fiduciary capacity or to individuals directly or through investment professionals. The Fund may not be a suitable investment for retirement plans or for non-Ohio taxpayers because it invests in Ohio tax-exempt securities. 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 1:00 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 on the day 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 CLEARINGHOUSE (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 redemtion 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 12:00 noon (Eastern time), your redemption will be wired to you the same day. You will not receive that day's dividend. If you call after 12:00 noon (Eastern time), your redemption will be wired to you the following business day. You will receive that day's dividend. Under limited circumstances, arrangements may be made with the Distributor for same-day payment of redemption proceeds, without that day's dividend, for redemption requests received before 2:00 p.m. (Eastern time). 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 30 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 CONFIRMATIONS AND ACCOUNT STATEMENTS You will receive confirmation of purchases and redemptions (except for systematic transactions). In addition, 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, 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. It is anticipated that Fund distributions will be primarily dividends that are exempt from federal income tax, although a portion of the Fund's dividends may not be exempt. Dividends may be subject to state and local taxes, although the Fund's dividends will be exempt from Ohio state personal income tax to the extent they are derived from interest on obligations exempt from Ohio personal income taxes. Capital gains and non-exempt dividends are taxable whether paid in cash or reinvested in the Fund. 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 Management. 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 and/or provide administrative services to more than 300 mutual funds and private accounts, which totaled over $120 billion in assets as of December 31, 1997. Federated was established in 1955 and is one of the largest mutual fund investment managers in the United States with more than 2,000 employees. Over 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 affect on the Fund. Last Meeting of Shareholders A special meeting of shareholders of Ohio Municipal Cash Trust was held on May 21, 1998. On February 24, 1998, the record date for shareholders voting at the meeting, there were 407,796,744 total outstanding shares. The following items were considered by shareholders of the Fund and the results of their voting were as follows: AGENDA ITEM To approve or disapprove amending and changing from fundamental to an operating policy the Fund's ability to invest in restricted securities. The results of shareholders voting were as follows:
SHARES VOTED SHARES VOTED SHARES BROKER FOR AGAINST ABSTAINED NON-VOTE 221,451,369 6,231,898 8,923,545 17,751
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-Institutional Shares (For a share outstanding throughout each period) Reference is made to the Report of Independent Public Accountants on page 29.
YEAR ENDED OCTOBER 31 1998 1997 1996 1 NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 INCOME FROM INVESTMENT OPERATIONS: Net investment income 0.03 0.03 0.02 LESS DISTRIBUTIONS: Distributions from net investment income (0.03) (0.03) (0.02) NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 TOTAL RETURN 2 3.43% 3.49% 2.22% RATIOS TO AVERAGE NET ASSETS: Expenses 0.38% 0.37% 0.37% 4 Net investment income 3.39% 3.40% 3.38% 4 Expense waiver/reimbursement 3 0.48% 0.48% 0.51% 4 SUPPLEMENTAL DATA: Net assets, end of period (000 omitted) $131,395 $55,710 $72,680
1 Reflects operations for the period from March 5, 1996 (date of initial public investment) to October 31, 1996. 2 Based on net asset value, which does not reflect the sales charge or contingent deferred sales charge, if applicable. 3 This voluntary expense decrease is reflected in both the expense and net investment income ratios shown above. 4 Computed on an annualized basis. See Notes which are an integral part of the Financial Statements Portfolio of Investments October 31, 1998
PRINCIPAL AMOUNT VALUE Short-Term Municipals-99.4% 1 OHIO-99.4% $ 2,250,000 Akron, Bath & Copley, OH Joint Township Weekly VRDNs (Visiting Nurses)/(National City Bank, Cleveland, OH LOC) $ 2,250,000 1,925,000 Akron, OH, Street Improvement Special Assessment Notes (Series 1997), 4.26% RANs, 12/18/1998 1,925,976 3,000,000 American Municipal Power-Ohio, Inc., Electric System Improvement Revenue Bonds, 3.85% BANs (Bryan, OH), 8/27/1999 3,000,000 2,425,000 Ashland County, OH Health Care Weekly VRDNs (Brethren Care, Inc.)/(National City Bank, Ohio LOC) 2,425,000 1,750,000 Ashland, OH, 3.95% TANs, 7/15/1999 1,752,954 28,560,000 Banc One Capital Higher Education Tax-Exempt Income Trust, (Series 2 Certificates of Ownership) Weekly VRDNs (Bank One, Kentucky LOC) 28,560,000 5,875,000 Belmont County, OH Weekly VRDNs (Lesco, Inc.)/(PNC Bank, N.A. LOC) 5,875,000 1,400,000 Belmont County, OH, 4.18% BANs, 12/1/1998 1,400,311 3,140,000 Bowling Green, OH, (Series 1998), 3.80% BANs, 6/17/1999 3,140,944 4,000,000 Brookville, OH, (Series 1988) Weekly VRDNs (Green Tokai)/ (Bank of Tokyo-Mitsubishi Ltd. LOC) 4,000,000 3,100,000 Butler County, OH, 3.50% BANs, 3/19/1999 3,104,654 1,500,000 Butler County, OH, 4.10% BANs, 8/5/1999 1,504,383 5,750,000 Clark County, OH, Multifamily Housing Revenue Bonds (Series 1997) Weekly VRDNs (Ohio Masonic Home)/(Huntington National Bank, Columbus, OH LOC) 5,750,000 6,900,000 Clermont County, OH, Variable Rate IDRB's (Series 1997) Weekly VRDNs (Buriot International, Inc.)/(KeyBank, N.A. LOC) 6,900,000 2,110,000 Cleveland, OH Airport System, Series C, 4.25% Bonds (FSA INS), 1/1/1999 2,111,516 2,000,000 Cleveland, OH IDA, (Series B), 4.50% BANs, 10/1/1999 2,019,618 2,335,000 2 Cleveland, OH Parking Facilities, PA-182 (Series 1996) Weekly VRDNs (MBIA INS)/(Merrill Lynch Capital Services, Inc. LIQ) 2,335,000 1,600,000 Clinton County, OH Hospital Authority Weekly VRDNs (Clinton Memorial Hospital)/(National City Bank, Columbus, OH LOC) 1,600,000 1,700,000 Columbiana County, OH, Industrial Development Revenue Bonds Weekly VRDNs (C & S Land Company Project)/(Bank One, Ohio, N.A. LOC) 1,700,000 5,000,000 Cuyahoga County, OH Hospital Authority, (Series 1998B) Weekly VRDNs (Cleveland Clinic)/(Chase Manhattan Bank N.A., New York LIQ) 5,000,000 2,000,000 Cuyahoga County, OH Hospital Authority, (Series C) Weekly VRDNs (Cleveland Clinic)/(Bank of America NT and SA, San Francisco LIQ) 2,000,000 PRINCIPAL AMOUNT VALUE Short-Term Municipals-continued 1 OHIO-CONTINUED $ 500,000 Cuyahoga County, OH IDA Weekly VRDNs (Animal Protection League (Cuyahoga County))/(KeyBank, N.A. LOC) $ 500,000 1,350,000 Cuyahoga County, OH IDA Weekly VRDNs (East Park Community, Inc.)/ (KeyBank, N.A. LOC) 1,350,000 2,350,000 Cuyahoga County, OH IDA Weekly VRDNs (H.P. Parking Co.)/ (KeyBank, N.A. LOC) 2,350,000 260,000 Cuyahoga County, OH IDA Weekly VRDNs (Interstate Diesel Service, Inc.)/ (Huntington National Bank, Columbus, OH LOC) 260,000 850,000 Cuyahoga County, OH IDA Weekly VRDNs (Premier Manufacturing Corp.)/(National City Bank, Kentucky LOC) 850,000 2,600,000 Cuyahoga County, OH IDA, (Series 1988) Weekly VRDNs (Trebmal Landerhaven)/ (Star Bank, NA, Cincinnati LOC) 2,600,000 3,100,000 Cuyahoga County, OH IDA, (Series 1997) Weekly VRDNs (Northstar Plastics, Inc.)/ (Bank One, Ohio, N.A. LOC) 3,100,000 1,700,000 Cuyahoga County, OH IDA, IDRB (Series 1995) Weekly VRDNs (Avalon Precision Casting Co. Project)/(KeyBank, N.A. LOC) 1,700,000 3,500,000 Dayton, OH Department of Aviation, (Series 1998), 3.65% BANs, 6/15/1999 3,503,796 1,755,000 Delaware County, OH, (Street Improvement), 4.00% BANs, 7/28/ 1999 1,758,738 1,585,000 Delaware County, OH, IDRB (Series 1995) Weekly VRDNs (Air Waves, Inc. Project)/(KeyBank, N.A. LOC) 1,585,000 5,000,000 Dublin, OH, (Series 1998B), 3.75% BANs, 12/17/1998 5,000,302 8,500,000 Dublin, OH, Industrial Development Refunding Revenue Bonds (Series 1997) Weekly VRDNs (Witco Corp.)/(Fleet National Bank, Springfield, MA LOC) 8,500,000 5,055,000 Erie County, OH, Adjustable Rate Demand Health Care Facilities Bonds (Series 1996A) Weekly VRDNs (Providence Care Center)/(Fifth Third Bank of Northwestern OH LOC) 5,055,000 1,150,000 Fairfield County, OH, 4.45% BANs, 7/27/1999 1,156,105 1,750,000 Fairlawn City, OH, 3.90% BANs, 1/20/1999 1,750,933 7,000,000 Franklin County, OH Hospital Facility Authority, (Series 1992) Weekly VRDNs (Wesley Glenn, Inc.)/(Fifth Third Bank, Cincinnati LOC) 7,000,000 4,500,000 Franklin County, OH IDA Weekly VRDNs (Heekin Can, Inc.)/(PNC Bank, Ohio, N.A. LOC) 4,500,000 2,820,000 Franklin County, OH IDA Weekly VRDNs (Unicorn Leasing Corp.)/(Fifth Third Bank, Cincinnati LOC) 2,820,000 3,130,000 Franklin County, OH IDA, (Series 1995) Weekly VRDNs (Fabcon L.L.C. Project)/(Norwest Bank Minnesota, Minneapolis LOC) 3,130,000 4,900,000 Franklin County, OH IDA, Adjustable Rate Demand IDRB's (Series 1996A) Weekly VRDNs (Carams, Ltd.)/(Huntington National Bank, Columbus, OH LOC) 4,900,000 1,815,000 Franklin County, OH IDA, Adjustable Rate Demand IDRB's (Series 1996B) Weekly VRDNs (Carams, Ltd.)/(Huntington National Bank, Columbus, OH LOC) 1,815,000 PRINCIPAL AMOUNT VALUE Short-Term Municipals-continued 1 OHIO-CONTINUED $ 1,810,000 Franklin County, OH, Adjustable Rate Demand Economic Development Revenue Refunding Bonds (Series 1996) Weekly VRDNs (CPM Investments)/(Huntington National Bank, Columbus, OH LOC) $ 1,810,000 4,500,000 Franklin County, OH, Adjustable Rate Demand Multifamily Housing Revenue Bonds (Series 1998), 3.85% TOBs (Jefferson Chase L.P.)/(Fifth Third Bank, Cincinnati LOC), Mandatory Tender 12/1/1998 4,500,000 1,350,000 Franklin County, OH, Health Care Facilities Revenue Bonds (Series 1994) Weekly VRDNs (Wesley Glenn, Inc.)/(Fifth Third Bank of Northwestern OH LOC) 1,350,000 21,300,000 Franklin County, OH, Hospital Revenue Bonds (Series 1995) Weekly VRDNs (Holy Cross Health System Corp.)/(Morgan Guaranty Trust Co., New York LIQ) 21,300,000 4,995,000 2 Franklin County, OH, PT156 (Series 1993A), 3.75% TOBs (Riverside United Methodist Hospital)/(AMBAC INS)/ (Bayerische Hypotheken-Und Wechsel-Bank AG LIQ), Optional Tender 1/14/1999 4,995,000 1,000,000 Hamilton County, OH Health System Weekly VRDNs (West Park Community)/(Fifth Third Bank, Cincinnati LOC) 1,000,000 2,000,000 Hamilton, OH, (Issue I & IV), 3.75% BANs, 6/11/1999 2,000,000 1,305,000 Hamilton, OH, 3.49% BANs, 10/22/1999 1,307,329 7,500,000 Henry County, OH, Series 1996 Automatic Feed Project Weekly VRDNs (Huntington National Bank, Columbus, OH LOC) 7,500,000 3,600,000 Hilliard, OH, Adjustable Rate IDRB's (Series 1996) Weekly VRDNs (Medex, Inc.)/ (Bank One, Ohio, N.A. LOC) 3,600,000 2,000,000 Holmes County, OH IDA Weekly VRDNs (Poultry Processing)/ (Rabobank Nederland, Utrecht LOC) 2,000,000 1,095,000 Huber Heights, OH, IDRB (Series 1994) Weekly VRDNs (Lasermike, Inc. Project)/(KeyBank, N.A. LOC) 1,095,000 1,723,000 Huber Heights, OH, Various Purpose Assessment, 3.74% BANs, 3/12/1999 1,723,235 1,700,000 Kent, OH, Adjustable Rate IDRB's (Series 1994) Weekly VRDNs (Raven's Metal Products, Inc. Project)/(FirstMerit Bank, N.A. LOC) 1,700,000 3,160,000 Lake County, OH, Adjustable Rate IDRB's (Series 1996) Weekly VRDNs (Apsco Properties, Ltd.)/(FirstMerit Bank, N.A. LOC) 3,160,000 3,975,000 Lorain Port Authority, OH, (Series 1994) Weekly VRDNs (Spitzer Great Lakes Ltd., Inc.)/(Bank One, Ohio, N.A. LOC) 3,975,000 1,105,000 Lorain Port Authority, OH, Adjustable Rate Demand Port Development Refunding Revenue Bonds (Series 1996) Weekly VRDNs (Spitzer Project)/(Bank One, Ohio, N.A. LOC) 1,105,000 8,305,000 Lorain Port Authority, OH, IDRB (Series 1996) Weekly VRDNs (Brush Wellman, Inc.)/(National City Bank, Cleveland, OH LOC) 8,305,000 1,100,000 Louisville City, OH, 4.25% BANs, 5/3/1999 1,101,592 400,000 Lucas County, OH IDA Weekly VRDNs (Kuhlman Corp.)/(KeyBank, N.A. LOC) 400,000 PRINCIPAL AMOUNT VALUE Short-Term Municipals-continued 1 OHIO-CONTINUED $ 1,510,000 Lucas County, OH, Hospital Facility Improvement Revenue Bonds (Series 93) Weekly VRDNs (Lott Industries, Inc.)/ (National City Bank, Cleveland, OH LOC) $ 1,510,000 220,000 Lucas County, OH, Hospital Improvement Revenue Weekly VRDNs (Sunshine Children's Home)/(National City Bank, Cleveland, OH LOC) 220,000 2,150,000 Lyndhurst, OH, 3.875% BANs, 3/17/1999 2,151,738 5,325,000 Mahoning County, OH Multifamily HFA Weekly VRDNs (International Towers, Inc.)/(PNC Bank, N.A. LOC) 5,325,000 5,360,000 Mahoning County, OH, Housing Revenue Bonds (Series 1995) Weekly VRDNs (Copeland Oaks Project)/(Bank One, Ohio, N.A. LOC) 5,360,000 310,000 Mansfield, OH, IDR Weekly VRDNs (Designed Metal Products, Inc.)/ (Bank One, Ohio, N.A. LOC) 310,000 1,500,000 Marion County, OH Health Care Facilities Weekly VRDNs (Marion Area Counseling Center, Inc.)/(Huntington National Bank, Columbus, OH LOC) 1,500,000 1,135,000 Marion County, OH Hospital Authority, (Series 1991) Weekly VRDNs (Marion County, OH Pooled Hospital Program)/(Bank One, Ohio, N.A. LOC) 1,135,000 1,150,000 Mason City, OH, 3.95% BANs, 12/17/1998 1,150,209 3,500,000 Mayfield Village, OH IDA Weekly VRDNs (Beta Campus Co.)/ (KeyBank, N.A. LOC) 3,500,000 7,400,000 Medina County, OH, (Series 1997) Weekly VRDNs (Plaza 71 Associates Ltd.)/(Westdeutsche Landesbank Girozentrale LOC) 7,400,000 6,250,000 Medina County, OH, (Series 1998) Weekly VRDNs (Mack Industries)/(Huntington National Bank, Columbus, OH LOC) 6,250,000 3,000,000 Medina County, OH, (Series 1998) Weekly VRDNs (Michael Day Enterprises)/(KeyBank, N.A. LOC) 3,000,000 5,400,000 Medina County, OH, Solid Waste Disposal Revenue Bonds (Series 1995) Weekly VRDNs (Valley City Steel Company Project)/(KeyBank, N.A. LOC) 5,400,000 1,750,000 Mentor Village, OH School District, 3.95% BANs, 5/6/1999 1,750,599 3,280,000 Mentor, OH, Adjustable Rate IDRB's (Series 1997) Weekly VRDNs (Risch Investments/Roll Kraft, Inc.)/(Bank One, Ohio, N.A. LOC) 3,280,000 4,500,000 Miami County, OH, 3.90% BANs, 7/15/1999 4,506,696 4,675,000 Montgomery County, OH, Variable Rate Limited Obligation Revenue Bonds (Series 1996) Weekly VRDNs (Society of St. Vincent De Paul)/(National City Bank, Ohio LOC) 4,675,000 1,870,000 Montgomery, OH IDA Weekly VRDNs (Bethesda Two Limited Partnership)/(Huntington National Bank, Columbus, OH LOC) 1,870,000 10,000,000 New Albany, OH Community Authority, Adjustable Rate Multi- Purpose Infrastructure Improvement Bonds, (Series A) Weekly VRDNs (Huntington National Bank, Columbus, OH LOC) 10,000,000 730,000 North Olmsted, OH IDA, 3.95% TOBs (Therm-All)/(National City Bank, Ohio LOC), Optional Tender 2/1/1999 730,000 PRINCIPAL AMOUNT VALUE Short-Term Municipals-continued 1 OHIO-CONTINUED $ 1,175,000 Ohio HFA Weekly VRDNs (Westchester Village)/(KeyBank, N.A. LOC) $ 1,175,000 7,775,000 2 Ohio HFA, (Series 1990-C) PT-239, 3.15% TOBs (GNMA COL)/ (Credit Suisse First Boston LIQ), Optional Tender 9/8/1999 7,775,000 6,835,000 Ohio HFA, 3.85% TOBs (Lincoln Park Associates)/(Bank One, Ohio, N.A. LOC), Optional Tender 11/1/1998 6,835,000 2,680,000 Ohio HFA, PT-122 Weekly VRDNs (GNMA COL)/(Banco Santander SA LIQ) 2,680,000 10,000,000 Ohio HFA, Residential Mortgage Revenue Notes (1998 Series A- 2), 3.80% BANs, 3/1/1999 10,000,000 5,195,000 Ohio HFA, Single Family Mortgage (Series PT-71) Weekly VRDNs (GNMA COL)/(Commerzbank AG, Frankfurt LIQ) 5,195,000 8,880,000 Ohio HFA, Trust Receipts (Series 1996 FR/RI-6) Weekly VRDNs (GNMA COL)/(Bank of New York, New York LIQ) 8,880,000 3,300,000 Ohio HFA, Trust Receipts (Series 1997 FR/RI-14) Weekly VRDNs (GNMA GTD)/(Bank of New York, New York LIQ) 3,300,000 9,250,000 Ohio HFA, Trust Receipts, (Series 1996 FR/RI-5) Weekly VRDNs (GNMA COL)/(Bank of New York, New York LIQ) 9,250,000 20,000,000 2 Ohio HFA, Variable Rate Certificates (Series 1998Q), 3.75% TOBs (GNMA COL)/(Bank of America NT and SA, San Francisco LIQ), Optional Tender 8/4/1999 20,000,000 1,000,000 Ohio State Air Quality Development Authority Weekly VRDNs (Timken Co.)/(Credit Suisse First Boston LOC) 1,000,000 2,800,000 Ohio State Air Quality Development Authority, (Series 1988A) Weekly VRDNs (PPG Industries, Inc.) 2,800,000 3,000,000 Ohio State Air Quality Development Authority, (Series C), 4.20% TOBs (Ohio Edison Co.)/(Barclays Bank PLC, London LOC), Optional Tender 9/1/1999 3,008,826 7,600,000 Ohio State Air Quality Development Authority, Air Quality Development Revenue Bonds (1995 Series B) Weekly VRDNs (JMG Funding Limited Partnership)/(Societe Generale, Paris LOC) 7,600,000 1,565,000 Ohio State Higher Education Facility, Revenue Bonds Weekly VRDNs (Notre Dame College Project)/(National City Bank, Cleveland, OH LOC) 1,565,000 1,000,000 Ohio State Public Facilities Commission, (Series II A), 5.20% Bonds (AMBAC INS), 5/1/1999 1,008,923 4,400,000 Ohio State Public Facilities Commission, (Series II-1998A), 4.25% Bonds, 12/1/1998 4,402,260 5,000,000 Ohio State Public Facilities Commission, (Series II-B), 4.50% Bonds, 11/1/1998 5,000,000 3,200,000 Ohio State Public Facilities Commission, Higher Education Cap Facs (Series II-B), 5.00% Bonds, 11/1/1998 3,200,000 2,500,000 Ohio State Water Development Authority, Multimodal Water Development (Series 1993) Weekly VRDNs (Timken Co.)/ (Wachovia Bank of NC, N.A., Winston-Salem LOC) 2,500,000 5,000,000 Ohio State Water Development Authority, Ohio PCR Bonds (Series 1989) Weekly VRDNs (Duquesne Light Power Co.)/(First National Bank of Chicago LOC) 5,000,000 PRINCIPAL AMOUNT VALUE Short-Term Municipals -continued 1 OHIO-CONTINUED $ 10,000,000 Ohio State Water Development Authority, PCR Refunding Bonds Weekly VRDNs (General Motors Corp.) $ 10,000,000 4,000,000 Ohio State Water Development Authority, PCR Bonds (Series 1988), 3.60% CP (Duquesne Light Power Co.)/(Toronto-Dominion Bank LOC), Mandatory Tender 11/12/1998 4,000,000 10,000,000 Ohio State Water Development Authority, Pollution Control Revenue Refunding Bonds (Series 1997) Weekly VRDNs (Philip Morris Cos., Inc.) 10,000,000 400,000 Ohio State Weekly VRDNs (John Carroll University, OH)/(PNC Bank, N.A. LOC) 400,000 4,350,000 Ohio State, Adjustable Rate Weekly VRDNs (General Motors Corp.) 4,350,000 5,000,000 Ohio State, Environmental Improvement Revenue Bonds (Series 1996) Weekly VRDNs (Newark Group Industries, Inc.)/(Chase Manhattan Bank N.A., New York LOC) 5,000,000 930,000 Ohio State, IDR (Series 1991) Weekly VRDNs (Standby Screw, Inc.)/(National City Bank, Columbus, OH LOC) 930,000 1,200,000 Ohio State, IDRB (Series 1994) Weekly VRDNs (Anomatic Corp.)/(National City Bank, Columbus, OH LOC) 1,200,000 4,840,000 Ohio Water Development Authority, PA-201 Weekly VRDNs (AMBAC INS)/(Merrill Lynch Capital Services, Inc. LIQ) 4,840,000 4,600,000 Oregon City, OH, (Series 1997-3), 4.00% BANs, 12/3/1998 4,600,581 1,000,000 Orrville, OH IDA Weekly VRDNs (O.S. Associates/Contours, Inc.)/(National City Bank, Cleveland, OH LOC) 1,000,000 2,000,000 Pickerington Local School District, OH, 4.04% BANs, 1/22/ 1999 2,001,487 35,000 Portage County, OH IDA Weekly VRDNs (D & W Associates)/(Bank One, Ohio, N.A. LOC) 35,000 5,000,000 Portage County, OH IDA, (Series 1998) Weekly VRDNs (Amweld Building Products, Inc.)/(First Union National Bank, Charlotte, N.C. LOC) 5,000,000 305,000 Portage County, OH IDA, 3.90% TOBs (Neidlinger)/(KeyBank, N.A. LOC), Optional Tender 3/1/1999 305,000 4,050,000 Portage County, OH IDA, Adjustable Rate IDRB's (Series 1996) Weekly VRDNs (Barnette Project)/(National City, Northeast LOC) 4,050,000 735,000 Portage County, OH IDA, Industries Revenue Bonds Weekly VRDNs (Lovejoy Industries)/(Star Bank, NA, Cincinnati LOC) 735,000 3,690,000 Preble Shawnee, OH Local Schools, 4.00% BANs, 3/31/1999 3,695,149 5,000,000 Rickenbacker, OH Port Authority, (Series 1992) Weekly VRDNs (Rickenbacker Holdings, Inc.)/(Bank One, Ohio, N.A. LOC) 5,000,000 4,275,000 Ross County, OH, Hospital Facilities Revenue Bonds (Series 1995) Weekly VRDNs (Medical Center Hospital Project)/(Fifth Third Bank, Cincinnati LOC) 4,275,000 2,000,000 Ross County, OH, Hospital Revenue Bonds Weekly VRDNs (Adena Health System)/(Fifth Third Bank, Cincinnati LOC) 2,000,000 5,200,000 Scioto County, OH Hospital Authority Weekly VRDNs (AMBAC INS)/(First National Bank of Chicago LIQ) 5,200,000 PRINCIPAL AMOUNT VALUE Short-Term Municipals-continued 1 OHIO-CONTINUED $ 1,600,000 Seneca County, OH Hospital Facility Authority Weekly VRDNs (St. Francis Home)/(National City Bank, Cleveland, OH LOC) $ 1,600,000 2,000,000 Seven Hills City, OH, (Series 1998), 3.85% BANs, 8-1/2/1999 2,000,741 400,000 Solon, OH, IDR Weekly VRDNs (Graphic Laminating)/(KeyBank, N.A. LOC) 400,000 1,000,000 South Euclid, OH, Sewer System Improvements, 3.95% BANs, 4/ 7/1999 1,001,037 800,000 Stark County, OH IDR Weekly VRDNs (Sancap Abrasives, Inc.)/ (KeyBank, N.A. LOC) 800,000 6,600,000 Stark County, OH IDR Weekly VRDNs (Shearer's Foods, Inc.)/ (Bank One, Ohio, N.A. LOC) 6,600,000 1,945,000 Stark County, OH IDR, (Series 1994) Weekly VRDNs (Wilkof Morris)/(KeyBank, N.A. LOC) 1,945,000 1,210,000 Stark County, OH IDR, IDRB (Series 1996) Weekly VRDNs (Foundations Systems and Anchors, Inc. Project)/(Bank One, Ohio, N.A. LOC) 1,210,000 1,140,000 Strongsville, OH, IDRB (Series 1994) Weekly VRDNs (Nutro Machinery Corp., Project)/(Huntington National Bank, Columbus, OH LOC) 1,140,000 2,250,000 Summit County, OH IDR Weekly VRDNs (Maison Aine Limited Partnership)/ (KeyBank, N.A. LOC) 2,250,000 4,500,000 Summit County, OH IDR, (Series 1994) Weekly VRDNs (Harry London Candies, Inc.)/ (Bank One, Ohio, N.A. LOC) 4,500,000 1,300,000 Summit County, OH IDR, (Series 1997) Weekly VRDNs (Baker McMillen Co.)/(National City, Northeast LOC) 1,300,000 3,180,000 Summit County, OH IDR, (Series 1997) Weekly VRDNs (Malco Products, Inc.)/(Bank One, Ohio, N.A. LOC) 3,180,000 905,000 Summit County, OH IDR, 3.80% TOBs (Matech Machine Tool Co.)/ (Bank One, Ohio, N.A. LOC), Optional Tender 2/1/1999 905,000 745,000 Summit County, OH IDR, 3.80% TOBs (S.D. Meyers, Inc.)/(Bank One, Ohio, N.A. LOC), Optional Tender 2/15/1999 745,000 975,000 Summit County, OH IDR, 3.85% TOBs (Rogers Industrial Products, Inc.)/(Bank One, Ohio, N.A. LOC), Optional Tender 11/1/1998 975,000 590,000 Summit County, OH IDR, 3.90% TOBs (Bechmer-Boyce Project)/ (KeyBank, N.A. LOC), Optional Tender 1/15/1999 590,000 290,000 Summit County, OH IDR, 3.90% TOBs (Keltec Industries)/(Bank One, Ohio, N.A. LOC), Optional Tender 3/1/1999 290,000 690,000 Summit County, OH IDR, 3.90% TOBs (Universal Rack)/(National City Bank, Cleveland, OH LOC), Optional Tender 3/1/1999 690,000 1,325,000 Summit County, OH IDR, Adjustable Rate IDRB's (Series 1996) Weekly VRDNs (Fomo Products, Inc.)/(FirstMerit Bank, N.A. LOC) 1,325,000 755,000 Summit County, OH IDR, Bonds (Series 1994) Weekly VRDNs (Austin Printing Co., Inc.)/(Bank One, Ohio, N.A. LOC) 755,000 2,545,000 Summit County, OH IDR, IDRB (Series 1994B) Weekly VRDNs (Harry London Candies, Inc.)/(Bank One, Ohio, N.A. LOC) 2,545,000 PRINCIPAL AMOUNT VALUE Short-Term Municipals-continued 1 OHIO-CONTINUED $ 745,000 Summit County, OH IDR, IDRB (Series 1995) Weekly VRDNs (Cardtech Project (OH))/(KeyBank, N.A. LOC) $ 745,000 1,215,000 Summit County, OH IDR, Industrial Development Bonds (Series 1996) Weekly VRDNs (Creative Screen Print Project)/(National City, Northeast LOC) 1,215,000 1,045,000 Summit County, OH IDR, Multi-Mode Variable Rate I Weekly VRDNs (Mastergraphics, Inc. Project)/(KeyBank, N.A. LOC) 1,045,000 2,155,000 Summit County, OH IDR, Variable Rate IDRB's (Series 1998A) Weekly VRDNs (Wintek Ltd.)/(FirstMerit Bank, N.A. LOC) 2,155,000 6,000,000 Summit County, OH, (Series A), 4.50% BANs, 6/3/1999 6,025,399 3,415,000 Summit County, OH, Adjustable Rate Healthcare Facilities Revenue Bonds (Series 1996) Weekly VRDNs (United Disability Services, Inc.)/(FirstMerit Bank, N.A. LOC) 3,415,000 3,200,000 Toledo, OH, Adjustable Rate City Services Special Assessment Notes (Services 1997) Weekly VRDNs (Canadian Imperial Bank of Commerce, Toronto LOC) 3,200,000 4,000,000 Toledo-Lucas County, OH Port Authority, Airport Development Revenue Bonds Series 1996-1) Weekly VRDNs (Burlington Air Express, Inc.)/ (ABN AMRO Bank N.V., Amsterdam LOC) 4,000,000 1,000,000 Toledo-Lucas County, OH Port Authority, IDA Weekly VRDNs (Medusa Corp.)/(Bayerische Vereinsbank AG, Munich LOC) 1,000,000 2,100,000 Trumbull County, OH IDA, (Series 1989) Weekly VRDNs (McSonald Steel Corp.)/ (PNC Bank, N.A. LOC) 2,100,000 1,270,000 Trumbull County, OH IDA, IDR Refunding Bonds (Series 1994) Weekly VRDNs (Churchill Downs, Inc.)/(Bank One, Ohio, N.A. LOC) 1,270,000 1,050,000 Tuscarawas County, OH, Adjustable Rate IDRB's (Series 1995) Weekly VRDNs (Primary Packaging, Inc.)/(FirstMerit Bank, N.A. LOC) 1,050,000 2,650,000 Williams County, OH, Multi-Mode Variable Rate IDRB's (Series 1996) Weekly VRDNs (Allied Moulded Products, Inc.)/(KeyBank, N.A. LOC) 2,650,000 1,030,000 Willoughby City, OH, IDR Refunding Bonds (Series 1995A) Weekly VRDNs (Pine Ridge Shopping Center Company Project)/ (Star Bank, N.A., Cincinnati LOC) 1,030,000 1,095,000 Willoughby City, OH, IDR Revenue Bonds (Series 1995 B) Weekly VRDNs (Pine Ridge Shopping Center Company Project)/ (Star Bank, N.A., Cincinnati LOC) 1,095,000 1,000,000 Wood County, OH Weekly VRDNs (Principle Business Enterprises)/(National City Bank, Cleveland, OH LOC) 1,000,000 2,030,000 Wood County, OH, EDRB Weekly VRDNs (Roe Inc. Project)/ (Huntington National Bank, Columbus, OH LOC) 2,030,000 PRINCIPAL AMOUNT VALUE Short-Term Municipals -continued 1 OHIO-CONTINUED $ 1,000,000 Wood County, OH, Williams Industrial Service, Inc., Project Weekly VRDNs (Williams Industrial Service, Inc.)/(Huntington National Bank, Columbus, OH LOC) $ 1,000,000 3,950,000 Youngstown, OH, Adjustable Rate Demand IDRB's (Series 1996A) Weekly VRDNs (Cantar/Polyair Corp./Performa Corp.)/(Marine Midland Bank N.A., Buffalo, NY LOC) 3,950,000 Total Investments (at amortized cost) 3 $ 566,006,031
Securities that are subject to Alternative Minimum Tax represent 44.9% of the portfolio as calculated based upon total portfolio market value. 1 The Fund may only invest in securities rated in one of the two highest short-term rating categories by one or more nationally recognized statistical rating organizations ("NRSROs") or unrated securities of comparable quality. 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, MIG- 1 or MIG-2 by Moody's Investors Service, Inc., or F-1+, F-1, or F-2 by Fitch IBCA, Inc. are all considered rated in one of the two highest short-term rating categories. Securities rated in the highest short-term rating category (and unrated securities of comparable quality) are identified as First Tier securities. Securities rated in the second highest short-term rating category (and unrated securities of comparable quality) are identified as Second Tier securities. The Fund follows applicable regulations in determining whether a security is rated and whether a security rated by multiple NRSROs in different rating categories should be identified as a First or Second Tier security. At October 31, 1998, the portfolio securities were rated as follows: Tier Rating Percentage Based on Total Market Value (Unaudited)
FIRST TIER SECOND TIER 96.0% 4.0%
2 Denotes a restricted security which is subject to restrictions on resale under Federal Securities laws. At October 31, 1998, these securities amounted to $35,105,000 which represents 6% of net assets. 3 Also represents cost for federal tax purposes. Note: The categories of investments are shown as a percentage of net assets ($569,237,375) at October 31, 1998. The following acronyms are used throughout this portfolio: AMBAC -American Municipal Bond Assurance Corporation BANs -Bond Anticipation Notes COL -Collateralized CP -Commercial Paper EDRB -Economic Development Revenue Bonds FSA -Financial Security Assurance GNMA -Government National Mortgage Association GTD -Guaranty HFA -Housing Finance Authority IDA -Industrial Development Authority IDR -Industrial Development Revenue IDRB -Industrial Development Revenue Bond INS -Insured LIQ -Liquidity Agreement LOC -Letter of Credit MBIA -Municipal Bond Investors Assurance PCR -Pollution Control Revenue PLC -Public Limited Company RANs -Revenue Anticipation Notes SA -Support Agreement TANs -Tax Anticipation Notes TOBs -Tender Option Bonds VRDNs -Variable Rate Demand Notes See Notes which are an integral part of the Financial Statements Statement of Assets and Liabilities October 31, 1998 ASSETS: Total investments in securities, at amortized cost and value $ 566,006,031 Cash 361,802 Income receivable 3,658,143 Receivable for shares sold 3,212 Total assets 570,029,188 LIABILITIES: Payable for shares redeemed $ 18,618 Income distribution payable 530,528 Accrued expenses 242,667 Total liabilities 791,813 Net Assets for 569,237,375 shares outstanding $ 569,237,375 NET ASSET VALUE, OFFERING PRICE, AND REDEMPTION PROCEEDS PER SHARE: INSTITUTIONAL SERVICE SHARES: $94,895,944 / 94,895,944 shares outstanding $1.00 CASH II SHARES: $342,946,498 / 342,946,498 shares outstanding $1.00 INSTITUTIONAL SHARES: $131,394,933 / 131,394,933 shares outstanding $1.00
See Notes which are an integral part of the Financial Statements Statement of Operations Year Ended October 31, 1998 INVESTMENT INCOME: Interest $ 16,793,463 EXPENSES: Investment advisory fee $ 1,795,830 Administrative personnel and services fee 338,546 Custodian fees 15,476 Transfer and dividend disbursing agent fees and expenses 308,672 Directors'/Trustees' fees 2,258 Auditing fees 13,000 Legal fees 16,903 Portfolio accounting fees 110,848 Distribution services fee-Cash II Shares 847,854 Shareholder services fee-Institutional Service Shares 208,486 Shareholder services fee-Cash II Shares 706,545 Shareholder services fee-Institutional Shares 207,293 Share registration costs 47,435 Printing and postage 34,042 Insurance premiums 28,241 Miscellaneous 4,249 Total expenses 4,685,678 WAIVERS: Waiver of investment advisory fee $ (1,034,602) Waiver of distribution services fee-Cash II Shares (141,309) Waiver of shareholder services fee-Institutional Service Shares (41,697) Waiver of shareholder services fee-Institutional Shares (207,293) Total waivers (1,424,901) Net expenses 3,260,777 Net investment income $ 13,532,686
(See Notes which are an integral part of the Financial Statements) Statement of Changes in Net Assets
YEAR ENDED OCTOBER 31 1998 1997 INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income $ 13,532,686 $ 11,151,320 DISTRIBUTIONS TO SHAREHOLDERS: Distributions from net investment income Institutional Service Shares (2,641,476) (2,309,907) Cash II Shares (8,076,502) (6,696,096) Institutional Shares (2,814,708) (2,145,317) Change in net assets resulting from distributions to shareholders (13,532,686) (11,151,320) SHARE TRANSACTIONS: Proceeds from sale of shares 2,158,852,726 1,714,819,513 Net asset value of shares issued to shareholders in payment of distributions declared 8,564,300 7,135,525 Cost of shares redeemed (1,979,838,390) (1,678,846,130) Change in net assets resulting from share transactions 187,578,636 43,108,908 Change in net assets 187,578,636 43,108,908 NET ASSETS: Beginning of period 381,658,739 338,549,831 End of period $ 569,237,375 $ 381,658,739
See Notes which are an integral part of the Financial Statements Notes to Financial Statements October 31, 1998 ORGANIZATION Federated Municipal Trust (the "Trust") is registered under the Investment Company Act of 1940, as amended (the "Act") as an open-end, management investment company. The Trust consists of 17 portfolios. The financial statements included herein are only those of Ohio Municipal Cash Trust (the "Fund"). The financial statements of the other portfolios are presented separately. The assets of each portfolio are segregated and a shareholder's interest is limited to the portfolio in which shares are held. The Fund offers three classes of shares: Institutional Service Shares, Cash II Shares, and Institutional Shares. The investment objective of the Fund is current income exempt from federal regular income tax and the personal income taxes imposed by the State of Ohio and Ohio municipalities consistent with stability of principal. 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. 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. RESTRICTED SECURITIES Restricted securities are securities that may only be resold upon registration under federal securities laws or in transactions exempt from such registration. Many restricted securities may be resold in the secondary market in transactions exempt from registration. In some cases, the restricted securities may be resold without registration upon exercise of a demand feature. Such restricted securities may be determined to be liquid under criteria established by the Board of Trustees. The Fund will not incur any registration costs upon such resales. Restricted securities are valued at amortized cost in accordance with Rule 2a-7 under the Investment Company Act of 1940. Additional information on each restricted security held at October 31, 1998 is as follows:
ACQUISITION ACQUISITION SECURITY DATE COST Franklin County, OH, PT-156 (Series 1993A) 1/23/1998 4,995,000 Ohio HFA, PT-239 (Series 1990-C) 10/9/1998 7,775,000 Ohio HFA, Variable Rate Certificates (Series 1998Q) 8/25/1998 20,000,000 Cleveland, OH Parking Facilities, PA-182 (Series 1996) 10/10/1997 2,335,000
USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts of assets, liabilities, expenses and revenues reported in the financial statements. Actual results could differ from those estimated. OTHER Investment transactions are accounted for on the trade date. SHARES OF BENEFICIAL INTEREST The Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest (without par value) for each class of shares. At October 31, 1998, capital paid-in aggregated $569,237,375. Transactions in shares were as follows:
YEAR ENDED OCTOBER 31 1998 1997 INSTITUTIONAL SHARES: Shares sold 841,971,973 663,912,689 Shares issued to shareholders in payment of distributions declared 96,964 122,235 Shares redeemed (766,384,422) (681,004,550) Net change resulting from Institutional share transactions 75,684,515 (16,969,626) YEAR ENDED OCTOBER 31 1998 1997 CASH II SHARES: Shares sold 1,005,297,220 846,566,747 Shares issued to shareholders in payment of distributions declared 7,890,344 6,536,111 Shares redeemed (915,569,899) (813,922,799) Net change resulting from Cash II share transactions 97,617,665 39,180,059 YEAR ENDED OCTOBER 31 1998 1997 INSTITUTIONAL SERVICE SHARES: Shares sold 311,583,533 204,340,077 Shares issued to shareholders in payment of distributions declared 576,992 477,179 Shares redeemed (297,884,069) (183,918,781) Net change resulting from Institutional Service share transactions 14,276,456 20,898,475 Net change resulting from share transactions 187,578,636 43,108,908
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES INVESTMENT ADVISORY FEE Federated Management, 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. DISTRIBUTION SERVICES FEE The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b- 1 under the Act. Under the terms of the Plan, the Fund will compensate Federated Securities Corp. ("FSC"), the principal distributor, from the net assets of the Fund to finance activities intended to result in the sale of the Fund's Class II Shares. The Plan provides that the Fund may incur distribution expenses up to 0.30% of the average daily net assets of Cash II Shares, annually, to compensate FSC. The distributor may voluntarily choose to waive any portion of its fee. The distributor can modify or terminate this voluntary waiver at any time at its sole discretion. SHAREHOLDER SERVICES FEE Under the terms of a Shareholder Services Agreement with Federated Shareholder Services ("FSS"), the Fund will pay FSS up to 0.25% of average daily net assets of the Fund for the period. The fee paid to FSS is used to finance certain services for shareholders and to maintain shareholder accounts. For the period ended October 31, 1998, the Fund shares did not incur a shareholder services fee. FSS may voluntarily choose to waive any portion of its fee. FSS can modify or terminate this voluntary waiver at any time at its sole discretion. TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES FServ, through its subsidiary, Federated Shareholder Services Company ("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. INTERFUND TRANSACTIONS During the period ended October 31, 1998, the Fund engaged in purchase and sale transactions with funds that have a common investment adviser (or affiliated investment advisers), common Directors/Trustees, and/or common Officers. These purchase and sale transactions were made at current market value pursuant to Rule 17a-7 under the Act amounting to $700,580,000 and $652,664,786, respectively. GENERAL Certain of the Officers and Trustees of the Trust 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. CONCENTRATION OF CREDIT RISK Since the Fund invests a substantial portion of its assets in issuers located in one state, it will be more susceptible to factors adversely affecting issuers of that state than would be a comparable tax-exempt mutual fund that invests nationally. In order to reduce the credit risk associated with such factors, at October 31, 1998, 64.5% of the securities in the portfolio of investments are backed by letters of credit or bond insurance of various financial institutions and financial guaranty assurance agencies. The percentage of investments insured by or supported (backed) by a letter of credit from any one institution or agency did not exceed 15.4% of total investments. Report of Independent Public Accountants To the Board of Trustees of Federated Municipal Trust and the Shareholders of Ohio Municipal Cash Trust: We have audited the accompanying statement of assets and liabilities of Ohio Municipal Cash Trust (an investment portfolio of Federated Municipal Trust, a Massachusetts business trust), including the schedule of portfolio investments, as of October 31, 1998, the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for the periods presented. These financial statements and financial highlights are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the 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 October 31, 1998, by correspondence with the custodian. 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 Ohio Municipal Cash Trust (an investment portfolio of Federated Municipal Trust) as of October 31, 1998, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and its financial highlights for the periods presented, in conformity with generally accepted accounting principles. Arthur Andersen LLP Boston, Massachusetts December 23, 1998 [Graphic] PROSPECTUS Ohio Municipal Cash Trust A Portfolio of Federated Municipal Trust INSTITUTIONAL SHARES December 31, 1998 A Statement of Additional Information (SAI) dated December 31, 1998, is incorporated by reference into this prospectus. To obtain the SAI and 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] Ohio Municipal Cash 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. 811-5911 Cusip 314229659 G00211-01-IS (12/98) [Graphic] [Graphic] PROSPECTUS Ohio Municipal Cash Trust A Portfolio of Federated Municipal Trust INSTITUTIONAL SERVICE SHARES A money market mutual fund seeking current income exempt from federal regular income tax and the personal income taxes imposed by the State of Ohio and Ohio municipalities. 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. December 31, 1998 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? 6 How is the Fund Sold? 6 How to Purchase Shares 6 How to Redeem Shares 7 Account and Share Information 9 Who Manages the Fund? 10 Financial Information 11 Last Meeting of Shareholders 11 Report of Independent Public Accountants 30 Risk/Return Summary WHAT IS THE FUND'S INVESTMENT OBJECTIVE? The Fund is a money market fund which seeks to maintain a stable net asset value of $1.00. The Fund's investment objective is current income which is exempt from federal regular income tax and the personal income taxes imposed by the State of Ohio and Ohio municipalities consistent with stability of principal. 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 tax-exempt securities so that the Fund's annual interest income is exempt from federal regular income tax and Ohio state income taxes. Interest from the Fund's investments may be subject to the federal alternative minimum tax for individuals and corporations. WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND? Because the Fund may invest a significant portion of its assets in securities of a single issuer, an investment in the Fund may involve additional risks compared to a fully diversified money market 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] - See Appendix C-10 Historically, the Fund has maintained a constant $1.00 net asset value per share. The bar chart shows the variability of the Fund's Institutional Service Shares total returns on a yearly basis. The Fund's Institutional Service Shares are not sold subject to a sales charge (load). The total returns displayed above are based upon net asset value. The Fund's Institutional Service Shares year-to-date total return as of the most recent calendar quarter of September 30, 1998 was 2.38%. Within the period shown in the Chart, the Fund's Institutional Service Shares highest quarterly return was 0.95% (quarter ended June 30, 1991). Its lowest quarterly return was 0.52% (quarter ended March 31, 1994). The Fund's Institutional Service Shares Seven-Day Net Yield as of 12/31/97 was 3.61%. The following table represents the Fund's Institutional Service Shares Average Total Return through 12/31/97. CALENDAR PERIOD FUND 1 Year 3.33% 5 Years 3.01% Start of Performance 1 3.16% 1 The Fund's Institutional Service Shares start of performance date was April 22, 1991. Investors may call the Fund at 1-800-341-7400 to acquire the current Seven- Day Net Yield. 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? OHIO MUNICIPAL CASH TRUST FEES AND EXPENSES This table describes the fees and expenses that you may pay if you buy, hold and redeem shares of the Fund's Institutional Service Shares.
SHAREHOLDER FEES 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 a percentage of average net assets) Management Fee 2 0.40% Distribution (12b-1) Fee None Shareholder Services Fee 3 0.25% Other Expenses 0.20% Total Annual Fund Operating Expenses 0.85% 1 Although not contractually obligated to do so, the adviser and shareholder services provider waived certain amounts. These are shown below along with the net expenses the Fund actually paid for the fiscal year ended October 31, 1998. Waiver of Fund Expenses 0.28% Total Actual Annual Fund Operating Expenses (after waivers) 0.57% 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 0.17% for the year ended October 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 0.20% for the fiscal year ended October 31, 1998.
EXAMPLE The following Example is intended to help you compare the cost of investing in the Ohio Municipal Cash Trust's Institutional Service Shares with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund's Institutional Service 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 Ohio Municipal Cash Trust's Institutional Service Shares operating expenses are BEFORE WAIVERS as shown above and remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be: 1 YEAR 3 YEARS 5 YEARS 10 YEARS Expenses assuming no redemption $87 $271 $471 $1,049 What are the Fund's Investment Strategies? The Fund invests in a portfolio of high-quality tax-exempt securities maturing in 13 months or less. The average maturity of the Fund's portfolio, computed on a dollar-weighted basis, will be 90 days or less. The Fund's Adviser performs a fundamental credit analysis to develop an approved list of issuers and securities that meet the Adviser's minimum credit standards. The Adviser targets an average portfolio maturity based upon its interest rate outlook and the tax-exempt securities available. The Adviser structures the portfolio by combining variable rate demand instruments and municipal notes. Depending on the supply of tax-exempt securities, the Adviser generally shortens the portfolio's maturity when it expects interest rates to rise and extends the maturity when it expects interest rates to fall. TEMPORARY DEFENSIVE INVESTMENTS During adverse market conditions the Fund may temporarily depart from its principal investment strategies by investing in securities subject to federal regular income tax and the personal income taxes imposed by the State of Ohio and Ohio municipalities. Temporary investments will be of comparable quality to other securities in which the Fund invests. This may cause the Fund to give up greater investment returns to maintain the safety of principal. This also may cause the Fund to receive and distribute taxable income to investors. What are the Principal Securities in Which the Fund Invests? TAX-EXEMPT SECURITIES Tax-exempt securities are fixed income securities that pay interest exempt from regular federal income taxes. States, counties, cities and other political subdivisions and authorities typically issue tax-exempt securities. Tax-exempt securities are generally differentiated by their source of repayment. FIXED INCOME SECURITIES Fixed income 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. VARIABLE RATE DEMAND INSTRUMENTS Variable rate demand instruments are tax-exempt securities that require the issuer or a third party, such as a dealer or bank, to repurchase the security for its face value upon demand. The securities also bear interest at a variable rate intended to cause the securities to trade at their face value. The Fund treats demand instruments as short-term securities, even though their stated maturity may extend beyond 13 months. MUNICIPAL NOTES Municipal notes are short-term tax-exempt securities. Many municipalities issue such notes to fund their current operations before collecting taxes or other municipal revenues. Municipalities may also issue notes to fund capital projects prior to issuing long-term bonds. The issuers typically repay the notes at the end of their fiscal year, either with taxes, other revenues or proceeds from newly issued notes or bonds. INVESTMENT 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 rating services or be of comparable quality to securities having such ratings. CREDIT ENHANCEMENT Credit enhancement consists of an arrangement in which a company agrees to pay amounts due on a fixed income security if the issuer defaults. In some cases the company providing credit enhancement makes all payments directly to the security holders and receives reimbursement from the issuer. Normally, the credit enhancer has greater financial resources and liquidity than the issuer. For this reason, the Adviser usually evaluates the credit risk of a fixed income security based solely upon its credit enhancement. What are the Specific Risks of Investing in the Fund? Although there are many factors which may affect an investment in the Fund, the principal risks of investing in a tax-exempt money market fund are described below. CREDIT RISK Credit risk is the possibility that an issuer or a credit enhancer will default (fails to repay interest and principal when due). If an issuer or credit enhancer defaults, the Fund will lose money. Money market funds try to minimize this risk by purchasing higher quality securities. Many fixed income securities receive credit ratings from companies such as Standard & Poor's and Moody's Investor Services. Fixed income securities receive different credit ratings depending on the rating company's assessment of the likelihood of default by the issuer. The lower the credit rating, the greater the credit risk. If the security is unrated, greater reliance is placed on the Adviser's credit assessment. 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. SECTOR RISK Most of the Fund's securities will be invested in issuers located in Ohio. In addition, a substantial part of the Fund's portfolio may be comprised of tax-exempt securities issued or credit enhanced by companies in similar businesses or with other similar characteristics. As a result, the Fund will be more susceptible to any economic, business, political, or other developments which generally affect these issuers. 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 determined net asset value (NAV). The Fund does not charge a sales charge. NAV is determined at 12:00 noon and 1:00 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 offers three share classes: Institutional Shares, Institutional Service Shares and Cash II Shares each representing interests in a single portfolio of securities. This prospectus relates only to Institutional Service Shares. Each share class has different expenses, which affect their performance. Contact your investment professional or call 1-800-341-7400 for more information concerning the other classes. The Fund's Distributor markets the Shares described in this prospectus to institutions acting in an agency or fiduciary capacity or to individuals directly or through investment professionals. The Fund may not be a suitable investment for retirement plans or for non-Ohio taxpayers because it invests in Ohio tax-exempt securities. 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 1:00 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 on the day 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 SYSTEMATIC INVESTMENT PROGRAM Once you have opened an account, you may automatically purchase additional Shares on a regular basis by completing the Systematic Investment Program (SIP) section of the New Account Form or by contacting the Fund or your investment professional. The minimum investment amount for SIPs is $50. BY AUTOMATED CLEARINGHOUSE (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 12:00 noon (Eastern time), your redemption will be wired to you the same day. You will not receive that day's dividend. If you call after 12:00 noon (Eastern time), your redemption will be wired to you the following business day. You will receive that day's dividend. Under limited circumstances, arrangements may be made with the Distributor for same-day payment of redemption proceeds, without that day's dividend, for redemption requests received before 2:00 p.m. (Eastern time). 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 30 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. SYSTEMATIC WITHDRAWAL PROGRAM You may automatically redeem Shares in a minimum amount of $100 on a regular basis. Complete the appropriate section of the New Account Form or an Account Service Options Form or contact your investment professional or the Fund. Your account value must meet the minimum initial investment amount at the time the program is established. This program may reduce, and eventually deplete, your account. Payments should not be considered yield or income. CHECKWRITING You may request checks to redeem your Fund Shares. Your account will continue to receive the daily dividend declared on the Shares being redeemed until a check is presented for payment. DEBIT CARD You may request a debit card account that allows you to redeem Shares. There is an annual fee for this service that the Fund will automatically deduct from your account. 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 CONFIRMATIONS AND ACCOUNT STATEMENTS You will receive confirmation of purchases and redemptions (except for systematic transactions). In addition, you will receive periodic statements reporting all account activity, including systematic transactions, 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, 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. It is anticipated that Fund distributions will be primarily dividends that are exempt from federal income tax, although a portion of the Fund's dividends may not be exempt. Dividends may be subject to state and local taxes, although the Fund's dividends will be exempt from Ohio state personal income tax to the extent they are derived from interest on obligations exempt from Ohio personal income taxes. Capital gains and non-exempt dividends are taxable whether paid in cash or reinvested in the Fund. 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 Management. 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 and/or provide administrative services to more than 300 mutual funds and private accounts, which totaled over $120 billion in assets as of December 31, 1997. Federated was established in 1955 and is one of the largest mutual fund investment managers in the United States with more than 2,000 employees. Over 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 affect on the Fund. Last Meeting of Shareholders A special meeting of shareholders of Ohio Municipal Cash Trust was held on May 21, 1998. On February 24, 1998, the record date for shareholders voting at the meeting, there were 407,796,744 total outstanding shares. The following items were considered by shareholders of the Fund and the results of their voting were as follows: AGENDA ITEM To approve or disapprove amending and changing from fundamental to an operating policy the Fund's ability to invest in restricted securities. The results of shareholders voting were as follows: SHARES VOTED SHARES VOTED SHARES BROKER FOR AGAINST ABSTAINED NON-VOTE 221,451,369 6,231,898 8,923,545 17,751 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-Institutional Service Shares (For a share outstanding throughout each period) Reference is made to the Report of Independent Public Accountants on page 30.
YEAR ENDED OCTOBER 31 1998 1997 1996 1995 1994 NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 INCOME FROM INVESTMENT OPERATIONS: Net investment income 0.03 0.03 0.03 0.04 0.02 LESS DISTRIBUTIONS: Distributions from net investment income (0.03) (0.03) (0.03) (0.04) (0.02) NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 TOTAL RETURN 1 3.22% 3.29% 3.27% 3.61% 2.41% RATIOS TO AVERAGE NET ASSETS: Expenses 0.57% 0.57% 0.57% 0.57% 0.55% Net investment income 3.17% 3.25% 3.23% 3.56% 2.36% Expense waiver/reimbursement 2 0.28% 0.28% 0.31% 0.29% 0.07% SUPPLEMENTAL DATA: Net assets, end of period (000 omitted) $94,896 $80,619 $59,721 $72,931 $62,499
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 October 31, 1998
PRINCIPAL AMOUNT VALUE Short-Term Municipals-99.4% 1 OHIO-99.4% $ 2,250,000 Akron, Bath & Copley, OH Joint Township Weekly VRDNs (Visiting Nurses)/(National City Bank, Cleveland, OH LOC) $ 2,250,000 1,925,000 Akron, OH, Street Improvement Special Assessment Notes (Series 1997), 4.26% RANs, 12/18/1998 1,925,976 3,000,000 American Municipal Power-Ohio, Inc., Electric System Improvement Revenue Bonds, 3.85% BANs (Bryan, OH), 8/27/1999 3,000,000 2,425,000 Ashland County, OH Health Care Weekly VRDNs (Brethren Care, Inc.)/(National City Bank, Ohio LOC) 2,425,000 1,750,000 Ashland, OH, 3.95% TANs, 7/15/1999 1,752,954 28,560,000 Banc One Capital Higher Education Tax-Exempt Income Trust, (Series 2 Certificates of Ownership) Weekly VRDNs (Bank One, Kentucky LOC) 28,560,000 5,875,000 Belmont County, OH Weekly VRDNs (Lesco, Inc.)/(PNC Bank, N.A. LOC) 5,875,000 1,400,000 Belmont County, OH, 4.18% BANs, 12/1/1998 1,400,311 3,140,000 Bowling Green, OH, (Series 1998), 3.80% BANs, 6/17/1999 3,140,944 4,000,000 Brookville, OH, (Series 1988) Weekly VRDNs (Green Tokai)/ (Bank of Tokyo-Mitsubishi Ltd. LOC) 4,000,000 3,100,000 Butler County, OH, 3.50% BANs, 3/19/1999 3,104,654 1,500,000 Butler County, OH, 4.10% BANs, 8/5/1999 1,504,383 5,750,000 Clark County, OH, Multifamily Housing Revenue Bonds (Series 1997) Weekly VRDNs (Ohio Masonic Home)/(Huntington National Bank, Columbus, OH LOC) 5,750,000 6,900,000 Clermont County, OH, Variable Rate IDRB's (Series 1997) Weekly VRDNs (Buriot International, Inc.)/(KeyBank, N.A. LOC) 6,900,000 2,110,000 Cleveland, OH Airport System, Series C, 4.25% Bonds (FSA INS), 1/1/1999 2,111,516 2,000,000 Cleveland, OH IDA, (Series B), 4.50% BANs, 10/1/1999 2,019,618 2,335,000 2 Cleveland, OH Parking Facilities, PA-182 (Series 1996) Weekly VRDNs (MBIA INS)/(Merrill Lynch Capital Services, Inc. LIQ) 2,335,000 1,600,000 Clinton County, OH Hospital Authority Weekly VRDNs (Clinton Memorial Hospital)/(National City Bank, Columbus, OH LOC) 1,600,000 1,700,000 Columbiana County, OH, Industrial Development Revenue Bonds Weekly VRDNs (C & S Land Company Project)/(Bank One, Ohio, N.A. LOC) 1,700,000 5,000,000 Cuyahoga County, OH Hospital Authority, (Series 1998B) Weekly VRDNs (Cleveland Clinic)/(Chase Manhattan Bank N.A., New York LIQ) 5,000,000 2,000,000 Cuyahoga County, OH Hospital Authority, (Series C) Weekly VRDNs (Cleveland Clinic)/(Bank of America NT and SA, San Francisco LIQ) 2,000,000 PRINCIPAL AMOUNT VALUE Short-Term Municipals-continued 1 OHIO-CONTINUED $ 500,000 Cuyahoga County, OH IDA Weekly VRDNs (Animal Protection League (Cuyahoga County))/(KeyBank, N.A. LOC) $ 500,000 1,350,000 Cuyahoga County, OH IDA Weekly VRDNs (East Park Community, Inc.)/(KeyBank, N.A. LOC) 1,350,000 2,350,000 Cuyahoga County, OH IDA Weekly VRDNs (H.P. Parking Co.)/ (KeyBank, N.A. LOC) 2,350,000 260,000 Cuyahoga County, OH IDA Weekly VRDNs (Interstate Diesel Service, Inc.)/(Huntington National Bank, Columbus, OH LOC) 260,000 850,000 Cuyahoga County, OH IDA Weekly VRDNs (Premier Manufacturing Corp.)/(National City Bank, Kentucky LOC) 850,000 2,600,000 Cuyahoga County, OH IDA, (Series 1988) Weekly VRDNs (Trebmal Landerhaven)/(Star Bank, NA, Cincinnati LOC) 2,600,000 3,100,000 Cuyahoga County, OH IDA, (Series 1997) Weekly VRDNs (Northstar Plastics, Inc.)/(Bank One, Ohio, N.A. LOC) 3,100,000 1,700,000 Cuyahoga County, OH IDA, IDRB (Series 1995) Weekly VRDNs (Avalon Precision Casting Co. Project)/(KeyBank, N.A. LOC) 1,700,000 3,500,000 Dayton, OH Department of Aviation, (Series 1998), 3.65% BANs, 6/15/1999 3,503,796 1,755,000 Delaware County, OH, (Street Improvement), 4.00% BANs, 7/28/1999 1,758,738 1,585,000 Delaware County, OH, IDRB (Series 1995) Weekly VRDNs (Air Waves, Inc. Project)/(KeyBank, N.A. LOC) 1,585,000 5,000,000 Dublin, OH, (Series 1998B), 3.75% BANs, 12/17/1998 5,000,302 8,500,000 Dublin, OH, Industrial Development Refunding Revenue Bonds (Series 1997) Weekly VRDNs (Witco Corp.)/(Fleet National Bank, Springfield, MA LOC) 8,500,000 5,055,000 Erie County, OH, Adjustable Rate Demand Health Care Facilities Bonds (Series 1996A) Weekly VRDNs (Providence Care Center)/(Fifth Third Bank of Northwestern OH LOC) 5,055,000 1,150,000 Fairfield County, OH, 4.45% BANs, 7/27/1999 1,156,105 1,750,000 Fairlawn City, OH, 3.90% BANs, 1/20/1999 1,750,933 7,000,000 Franklin County, OH Hospital Facility Authority, (Series 1992) Weekly VRDNs (Wesley Glenn, Inc.)/(Fifth Third Bank, Cincinnati LOC) 7,000,000 4,500,000 Franklin County, OH IDA Weekly VRDNs (Heekin Can, Inc.)/(PNC Bank, Ohio, N.A. LOC) 4,500,000 2,820,000 Franklin County, OH IDA Weekly VRDNs (Unicorn Leasing Corp.)/(Fifth Third Bank, Cincinnati LOC) 2,820,000 3,130,000 Franklin County, OH IDA, (Series 1995) Weekly VRDNs (Fabcon L.L.C. Project)/(Norwest Bank Minnesota, Minneapolis LOC) 3,130,000 4,900,000 Franklin County, OH IDA, Adjustable Rate Demand IDRB's (Series 1996A) Weekly VRDNs (Carams, Ltd.)/(Huntington National Bank, Columbus, OH LOC) 4,900,000 1,815,000 Franklin County, OH IDA, Adjustable Rate Demand IDRB's (Series 1996B) Weekly VRDNs (Carams, Ltd.)/(Huntington National Bank, Columbus, OH LOC) 1,815,000 PRINCIPAL AMOUNT VALUE Short-Term Municipals-continued 1 OHIO-CONTINUED $ 1,810,000 Franklin County, OH, Adjustable Rate Demand Economic Development Revenue Refunding Bonds (Series 1996) Weekly VRDNs (CPM Investments)/(Huntington National Bank, Columbus, OH LOC) $ 1,810,000 4,500,000 Franklin County, OH, Adjustable Rate Demand Multifamily Housing Revenue Bonds (Series 1998), 3.85% TOBs (Jefferson Chase L.P.)/(Fifth Third Bank, Cincinnati LOC), Mandatory Tender 12/1/1998 4,500,000 1,350,000 Franklin County, OH, Health Care Facilities Revenue Bonds (Series 1994) Weekly VRDNs (Wesley Glenn, Inc.)/(Fifth Third Bank of Northwestern OH LOC) 1,350,000 21,300,000 Franklin County, OH, Hospital Revenue Bonds (Series 1995) Weekly VRDNs (Holy Cross Health System Corp.)/(Morgan Guaranty Trust Co., New York LIQ) 21,300,000 4,995,000 2 Franklin County, OH, PT156 (Series 1993A), 3.75% TOBs (Riverside United Methodist Hospital)/(AMBAC INS)/ (Bayerische Hypotheken-Und Wechsel-Bank Ag LIQ), Optional Tender 1/14/1999 4,995,000 1,000,000 Hamilton County, OH Health System Weekly VRDNs (West Park Community)/(Fifth Third Bank, Cincinnati LOC) 1,000,000 2,000,000 Hamilton, OH, (Issue I & IV), 3.75% BANs, 6/11/1999 2,000,000 1,305,000 Hamilton, OH, 3.49% BANs, 10/22/1999 1,307,329 7,500,000 Henry County, OH, Series 1996 Automatic Feed Project Weekly VRDNs (Huntington National Bank, Columbus, OH LOC) 7,500,000 3,600,000 Hilliard, OH, Adjustable Rate IDRB's (Series 1996) Weekly VRDNs (Medex, Inc.)/(Bank One, Ohio, N.A. LOC) 3,600,000 2,000,000 Holmes County, OH IDA Weekly VRDNs (Poultry Processing)/ (Rabobank Nederland, Utrecht LOC) 2,000,000 1,095,000 Huber Heights, OH, IDRB (Series 1994) Weekly VRDNs (Lasermike, Inc. Project)/(KeyBank, N.A. LOC) 1,095,000 1,723,000 Huber Heights, OH, Various Purpose Assessment, 3.74% BANs, 3/12/1999 1,723,235 1,700,000 Kent, OH, Adjustable Rate IDRB's (Series 1994) Weekly VRDNs (Raven's Metal Products, Inc. Project)/(FirstMerit Bank, N.A. LOC) 1,700,000 3,160,000 Lake County, OH, Adjustable Rate IDRB's (Series 1996) Weekly VRDNs (Apsco Properties, LTD.)/(FirstMerit Bank, N.A. LOC) 3,160,000 3,975,000 Lorain Port Authority, OH, (Series 1994) Weekly VRDNs (Spitzer Great Lakes Ltd., Inc.)/(Bank One, Ohio, N.A. LOC) 3,975,000 1,105,000 Lorain Port Authority, OH, Adjustable Rate Demand Port Development Refunding Revenue Bonds (Series 1996) Weekly VRDNs (Spitzer Project)/(Bank One, Ohio, N.A. LOC) 1,105,000 8,305,000 Lorain Port Authority, OH, IDRB (Series 1996) Weekly VRDNs (Brush Wellman, Inc.)/(National City Bank, Cleveland, OH LOC) 8,305,000 1,100,000 Louisville City, OH, 4.25% BANs, 5/3/1999 1,101,592 400,000 Lucas County, OH IDA Weekly VRDNs (Kuhlman Corp.)/(KeyBank, N.A. LOC) 400,000 PRINCIPAL AMOUNT VALUE Short-Term Municipals-continued 1 OHIO-CONTINUED $ 1,510,000 Lucas County, OH, Hospital Facility Improvement Revenue Bonds (Series 93) Weekly VRDNs (Lott Industries, Inc.)/ (National City Bank, Cleveland, OH LOC) $ 1,510,000 220,000 Lucas County, OH, Hospital Improvement Revenue Weekly VRDNs (Sunshine Children's Home)/(National City Bank, Cleveland, OH LOC) 220,000 2,150,000 Lyndhurst, OH, 3.875% BANs, 3/17/1999 2,151,738 5,325,000 Mahoning County, OH Multifamily HFA Weekly VRDNs (International Towers, Inc.)/(PNC Bank, N.A. LOC) 5,325,000 5,360,000 Mahoning County, OH, Housing Revenue Bonds (Series 1995) Weekly VRDNs (Copeland Oaks Project)/(Bank One, Ohio, N.A. LOC) 5,360,000 310,000 Mansfield, OH, IDR Weekly VRDNs (Designed Metal Products, Inc.)/(Bank One, Ohio, N.A. LOC) 310,000 1,500,000 Marion County, OH Health Care Facilities Weekly VRDNs (Marion Area Counseling Center, Inc.)/(Huntington National Bank, Columbus, OH LOC) 1,500,000 1,135,000 Marion County, OH Hospital Authority, (Series 1991) Weekly VRDNs (Marion County, OH Pooled Hospital Program)/(Bank One, Ohio, N.A. LOC) 1,135,000 1,150,000 Mason City, OH, 3.95% BANs, 12/17/1998 1,150,209 3,500,000 Mayfield Village, OH IDA Weekly VRDNs (Beta Campus Co.)/ (KeyBank, N.A. LOC) 3,500,000 7,400,000 Medina County, OH, (Series 1997) Weekly VRDNs (Plaza 71 Associates Ltd.)/(Westdeutsche Landesbank Girozentrale LOC) 7,400,000 6,250,000 Medina County, OH, (Series 1998) Weekly VRDNs (Mack Industries)/(Huntington National Bank, Columbus, OH LOC) 6,250,000 3,000,000 Medina County, OH, (Series 1998) Weekly VRDNs (Michael Day Enterprises)/(KeyBank, N.A. LOC) 3,000,000 5,400,000 Medina County, OH, Solid Waste Disposal Revenue Bonds (Series 1995) Weekly VRDNs (Valley City Steel Company Project)/(KeyBank, N.A. LOC) 5,400,000 1,750,000 Mentor Village, OH School District, 3.95% BANs, 5/6/1999 1,750,599 3,280,000 Mentor, OH, Adjustable Rate IDRB's (Series 1997) Weekly VRDNs (Risch Investments/Roll Kraft, Inc.)/(Bank One, Ohio, N.A. LOC) 3,280,000 4,500,000 Miami County, OH, 3.90% BANs, 7/15/1999 4,506,696 4,675,000 Montgomery County, OH, Variable Rate Limited Obligation Revenue Bonds (Series 1996) Weekly VRDNs (Society of St. Vincent De Paul)/(National City Bank, Ohio LOC) 4,675,000 1,870,000 Montgomery, OH IDA Weekly VRDNs (Bethesda Two Limited Partnership)/(Huntington National Bank, Columbus, OH LOC) 1,870,000 10,000,000 New Albany, OH Community Authority, Adjustable Rate Multi- Purpose Infrastructure Improvement Bonds, (Series A) Weekly VRDNs (Huntington National Bank, Columbus, OH LOC) 10,000,000 730,000 North Olmsted, OH IDA, 3.95% TOBs (Therm-All)/(National City Bank, Ohio LOC), Optional Tender 2/1/1999 730,000 PRINCIPAL AMOUNT VALUE Short-Term Municipals-continued 1 OHIO-CONTINUED $ 1,175,000 Ohio HFA Weekly VRDNs (Westchester Village)/(KeyBank, N.A. LOC) $ 1,175,000 7,775,000 2 Ohio HFA, (Series 1990-C) PT-239, 3.15% TOBs (GNMA COL)/ (Credit Suisse First Boston LIQ), Optional Tender 9/8/1999 7,775,000 6,835,000 Ohio HFA, 3.85% TOBs (Lincoln Park Associates)/(Bank One, Ohio, N.A. LOC), Optional Tender 11/1/1998 6,835,000 2,680,000 Ohio HFA, PT-122 Weekly VRDNs (GNMA COL)/(Banco Santander SA LIQ) 2,680,000 10,000,000 Ohio HFA, Residential Mortgage Revenue Notes (1998 Series A-2), 3.80% BANs, 3/1/1999 10,000,000 5,195,000 Ohio HFA, Single Family Mortgage (Series PT-71) Weekly VRDNs (GNMA COL)/(Commerzbank AG, Frankfurt LIQ) 5,195,000 8,880,000 Ohio HFA, Trust Receipts (Series 1996 FR/RI-6) Weekly VRDNs (GNMA COL)/(Bank of New York, New York LIQ) 8,880,000 3,300,000 Ohio HFA, Trust Receipts (Series 1997 FR/RI-14) Weekly VRDNs (GNMA GTD)/(Bank of New York, New York LIQ) 3,300,000 9,250,000 Ohio HFA, Trust Receipts, (Series 1996 FR/RI-5) Weekly VRDNs (GNMA COL)/(Bank of New York, New York LIQ) 9,250,000 20,000,000 2 Ohio HFA, Variable Rate Certificates (Series 1998Q), 3.75% TOBs (GNMA COL)/(Bank of America NT and SA, San Francisco LIQ), Optional Tender 8/4/1999 20,000,000 1,000,000 Ohio State Air Quality Development Authority Weekly VRDNs (Timken Co.)/(Credit Suisse First Boston LOC) 1,000,000 2,800,000 Ohio State Air Quality Development Authority, (Series 1988A) Weekly VRDNs (PPG Industries, Inc.) 2,800,000 3,000,000 Ohio State Air Quality Development Authority, (Series C), 4.20% TOBs (Ohio Edison Co.)/(Barclays Bank PLC, London LOC), Optional Tender 9/1/1999 3,008,826 7,600,000 Ohio State Air Quality Development Authority, Air Quality Development Revenue Bonds (1995 Series B) Weekly VRDNs (JMG Funding Limited Partnership)/(Societe Generale, Paris LOC) 7,600,000 1,565,000 Ohio State Higher Education Facility, Revenue Bonds Weekly VRDNs (Notre Dame College Project)/(National City Bank, Cleveland, OH LOC) 1,565,000 1,000,000 Ohio State Public Facilities Commission, (Series II A), 5.20% Bonds (AMBAC INS), 5/1/1999 1,008,923 4,400,000 Ohio State Public Facilities Commission, (Series II-1998A), 4.25% Bonds, 12/1/1998 4,402,260 5,000,000 Ohio State Public Facilities Commission, (Series II-B), 4.50% Bonds, 11/1/1998 5,000,000 3,200,000 Ohio State Public Facilities Commission, Higher Education Cap Facs (Series II-B), 5.00% Bonds, 11/1/1998 3,200,000 2,500,000 Ohio State Water Development Authority, Multimodal Water Development (Series 1993) Weekly VRDNs (Timken Co.)/ (Wachovia Bank of NC, N.A., Winston-Salem LOC) 2,500,000 5,000,000 Ohio State Water Development Authority, Ohio PCR Bonds (Series 1989) Weekly VRDNs (Duquesne Light Power Co.)/(First National Bank of Chicago LOC) 5,000,000 PRINCIPAL AMOUNT VALUE Short-Term Municipals-continued 1 OHIO-CONTINUED $ 10,000,000 Ohio State Water Development Authority, PCR Refunding Bonds Weekly VRDNs (General Motors Corp.) $ 10,000,000 4,000,000 Ohio State Water Development Authority, PCR Bonds (Series 1988), 3.60% CP (Duquesne Light Power Co.)/(Toronto-Dominion Bank LOC), Mandatory Tender 11/12/1998 4,000,000 10,000,000 Ohio State Water Development Authority, Pollution Control Revenue Refunding Bonds (Series 1997) Weekly VRDNs (Philip Morris Cos., Inc.) 10,000,000 400,000 Ohio State Weekly VRDNs (John Carroll University, OH)/(PNC Bank, N.A. LOC) 400,000 4,350,000 Ohio State, Adjustable Rate Weekly VRDNs (General Motors Corp.) 4,350,000 5,000,000 Ohio State, Environmental Improvement Revenue Bonds (Series 1996) Weekly VRDNs (Newark Group Industries, Inc.)/(Chase Manhattan Bank N.A., New York LOC) 5,000,000 930,000 Ohio State, IDR (Series 1991) Weekly VRDNs (Standby Screw, Inc.)/(National City Bank, Columbus, OH LOC) 930,000 1,200,000 Ohio State, IDRB (Series 1994) Weekly VRDNs (Anomatic Corp.)/(National City Bank, Columbus, OH LOC) 1,200,000 4,840,000 Ohio Water Development Authority, PA-201 Weekly VRDNs (AMBAC INS)/(Merrill Lynch Capital Services, Inc. LIQ) 4,840,000 4,600,000 Oregon City, OH, (Series 1997-3), 4.00% BANs, 12/3/1998 4,600,581 1,000,000 Orrville, OH IDA Weekly VRDNs (O.S. Associates/Contours, Inc.)/(National City Bank, Cleveland, OH LOC) 1,000,000 2,000,000 Pickerington Local School District, OH, 4.04% BANs, 1/22/1999 2,001,487 35,000 Portage County, OH IDA Weekly VRDNs (D & W Associates)/(Bank One, Ohio, N.A. LOC) 35,000 5,000,000 Portage County, OH IDA, (Series 1998) Weekly VRDNs (Amweld Building Products, Inc.)/(First Union National Bank, Charlotte, N.C. LOC) 5,000,000 305,000 Portage County, OH IDA, 3.90% TOBs (Neidlinger)/(KeyBank, N.A. LOC), Optional Tender 3/1/1999 305,000 4,050,000 Portage County, OH IDA, Adjustable Rate IDRB's (Series 1996) Weekly VRDNs (Barnette Project)/(National City, Northeast LOC) 4,050,000 735,000 Portage County, OH IDA, Industries Revenue Bonds Weekly VRDNs (Lovejoy Industries)/(Star Bank, NA, Cincinnati LOC) 735,000 3,690,000 Preble Shawnee, OH Local Schools, 4.00% BANs, 3/31/1999 3,695,149 5,000,000 Rickenbacker, OH Port Authority, (Series 1992) Weekly VRDNs (Rickenbacker Holdings, Inc.)/(Bank One, Ohio, N.A. LOC) 5,000,000 4,275,000 Ross County, OH, Hospital Facilities Revenue Bonds (Series 1995) Weekly VRDNs (Medical Center Hospital Project)/(Fifth Third Bank, Cincinnati LOC) 4,275,000 2,000,000 Ross County, OH, Hospital Revenue Bonds Weekly VRDNs (Adena Health System)/(Fifth Third Bank, Cincinnati LOC) 2,000,000 5,200,000 Scioto County, OH Hospital Authority Weekly VRDNs (AMBAC INS)/(First National Bank of Chicago LIQ) 5,200,000 PRINCIPAL AMOUNT VALUE Short-Term Municipals-continued 1 OHIO-CONTINUED $ 1,600,000 Seneca County, OH Hospital Facility Authority Weekly VRDNs (St. Francis Home)/(National City Bank, Cleveland, OH LOC) $ 1,600,000 2,000,000 Seven Hills City, OH, (Series 1998), 3.85% BANs, 8-1/2/1999 2,000,741 400,000 Solon, OH, IDR Weekly VRDNs (Graphic Laminating)/(KeyBank, N.A. LOC) 400,000 1,000,000 South Euclid, OH, Sewer System Improvements, 3.95% BANs, 4/7/1999 1,001,037 800,000 Stark County, OH IDR Weekly VRDNs (Sancap Abrasives, Inc.)/ (KeyBank, N.A. LOC) 800,000 6,600,000 Stark County, OH IDR Weekly VRDNs (Shearer's Foods, Inc.)/ (Bank One, Ohio, N.A. LOC) 6,600,000 1,945,000 Stark County, OH IDR, (Series 1994) Weekly VRDNs (Wilkof Morris)/(KeyBank, N.A. LOC) 1,945,000 1,210,000 Stark County, OH IDR, IDRB (Series 1996) Weekly VRDNs (Foundations Systems and Anchors, Inc. Project)/(Bank One, Ohio, N.A. LOC) 1,210,000 1,140,000 Strongsville, OH, IDRB (Series 1994) Weekly VRDNs (Nutro Machinery Corp., Project)/(Huntington National Bank, Columbus, OH LOC) 1,140,000 2,250,000 Summit County, OH IDR Weekly VRDNs (Maison Aine Limited Partnership)/(KeyBank, N.A. LOC) 2,250,000 4,500,000 Summit County, OH IDR, (Series 1994) Weekly VRDNs (Harry London Candies, Inc.)/(Bank One, Ohio, N.A. LOC) 4,500,000 1,300,000 Summit County, OH IDR, (Series 1997) Weekly VRDNs (Baker McMillen Co.)/(National City, Northeast LOC) 1,300,000 3,180,000 Summit County, OH IDR, (Series 1997) Weekly VRDNs (Malco Products, Inc.)/(Bank One, Ohio, N.A. LOC) 3,180,000 905,000 Summit County, OH IDR, 3.80% TOBs (Matech Machine Tool Co.)/ (Bank One, Ohio, N.A. LOC), Optional Tender 2/1/1999 905,000 745,000 Summit County, OH IDR, 3.80% TOBs (S.D. Meyers, Inc.)/(Bank One, Ohio, N.A. LOC), Optional Tender 2/15/1999 745,000 975,000 Summit County, OH IDR, 3.85% TOBs (Rogers Industrial Products, Inc.)/(Bank One, Ohio, N.A. LOC), Optional Tender 11/1/1998 975,000 590,000 Summit County, OH IDR, 3.90% TOBs (Bechmer-Boyce Project)/ (KeyBank, N.A. LOC), Optional Tender 1/15/1999 590,000 290,000 Summit County, OH IDR, 3.90% TOBs (Keltec Industries)/(Bank One, Ohio, N.A. LOC), Optional Tender 3/1/1999 290,000 690,000 Summit County, OH IDR, 3.90% TOBs (Universal Rack)/(National City Bank, Cleveland, OH LOC), Optional Tender 3/1/1999 690,000 1,325,000 Summit County, OH IDR, Adjustable Rate IDRB's (Series 1996) Weekly VRDNs (Fomo Products, Inc.)/(FirstMerit Bank, N.A. LOC) 1,325,000 755,000 Summit County, OH IDR, Bonds (Series 1994) Weekly VRDNs (Austin Printing Co., Inc.)/(Bank One, Ohio, N.A. LOC) 755,000 2,545,000 Summit County, OH IDR, IDRB (Series 1994B) Weekly VRDNs (Harry London Candies, Inc.)/(Bank One, Ohio, N.A. LOC) 2,545,000 PRINCIPAL AMOUNT VALUE Short-Term Municipals-continued 1 OHIO-CONTINUED $ 745,000 Summit County, OH IDR, IDRB (Series 1995) Weekly VRDNs (Cardtech Project (OH))/(KeyBank, N.A. LOC) $ 745,000 1,215,000 Summit County, OH IDR, Industrial Development Bonds (Series 1996) Weekly VRDNs (Creative Screen Print Project)/(National City, Northeast LOC) 1,215,000 1,045,000 Summit County, OH IDR, Multi-Mode Variable Rate I Weekly VRDNs (Mastergraphics, Inc. Project)/(KeyBank, N.A. LOC) 1,045,000 2,155,000 Summit County, OH IDR, Variable Rate IDRB's (Series 1998A) Weekly VRDNs (Wintek Ltd.)/(FirstMerit Bank, N.A. LOC) 2,155,000 6,000,000 Summit County, OH, (Series A), 4.50% BANs, 6/3/1999 6,025,399 3,415,000 Summit County, OH, Adjustable Rate Healthcare Facilities Revenue Bonds (Series 1996) Weekly VRDNs (United Disability Services, Inc.)/(FirstMerit Bank, N.A. LOC) 3,415,000 3,200,000 Toledo, OH, Adjustable Rate City Services Special Assessment Notes (Services 1997) Weekly VRDNs (Canadian Imperial Bank of Commerce, Toronto LOC) 3,200,000 4,000,000 Toledo-Lucas County, OH Port Authority, Airport Development Revenue Bonds Series 1996-1) Weekly VRDNs (Burlington Air Express, Inc.)/(ABN AMRO Bank N.V., Amsterdam LOC) 4,000,000 1,000,000 Toledo-Lucas County, OH Port Authority, IDA Weekly VRDNs (Medusa Corp.)/(Bayerische Vereinsbank AG, Munich LOC) 1,000,000 2,100,000 Trumbull County, OH IDA, (Series 1989) Weekly VRDNs (McSonald Steel Corp.)/(PNC Bank, N.A. LOC) 2,100,000 1,270,000 Trumbull County, OH IDA, IDR Refunding Bonds (Series 1994) Weekly VRDNs (Churchill Downs, Inc.)/(Bank One, Ohio, N.A. LOC) 1,270,000 1,050,000 Tuscarawas County, OH, Adjustable Rate IDRB's (Series 1995) Weekly VRDNs (Primary Packaging, Inc.)/(FirstMerit Bank, N.A. LOC) 1,050,000 2,650,000 Williams County, OH, Multi-Mode Variable Rate IDRB's (Series 1996) Weekly VRDNs (Allied Moulded Products, Inc.)/(KeyBank, N.A. LOC) 2,650,000 1,030,000 Willoughby City, OH, IDR Refunding Bonds (Series 1995A) Weekly VRDNs (Pine Ridge Shopping Center Company Project)/ (Star Bank, NA, Cincinnati LOC) 1,030,000 1,095,000 Willoughby City, OH, IDR Revenue Bonds (Series 1995 B) Weekly VRDNs (Pine Ridge Shopping Center Company Project)/ (Star Bank, NA, Cincinnati LOC) 1,095,000 1,000,000 Wood County, OH Weekly VRDNs (Principle Business Enterprises)/(National City Bank, Cleveland, OH LOC) 1,000,000 2,030,000 Wood County, OH, EDRB Weekly VRDNs (Roe Inc. Project)/ (Huntington National Bank, Columbus, OH LOC) 2,030,000 PRINCIPAL AMOUNT VALUE Short-Term Municipals-continued 1 OHIO-CONTINUED $ 1,000,000 Wood County, OH, Williams Industrial Service, Inc., Project Weekly VRDNs (Williams Industrial Service, Inc.)/(Huntington National Bank, Columbus, OH LOC) $ 1,000,000 3,950,000 Youngstown, OH, Adjustable Rate Demand IDRB's (Series 1996A) Weekly VRDNs (Cantar/Polyair Corp./Performa Corp.)/(Marine Midland Bank N.A., Buffalo, NY LOC) 3,950,000 Total Investments (at amortized cost) 3 $ 566,006,031
Securities that are subject to Alternative Minimum Tax represent 44.9% of the portfolio as calculated based upon total portfolio market value. 1 The Fund may only invest in securities rated in one of the two highest short-term rating categories by one or more nationally recognized statistical rating organizations ("NRSROs") or unrated securities of comparable quality. 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, MIG- 1 or MIG-2 by Moody's Investors Service, Inc., or F-1+, F-1 or F-2 by Fitch IBCA, Inc. are all considered rated in one of the two highest short-term rating categories. Securities rated in the highest short-term rating category (and unrated securities of comparable quality) are identified as First Tier securities. Securities rated in the second highest short-term rating category (and unrated securities of comparable quality) are identified as Second Tier securities. The Fund follows applicable regulations in determining whether a security is rated and whether a security rated by multiple NRSROs in different rating categories should be identified as a First or Second Tier security. At October 31, 1998, the portfolio securities were rated as follows: Tier Rating Percentage Based on Total Market Value (Unaudited) FIRST TIER SECOND TIER 96.0% 4.0% 2 Denotes a restricted security which is subject to restrictions on resale under Federal Securities laws. At October 31, 1998, these securities amounted to $35,105,000 which represents 6% of net assets. 3 Also represents cost for federal tax purposes. Note: The categories of investments are shown as a percentage of net assets ($569,237,375) at October 31, 1998. The following acronyms are used throughout this portfolio: AMBAC -American Municipal Bond Assurance Corporation BANs -Bond Anticipation Notes COL -Collateralized CP -Commercial Paper EDRB -Economic Development Revenue Bonds FSA -Financial Security Assurance GNMA -Government National Mortgage Association GTD -Guaranty HFA -Housing Finance Authority IDA -Industrial Development Authority IDR -Industrial Development Revenue IDRB -Industrial Development Revenue Bond INS -Insured LIQ -Liquidity Agreement LOC -Letter of Credit MBIA -Municipal Bond Investors Assurance PCR -Pollution Control Revenue PLC -Public Limited Company RANs -Revenue Anticipation Notes SA -Support Agreement TANs -Tax Anticipation Notes TOBs -Tender Option Bonds VRDNs -Variable Rate Demand Notes See Notes which are an integral part of the Financial Statements Statement of Assets and Liabilities October 31, 1998 ASSETS: Total investments in securities, at amortized cost and value $ 566,006,031 Cash 361,802 Income receivable 3,658,143 Receivable for shares sold 3,212 Total assets 570,029,188 LIABILITIES: Payable for shares redeemed $ 18,618 Income distribution payable 530,528 Accrued expenses 242,667 Total liabilities 791,813 Net Assets for 569,237,375 shares outstanding $ 569,237,375 NET ASSET VALUE, OFFERING PRICE, AND REDEMPTION PROCEEDS PER SHARE: INSTITUTIONAL SERVICE SHARES: $94,895,944 / 94,895,944 shares outstanding $1.00 CASH II SHARES: $342,946,498 / 342,946,498 shares outstanding $1.00 INSTITUTIONAL SHARES: $131,394,933 / 131,394,933 shares outstanding $1.00
See Notes which are an integral part of the Financial Statements Statement of Operations Year Ended October 31, 1998 INVESTMENT INCOME: Interest $ 16,793,463 EXPENSES: Investment advisory fee $ 1,795,830 Administrative personnel and services fee 338,546 Custodian fees 15,476 Transfer and dividend disbursing agent fees and expenses 308,672 Directors'/Trustees' fees 2,258 Auditing fees 13,000 Legal fees 16,903 Portfolio accounting fees 110,848 Distribution services fee-Cash II Shares 847,854 Shareholder services fee-Institutional Service Shares 208,486 Shareholder services fee-Cash II Shares 706,545 Shareholder services fee-Institutional Shares 207,293 Share registration costs 47,435 Printing and postage 34,042 Insurance premiums 28,241 Miscellaneous 4,249 Total expenses 4,685,678 WAIVERS: Waiver of investment advisory fee $ (1,034,602) Waiver of distribution services fee-Cash II Shares (141,309) Waiver of shareholder services fee-Institutional Service Shares (41,697) Waiver of shareholder services fee-Institutional Shares (207,293) Total waivers (1,424,901) Net expenses 3,260,777 Net investment income $ 13,532,686
(See Notes which are an integral part of the Financial Statements) Statement of Changes in Net Assets
YEAR ENDED OCTOBER 31 1998 1997 INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income $ 13,532,686 $ 11,151,320 DISTRIBUTIONS TO SHAREHOLDERS: Distributions from net investment income Institutional Service Shares (2,641,476) (2,309,907) Cash II Shares (8,076,502) (6,696,096) Institutional Shares (2,814,708) (2,145,317) Change in net assets resulting from distributions to shareholders (13,532,686) (11,151,320) SHARE TRANSACTIONS: Proceeds from sale of shares 2,158,852,726 1,714,819,513 Net asset value of shares issued to shareholders in payment of distributions declared 8,564,300 7,135,525 Cost of shares redeemed (1,979,838,390) (1,678,846,130) Change in net assets resulting from share transactions 187,578,636 43,108,908 Change in net assets 187,578,636 43,108,908 NET ASSETS: Beginning of period 381,658,739 338,549,831 End of period $ 569,237,375 $ 381,658,739
See Notes which are an integral part of the Financial Statements Notes to Financial Statements October 31, 1998 ORGANIZATION Federated Municipal Trust (the "Trust") is registered under the Investment Company Act of 1940, as amended (the "Act") as an open-end, management investment company. The Trust consists of 17 portfolios. The financial statements included herein are only those of Ohio Municipal Cash Trust (the "Fund"). The financial statements of the other portfolios are presented separately. The assets of each portfolio are segregated and a shareholder's interest is limited to the portfolio in which shares are held. The Fund offers three classes of shares: Institutional Service Shares, Cash II Shares, and Institutional Shares. The investment objective of the Fund is current income exempt from federal regular income tax and the personal income taxes imposed by the State of Ohio and Ohio municipalities consistent with stability of principal. 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. 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. RESTRICTED SECURITIES Restricted securities are securities that may only be resold upon registration under federal securities laws or in transactions exempt from such registration. Many restricted securities may be resold in the secondary market in transactions exempt from registration. In some cases, the restricted securities may be resold without registration upon exercise of a demand feature. Such restricted securities may be determined to be liquid under criteria established by the Board of Trustees. The Fund will not incur any registration costs upon such resales. Restricted securities are valued at amortized cost in accordance with Rule 2a-7 under the Investment Company Act of 1940. Additional information on each restricted security held at October 31, 1998, is as follows: ACQUISITION ACQUISITION SECURITY DATE COST Franklin County, OH, PT-156 (Series 1993A) 1/23/1998 4,995,000 Ohio HFA, PT-239 (Series 1990-C) 10/9/1998 7,775,000 Ohio HFA, Variable Rate Certificates (Series 1998Q) 8/25/1998 20,000,000 Cleveland, OH Parking Facilities, PA-182 (Series 1996) 10/10/1997 2,335,000 USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts of assets, liabilities, expenses and revenues reported in the financial statements. Actual results could differ from those estimated. OTHER Investment transactions are accounted for on the trade date. SHARES OF BENEFICIAL INTEREST The Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest (without par value) for each class of shares. At October 31, 1998, capital paid-in aggregated $569,237,375. Transactions in shares were as follows:
YEAR ENDED OCTOBER 31 1998 1997 INSTITUTIONAL SERVICE SHARES: Shares sold 311,583,533 204,340,077 Shares issued to shareholders in payment of distributions declared 576,992 477,179 Shares redeemed (297,884,069) (183,918,781) Net change resulting from Institutional Service share transactions 14,276,456 20,898,475 YEAR ENDED OCTOBER 31 1998 1997 CASH II SHARES: Shares sold 1,005,297,220 846,566,747 Shares issued to shareholders in payment of distributions declared 7,890,344 6,536,111 Shares redeemed (915,569,899) (813,922,799) Net change resulting from Cash II share transactions 97,617,665 39,180,059 YEAR ENDED OCTOBER 31 1998 1997 INSTITUTIONAL SHARES: Shares sold 841,971,973 663,912,689 Shares issued to shareholders in payment of distributions declared 96,964 122,235 Shares redeemed (766,384,422) (681,004,550) Net change resulting from Institutional share transactions 75,684,515 (16,969,626) Net change resulting from share transactions 187,578,636 43,108,908
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES INVESTMENT ADVISORY FEE Federated Management, 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. DISTRIBUTION SERVICES FEE The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b- 1 under the Act. Under the terms of the Plan, the Fund will compensate Federated Securities Corp. ("FSC"), the principal distributor, from the net assets of the Fund to finance activities intended to result in the sale of the Fund's Class II Shares. The Plan provides that the Fund may incur distribution expenses up to 0.30% of the average daily net assets of Cash II Shares, annually, to compensate FSC. The distributor may voluntarily choose to waive any portion of its fee. The distributor can modify or terminate this voluntary waiver at any time at its sole discretion. SHAREHOLDER SERVICES FEE Under the terms of a Shareholder Services Agreement with Federated Shareholder Services ("FSS"), the Fund will pay FSS up to 0.25% of average daily net assets of the Fund for the period. The fee paid to FSS is used to finance certain services for shareholders and to maintain shareholder accounts. FSS may voluntarily choose to waive any portion of its fee. FSS can modify or terminate this voluntary waiver at any time at its sole discretion. TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES FServ, through its subsidiary, Federated Shareholder Services Company ("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. INTERFUND TRANSACTIONS During the period ended October 31, 1998, the Fund engaged in purchase and sale transactions with funds that have a common investment adviser (or affiliated investment advisers), common Directors/Trustees, and/or common Officers. These purchase and sale transactions were made at current market value pursuant to Rule 17a-7 under the Act amounting to $700,580,000 and $652,664,786, respectively. GENERAL Certain of the Officers and Trustees of the Trust are Officers and Directors or Trustees of the above companies. CONCENTRATION OF CREDIT RISK Since the Fund invests a substantial portion of its assets in issuers located in one state, it will be more susceptible to factors adversely affecting issuers of that state than would be a comparable tax-exempt mutual fund that invests nationally. In order to reduce the credit risk associated with such factors, at October 31, 1998, 64.5% of the securities in the portfolio of investments are backed by letters of credit or bond insurance of various financial institutions and financial guaranty assurance agencies. The percentage of investments insured by or supported (backed) by a letter of credit from any one institution or agency did not exceed 15.4% of total investments. 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 Board of Trustees of Federated Municipal Trust and and Shareholders of Ohio Municipal Cash Trust: We have audited the accompanying statement of assets and liabilities of Ohio Municipal Cash Trust (an investment portfolio of Federated Municipal Trust, a Massachusetts business trust), including the schedule of portfolio investments, as of October 31, 1998, the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for the periods presented. These financial statements and financial highlights are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the 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 October 31, 1998, by correspondence with the custodian. 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 Ohio Municipal Cash Trust (an investment portfolio of Federated Municipal Trust) as of October 31, 1998, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and its financial highlights for the periods presented, in conformity with generally accepted accounting principles. Arthur Andersen LLP Boston, Massachusetts December 23, 1998 [Graphic] PROSPECTUS Ohio Municipal Cash Trust A Portfolio of Federated Municipal Trust INSTITUTIONAL SERVICE SHARES December 31, 1998 A Statement of Additional Information (SAI) dated December 31, 1998, is incorporated by reference into this prospectus. To obtain the SAI and 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] Ohio Municipal Cash 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. 811-5911 Cusip 314229857 G00211-02-SS (12/98) [Graphic] STATEMENT OF ADDITIONAL INFORMATION Ohio Municipal Cash Trust A Portfolio of Federated Municipal Trust INSTITUTIONAL SHARES INSTITUTIONAL SERVICE SHARES CASH II SHARES This Statement of Additional Information (SAI) is not a prospectus. Read this SAI in conjunction with the prospectuses for Ohio Municipal Cash Trust, dated December 31, 1998. Obtain the prospectuses without charge by calling 1-800-341-7400. CONTENTS How is the Fund Organized? Securities in Which the Fund Invests How is the Fund Sold? Subaccounting Services Redemption in Kind Massachusetts Partnership Law Account and Share Information Tax Information Who Manages and Provides Services to the Fund? How Does the Fund Measure Performance? Who is Federated Investors, Inc.? Investment Ratings Addresses DECEMBER 31, 1998 [Federated Investors Logo] Federated Securities Corp., Distributor, subsidiary of Federated Investors, Inc. Cusip 314229659 Cusip 314229857 Cusip 314229840 1030105B (12/98) How is the Fund Organized? The Fund is a diversified portfolio of Federated Municipal Trust (Trust). The Trust is an open-end, management investment company that was established under the laws of the Commonwealth of Massachusetts on September 1, 1989. The Trust may offer separate series of shares representing interests in separate portfolios of securities. The Board of Trustees (the Board) has established three classes of shares of the Fund, known as Institutional Shares, Institutional Service Shares and Cash II Shares. This SAI relates to all of the classes of the above-mentioned Shares. Securities in Which the Fund Invests SECURITIES DESCRIPTIONS AND TECHNIQUES In pursuing its investment strategy, the Fund may invest in the following tax- exempt securities for any purpose that is consistent with its investment objective. General Obligation Bonds General obligation bonds are supported by the issuer's full faith and credit. The issuer must levy and collect taxes sufficient to pay principal and interest on the bonds. However, the issuer's authority to levy additional taxes may be limited by its charter or state law. Special Revenue Bonds Special revenue bonds are payable solely from specific revenues received by the issuer. The revenues may consist of specific taxes, assessments, tolls, fees or other types of municipal revenues. For example, a municipality may issue bonds to build a toll road, and pledge the tolls to repay the bonds. Bondholders could not collect from the municipality's general taxes or revenues. Therefore, any shortfall in the tolls could result in a default on the bonds. Private Activity Bonds Private activity bonds are special revenue bonds used to finance private entities. For example, a municipality may issue bonds to finance a new factory to improve its local economy. The municipality would lend the proceeds to the company using the factory, and the company would agree make loan payments sufficient to repay the bonds. The bonds would be payable solely from the company's loan payments, not from any other revenues of the municipality. Therefore, any default on the loan normally would result in a default on the bonds. Municipal Leases Municipalities may enter into leases for equipment or facilities. In order to comply with state public financing laws, these leases are typically subject to annual appropriation. In other words, a municipality may end a lease, without penalty, by not providing for the lease payments in its annual budget. After the lease ends, the lessor (the Fund) can resell the equipment or facility but the Fund may lose money on the sale. The Fund may invest in securities supported by pools of municipal leases. The most common type of lease backed securities are certificates of participation (COPs). However, the Fund may also invest directly in individual leases. Credit Enhancement Common types of credit enhancement include guarantees, letters of credit, bond insurance and surety bonds. Credit enhancement also includes arrangements where securities or other liquid assets secure payment of a fixed income security. If a default occurs, these assets may be sold and the proceeds paid to a security's holders. Either form of credit enhancement reduces credit risks by providing another source of payment for a fixed income security. INVESTMENT RATINGS A nationally recognized rating service'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 (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 IBCA, 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 rating service can be treated as being in one of the two highest short-term rating categories; currently, such securities must be rated by two rating services in one of their two highest rating categories. See "Regulatory Compliance." INVESTMENT RISKS There are many factors which may effect an investment in the Fund. The Fund's principal risks are described in its prospectus. An additional risk factor is outlined below. Tax Risk In order for the interest income from the securities to be exempt from federal regular income tax ("tax-exempt"), tax-exempt securities must meet certain legal requirements. Failure to meet such requirements may cause the interest received and distributed by the Fund to shareholders to be taxable. FUNDAMENTAL INVESTMENT POLICIES The Fund invests in tax-exempt securities so that at least 80% of the Fund's annual interest income is exempt from federal regular income tax and Ohio state income taxes. This policy is fundamental and cannot be changed without shareholder approval. 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 and engage in 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 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 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 tax-exempt 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 Real Estate The Fund will not purchase or sell real estate or real estate limited partnerships, 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 (including instruments issued by a U.S. branch of a domestic bank or savings and loan having capital, surplus, and undivided profits in excess of $100,000,000 at the time of investment), 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 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 Restricted and Illiquid Securities The Fund may invest in restricted securities. Restricted securities are any securities in which the Fund may invest pursuant to its investment objective and policies but which are subject to restrictions on resale under federal securities law. Under criteria established by the Board certain restricted securities are determined to be liquid. To the extent that restricted securities are not determined to be liquid the Fund will limit their purchase, together with other illiquid securities, to 10% of its net assets. 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 nationally recognized rating services, 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 Board has 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 Board 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 Board 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 Board 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. 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. RULE 12B-1 PLAN (CASH II SHARES) As a compensation-type plan, the Rule 12b-1 Plan is designed to pay the Distributor (who may then pay investment professionals such as banks, broker/dealers, trust departments of banks, and registered investment advisers) for marketing activities (such as advertising, printing and distributing prospectuses, and providing incentives to investment professionals) to promote sales of Shares so that overall Fund assets are maintained or increased. This helps the Fund achieve economies of scale, reduce per Share expenses, and provide cash for orderly portfolio management and Share redemptions. Also, the Fund's service providers that receive asset-based fees also benefit from stable or increasing Fund assets. The Fund may compensate the Distributor more or less than its actual marketing expenses. In no event will the Fund pay for any expenses of the Distributor that exceed the maximum Rule 12b-1 Plan fee. For some classes of Shares, the maximum Rule 12b-1 Plan fee that can be paid in any one year may not be sufficient to cover the marketing related expenses the Distributor has incurred. Therefore, it may take the Distributor a number of years to recoup these expenses. SHAREHOLDER SERVICES The Fund may pay Federated Shareholder Services Company, a subsidiary of Federated Investors, Inc. (Federated), for providing shareholder services and maintaining shareholder accounts. Federated Shareholder Services Company may select others to perform these services for their customers and may pay them fees. SUPPLEMENTAL PAYMENTS Investment professionals may be paid fees out of the assets of the Distributor and/or Federated Shareholder Services Company (but not out of Fund assets). The Distributor and/or Federated Shareholder Services Company may be reimbursed by the Adviser or its affiliates. Investment professionals receive such fees for providing distribution-related or shareholder services such as sponsoring sales, providing sales literature, conducting training seminars for employees, and engineering sales-related computer software programs and systems. Also, investment professionals may be paid cash or promotional incentives, such as reimbursement of certain expenses relating to attendance at informational meetings about the Fund or other special events at recreational-type facilities, or items of material value. These payments will be based upon the amount of Shares the investment professional sells or may sell and/or upon the type and nature of sales or marketing support furnished by the investment professional. 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 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. 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. 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 Trust have equal voting rights, except that in matters affecting only a particular Fund or class, only Shares of that Fund or class are entitled to vote. Trustees may be removed by the Board or by shareholders at a special meeting. A special meeting of shareholders will be called by the Board upon the written request of shareholders who own at least 10% of the Trust's outstanding shares of all series entitled to vote. As of December 8, 1998, the following shareholders owned of record, beneficially, or both, 5% or more of the outstanding Institutional Service Shares: Parcol & Company, Oaks, Pennsylvania, owned approximately 50,343,466 shares (47.00%); SNBSO & Company, Springfield, Ohio, owned approximately 14,220,669 shares (13.28%); Delaware County Bank, Delaware, Ohio, owned approximately 10,814,838 shares (10.10%); Kent Sporting Goods, New London, Ohio, owned approximately 6,551,746 shares (6.12%). As of December 8, 1998, the following shareholders owned of record, beneficially, or both, 5% or more of the outstanding Cash II Shares: Gradison & Company, Inc. (for the benefit of its customers), Cincinnati, Ohio, owned approximately 303,066,951 shares (79.68%) and FirstMerit Bank, N.A., Akron, Ohio, owned approximately 28,278,371 shares (7.43%). As of December 8, 1998, the following shareholders owned of record, beneficially, or both, 5% or more of the outstanding Institutional Shares: Panabco, Newark, Ohio, owned approximately 72,834,796 shares (45.59%); Key Trust Co. TTEE, Cleveland, Ohio, owned approximately 18,078,430 shares (11.32%); Mahoning National Bank, Youngstown, Ohio, owned approximately 16,150,195 shares (10.11%); and Grand Old Co., The First National Bank, Zanesville, Ohio, owned approximately 10,027,969 shares (6.28%). Shareholders owning 25% or more of outstanding Shares may be in control and be able to affect the outcome of certain matters presented for a vote of shareholders. Tax Information FEDERAL INCOME TAX The Fund intends to meet the requirements of Subchapter M of the Internal Revenue Code applicable to regulated investment companies. If these requirements are not met, it will not receive the special tax treatment and will pay federal income tax. The Fund will be treated as a single, separate entity for federal income tax purposes so that income earned and capital gains and losses realized by the Trust's other portfolios will be separate from those realized by the Fund. STATE TAXES Under existing Ohio laws, distributions made by the Fund will not be subject to Ohio individual income taxes to the extent that such distributions qualify as exempt-interest dividends under the Internal Revenue Code, and represent (i) interest from obligations of Ohio or its subdivisions which is exempt from federal income tax; or (ii) interest or dividends from obligations issued by the United States and its territories or possessions or by any authority, commission or instrumentality of the United States which are exempt from state income tax under federal laws. Conversely, to the extent that distributions made by the Fund are derived from other types of obligations, such distributions will be subject to Ohio individual income taxes. Distributions made by the Fund will not be subject to Ohio corporation franchise tax to the extent that such distributions qualify as exempt-interest dividends under the Internal Revenue Code, and represent (i) interest from obligations of Ohio or its subdivisions which is exempt from federal income tax; or (ii) net interest income from obligations issued by the United States and its territories or possessions or by any authority, commission or instrumentality of the United States, which is included in federal taxable income and which is exempt from state income tax under federal laws. Exempt-interest dividends that represent interest from obligations held by the Fund which are issued by Ohio or its political subdivisions will be exempt from any Ohio municipal income tax (even if the municipality is permitted under Ohio law to levy a tax on intangible income). Who Manages and Provides Services to the Fund? BOARD OF TRUSTEES The Board is responsible for managing the Trust's business affairs and for exercising all the Trust's powers except those reserved for the shareholders. Information about each Board member is provided below and includes the following data: name, address, birthdate, present position(s) held with the Trust, principal occupations for the past five years and other notable positions held, total compensation received as a Trustee from the Trust for its most recent fiscal year, and the total compensation received from the Federated Fund Complex for the most recent calendar year. The Trust is comprised of 17 Funds and the Federated Fund Complex is comprised of 56 investment companies, whose investment advisers are affiliated with the Fund's Adviser. As of December 8, 1998, 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.
Name Total Birthdate Aggregate Compensation Address Principal Occupations Compensation From Trust and Position With Trust for Past 5 Years From Trust Fund Complex - ------------------------------ -------------------------------------------------------- --------------- ------------------- John F. Donahue##* Chief Executive Officer and Director or Trustee of $0 $0 for the Trust Birthdate: July 28, 1924 the Federated Fund Complex. Chairman and Director, and 56 other Federated Investors Tower Federated Investors, Inc.; Chairman and Trustee, investment 1001 Liberty Avenue Federated Advisers, Federated Management, and companies in the Pittsburgh, PA Federated Research; Chairman and Director, Federated Fund Complex CHAIRMAN and TRUSTEE Research Corp., and Federated Global Research Corp.; Chairman, Passport Research, Ltd. Thomas G. Bigley Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: February 3, 1934 Director, Member of Executive Committee, Children's Trust and 15 Old Timber Trail Hospital of Pittsburgh; formerly: Senior Partner, 56 other Pittsburgh, PA Ernst & Young LLP; Director, MED 3000 Group, Inc.; investment TRUSTEE Director, Member of Executive Committee, University companies in the of Pittsburgh. Fund Complex John T. Conroy, Jr. Director or Trustee of the Federated Fund Complex; $4,484.62 $122,362 for the Birthdate: June 23, 1937 President, Investment Properties Corporation; Senior Trust and Wood/IPC Commercial Dept. Vice President, John R. Wood and Associates, Inc., 56 other John R. Wood and Realtors; Partner or Trustee in private real estate investment Associates, Inc. Realtors ventures in Southwest Florida; formerly: President, companies in the 3255 Tamiami Trail North Naples Property Management, Inc. and Northgate Fund Complex Naples, FL Village Development Corporation. TRUSTEE William J. Copeland Director or Trustee of the Federated Fund Complex; $4,484.62 $122,362 for the Birthdate: July 4, 1918 Director and Member of the Executive Committee, Trust and One PNC Plaza-23rd Floor Michael Baker, Inc.; formerly: Vice Chairman and 56 other Pittsburgh, PA Director, PNC Bank, N.A., and PNC Bank Corp.; investment TRUSTEE Director, Ryan Homes, Inc. companies in the Fund Complex Retired: Director, United Refinery; Director, Forbes Fund; Chairman, Pittsburgh Foundation; Chairman, Pittsburgh Civic Light Opera. James E. Dowd, Esq. Director or Trustee of the Federated Fund Complex; $4,484.62 $122,362 for the Birthdate: May 18, 1922 Attorney-at-law; Director, The Emerging Germany Fund, Trust and 571 Hayward Mill Road Inc. 56 other Concord, MA investment TRUSTEE Retired: President, Boston Stock Exchange, Inc.; companies in the Regional Administrator, United States Securities and Fund Complex Exchange Commission. Lawrence D. Ellis, M.D.* Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: October 11, 1932 Professor of Medicine, University of Pittsburgh; Trust and 3471 Fifth Avenue Medical Director, University of Pittsburgh Medical 56 other Suite 1111 Center - Downtown; Hematologist, Oncologist, and investment Pittsburgh, PA Internist, Presbyterian and Montefiore Hospitals; companies in the TRUSTEE Member, National Board of Trustees, Leukemia Society Fund Complex of America. Edward L. Flaherty, Jr., Director or Trustee of the Federated Fund Complex; $4,484.62 $122,362 for the Esq. # Attorney, of Counsel, Miller, Ament, Henny & Kochuba; Trust and Birthdate: June 18, 1924 Director, Eat'N Park Restaurants, Inc.; formerly: 56 other Miller, Ament, Henny & Counsel, Horizon Financial, F.A., Western Region; investment Kochuba Partner, Meyer and Flaherty. companies in the 205 Ross Street Fund Complex Pittsburgh, PA TRUSTEE Peter E. Madden Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: March 16, 1942 formerly: Representative, Commonwealth of Trust and One Royal Palm Way Massachusetts General Court; President, State Street 56 other 100 Royal Palm Way Bank and Trust Company and State Street Corporation. investment Palm Beach, FL companies in the TRUSTEE Retired: Director, VISA USA and VISA International; Fund Complex Chairman and Director, Massachusetts Bankers Association; Director, Depository Trust Corporation. John E. Murray, Jr., J.D., Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the S.J.D. President, Law Professor, Duquesne University; Trust and Birthdate: December 20, 1932 Consulting Partner, Mollica & Murray. 56 other President, Duquesne investment University Retired: Dean and Professor of Law, University of companies in the Pittsburgh, PA Pittsburgh School of Law; Dean and Professor of Law, Fund Complex TRUSTEE Villanova University School of Law. Wesley W. Posvar Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: September 14, President, World Society of Ekistics, Athens; Trust and 1925 Professor, International Politics; Management 56 other 1202 Cathedral of Learning Consultant; Trustee, Carnegie Endowment for investment University of Pittsburgh International Peace, RAND Corporation, Online companies in the Pittsburgh, PA Computer Library Center, Inc., National Defense Fund Complex TRUSTEE University and U.S. Space Foundation; President Emeritus, University of Pittsburgh; Founding Chairman, National Advisory Council for Environmental Policy and Technology, Federal Emergency Management Advisory Board and Czech Management Center, Prague. Retired: Professor, United States Military Academy; Professor, United States Air Force Academy. Marjorie P. Smuts Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: June 21, 1935 Public Relations/Marketing/Conference Planning. Trust and 4905 Bayard Street 56 other Pittsburgh, PA Retired: National Spokesperson, Aluminum Company of investment TRUSTEE America; business owner. companies in the Fund Complex Glen R. Johnson* Trustee, Federated Investors, Inc.; staff member, $0 $0 for the Trust Birthdate: May 2, 1929 Federated Securities Corp. and Federated Investors Tower 8 other investment 1001 Liberty Avenue companies in the Pittsburgh, PA Fund Complex PRESIDENT and TRUSTEE J. Christopher Donahue##* President or Executive Vice President of the $0 $0 for the Trust Birthdate: April 11, 1949 Federated Fund Complex; Director or Trustee of some and Federated Investors Tower of the Funds in the Federated Fund Complex; President 18 other 1001 Liberty Avenue and Director, Federated Investors, Inc.; President investment Pittsburgh, PA and Trustee, Federated Advisers, Federated companies in the EXECUTIVE VICE PRESIDENT Management, and Federated Research; President and Fund Complex Director, Federated Research Corp. and Federated Global Research Corp.; President, Passport Research, Ltd.; Trustee, Federated Shareholder Services Company; Director, Federated Services Company. Edward C. Gonzales* Trustee or Director of some of the Funds in the $0 $0 for the Trust Birthdate: October 22, 1930 Federated Fund Complex; President, Executive Vice and Federated Investors Tower President and Treasurer of some of the Funds in the 1 other investment 1001 Liberty Avenue Federated Fund Complex; Vice Chairman, Federated companies in the Pittsburgh, PA Investors, Inc.; Vice President, Federated Advisers, Fund Complex EXECUTIVE VICE PRESIDENT 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. John W. McGonigle Executive Vice President and Secretary of the $0 $0 for the Trust Birthdate: October 26, 1938 Federated Fund Complex; Executive Vice President, and Federated Investors Tower Secretary, and Director, Federated Investors, Inc.; 56 other 1001 Liberty Avenue Trustee, Federated Advisers, Federated Management, investment Pittsburgh, PA and Federated Research; Director, Federated Research companies in the EXECUTIVE VICE PRESIDENT Corp. and Federated Global Research Corp.; Director, Fund Complex and SECRETARY Federated Services Company; Director, Federated Securities Corp. Richard J. Thomas Treasurer of the Federated Fund Complex; Vice $0 $0 for the Trust Birthdate: June 17, 1954 President - Funds Financial Services Division, and Federated Investors Tower Federated Investors, Inc.; Formerly: various 56 other 1001 Liberty Avenue management positions within Funds Financial Services investment Pittsburgh, PA Division of Federated Investors, Inc. companies in the TREASURER Fund Complex Richard B. Fisher* President or Vice President of some of the Funds in $0 $0 for the Trust Birthdate: May 17, 1923 the Federated Fund Complex; Director or Trustee of and Federated Investors Tower some of the Funds in the Federated Fund Complex; 6 other investment 1001 Liberty Avenue Executive Vice President, Federated Investors, Inc.; companies in the Pittsburgh, PA Chairman and Director, Federated Securities Corp. Fund Complex VICE PRESIDENT William D. Dawson, III Chief Investment Officer of this Fund and various $0 $0 for the Trust Birthdate: March 3, 1949 other Funds in the Federated Fund Complex; Executive and Federated Investors Tower Vice President, Federated Investment Counseling, 41 other 1001 Liberty Avenue Federated Global Research Corp., Federated Advisers, investment Pittsburgh, PA Federated Management, Federated Research, and companies in the CHIEF INVESTMENT OFFICER Passport Research, Ltd.; Registered Representative, Fund Complex 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. Mary Jo Ochson Senior Portfolio Manager and Vice President of eight $0 $0 for the Birthdate: September 12, investment companies in the Federated Fund Complex; Trust and 1953 Senior Vice President, Federated Investment 7 other investment Federated Investors Tower Counseling, Federated Advisers, Federated Global companies 1001 Liberty Avenue Research Corp., Federated Management, Federated in the Fund Complex Pittsburgh, PA Research, Federated Research Corp. and Passport SENIOR PORTFOLIO Research, Ltd.; Formerly: Vice President, Federated MANAGER/VICE PRESIDENT Advisers, Federated Management, Federated Research, Federated Research Corp. , Passport Research, Ltd. and Federated Global Research Corp. Jeff A. Kozemchak Senior Portfolio Manager and Vice President of four $0 $0 for the Birthdate: January 15, 1960 investment companies in the Federated Fund Complex; Trust and Federated Investors Tower Vice President, Federated Investment Counseling, 3 other investment 1001 Liberty Avenue Federated Advisers, Federated Global Research Corp., companies Pittsburgh, PA Federated Management, Federated Research, Federated in the Fund Complex SENIOR PORTFOLIO Research Corp. and Passport Research, Ltd.; MANAGER/VICE PRESIDENT Formerly: Assistant Vice President and Investment Analyst, Federated Research Corp. and Passport Research, Ltd. ; Assistant Vice President, Federated Advisers, Federated Management and Federated Research.
## Mr. Donahue is the father of J. Christopher Donahue, Executive Vice President of the Trust. 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 Trust, 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 Trust. 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:
Maximum Average Aggregate Daily Administrative Fee Net Assets of the Federated Funds - ------------------------------------------------------------ 0.150 of 1% on the first $250 million 0.125 of 1% on the next $250 million 0.100 of 1% on the next $250 million 0.075 of 1% on assets in excess of $750 million
The administrative fee received during any fiscal year shall be at least $125,000 per portfolio and $30,000 per each additional class of shares. Federated Services Company may voluntarily waive a portion of its fee and may reimburse the Fund for expenses. Federated Services Company also provides certain accounting and recordkeeping services with respect to the Fund's portfolio investments for a fee based on Fund assets plus out-of-pocket expenses. CUSTODIAN State Street Bank and Trust Company, Boston, Massachusetts, is custodian for the securities and cash of the Fund. Foreign instruments purchased by the Fund are held by foreign banks participating in a network coordinated by State Street Bank. TRANSFER AGENT AND DIVIDEND DISBURSING AGENT Federated Services Company, through its registered transfer agent subsidiary, Federated Shareholder Services Company, maintains all necessary shareholder records. The Fund pays the transfer agent a fee based on the size, type, and number of accounts and transactions made by shareholders. INDEPENDENT PUBLIC ACCOUNTANTS Arthur Andersen LLP is the independent public accountant for the Fund. FEES PAID BY THE FUND FOR SERVICES
For the Year Ended October 31, 1998 1997 1996 - ------------------------------------------------------------------------------------- Advisory Fee Earned $1,795,830 $1,448,035 $1,183,374 - ------------------------------------------------------------------------------------- Advisory Fee Reduction 1,034,602 846,106 570,677 - ------------------------------------------------------------------------------------- Brokerage Commissions 0 0 0 - ------------------------------------------------------------------------------------- Administrative Fee 338,546 273,333 223,680 - ------------------------------------------------------------------------------------- 12b-1 Fee - ------------------------------------------------------------------------------------- Cash II Series Shares 706,545 --- --- ------------------------------------------------------------------------------------ Shareholder Services Fee - ------------------------------------------------------------------------------------- Institutional Shares 0 --- ------------------------------------------------------------------------------------ Institutional Service Shares 166,789 --- --- ------------------------------------------------------------------------------------ Cash II Series Shares 706,545 --- --- - -------------------------------------------------------------------------------------
Fees are allocated among Classes based on their pro rata share of Fund assets, except for marketing (Rule 12b-1) fees and shareholder services fees, which are borne only by the applicable Class of Shares. If the Fund's expenses are capped at a particular level, the cap does not include reimbursement to the Fund of any expenses incurred by shareholders who use the transfer agent's subaccounting facilities. How Does the Fund Measure Performance? The Fund may advertise Share performance by using the Securities and Exchange Commission's (SEC) standard method for calculating performance applicable to all mutual funds. The SEC also permits this standard performance information to be accompanied by non-standard performance information. Unless otherwise stated, any quoted Share performance reflects the effect of non-recurring charges, such as maximum sales charges, which, if excluded, would increase the total return and yield. The performance of Shares depends upon such variables as: portfolio quality; average portfolio maturity; type and value of portfolio securities; changes in interest rates; changes or differences in the Fund's or any class of Shares' expenses; and various other factors. Share performance fluctuates on a daily basis largely because net earnings and offering price per Share 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-years and since inception periods ended October 31, 1998. Yield, Effective Yield and Tax-Equivalent Yield given for the Seven-day period ended October 31, 1998.
Share Class Seven-Day Period 1 Year Since Inception on March 5, 1996 Institutional Shares - ------------------------------------------------------------------------------------------------------------------------------ Total Return -- 3.43% 3.44% Yield 3.05% -- -- Effective Yield 3.09% -- -- Tax-Equivalent Yield 5.81% -- -- - ------------------------------------------------------------------------------------------------------------------------------
Share Class Seven-Day Period 1 Year 5 Years Since Inception on April 22, 1991 Institutional Service Shares - ------------------------------------------------------------------------------------------------------------------------------ Total Return -- 3.22% 3.16% 3.16% Yield 2.85% -- -- -- Effective Yield 2.89% -- -- -- Tax-Equivalent Yield 5.43% -- -- -- - ------------------------------------------------------------------------------------------------------------------------------
Share Class Seven-Day Period 1 Year 5 Years Since Inception on April 22, 1991 Cash II Shares - ------------------------------------------------------------------------------------------------------------------------------ Total Return -- 2.91% 2.85% 2.85% Yield 2.55% -- -- -- Effective Yield 2.58% -- -- -- Tax-Equivalent Yield 4.85% -- -- -- - ------------------------------------------------------------------------------------------------------------------------------
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. The adjusted to reflect the taxable yield that Shares would have had to earn to equal the actual yield, assuming a specific tax rate. 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. TAX EQUIVALENCY TABLE Set forth below is a sample of a tax-equivalency table that may be used in advertising and sales literature. This table is for illustrative purposes only and is not representative of past or future performance of the Fund. The interest earned by the tax-exempt securities owned by the Fund generally remains free from federal regular income tax and is often free from state and local taxes as well. However, some of the Fund's income may be subject to the federal alternative minimum tax and state and/or local taxes.
TAXABLE YIELD EQUIVALENT FOR 1998 STATE OF OHIO Federal Tax Bracket: 15.00% 28.00% 31.00% 36.00% 39.60% - ----------------------------------------------------------------------------------------------------------------------------------- Combined Federal and State Tax Bracket: 19.993% 34.624% 37.624% 43.201% 46.801% - ----------------------------------------------------------------------------------------------------------------------------------- Joint Return $1-42,350 $42,351-102,300 $102,301-155,950 $155,951-278,450 OVER $278,450 - ----------------------------------------------------------------------------------------------------------------------------------- Tax-Exempt Yield Taxable Yield Equivalent - ----------------------------------------------------------------------------------------------------------------------------------- 1.50% 1.87% 2.29% 2.40% 2.64% 2.82% - ----------------------------------------------------------------------------------------------------------------------------------- 2.00% 2.50% 3.06% 3.21% 3.52% 3.76% - ----------------------------------------------------------------------------------------------------------------------------------- 2.50% 3.12% 3.82% 4.01% 4.40% 4.70% - ----------------------------------------------------------------------------------------------------------------------------------- 3.00% 3.75% 4.59% 4.81% 5.28% 5.64% - ----------------------------------------------------------------------------------------------------------------------------------- 3.50% 4.37% 5.35% 5.61% 6.16% 6.58% - ----------------------------------------------------------------------------------------------------------------------------------- 4.00% 5.00% 6.12% 6.41% 7.04% 7.52% - ----------------------------------------------------------------------------------------------------------------------------------- 4.50% 5.62% 6.88% 7.21% 7.92% 8.46% - ----------------------------------------------------------------------------------------------------------------------------------- 5.00% 6.25% 7.66% 8.02% 8.80% 9.40% - ----------------------------------------------------------------------------------------------------------------------------------- 5.50% 6.87% 8.41% 8.82% 9.68% 10.34% - ----------------------------------------------------------------------------------------------------------------------------------- 6.00% 7.50% 9.18% 9.62% 10.56% 11.28% - -----------------------------------------------------------------------------------------------------------------------------------
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. 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., 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 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, 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, 1997, Federated managed 11 bond funds with approximately $2.1 billion in assets and 22 money market funds with approximately $10.9 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 tax-exempt 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 27 years' experience. As of December 31, 1997, Federated managed 29 equity funds totaling approximately $11.7 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, 1997, Federated managed 11 money market funds and 16 bond funds with assets approximating $17.1 billion and $5.6 billion, respectively. Federated's corporate bond decision making--based on intensive, diligent credit analysis--is backed by over 22 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 $200 billion. GOVERNMENT FUNDS In the government sector, as of December 31, 1997, Federated manages 9 mortgage- backed, 6 government/ agency and 18 government money market mutual funds, with assets approximating $5.9 billion, $1.5 billion and $35 billion, respectively. Federated trades approximately $400 million in U.S. government and mortgage- backed securities daily and places approximately $23 billion in repurchase agreements each day. Federated introduced the first U.S. government fund to invest in U.S. government bond securities in 1969. Federated has been a major force in the short- and intermediate-term government markets since 1982 and currently manages approximately $36 billion in government funds within these maturity ranges. 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, 1997, Federated managed more than $63.1 billion in assets across 51 money market funds, including 18 government, 11 prime and 22 municipal with assets approximating $35 billion, $17.1 billion and $10.9 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 $4 trillion to the more than 6,700 funds available, according to the Investment Company Institute. Federated distributes mutual funds through its subsidiaries for a variety of investment purposes. Specific markets include: FEDERATED CLIENTS OVERVIEW 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. Investment Ratings APPENDIX STANDARD & POOR'S SHORT-TERM MUNICIPAL OBLIGATION RATINGS A Standard & Poor's (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-1+, 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 rated 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. MOODY'S 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 SERVICE, L.P. 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. Addresses OHIO MUNICIPAL CASH TRUST Cash II Shares, Institutional Service Shares Federated Investors Funds Institutional Shares 5800 Corporate Drive Pittsburgh, PA 15237-7000 Distributor Federated Securities Corp. Federated Investors Tower 1001 Liberty Avenue, Pittsburgh, PA 15222-3779 Investment Adviser Federated Management Federated Investors Tower 1001 Liberty Avenue, Pittsburgh, PA 15222-3779 Custodian State Street Bank and Trust Company P.O. Box 8600 Boston, MA 02266-8600 Transfer Agent and Dividend Disbursing Agent Federated Shareholder Services Company P.O. Box 8600 Boston, MA 02266-8600 Independent Public Accountants Arthur Andersen LLP 225 Franklin Street Boston, MA 02110-2812 PROSPECTUS Pennsylvania Municipal Cash Trust A Portfolio of Federated Municipal Trust CASH SERIES SHARES A money market mutual fund seeking to provide current income exempt from federal regular income tax and the personal income tax imposed by the Commonwealth of Pennsylvania. 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. December 31, 1998 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? 6 How is the Fund Sold? 6 How to Purchase Shares 6 How to Redeem Shares 8 Account and Share Information 9 Who Manages the Fund? 10 Financial Information 11 Report of Independent Public Accountants 29 Risk/Return Summary WHAT IS THE FUND'S INVESTMENT OBJECTIVE? The Fund is a money market fund which seeks to maintain a stable net asset value of $1.00. The Fund's investment objective is current income exempt from federal regular income tax and the personal income tax imposed by the Commonwealth of Pennsylvania consistent with stability of principal. 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 tax-exempt securities so that the Fund's annual interest income is exempt from federal regular income tax and Pennsylvania dividend and interest income tax. Interest from the Fund's investments may be subject to the federal alternative minimum tax for individuals and corporations. WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND? Because the Fund may invest a significant portion of its assets in securities of a single issuer, an investment in the Fund may involve additional risks compared to a fully diversified money market 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] - See Appendix C-11 Historically, the Fund has maintained a constant $1.00 net asset value per share. The bar chart shows the variability of the Fund's Cash Series Shares total returns on a yearly basis. The Fund's Cash Series Shares are not sold subject to a sales charge (load). The total returns displayed above are based upon net asset value. The Fund's Cash Series Shares year-to-date total return as of the most recent calendar quarter of September 30, 1998 was 2.02%. Within the period shown in the Chart, the Fund's Cash Series Shares highest quarterly return was 1.03% (quarter ended June 30, 1991). Its lowest quarterly return was 0.37% (quarter ended March 31, 1994). The Fund's Cash Series Shares Seven-Day Net Yield as of 12/31/97 was 3.05%. The following table represents the Fund's Cash Series Shares Average Annual Total Return through 12/31/97. CALENDAR PERIOD FUND 1 Year 2.81% 5 Years 2.47% Start of Performance 1 2.70% 1 The Fund's Cash Series Shares start of performance date was January 25, 1991. Investors may call the Fund at 1-800-341-7400 to acquire the current Seven- Day Net Yield. 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? PENNSYLVANIA MUNICIPAL CASH TRUST FEES AND EXPENSES This table describes the fees and expenses that you may pay if you buy, hold and redeem shares of the Fund's Cash Series Shares. SHAREHOLDER FEES 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 a percentage of average net assets) Management Fee 2 0.50% Distribution (12b-1) Fee 3 0.40% Shareholder Services Fee 0.25% Other Expenses 0.16% Total Annual Fund Operating Expenses 1.31%
1 Although not contractually obligated to do so, the adviser and distributor waived certain amounts. These are shown below along with the net expenses the Fund actually paid for the fiscal year ended October 31, 1998. Waiver of Fund Expenses 0.26% Total Actual Annual Fund Operating Expenses (after waivers) 1.05%
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 0.29% for the year ended October 31, 1998. 3 The distribution (12b-1) fee has been voluntarily reduced. This voluntary reduction can be terminated at any time. The distribution (12b-1) fee paid by the Fund (after the voluntary reduction) was 0.35% for the year ended October 31, 1998. EXAMPLE The following Example is intended to help you compare the cost of investing in the Fund's Cash Series Shares with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund's Cash Series 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 Cash Series Shares' operating expenses are BEFORE WAIVERS as shown above and remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS Expenses assuming no redemption $133 $415 $718 $1,579
What are the Fund's Investment Strategies? The Fund invests in a portfolio of high-quality tax-exempt securities maturing in 13 months or less. The average maturity of the Fund's portfolio, computed on a dollar-weighted basis, will be 90 days or less. The Fund's Adviser performs a fundamental credit analysis to develop an approved list of issuers and securities that meet the Adviser's minimum credit standards. The Adviser targets an average portfolio maturity based upon its interest rate outlook and the tax-exempt securities available. The Adviser structures the portfolio by combining variable rate demand instruments and municipal notes. Depending on the supply of tax-exempt securities, the Adviser generally shortens the portfolio's maturity when it expects interest rates to rise and extends the maturity when it expects interest rates to fall. TEMPORARY DEFENSIVE INVESTMENTS During adverse market conditions the Fund may temporarily depart from its principal investment strategies by investing in securities subject to federal regular income tax and Pennsylvania dividend and interest income tax. Temporary investments will be of comparable quality to other securities in which the Fund invests. This may cause the Fund to give up greater investment returns to maintain the safety of principal. This also may cause the Fund to receive and distribute taxable income to investors. What are the Principal Securities in Which the Fund Invests? TAX-EXEMPT SECURITIES Tax-exempt securities are fixed income securities that pay interest exempt from regular federal income taxes. States, counties, cities and other political subdivisions and authorities typically issue tax-exempt securities. Tax-exempt securities are generally differentiated by their source of repayment. FIXED INCOME SECURITIES Fixed income 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. VARIABLE RATE DEMAND INSTRUMENTS Variable rate demand instruments are tax-exempt securities that require the issuer or a third party, such as a dealer or bank, to repurchase the security for its face value upon demand. The securities also bear interest at a variable rate intended to cause the securities to trade at their face value. The Fund treats demand instruments as short-term securities, even though their stated maturity may extend beyond 13 months. MUNICIPAL NOTES Municipal notes are short-term tax-exempt securities. Many municipalities issue such notes to fund their current operations before collecting taxes or other municipal revenues. Municipalities may also issue notes to fund capital projects prior to issuing long-term bonds. The issuers typically repay the notes at the end of their fiscal year, either with taxes, other revenues or proceeds from newly issued notes or bonds. INVESTMENT 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 rating services or be of comparable quality to securities having such ratings. CREDIT ENHANCEMENT Credit enhancement consists of an arrangement in which a company agrees to pay amounts due on a fixed income security if the issuer defaults. In some cases the company providing credit enhancement makes all payments directly to the security holders and receives reimbursement from the issuer. Normally, the credit enhancer has greater financial resources and liquidity than the issuer. For this reason, the Adviser usually evaluates the credit risk of a fixed income security based solely upon its credit enhancement. What are the Specific Risks of Investing in the Fund? Although there are many factors which may affect an investment in the Fund, the principal risks of investing in a tax-exempt money market fund are described below. CREDIT RISK Credit risk is the possibility that an issuer or a credit enhancer will default (fails to repay interest and principal when due). If an issuer or credit enhancer defaults, the Fund will lose money. Money market funds try to minimize this risk by purchasing higher quality securities. Many fixed income securities receive credit ratings from companies such as Standard & Poor's and Moody's Investor Services. Fixed income securities receive different credit ratings depending on the rating company's assessment of the likelihood of default by the issuer. The lower the credit rating, the greater the credit risk. If the security is unrated, greater reliance is placed on the Adviser's credit assessment. 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. SECTOR RISK Most of the Fund's securities will be invested in issuers located in Pennsylvania. In addition, a substantial part of the Fund's portfolio may be comprised of tax-exempt securities issued or credit enhanced by companies in similar businesses or with other similar characteristics. As a result, the Fund will be more susceptible to any economic, business, political, or other developments which generally affect these issuers. 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 determined net asset value (NAV). The Fund does not charge a sales charge. NAV is determined at 12:00 noon and 1:00 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 $10,000. There is no required minimum subsequent investment amount. An account may be opened with a smaller amount as long as the $10,000 minimum is reached within 90 days. 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 offers three share classes: Institutional Shares, Institutional Service Shares and Cash Series Shares each representing interests in a single portfolio of securities. This prospectus relates only to Cash Series Shares. Each share class has different expenses, which affect their performance. Contact your investment professional or call 1-800-341-7400 for more information concerning the other classes. The Fund's Distributor markets the Shares described in this prospectus to institutions or to individuals directly or through investment professionals. The Fund may not be a suitable investment for retirement plans or for non-Pennsylvania taxpayers because it invests in Pennsylvania tax-exempt securities. When the Distributor receives marketing fees, it may pay some or all of them to 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). RULE 12B-1 PLAN The Fund has adopted a Rule 12b-1 Plan, which allows it to pay marketing fees to the Distributor and investment professionals for the sale, distribution and customer servicing of the Fund's Cash Series Shares. Because these Shares pay marketing fees on an ongoing basis, your investment cost may be higher over time than other shares with different sales charges and marketing fees. 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 1:00 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 on the day 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 SYSTEMATIC INVESTMENT PROGRAM Once you have opened an account, you may automatically purchase additional Shares on a regular basis by completing the Systematic Investment Program (SIP) section of the New Account Form or by contacting the Fund or your investment professional. The minimum investment amount for SIPs is $50. BY AUTOMATED CLEARINGHOUSE (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 12:00 noon (Eastern time) your redemption will be wired to you the same day. You will not receive that day's dividend. If you call after 12:00 noon (Eastern time) your redemption will be wired to you the following business day. You will receive that day's dividend. Under limited circumstances, arrangements may be made with the Distributor for same-day payment of redemption proceeds, without that day's dividend, for redemption requests received before 2:00 p.m. (Eastern time). 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 30 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. SYSTEMATIC WITHDRAWAL PROGRAM You may automatically redeem Shares in a minimum amount of $100 on a regular basis. Complete the appropriate section of the New Account Form or an Account Service Options Form or contact your investment professional or the Fund. Your account value must meet the minimum initial investment amount at the time the program is established. This program may reduce, and eventually deplete, your account. Payments should not be considered yield or income. CHECKWRITING You may request checks to redeem your Fund Shares. Your account will continue to receive the daily dividend declared on the Shares being redeemed until a check is presented for payment. DEBIT CARD You may request a debit card account that allows you to redeem Shares. There is an annual fee for this service that the Fund will automatically deduct from your account. 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 CONFIRMATIONS AND ACCOUNT STATEMENTS You will receive confirmation of purchases and redemptions (except for systematic transactions). In addition, you will receive periodic statements reporting all account activity, including systematic transactions, 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, 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. It is anticipated that Fund distributions will be primarily dividends that are exempt from federal income tax, although a portion of the Fund's dividends may not be exempt. Dividends may be subject to state and local taxes, although the Fund's dividends will be exempt from Pennsylvania state personal income tax to the extent they are derived from interest on obligations exempt from Pennsylvania personal income taxes. Capital gains and non-exempt dividends are taxable whether paid in cash or reinvested in the Fund. 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 Management. 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 and/or provide administrative services to more than 300 mutual funds and private accounts, which totaled over $120 billion in assets as of December 31, 1997. Federated was established in 1955 and is one of the largest mutual fund investment managers in the United States with more than 2,000 employees. Over 4,000 investment professionals make Federated Funds available to their customers. ADVISORY FEES The Adviser receives an annual investment advisory fee of 0.50% 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 affect 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-Cash Series Shares (For a share outstanding throughout each period) Reference is made to the Report of Independent Public Accountants on page 29.
YEAR ENDED OCTOBER 31 1998 1997 1996 1995 1994 NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 INCOME FROM INVESTMENT OPERATIONS: Net investment income 0.03 0.03 0.03 0.03 0.02 LESS DISTRIBUTIONS: Distributions from net investment income (0.03) (0.03) (0.03) (0.03) (0.02) NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 TOTAL RETURN 1 2.74% 2.77% 2.75% 3.02% 1.84% RATIOS TO AVERAGE NET ASSETS: Expenses 1.05% 1.05% 1.05% 1.05% 1.04% Net investment income 2.70% 2.72% 2.72% 2.98% 1.73% Expense waiver/reimbursement 2 0.26% 0.27% 0.27% 0.28% 0.18% SUPPLEMENTAL DATA: Net assets, end of period (000 omitted) $47,940 $23,777 $19,825 $28,255 $18,352
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 October 31, 1998
PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-99.5% 1 PENNSYLVANIA-99.5% $ 4,000,000 Allegheny County, PA HDA, Variable Rate Demand Hospital Revenue Bonds (Series B of 1998), 4.25% TOBs (South Hills Health System)/(PNC Bank, N.A. LOC), Mandatory Tender 3/31/ 1999 $ 4,007,940 1,010,000 Allegheny County, PA Housing Development Authority, 6.40% Bonds (Children's Hospital of Pittsburgh)/(MBIA INS), 7/1/ 1999 1,029,663 1,000,000 Allegheny County, PA IDA, (Series 1991) Weekly VRDNs (Mine Safety Appliances Co.)/(Sanwa Bank Ltd., Osaka LOC) 1,000,000 4,560,000 Allegheny County, PA IDA, Commercial Development Revenue Bonds (Series 1992) Weekly VRDNs (Eleven Parkway Center Associates)/(Mellon Bank N.A., Pittsburgh LOC) 4,560,000 5,000,000 Allegheny County, PA IDA, PCR (Series 1992A), 3.05% TOBs (Duquesne Light Power Co.)/(Canadian Imperial Bank of Commerce, Toronto LOC), Mandatory Tender 1/28/1999 5,000,000 3,040,000 Allegheny County, PA IDA, Variable Rate Demand Revenue Bonds (Series A of 1997) Weekly VRDNs (Jewish Community Center)/ (National City, Pennsylvania LOC) 3,040,000 1,795,000 Altoona, PA City Authority, Water Revenue Refunding Bonds (Series 1997) PA-321 Weekly VRDNs (Blair County, PA)/(FGIC INS)/(Merrill Lynch Capital Services, Inc. LIQ) 1,795,000 5,000,000 Beaver County, PA IDA, PCR Refunding Bonds (1992 Series-E), 3.80% CP (Toledo Edison Co.)/(Toronto-Dominion Bank LOC), Mandatory Tender 12/1/1998 5,000,000 5,000,000 Bensalem Township School District, PA, 3.97% TRANs, 6/30/ 1999 5,000,927 1,055,000 Berks County, PA IDA Weekly VRDNs (ADC Quaker Maid Meats)/ (Corestates Bank N.A., Philadelphia, PA LOC) 1,055,000 575,000 Berks County, PA IDA Weekly VRDNs (Beacon Container)/ (Corestates Bank N.A., Philadelphia, PA LOC) 575,000 520,000 Berks County, PA IDA, (1996 Series A) Weekly VRDNs (Lebanon Valley Mall Co.)/(Meridian Bank, Reading, PA LOC) 520,000 1,500,000 Berks County, PA IDA, (Series 1988) Weekly VRDNs (Arrow Electronics, Inc.)/(Corestates Bank N.A., Philadelphia, PA LOC) 1,500,000 6,000,000 Berks County, PA IDA, (Series 1998) Weekly VRDNs (Eastern Industries, Inc.)/(Dauphin Deposit Bank and Trust LOC) 6,000,000 3,330,000 Berks County, PA IDA, Manufacturing Facilities Revenue Bonds (Series 1996) Weekly VRDNs (Ram Industries, Inc.)/ (Corestates Bank N.A., Philadelphia, PA LOC) 3,330,000 1,585,000 Berks County, PA IDA, Manufacturing Facilities Revenue Bonds (Series 1995) Weekly VRDNs (Grafika Commercial Printing, Inc.)/(Corestates Bank N.A., Philadelphia, PA LOC) 1,585,000 235,000 Berks County, PA IDA, Revenue Bonds (Series 1995A/Subseries A) Weekly VRDNs (Corestates Bank N.A., Philadelphia, PA LOC) 235,000 910,000 Berks County, PA IDA, Revenue Bonds (Series 1995A/Subseries B) Weekly VRDNs (Corestates Bank N.A., Philadelphia, PA LOC) 910,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 PENNSYLVANIA-CONTINUED $ 1,000,000 Bethlehem, PA Area School District, UT GO Bonds, 6.35% Bonds (AMBAC INS), 9/1/1999 $ 1,024,085 2,375,000 Boyertown, PA Area School District, (Series of 1998/99), 4.00% TRANs, 6/30/1999 2,377,272 1,855,000 Bucks County, PA IDA Weekly VRDNs (Double H Plastics, Inc.)/ (Corestates Bank N.A., Philadelphia, PA LOC) 1,855,000 2,560,000 Bucks County, PA IDA Weekly VRDNs (Pennsylvania Associates)/ (Corestates Bank N.A., Philadelphia, PA LOC) 2,560,000 2,865,000 Bucks County, PA IDA, (Series 1991) Weekly VRDNs (Cabot Medical Corp.)/(Corestates Bank N.A., Philadelphia, PA LOC) 2,865,000 3,205,000 Bucks County, PA IDA, Variable Rate Demand/Fixed Rate Revenue Bonds (Series 1997) Weekly VRDNs (Boekel Industries, Inc.)/(Corestates Bank N.A., Philadelphia, PA LOC) 3,205,000 4,000,000 Butler County, PA IDA Weekly VRDNs (Mine Safety Appliances Co.)/(Sanwa Bank Ltd., Osaka LOC) 4,000,000 1,000,000 Butler County, PA IDA, (Series 1992B) Weekly VRDNs (Mine Safety Appliances Co.)/(Sanwa Bank Ltd., Osaka LOC) 1,000,000 1,200,000 Butler County, PA IDA, (Series 1996 A) Weekly VRDNs (Armco, Inc.)/(Chase Manhattan Bank N.A., New York LOC) 1,200,000 2,125,000 Butler County, PA IDA, (Series 1998) Weekly VRDNs (Allegheny Metalworking Corp.)/(National City, Pennsylvania LOC) 2,125,000 2,270,000 Butler County, PA IDA, IDRB (Series 1994) Weekly VRDNs (Lue- Rich Holding Company, Inc. Project)/(ABN AMRO Bank N.V., Amsterdam LOC) 2,270,000 2,250,000 Butler County, PA IDA, IDRB's (Series 1997) Weekly VRDNs (Wise Business Forms, Inc.)/(SouthTrust Bank of Alabama, Birmingham LOC) 2,250,000 6,000,000 Butler County, PA IDA, Variable Rate Demand Revenue Bonds (Series 1996A), 3.80% TOBs (Lutheran Welfare)/(PNC Bank, N.A. LOC), Mandatory Tender 11/1/1998 6,000,000 6,400,000 Cambria County, PA IDA Weekly VRDNs (Cambria Cogeneration)/ (ABN AMRO Bank N.V., Amsterdam LOC) 6,400,000 1,300,000 Carbon County, PA IDA Weekly VRDNs (Summit Management & Utilities, Inc.)/ (PNC Bank, N.A. LOC) 1,300,000 5,000,000 Carbon County, PA IDA, Resource Recovery Bonds (Series B), 3.60% CP (Panther Creek)/(National Westminster Bank, PLC, London LOC), Mandatory Tender 11/12/1998 5,000,000 1,290,000 Carbon County, PA IDA, Resource Recovery Bonds (Series B), 3.65% CP (Panther Creek)/(National Westminster Bank, PLC, London LOC), Mandatory Tender 11/16/1998 1,290,000 5,000,000 Carbon County, PA IDA, Solid Waste Disposal Revenue Bonds, 4.15% RANs (Horsehead Resource Development, Inc.)/(Chase Manhattan Bank N.A., New York LOC), 12/3/1998 5,000,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 PENNSYLVANIA-CONTINUED $ 3,060,000 Chartiers Valley Industrial & Commercial Development Authority, Nursing home Revenue Refunding Bonds (Series 1997A) Weekly VRDNs (Woodhaven Convalescent Center)/ (Bank One, Ohio, N.A. LOC) $ 3,060,000 7,300,000 Clearfield County, PA IDA Weekly VRDNs (Penn Traffic Co.)/ (ABN AMRO Bank N.V., Amsterdam LOC) 7,300,000 2,500,000 Coatsville, PA School District, 4.05% TRANs, 6/30/1999 2,502,367 1,000,000 Commonwealth of Pennsylvania, GO UT Refunding Bonds (First Series A), 6.60% Bonds, 6/1/1999 1,019,654 4,000,000 Commonwealth of Pennsylvania, PA-274 (1st Series of 1997) Weekly VRDNs (AMBAC INS)/(Merrill Lynch Capital Services, Inc. LIQ) 4,000,000 25,000,000 Commonwealth of Pennsylvania, Trust Receipts (Series 1998 FR/RI-A9) Weekly VRDNs (MBIA INS)/(Bayerische Hypotheken-Und Wechsel-Bank AG LIQ) 25,000,000 1,100,000 Cumberland County, PA IDA, Industrial Development Bonds (Series 1994) Weekly VRDNs (Lane Enterprises, Inc. Project)/ (Corestates Bank N.A., Philadelphia, PA LOC) 1,100,000 10,000,000 Cumberland County, PA Municipal Authority, Variable Rate Revenue Bonds (Series 1996 B), 3.75% TOBs (Dickinson College)/(Mellon Bank N.A., Pittsburgh LOC), Optional Tender 11/2/1998 10,000,000 1,000,000 Dallastown Area School District, PA, GO Bonds (Series 1998) Weekly VRDNs (FGIC INS)/(FGIC Securities Purchase, Inc. LIQ) 1,000,000 14,500,000 Dauphin County, PA General Authority, (Education and Health Loan Program, Series 1997) Weekly VRDNs (AMBAC INS)/(Chase Manhattan Bank N.A., New York LIQ) 14,500,000 15,500,000 Dauphin County, PA General Authority, (Series A of 1997) Weekly VRDNs (Allhealth Pooled Financing Program)/(FSA INS)/ (Credit Suisse First Boston LIQ) 15,500,000 1,000,000 Delaware County Authority, PA, Hospital Revenue Bonds (Series of 1996) Weekly VRDNs (Crozer-Chester Medical Center)/(KBC Bank N.V., Brussels LOC) 1,000,000 10,000,000 Delaware County, PA PCR, (Series 1988A), 3.20% CP (Philadelphia Electric Co.)/(FGIC INS), Mandatory Tender 12/ 9/1998 10,000,000 3,000,000 Downington Area School District, (Series of 1998/99), 4.04% TRANs, 6/30/1999 3,002,662 12,500,000 Doylestown Hospital Authority, PA, Doylestown Hospital Revenue Bonds Weekly VRDNs (AMBAC INS)/(PNC Bank, N.A. LIQ) 12,500,000 5,000,000 Doylestown Hospital Authority, PA, Hospital Revenue Bonds (Series 1998C) Weekly VRDNs (Doylestown Hospital, PA)/(AMBAC INS)/(PNC Bank, N.A. LIQ) 5,000,000 4,400,000 East Hempfield Township, PA IDA, (Series 1985) Weekly VRDNs (Yellow Freight System)/(Wachovia Bank of Georgia, N.A., Atlanta LOC) 4,400,000 8,500,000 East Hempfield Township, PA IDA, (Series of 1997) Weekly VRDNs (Mennonite Home)/(Dauphin Deposit Bank and Trust LOC) 8,500,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 PENNSYLVANIA-CONTINUED $ 8,505,000 Easton Area School District, PA, (Series 1997) Weekly VRDNs (FGIC INS)/(FGIC Securities Purchase, Inc. LIQ) $ 8,505,000 2,800,000 Erie County, PA Hospital Authority Weekly VRDNs (St. Mary's Hospital Erie, PA)/ (PNC Bank, N.A. LOC) 2,800,000 125,000 Erie County, PA IDA, (Series 1985) Weekly VRDNs (R. P-C Value, Inc.)/ (PNC Bank, N.A. LOC) 125,000 300,000 Erie County, PA IDA, (Series B) Weekly VRDNs (P.H.B. Project)/(PNC Bank, N.A. LOC) 300,000 4,000,000 Erie County, PA, 4.375% TRANs (PNC Bank, N.A. LOC), 12/31/ 1998 4,003,643 100,000 Forest County, PA IDA Weekly VRDNs (Industrial Timber & Land Co.)/(National City Bank, Cleveland, OH LOC) 100,000 905,000 Forest County, PA IDA Weekly VRDNs (Marienville Health Care Facility)/ (PNC Bank, N.A. LOC) 905,000 2,900,000 Franconia Township, PA IDA, IDRB's (Series 1997A) Weekly VRDNs (Asher's Chocolates)/(Mellon Bank N.A., Pittsburgh LOC) 2,900,000 1,470,000 Franklin County, PA IDA Weekly VRDNs (The Guarriello Limited Partnership)/ (PNC Bank, N.A. LOC) 1,470,000 2,400,000 Gettysburg Area Industrial Development Authority, (Series A of 1998) Weekly VRDNs (Hanover Lantern, Inc.)/(First National Bank of Maryland, Baltimore LOC) 2,400,000 4,495,000 Greater Johnstown, PA School District, PA-361 Weekly VRDNs (MBIA INS)/(Merrill Lynch Capital Services, Inc. LIQ) 4,495,000 11,000,000 Lancaster County, PA Hospital Authority, Health Center Revenue Bonds (Series 1996) Weekly VRDNs (Masonic Homes) 11,000,000 3,385,000 Lancaster, PA IDA, (1988 Series C) Weekly VRDNs (Henry Molded Products, Inc.)/(Dauphin Deposit Bank and Trust LOC) 3,385,000 2,295,000 Lancaster, PA IDA, (1998 Series A) Weekly VRDNs (Henry Molded Products, Inc.)/(Dauphin Deposit Bank and Trust LOC) 2,295,000 1,000,000 Lehigh County, PA IDA, Variable Rate Demand Revenue Bonds (Series 1997) Weekly VRDNs (American Manufacturing Co., Inc.)/(Mellon Bank N.A., Pittsburgh LOC) 1,000,000 6,840,000 McKean County, PA IDA, Economic Development Revenue Bonds (Series 1997) Weekly VRDNs (Keystone Powdered Metal Co.)/ (Mellon Bank N.A., Pittsburgh LOC) 6,840,000 290,000 McKean County, PA IDA, Multi-Mode Revenue Refunding Bonds Weekly VRDNs (Bradford Manor, Inc.)/(PNC Bank, N.A. LOC) 290,000 3,300,000 Monroe County, PA IDA, PCR Weekly VRDNs (Cooper Industries, Inc.)/(Sanwa Bank Ltd., Osaka LOC) 3,300,000 3,500,000 Montgomery County, PA IDA, (Series 1984) Weekly VRDNs (Seton Co.)/(First Union National Bank, Charlotte, N.C. LOC) 3,500,000 1,200,000 Montgomery County, PA IDA, (Series 1992) Weekly VRDNs (RJI Limited Partnership)/(Corestates Bank N.A., Philadelphia, PA LOC) 1,200,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 PENNSYLVANIA-CONTINUED $ 1,000,000 Montgomery County, PA IDA, (Series A) Weekly VRDNs (Vari Corp.)/(Dauphin Deposit Bank and Trust LOC) $ 1,000,000 4,250,000 Montgomery County, PA IDA, (Series C) Weekly VRDNs (Vari Corp.)/(Dauphin Deposit Bank and Trust LOC) 4,250,000 2,030,000 Montgomery County, PA IDA, EDRB's (Series 1997) Weekly VRDNs (Palmer International, Inc.)/(Mellon Bank N.A., Pittsburgh LOC) 2,030,000 4,775,000 Moon Township, PA IDA Weekly VRDNs (Airport Hotel Associates)/(National City, Pennsylvania LOC) 4,775,000 3,310,000 Moon Township, PA IDA, Variable Rate Commercial Development Revenue Bond (Series 1995A) Weekly VRDNs (One Thorn Run Center)/(National City, Pennsylvania LOC) 3,310,000 3,000,000 North Penn Health, Hospital and Education Authority, PA, Hospital Revenue Bonds (Series 1998) Weekly VRDNs (North Penn Hospital, PA)/(First Union National Bank, Charlotte, N.C. LOC) 3,000,000 3,850,000 Northampton County, PA IDA, 3.40% CP (Citizens Utilities Co.), Mandatory Tender 2/9/1999 3,850,000 9,000,000 Northampton County, PA IDA, 3.65% CP (Citizens Utilities Co.), Mandatory Tender 1/13/1999 9,000,000 2,542,000 Northampton County, PA IDA, Variable Rate Revenue Bonds (Series 1997) Weekly VRDNs (Ultra-Poly Corp.)/(PNC Bank, N.A. LOC) 2,542,000 1,590,000 Northumberland County PA IDA, Revenue Bonds (Series A of 1995) Weekly VRDNs (Furman Farms, Inc. Project)/(Corestates Bank N.A., Philadelphia, PA LOC) 1,590,000 1,650,000 Pennsylvania EDFA Weekly VRDNs (Cyrogenics, Inc.)/(PNC Bank, N.A. LOC) 1,650,000 2,500,000 Pennsylvania EDFA Weekly VRDNs (Industrial Scientific Corp.)/(Mellon Bank N.A., Pittsburgh LOC) 2,500,000 525,000 Pennsylvania EDFA Weekly VRDNs (Pioneer Fluid)/(PNC Bank, N.A. LOC) 525,000 450,000 Pennsylvania EDFA Weekly VRDNs (RMF Associates)/(PNC Bank, N.A. LOC) 450,000 500,000 Pennsylvania EDFA, (Series B) Weekly VRDNs (Payne Printing Co.)/(PNC Bank, N.A. LOC) 500,000 2,890,000 Pennsylvania EDFA, Economic Development Revenue Bonds (Series 1996C) Weekly VRDNs (Napco, Inc. Project)/(Mellon Bank N.A., Pittsburgh LOC) 2,890,000 10,000,000 Pennsylvania EDFA, Exempt Facilities Revenue Bonds (Series 1997B) Weekly VRDNs (National Gypsum Co.)/(Nationsbank, N.A., Charlotte LOC) 10,000,000 625,000 Pennsylvania EDFA, Revenue Bonds (Series G4) Weekly VRDNs (Metamora Products)/(PNC Bank, N.A. LOC) 625,000 250,000 Pennsylvania EDFA, Revenue Bonds Weekly VRDNs (DDI Pharmaceuticals, Inc.)/ (PNC Bank, N.A. LOC) 250,000 250,000 Pennsylvania EDFA, Revenue Bonds Weekly VRDNs (RAM Forest Products)/ (PNC Bank, N.A. LOC) 250,000 13,665,000 2 Pennsylvania Housing Finance Authority, (Series 1997-58A), PT-149, 3.75% TOBs (Commerzbank AG, Frankfurt LIQ), Optional Tender 12/10/1998 13,665,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 PENNSYLVANIA-CONTINUED $ 14,430,000 Pennsylvania Housing Finance Authority, MERLOTs (Series K) Weekly VRDNs (Corestates Bank N.A., Philadelphia, PA LIQ) $ 14,430,000 2,905,000 Pennsylvania Housing Finance Authority, PT-119B (Series 1997-56B) Weekly VRDNs (Credit Suisse First Boston, Inc. LIQ) 2,905,000 915,000 Pennsylvania Housing Finance Authority, Section 8 Assisted Residential Development Refunding Bonds (Series 1992A) Weekly VRDNs (CGIC INS)/(Citibank N.A., New York LIQ) 915,000 10,000,000 Pennsylvania State Higher Education Assistance Agency, Student Loan Adjustable Rate Revenue Bonds (Series 1997A) Weekly VRDNs (Student Loan Marketing Association LOC) 10,000,000 6,000,000 Pennsylvania State Higher Education Facilities Authority, (Series 1997 B8), 4.50% TOBs (Wilkes University)/(PNC Bank, N.A. LOC), Mandatory Tender 11/1/1998 6,000,000 10,000,000 2 Philadelphia Authority for Industrial Development, Variable Rate Certificates (Series 1998P-1), 3.75% TOBs (Philadelphia Airport System)/ (FGIC INS)/ (Bank of America NT and SA, San Francisco LIQ), Optional Tender 8/4/1999 10,000,000 1,760,000 Philadelphia, PA Airport System, 5.25% Bonds (FGIC INS), 6/ 15/1999 1,775,878 12,900,000 Philadelphia, PA Gas Works, (Series C), 3.05% CP (Canadian Imperial Bank of Commerce, Toronto LOC), Mandatory Tender 2/ 17/1999 12,900,000 2,450,000 Philadelphia, PA IDA, Refunding Revenue Bonds (Series 1991) Weekly VRDNs (Tom James Co.)/(SunTrust Bank, Nashville LOC) 2,450,000 7,600,000 Philadelphia, PA Redevelopment Authority, Multi-Family Revenue Bonds (Series 1985) Weekly VRDNs (Franklin Town Towers)/(Marine Midland Bank N.A., Buffalo, NY LOC) 7,600,000 4,000,000 Philadelphia, PA School District, (Series B), 4.25% TRANs (PNC Bank, N.A. LOC), 6/30/1999 4,015,801 3,230,000 Philadelphia, PA Water & Wastewater System, (CDC Series 1997Q) Weekly VRDNs (MBIA INS)/(CDC Municipal Products, Inc. LIQ) 3,230,000 5,000,000 Philadelphia, PA Water & Wastewater System, (Series 1997A) PT-1033 Weekly VRDNs (AMBAC INS)/(Merrill Lynch Capital Services, Inc. LOC) 5,000,000 5,000,000 Philadelphia, PA, 4.25% TRANs, 6/30/1999 5,019,565 540,000 Pittsburgh, PA School District, (Series B), 4.10% Bonds (FGIC INS), 9/1/1999 543,716 2,500,000 Red Lion, PA Area School District, 4.05% TRANs, 6/30/1999 2,502,367 1,700,000 Schuylkill County, PA IDA, Manufacturing Facilities Revenue Bonds (Series 1995) Weekly VRDNs (Prime Packing, Inc. Project)/(Corestates Bank N.A., Philadelphia, PA LOC) 1,700,000 1,900,000 Schuylkill County, PA IDA, Variable Rate Demand/Fixed Rate Manufacturing Facilities Revenue Bonds (Series of 1996) Weekly VRDNs (Craftex Mills, Inc.)/(Corestates Bank N.A., Philadelphia, PA LOC) 1,900,000 2,000,000 Shaler Township, PA, 4.18% TANs, 12/31/1998 2,000,251 1,000,000 Southeastern, PA Transportation Authority, 6.00% Bonds (Canadian Imperial Bank of Commerce, Toronto LOC), 6/1/1999 1,016,349 1,000,000 Springfield, PA School District, 3.90% TRANs, 12/31/1998 1,000,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 PENNSYLVANIA-CONTINUED $ 6,000,000 Temple University, Refunding Bonds (Series B), 4.50% Bonds, 5/14/1999 $ 6,023,024 4,245,000 Upper Darby School District, PA, (Drexel Hill), 3.94% TRANs, 6/30/1999 4,248,766 4,000,000 Venango, PA IDA, Resource Recovery Bonds (Series 1993), 3.60% CP (Scrubgrass Power Corp.)/(National Westminster Bank, PLC, London LOC), Mandatory Tender 11/12/1998 4,000,000 2,700,000 Washington County, PA Authority, (Series 1985A) Weekly VRDNs (1985-A Pooled Equipment Lease Program)/(First Union National Bank, Charlotte, N.C. LOC) 2,700,000 1,900,000 Washington County, PA Hospital Authority Weekly VRDNs (Keystone Diversified Management Corp.)/(Mellon Bank N.A., Pittsburgh LOC) 1,900,000 10,700,000 Washington County, PA IDA, Solid Waste Disposal Revenue Bonds (Series 1995) Weekly VRDNs (American Iron Oxide Co. Project)/(Bank of Tokyo-Mitsubishi Ltd. LOC) 10,700,000 950,000 Washington County, PA, IDA (Series 1988) Weekly VRDNs (Coca- Cola Co.)/(Mellon Bank N.A., Pittsburgh LOC) 950,000 835,000 West Cornwall Township, PA Municipal Authority, Revenue Bonds (Series 1995) Weekly VRDNs (Lebanon Valley Brethren Home Project (PA))/ (Corestates Bank N.A., Philadelphia, PA LOC) 835,000 9,600,000 Westmoreland County, PA IDA, Guaranteed Variable Rate Revenue Bonds (Series of 1993) Weekly VRDNs (USA Waste Services, Inc.)/(Fleet Bank N.A. LOC) 9,600,000 2,500,000 York County, PA IDA, Limited Obligation Revenue Bonds (Series 1997) Weekly VRDNs (Metal Exchange Corp.)/(Comerica Bank, Detroit, MI LOC) 2,500,000 2,750,000 York County, PA IDA, Variable Rate Demand Ltd. Obligation Revenue Bonds (Series 1996) Weekly VRDNs (Metal Exchange Corp.)/(Comerica Bank, Detroit, MI LOC) 2,750,000 2,125,000 York County, PA Solid Waste & Refuse Authority, 4.75% Bonds (FGIC INS), 12/1/1998 2,126,559 Total Investments (at amortized cost) 3 $ 501,952,489
At October 31, 1998, 40.4% of the total investments at market value were subject to alternative minimum tax. 1 The Fund may only invest in securities rated in one of the two highest short-term rating categories by one or more nationally recognized statistical rating organizations ("NRSROs") or unrated securities of comparable quality. 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, MIG- 1 or MIG-2 by Moody's Investors Service, Inc., or F-1+, F-1, or F-2 by Fitch IBCA, Inc. are all considered rated in one of the two highest short-term rating categories. Securities rated in the highest short-term rating category (and unrated securities of comparable quality) are identified as First Tier securities. Securities rated in the second highest short-term rating category (and unrated securities of comparable quality) are identified as Second Tier securities. The Fund follows applicable regulations in determining whether a security is rated and whether a security rated by multiple NRSROs in different rating categories should be identified as a First or Second Tier security. At October 31, 1998, the portfolio securities were rated as follows: Tier Rating Based on Total Market Value (Unaudited) FIRST TIER SECOND TIER 100.00% 0.00% 2 Denotes a restricted security which is subject to restrictions on resale under Federal Securities laws. At October 31, 1998, these securities amounted to $23,665,000 which represents 4.7% of net assets. 3 Also represents cost for federal tax purposes. Note: The categories of investments are shown as a percentage of net assets ($504,601,894) at October 31, 1998. The following acronyms are used throughout this portfolio: AMBAC -American Municipal Bond Assurance Corporation CGIC -Capital Guaranty Insurance Corporation CP -Commercial Paper EDFA -Economic Development Financing Authority EDRB -Economic Development Revenue Bonds FGIC -Financial Guaranty Insurance Company FSA -Financial Security Assurance GO -General Obligation HAD -Hospital Development Authority IDA -Industrial Development Authority IDRB -Industrial Development Revenue Bond INS -Insured LIQ -Liquidity Agreement LOC -Letter of Credit MBIA -Municipal Bond Investors Assurance MERLOTS -Municipal Exempt Receipts - Liquidity Optional Tender Series PCR -Pollution Control Revenue PLC -Public Limited Company RANs -Revenue Anticipation Notes SA -Support Agreement TANs -Tax Anticipation Notes TOBs -Tender Option Bonds TRANs -Tax and Revenue Anticipation Notes UT -Unlimited Tax VRDNs -Variable Rate Demand Notes See Notes which are an integral part of the Financial Statements Statement of Assets and Liabilities October 31, 1998 ASSETS: Total investments in securities, at amortized cost and value $ 501,952,489 Cash 261,601 Income receivable 3,252,953 Receivable for shares sold 107,408 Prepaid expenses 8,393 Total assets 505,582,844 LIABILITIES: Payable for shares redeemed $ 11,122 Income distribution payable 829,501 Accrued expenses 140,327 Total liabilities 980,950 Net Assets for 504,601,894 shares outstanding $ 504,601,894 NET ASSET VALUE, OFFERING PRICE, AND REDEMPTION PROCEEDS PER SHARE: INSTITUTIONAL SERVICE SHARES: $392,380,805 / 392,380,805 shares outstanding $1.00 CASH SERIES SHARES: $47,940,017 / 47,940,017 shares outstanding $1.00 INSTITUTIONAL SHARES: $64,281,072 / 64,281,072 shares outstanding $1.00
See Notes which are an integral part of the Financial Statements Statement of Operations Year Ended October 31, 1998 INVESTMENT INCOME: Interest $ 15,641,600 EXPENSES: Investment advisory fee $ 2,086,146 Administrative personnel and services fee 314,620 Custodian fees 8,789 Transfer and dividend disbursing agent fees and expenses 109,379 Directors'/Trustees' fees 3,323 Auditing fees 13,019 Legal fees 11,056 Portfolio accounting fees 108,083 Distribution services fee-Cash Series Shares 179,698 Shareholder services fee-Institutional Service Shares 793,433 Shareholder services fee-Cash Series Shares 112,311 Shareholder services fee-Institutional Shares 137,329 Share registration costs 69,634 Printing and postage 35,246 Insurance premiums 21,971 Miscellaneous 5,824 Total expenses 4,009,861 WAIVERS: Waiver of investment advisory fee $ (891,201) Waiver of distribution services fee-Cash Series Shares (22,462) Waiver of shareholder services fee-Institutional Service Shares (158,686) Waiver of shareholder services fee-Institutional Shares (137,329) Total waivers (1,209,678) Net expenses 2,800,183 Net investment income $ 12,841,417
See Notes which are an integral part of the Financial Statements Statement of Changes in Net Assets YEAR ENDED OCTOBER 31 1998 1997 INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income $ 12,841,417 $ 10,489,997 DISTRIBUTIONS TO SHAREHOLDERS: Distributions from net investment income Institutional Service Shares (9,813,298) (8,169,653) Cash Series Shares (1,215,221) (617,375) Institutional Shares (1,812,898) (1,702,969) Change in net assets resulting from distributions to shareholders (12,841,417) (10,489,997) SHARE TRANSACTION: Proceeds from sale of shares 1,771,726,568 1,340,687,798 Net asset value of shares issued to shareholders in payment of distributions declared 4,355,879 3,168,018 Cost of shares redeemed (1,623,039,093) (1,271,049,376) Change in net assets resulting from share transactions 153,043,354 72,806,440 Change in net assets 153,043,354 72,806,440 NET ASSETS: Beginning of period 351,558,540 278,752,100 End of period $ 504,601,894 $ 351,558,540
See Notes which are an integral part of the Financial Statements Notes to Financial Statements October 31, 1998 ORGANIZATION Federated Municipal Trust (the "Trust") is registered under the Investment Company Act of 1940, as amended (the "Act") as an open-end, management investment company. The Trust consists of 17 portfolios. The financial statements included herein are only those of Pennsylvania Municipal Cash Trust (the "Fund"). The financial statements of the other portfolios are presented separately. The assets of each portfolio are segregated and a shareholder's interest is limited to the portfolio in which shares are held. The Fund offers three classes of shares: Institutional Service Shares, Cash Series Shares, and Institutional Shares. The investment objective of the Fund is current income exempt from federal income tax and the personal income taxes imposed by the Commonwealth of Pennsylvania consistent with stability of principal. 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. 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. RESTRICTED SECURITIES Restricted securities are securities that may only be resold upon registration under federal securities laws or in transactions exempt from such registration. Many restricted securities may be resold in the secondary market in transactions exempt from registration. In some cases, the restricted securities may be resold without registration upon exercise of a demand feature. Such restricted securities may be determined to be liquid under criteria established by the Board of Trustees ("Trustees"). The Fund will not incur any registration costs upon such resales. Restricted securities are valued at amortized cost in accordance with Rule 2a-7 under the Investment Company Act of 1940. Additional information on each restricted security held at October 31, 1998, is as follows:
ACQUISITION ACQUISITION SECURITY DATE COST Philadelphia Authority for Industrial Development, Variable Rate Certificates (Series 1998P-1) 8/27/98 $10,000,000 Pennsylvania Housing Finance Authority, (Series 1997-58A) 9/2/98 13,665,000
USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts of assets, liabilities, expenses, and revenues reported in the financial statements. Actual results could differ from those estimated. OTHER Investment transactions are accounted for on the trade date. SHARES OF BENEFICIAL INTEREST The Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest (without par value) for each class of shares. At October 31, 1998, capital paid-in aggregated $504,601,894. Transactions in shares were as follows:
YEAR ENDED OCTOBER 31 1998 1997 CASH SERIES SHARES Shares sold 158,966,434 71,085,166 Shares issued to shareholders in payment of distributions declared 1,162,158 559,551 Shares redeemed (135,965,506) (67,692,672) Net change resulting from Cash Series share transactions 24,163,086 3,952,045 YEAR ENDED OCTOBER 31 1998 1997 INSTITUTIONAL SERVICE SHARES Shares sold 1,209,407,656 1,052,427,056 Shares issued to shareholders in payment of distributions declared 3,071,889 2,495,116 Shares redeemed (1,084,732,294) (1,012,139,333) Net change resulting from Institutional Service share transactions 127,747,251 42,782,839 YEAR ENDED OCTOBER 31 1998 1997 INSTITUTIONAL SHARES Shares sold 403,352,478 217,175,576 Shares issued to shareholders in payment of distributions declared 121,832 113,351 Shares redeemed (402,341,293) (191,217,371) Net change resulting from Institutional share transactions 1,133,017 26,071,556 Net change resulting from share transactions 153,043,354 72,806,440
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES INVESTMENT ADVISORY FEE Federated Management, the Fund's investment adviser (the "Adviser"), receives for its services an annual investment advisory fee equal to 0.50% 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. DISTRIBUTION SERVICES FEE The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b- 1 under the Act. Under the terms of the Plan, the Fund will compensate Federated Securities Corp. ("FSC"), the principal distributor, from the net assets of the Fund to finance activities intended to result in the sale of the Fund's Cash Series Shares. The Plan provides that the Fund may incur distribution expenses up to 0.40% of the average daily net assets of Cash Series Shares, annually, to compensate FSC. The distributor may voluntarily choose to waive any portion of its fee. The distributor can modify or terminate this voluntary waiver at any time at its sole discretion. SHAREHOLDER SERVICES FEE Under the terms of a Shareholder Services Agreement with Federated Shareholder Services ("FSS"), the Fund will pay FSS up to 0.25% of average daily net assets of the Fund for the period. The fee paid to FSS is used to finance certain services for shareholders and to maintain shareholder accounts. FSS may voluntarily choose to waive any portion of its fee. FSS can modify or terminate this voluntary waiver at any time at its sole discretion. TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES FServ, through its subsidiary, Federated Shareholder Services Company ("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. INTERFUND TRANSACTIONS During the period ended October 31, 1998, the Fund engaged in purchase and sale transactions with funds that have a common investment adviser (or affiliated investment advisers), common Directors/Trustees, and/or common Officers. These purchase and sale transactions were made at current market value pursuant to Rule 17a-7 under the Act amounting to $800,160,971 and $690,796,000, respectively. GENERAL Certain of the Officers and Trustees of the Trust are Officers and Directors or Trustees of the above companies. CONCENTRATION OF CREDIT RISK Since the Fund invests a substantial portion of its assets in issuers located in one state, it will be more susceptible to factors adversely affecting issuers of that state than would be a comparable tax-exempt mutual fund that invests nationally. In order to reduce the credit risk associated with such factors, at October 31, 1998, 82.2% of the securities in the portfolio of investments are backed by letters of credit or bond insurance of various financial institutions and financial guaranty assurance agencies. The percentage of investments insured by or supported (backed) by a letter of credit from any one institution or agency did not exceed 8.4% of total investments. 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 Board of Trustees of Federated Municipal Trust and Shareholders of Pennsylvania Municipal Cash Trust: We have audited the accompanying statement of assets and liabilities of Pennsylvania Municipal Cash Trust (an investment portfolio of Federated Municipal Trust, a Massachusetts business trust), including the schedule of portfolio investments, as of October 31, 1998, the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for the periods presented. These financial statements and financial highlights are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the 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 October 31, 1998, by correspondence with the custodian. 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 Pennsylvania Municipal Cash Trust (an investment portfolio of Federated Municipal Trust) as of October 31, 1998, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and its financial highlights for the periods presented, in conformity with generally accepted accounting principles. Arthur Andersen LLP Boston, Massachusetts December 23, 1998 [Graphic] PROSPECTUS Pennsylvania Municipal Cash Trust A Portfolio of Federated Municipal Trust CASH SERIES SHARES December 31, 1998 A Statement of Additional Information (SAI) dated December 31, 1998, is incorporated by reference into this prospectus. To obtain the SAI 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] Pennsylvania Municipal Cash 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. 811-5911 Cusip 314229881 9101005A-CS (12/98) [Graphic] PROSPECTUS Pennsylvania Municipal Cash Trust A Portfolio of Federated Municipal Trust INSTITUTIONAL SERVICE SHARES A money market mutual fund seeking to provide current income exempt from federal regular income tax and the personal income tax imposed by the Commonwealth of Pennsylvania. 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. December 31, 1998 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? 6 How is the Fund Sold? 6 How to Purchase Shares 7 How to Redeem Shares 8 Account and Share Information 10 Who Manages the Fund? 11 Financial Information 12 Report of Independent Public Accountants 30 Risk/Return Summary WHAT IS THE FUND'S INVESTMENT OBJECTIVE? The Fund is a money market fund which seeks to maintain a stable net asset value of $1.00. The Fund's investment objective is current income exempt from federal regular income tax and the personal income tax imposed by the Commonwealth of Pennsylvania consistent with stability of principal. While there is not 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 tax-exempt securities so that the Fund's annual interest income is exempt from federal regular income tax and Pennsylvania dividend and interest income tax. Interest from the Fund's investments may be subject to the federal alternative minimum tax for individuals and corporations. WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND? Because the Fund may invest a significant portion of its assets in securities of a single issuer, an investment in the Fund may involve additional risks compared to a fully diversified money market 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] See Appendix C-12 Historically, the Fund has maintained a constant $1.00 net asset value per share. The bar chart shows the variability of the Fund's Institutional Service Shares total returns on a yearly basis. The Fund's Institutional Service Shares are not sold subject to a sales charge (load). The total returns displayed above are based upon the net asset value. The Fund's Institutional Service Shares year-to-date total return as of the most recent calendar quarter of September 30, 1998 was 2.32%. Within the period shown in the Chart, the Fund's Institutional Service Shares highest quarterly return was 1.43% (quarter ended December 31, 1990). Its lowest quarterly return was 0.47% (quarter ended March 31, 1994). The Fund's Institutional Service Shares Seven-Day Net Yield as of 12/31/97 was 3.45%. The following table represents the Fund's Institutional Service Shares Average Annual Total Return through 12/31/97. CALENDAR PERIOD FUND 1 Year 3.22% 5 Years 2.88% Start of Performance 1 3.43% 1 The Fund's start of performance date was November 21, 1990. Investors may call the Fund at 1-800-341-7400 to acquire the Seven-Day Net Yield. 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? PENNSYLVANIA MUNICIPAL CASH TRUST FEES AND EXPENSES This table describes the fees and expenses that you may pay if you buy, hold and redeem shares of the Fund's Institutional Service Shares.
SHAREHOLDER FEES 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 a percentage of average net assets) Management Fee 2 0.50% Distribution (12b-1) Fee None Shareholder Services Fee 3 0.25% Other Expenses 0.16% Total Annual Fund Operating Expenses 0.91% 1 Although not contractually obligated to do so, the adviser and shareholder services provider waived certain amounts. These are shown below along with the net expenses the fund actually paid for the fiscal year ended October 31, 1998. Waiver of Fund Expenses 0.26% Total Actual Annual Operating Expenses (after waivers) 0.65% 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 0.29% for the year ended October 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 0.20% for the year ended October 31, 1998.
EXAMPLE The following Example is intended to help you compare the cost of investing in the Fund's Institutional Service Shares with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund's Institutional Service 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 Institutional Service Shares' operating expenses are BEFORE WAIVERS as shown above and remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be: 1 YEAR 3 YEARS 5 YEARS 10 YEARS Expenses assuming no redemption $93 $290 $504 $1,120 What are the Fund's Investment Strategies? The Fund invests in a portfolio of high-quality tax-exempt securities maturing in 13 months or less. The average maturity of the Fund's portfolio, computed on a dollar-weighted basis, will be 90 days or less. The Fund's Adviser performs a fundamental credit analysis to develop an approved list of issuers and securities that meet the Adviser's minimum credit standards. The Adviser targets an average portfolio maturity based upon its interest rate outlook and the tax-exempt securities available. The Adviser structures the portfolio by combining variable rate demand instruments and municipal notes. Depending on the supply of tax-exempt securities, the Adviser generally shortens the portfolio's maturity when it expects interest rates to rise and extends the maturity when it expects interest rates to fall. TEMPORARY DEFENSIVE INVESTMENTS During adverse market conditions the Fund may temporarily depart from its principal investment strategies by investing in securities subject to federal regular income tax and Pennsylvania dividend and interest income tax. Temporary investments will be of comparable quality to other securities in which the Fund invests. This may cause the Fund to give up greater investment returns to maintain the safety of principal. This also may cause the Fund to receive and distribute taxable income to investors. What are the Principal Securities in Which the Fund Invests? TAX-EXEMPT SECURITIES Tax-exempt securities are fixed income securities that pay interest exempt from regular federal income taxes. States, counties, cities and other political subdivisions and authorities typically issue tax-exempt securities. Tax-exempt securities are generally differentiated by their source of repayment. FIXED INCOME SECURITIES Fixed income 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. VARIABLE RATE DEMAND INSTRUMENTS Variable rate demand instruments are tax-exempt securities that require the issuer or a third party, such as a dealer or bank, to repurchase the security for its face value upon demand. The securities also bear interest at a variable rate intended to cause the securities to trade at their face value. The Fund treats demand instruments as short-term securities, even though their stated maturity may extend beyond 13 months. MUNICIPAL NOTES Municipal notes are short-term tax-exempt securities. Many municipalities issue such notes to fund their current operations before collecting taxes or other municipal revenues. Municipalities may also issue notes to fund capital projects prior to issuing long-term bonds. The issuers typically repay the notes at the end of their fiscal year, either with taxes, other revenues or proceeds from newly issued notes or bonds. INVESTMENT 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 rating services or be of comparable quality to securities having such ratings. CREDIT ENHANCEMENT Credit enhancement consists of an arrangement in which a company agrees to pay amounts due on a fixed income security if the issuer defaults. In some cases the company providing credit enhancement makes all payments directly to the security holders and receives reimbursement from the issuer. Normally, the credit enhancer has greater financial resources and liquidity than the issuer. For this reason, the Adviser usually evaluates the credit risk of a fixed income security based solely upon its credit enhancement. What are the Specific Risks of Investing in the Fund? Although there are many factors which may affect an investment in the Fund, the principal risks of investing in a tax-exempt money market fund are described below. CREDIT RISK Credit risk is the possibility that an issuer or a credit enhancer will default (fails to repay interest and principal when due). If an issuer or credit enhancer defaults, the Fund will lose money. Money market funds try to minimize this risk by purchasing higher quality securities. Many fixed income securities receive credit ratings from companies such as Standard & Poor's and Moody's Investor Services. Fixed income securities receive different credit ratings depending on the rating company's assessment of the likelihood of default by the issuer. The lower the credit rating, the greater the credit risk. If the security is unrated, greater reliance is placed on the Adviser's credit assessment. 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. SECTOR RISK Most of the Fund's securities will be invested in issuers located in Pennsylvania. In addition, a substantial part of the Fund's portfolio may be comprised of tax-exempt securities issued or credit enhanced by companies in similar businesses or with other similar characteristics. As a result, the Fund will be more susceptible to any economic, business, political, or other developments which generally affect these issuers. 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 determined net asset value (NAV). The Fund does not charge a sales charge. NAV is determined at 12:00 noon and 1:00 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 offers three share classes: Institutional Shares, Institutional Service Shares and Cash Series Shares each representing interests in a single portfolio of securities. This prospectus relates only to Institutional Service Shares. Each share class has different expenses, which affect their performance. Contact your investment professional or call 1-800-341-7400 for more information concerning the other classes. The Fund's distributor markets the Shares described in this prospectus to institutions acting in an agency or fiduciary capacity or to individuals directly or through investment professionals. The Fund may not be a suitable investment for retirement plans or for non-Pennsylvania taxpayers because it invests in Pennsylvania tax-exempt securities. 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 1:00 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 on the day 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 SYSTEMATIC INVESTMENT PROGRAM Once you have opened an account, you may automatically purchase additional Shares on a regular basis by completing the Systematic Investment Program (SIP) section of the New Account Form or by contacting the Fund or your investment professional. The minimum investment amount for SIPs is $50. BY AUTOMATED CLEARINGHOUSE (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 12:00 noon (Eastern time), your redemption will be wired to you the same day. You will not receive that day's dividend. If you call after 12:00 noon (Eastern time), your redemption will be wired to you the following business day. You will receive that day's dividend. Under limited circumstances, arrangements may be made with the Distributor for same-day payment of redemption proceeds, without that day's dividend, for redemption requests received before 2:00 p.m. (Eastern time). 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 30 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. SYSTEMATIC WITHDRAWAL PROGRAM You may automatically redeem Shares in a minimum amount of $100 on a regular basis. Complete the appropriate section of the New Account Form or an Account Service Options Form or contact your investment professional or the Fund. Your account value must meet the minimum initial investment amount at the time the program is established. This program may reduce, and eventually deplete, your account. Payments should not be considered yield or income. CHECKWRITING You may request checks to redeem your Fund Shares. Your account will continue to receive the daily dividend declared on the Shares being redeemed until a check is presented for payment. DEBIT CARD You may request a debit card account that allows you to redeem Shares. There is an annual fee for this service that the Fund will automatically deduct from your account. 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 CONFIRMATIONS AND ACCOUNT STATEMENTS You will receive confirmation of purchases and redemptions (except for systematic transactions). In addition, you will receive periodic statements reporting all account activity, including systematic transactions, 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, 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. It is anticipated that Fund distributions will be primarily dividends that are exempt from federal income tax, although a portion of the Fund's dividends may not be exempt. Dividends may be subject to state and local taxes, although the Fund's dividends will be exempt from Pennsylvania state personal income tax to the extent they are derived from interest on obligations exempt from Pennsylvania personal income taxes. Capital gains and non-exempt dividends are taxable whether paid in cash or reinvested in the Fund. 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 Management. 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 and/or provide administrative services to more than 300 mutual funds and private accounts, which totaled over $120 billion in assets as of December 31, 1997. Federated was established in 1955 and is one of the largest mutual fund investment managers in the United States with more than 2,000 employees. Over 4,000 investment professionals make Federated Funds available to their customers. ADVISORY FEES The Adviser receives an annual investment advisory fee of 0.50% 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 affect 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-Institutional Service Shares (For a share outstanding throughout each period) Reference is made to the Report of Independent Public Accountants on page 30.
YEAR ENDED OCTOBER 31 1998 1997 1996 1995 1994 NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 INCOME FROM INVESTMENT OPERATIONS: Net investment income 0.03 0.03 0.03 0.03 0.02 LESS DISTRIBUTIONS: Distributions from net investment income (0.03) (0.03) (0.03) (0.03) (0.02) NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 TOTAL RETURN 1 3.15% 3.18% 3.16% 3.44% 2.25% RATIOS TO AVERAGE NET ASSETS: Expenses 0.65% 0.65% 0.65% 0.65% 0.64% Net investment income 3.09% 3.14% 3.12% 3.38% 2.19% Expense waiver/reimbursement 2 0.26% 0.27% 0.27% 0.27% 0.02% SUPPLEMENTAL DATA: Net assets, end of period (000 omitted) $392,381 $264,634 $221,851 $276,407 $229,160
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 October 31, 1998
PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-99.5% 1 PENNSYLVANIA-99.5% $ 4,000,000 Allegheny County, PA HDA, Variable Rate Demand Hospital Revenue Bonds (Series B of 1998), 4.25% TOBs (South Hills Health System)/(PNC Bank, N.A. LOC), Mandatory Tender 3/31/1999 $ 4,007,940 1,010,000 Allegheny County, PA Housing Development Authority, 6.40% Bonds (Children's Hospital of Pittsburgh)/(MBIA INS), 7/1/1999 1,029,663 1,000,000 Allegheny County, PA IDA, (Series 1991) Weekly VRDNs (Mine Safety Appliances Co.)/(Sanwa Bank Ltd., Osaka LOC) 1,000,000 4,560,000 Allegheny County, PA IDA, Commercial Development Revenue Bonds (Series 1992) Weekly VRDNs (Eleven Parkway Center Associates)/(Mellon Bank N.A., Pittsburgh LOC) 4,560,000 5,000,000 Allegheny County, PA IDA, PCR (Series 1992A), 3.05% TOBs (Duquesne Light Power Co.)/(Canadian Imperial Bank of Commerce, Toronto LOC), Mandatory Tender 1/28/1999 5,000,000 3,040,000 Allegheny County, PA IDA, Variable Rate Demand Revenue Bonds (Series A of 1997) Weekly VRDNs (Jewish Community Center)/ (National City, Pennsylvania LOC) 3,040,000 1,795,000 Altoona, PA City Authority, Water Revenue Refunding Bonds (Series 1997) PA-321 Weekly VRDNs (Blair County, PA)/(FGIC INS)/(Merrill Lynch Capital Services, Inc. LIQ) 1,795,000 5,000,000 Beaver County, PA IDA, PCR Refunding Bonds (1992 Series-E), 3.80% CP (Toledo Edison Co.)/(Toronto-Dominion Bank LOC), Mandatory Tender 12/1/1998 5,000,000 5,000,000 Bensalem Township School District, PA, 3.97% TRANs, 6/30/1999 5,000,927 1,055,000 Berks County, PA IDA Weekly VRDNs (ADC Quaker Maid Meats)/ (Corestates Bank N.A., Philadelphia, PA LOC) 1,055,000 575,000 Berks County, PA IDA Weekly VRDNs (Beacon Container)/ (Corestates Bank N.A., Philadelphia, PA LOC) 575,000 520,000 Berks County, PA IDA, (1996 Series A) Weekly VRDNs (Lebanon Valley Mall Co.)/(Meridian Bank, Reading, PA LOC) 520,000 1,500,000 Berks County, PA IDA, (Series 1988) Weekly VRDNs (Arrow Electronics, Inc.)/(Corestates Bank N.A., Philadelphia, PA LOC) 1,500,000 6,000,000 Berks County, PA IDA, (Series 1998) Weekly VRDNs (Eastern Industries, Inc.)/(Dauphin Deposit Bank and Trust LOC) 6,000,000 3,330,000 Berks County, PA IDA, Manufacturing Facilities Revenue Bonds (Series 1996) Weekly VRDNs (Ram Industries, Inc.)/ (Corestates Bank N.A., Philadelphia, PA LOC) 3,330,000 1,585,000 Berks County, PA IDA, Manufacturing Facilities Revenue Bonds (Series 1995) Weekly VRDNs (Grafika Commercial Printing, Inc.)/(Corestates Bank N.A., Philadelphia, PA LOC) 1,585,000 235,000 Berks County, PA IDA, Revenue Bonds (Series 1995A/Subseries A) Weekly VRDNs (Corestates Bank N.A., Philadelphia, PA LOC) 235,000 910,000 Berks County, PA IDA, Revenue Bonds (Series 1995A/Subseries B) Weekly VRDNs (Corestates Bank N.A., Philadelphia, PA LOC) 910,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 PENNSYLVANIA-CONTINUED $ 1,000,000 Bethlehem, PA Area School District, UT GO Bonds, 6.35% Bonds (AMBAC INS), 9/1/1999 $ 1,024,085 2,375,000 Boyertown, PA Area School District, (Series of 1998/99), 4.00% TRANs, 6/30/1999 2,377,272 1,855,000 Bucks County, PA IDA Weekly VRDNs (Double H Plastics, Inc.)/ (Corestates Bank N.A., Philadelphia, PA LOC) 1,855,000 2,560,000 Bucks County, PA IDA Weekly VRDNs (Pennsylvania Associates)/ (Corestates Bank N.A., Philadelphia, PA LOC) 2,560,000 2,865,000 Bucks County, PA IDA, (Series 1991) Weekly VRDNs (Cabot Medical Corp.)/(Corestates Bank N.A., Philadelphia, PA LOC) 2,865,000 3,205,000 Bucks County, PA IDA, Variable Rate Demand/Fixed Rate Revenue Bonds (Series 1997) Weekly VRDNs (Boekel Industries, Inc.)/(Corestates Bank N.A., Philadelphia, PA LOC) 3,205,000 4,000,000 Butler County, PA IDA Weekly VRDNs (Mine Safety Appliances Co.)/(Sanwa Bank Ltd., Osaka LOC) 4,000,000 1,000,000 Butler County, PA IDA, (Series 1992B) Weekly VRDNs (Mine Safety Appliances Co.)/(Sanwa Bank Ltd., Osaka LOC) 1,000,000 1,200,000 Butler County, PA IDA, (Series 1996 A) Weekly VRDNs (Armco, Inc.)/(Chase Manhattan Bank N.A., New York LOC) 1,200,000 2,125,000 Butler County, PA IDA, (Series 1998) Weekly VRDNs (Allegheny Metalworking Corp.)/(National City, Pennsylvania LOC) 2,125,000 2,270,000 Butler County, PA IDA, IDRB (Series 1994) Weekly VRDNs (Lue- Rich Holding Company, Inc. Project)/(ABN AMRO Bank N.V., Amsterdam LOC) 2,270,000 2,250,000 Butler County, PA IDA, IDRB's (Series 1997) Weekly VRDNs (Wise Business Forms, Inc.)/(SouthTrust Bank of Alabama, Birmingham LOC) 2,250,000 6,000,000 Butler County, PA IDA, Variable Rate Demand Revenue Bonds (Series 1996A), 3.80% TOBs (Lutheran Welfare)/(PNC Bank, N.A. LOC), Mandatory Tender 11/1/1998 6,000,000 6,400,000 Cambria County, PA IDA Weekly VRDNs (Cambria Cogeneration)/ (ABN AMRO Bank N.V., Amsterdam LOC) 6,400,000 1,300,000 Carbon County, PA IDA Weekly VRDNs (Summit Management & Utilities, Inc.)/(PNC Bank, N.A. LOC) 1,300,000 5,000,000 Carbon County, PA IDA, Resource Recovery Bonds (Series B), 3.60% CP (Panther Creek)/(National Westminster Bank, PLC, London LOC), Mandatory Tender 11/12/1998 5,000,000 1,290,000 Carbon County, PA IDA, Resource Recovery Bonds (Series B), 3.65% CP (Panther Creek)/(National Westminster Bank, PLC, London LOC), Mandatory Tender 11/16/1998 1,290,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 PENNSYLVANIA-CONTINUED $ 5,000,000 Carbon County, PA IDA, Solid Waste Disposal Revenue Bonds, 4.15% RANs (Horsehead Resource Development, Inc.)/(Chase Manhattan Bank N.A., New York LOC), 12/3/1998 $ 5,000,000 3,060,000 Chartiers Valley Industrial & Commercial Development Authority, Nursing home Revenue Refunding Bonds (Series 1997A) Weekly VRDNs (Woodhaven Convalescent Center)/ (Bank One, Ohio, N.A. LOC) 3,060,000 7,300,000 Clearfield County, PA IDA Weekly VRDNs (Penn Traffic Co.)/ (ABN AMRO Bank N.V., Amsterdam LOC) 7,300,000 2,500,000 Coatsville, PA School District, 4.05% TRANs, 6/30/1999 2,502,367 1,000,000 Commonwealth of Pennsylvania, GO UT Refunding Bonds (First Series A), 6.60% Bonds, 6/1/1999 1,019,654 4,000,000 Commonwealth of Pennsylvania, PA-274 (1st Series of 1997) Weekly VRDNs (AMBAC INS)/(Merrill Lynch Capital Services, Inc. LIQ) 4,000,000 25,000,000 Commonwealth of Pennsylvania, Trust Receipts (Series 1998 FR/RI-A9) Weekly VRDNs (MBIA INS)/(Bayerische Hypotheken-Und Wechsel-Bank AG LIQ) 25,000,000 1,100,000 Cumberland County, PA IDA, Industrial Development Bonds (Series 1994) Weekly VRDNs (Lane Enterprises, Inc. Project)/ (Corestates Bank N.A., Philadelphia, PA LOC) 1,100,000 10,000,000 Cumberland County, PA Municipal Authority, Variable Rate Revenue Bonds (Series 1996 B), 3.75% TOBs (Dickinson College)/ (Mellon Bank N.A., Pittsburgh LOC), Optional Tender 11/2/1998 10,000,000 1,000,000 Dallastown Area School District, PA, GO Bonds (Series 1998) Weekly VRDNs (FGIC INS)/(FGIC Securities Purchase, Inc. LIQ) 1,000,000 14,500,000 Dauphin County, PA General Authority, (Education and Health Loan Program, Series 1997) Weekly VRDNs (AMBAC INS)/(Chase Manhattan Bank N.A., New York LIQ) 14,500,000 15,500,000 Dauphin County, PA General Authority, (Series A of 1997) Weekly VRDNs (Allhealth Pooled Financing Program)/(FSA INS)/ (Credit Suisse First Boston LIQ) 15,500,000 1,000,000 Delaware County Authority, PA, Hospital Revenue Bonds (Series of 1996) Weekly VRDNs (Crozer-Chester Medical Center)/(KBC Bank N.V., Brussels LOC) 1,000,000 10,000,000 Delaware County, PA PCR, (Series 1988A), 3.20% CP (Philadelphia Electric Co.)/(FGIC INS), Mandatory Tender 12/9/1998 10,000,000 3,000,000 Downington Area School District, (Series of 1998/99), 4.04% TRANs, 6/30/1999 3,002,662 12,500,000 Doylestown Hospital Authority, PA, Doylestown Hospital Revenue Bonds Weekly VRDNs (AMBAC INS)/(PNC Bank, N.A. LIQ) 12,500,000 5,000,000 Doylestown Hospital Authority, PA, Hospital Revenue Bonds (Series 1998C) Weekly VRDNs (Doylestown Hospital, PA)/(AMBAC INS)/(PNC Bank, N.A. LIQ) 5,000,000 4,400,000 East Hempfield Township, PA IDA, (Series 1985) Weekly VRDNs (Yellow Freight System)/(Wachovia Bank of Georgia, N.A., Atlanta LOC) 4,400,000 8,500,000 East Hempfield Township, PA IDA, (Series of 1997) Weekly VRDNs (Mennonite Home)/(Dauphin Deposit Bank and Trust LOC) 8,500,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 PENNSYLVANIA-CONTINUED $ 8,505,000 Easton Area School District, PA, (Series 1997) Weekly VRDNs (FGIC INS)/(FGIC Securities Purchase, Inc. LIQ) $ 8,505,000 2,800,000 Erie County, PA Hospital Authority Weekly VRDNs (St. Mary's Hospital Erie, PA)/(PNC Bank, N.A. LOC) 2,800,000 125,000 Erie County, PA IDA, (Series 1985) Weekly VRDNs (R. P-C Value, Inc.)/(PNC Bank, N.A. LOC) 125,000 300,000 Erie County, PA IDA, (Series B) Weekly VRDNs (P.H.B. Project)/(PNC Bank, N.A. LOC) 300,000 4,000,000 Erie County, PA, 4.375% TRANs (PNC Bank, N.A. LOC), 12/31/1998 4,003,643 100,000 Forest County, PA IDA Weekly VRDNs (Industrial Timber & Land Co.)/(National City Bank, Cleveland, OH LOC) 100,000 905,000 Forest County, PA IDA Weekly VRDNs (Marienville Health Care Facility)/(PNC Bank, N.A. LOC) 905,000 2,900,000 Franconia Township, PA IDA, IDRB's (Series 1997A) Weekly VRDNs (Asher's Chocolates)/(Mellon Bank N.A., Pittsburgh LOC) 2,900,000 1,470,000 Franklin County, PA IDA Weekly VRDNs (The Guarriello Limited Partnership)/(PNC Bank, N.A. LOC) 1,470,000 2,400,000 Gettysburg Area Industrial Development Authority, (Series A of 1998) Weekly VRDNs (Hanover Lantern, Inc.)/(First National Bank of Maryland, Baltimore LOC) 2,400,000 4,495,000 Greater Johnstown, PA School District, PA-361 Weekly VRDNs (MBIA INS)/(Merrill Lynch Capital Services, Inc. LIQ) 4,495,000 11,000,000 Lancaster County, PA Hospital Authority, Health Center Revenue Bonds (Series 1996) Weekly VRDNs (Masonic Homes) 11,000,000 3,385,000 Lancaster, PA IDA, (1988 Series C) Weekly VRDNs (Henry Molded Products, Inc.)/(Dauphin Deposit Bank and Trust LOC) 3,385,000 2,295,000 Lancaster, PA IDA, (1998 Series A) Weekly VRDNs (Henry Molded Products, Inc.)/(Dauphin Deposit Bank and Trust LOC) 2,295,000 1,000,000 Lehigh County, PA IDA, Variable Rate Demand Revenue Bonds (Series 1997) Weekly VRDNs (American Manufacturing Co., Inc.)/(Mellon Bank N.A., Pittsburgh LOC) 1,000,000 6,840,000 McKean County, PA IDA, Economic Development Revenue Bonds (Series 1997) Weekly VRDNs (Keystone Powdered Metal Co.)/ (Mellon Bank N.A., Pittsburgh LOC) 6,840,000 290,000 McKean County, PA IDA, Multi-Mode Revenue Refunding Bonds Weekly VRDNs (Bradford Manor, Inc.)/(PNC Bank, N.A. LOC) 290,000 3,300,000 Monroe County, PA IDA, PCR Weekly VRDNs (Cooper Industries, Inc.)/(Sanwa Bank Ltd., Osaka LOC) 3,300,000 3,500,000 Montgomery County, PA IDA, (Series 1984) Weekly VRDNs (Seton Co.)/(First Union National Bank, Charlotte, N.C. LOC) 3,500,000 1,200,000 Montgomery County, PA IDA, (Series 1992) Weekly VRDNs (RJI Limited Partnership)/(Corestates Bank N.A., Philadelphia, PA LOC) 1,200,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 PENNSYLVANIA-CONTINUED $ 1,000,000 Montgomery County, PA IDA, (Series A) Weekly VRDNs (Vari Corp.)/(Dauphin Deposit Bank and Trust LOC) $ 1,000,000 4,250,000 Montgomery County, PA IDA, (Series C) Weekly VRDNs (Vari Corp.)/(Dauphin Deposit Bank and Trust LOC) 4,250,000 2,030,000 Montgomery County, PA IDA, EDRB's (Series 1997) Weekly VRDNs (Palmer International, Inc.)/(Mellon Bank N.A., Pittsburgh LOC) 2,030,000 4,775,000 Moon Township, PA IDA Weekly VRDNs (Airport Hotel Associates)/(National City, Pennsylvania LOC) 4,775,000 3,310,000 Moon Township, PA IDA, Variable Rate Commercial Development Revenue Bond (Series 1995A) Weekly VRDNs (One Thorn Run Center)/(National City, Pennsylvania LOC) 3,310,000 3,000,000 North Penn Health, Hospital and Education Authority, PA, Hospital Revenue Bonds (Series 1998) Weekly VRDNs (North Penn Hospital, PA)/(First Union National Bank, Charlotte, N.C. LOC) 3,000,000 3,850,000 Northampton County, PA IDA, 3.40% CP (Citizens Utilities Co.), Mandatory Tender 2/9/1999 3,850,000 9,000,000 Northampton County, PA IDA, 3.65% CP (Citizens Utilities Co.), Mandatory Tender 1/13/1999 9,000,000 2,542,000 Northampton County, PA IDA, Variable Rate Revenue Bonds (Series 1997) Weekly VRDNs (Ultra-Poly Corp.)/(PNC Bank, N.A. LOC) 2,542,000 1,590,000 Northumberland County PA IDA, Revenue Bonds (Series A of 1995) Weekly VRDNs (Furman Farms, Inc. Project)/(Corestates Bank N.A., Philadelphia, PA LOC) 1,590,000 1,650,000 Pennsylvania EDFA Weekly VRDNs (Cyrogenics, Inc.)/(PNC Bank, N.A. LOC) 1,650,000 2,500,000 Pennsylvania EDFA Weekly VRDNs (Industrial Scientific Corp.)/(Mellon Bank N.A., Pittsburgh LOC) 2,500,000 525,000 Pennsylvania EDFA Weekly VRDNs (Pioneer Fluid)/(PNC Bank, N.A. LOC) 525,000 450,000 Pennsylvania EDFA Weekly VRDNs (RMF Associates)/(PNC Bank, N.A. LOC) 450,000 500,000 Pennsylvania EDFA, (Series B) Weekly VRDNs (Payne Printing Co.)/(PNC Bank, N.A. LOC) 500,000 2,890,000 Pennsylvania EDFA, Economic Development Revenue Bonds (Series 1996C) Weekly VRDNs (Napco, Inc. Project)/(Mellon Bank N.A., Pittsburgh LOC) 2,890,000 10,000,000 Pennsylvania EDFA, Exempt Facilities Revenue Bonds (Series 1997B) Weekly VRDNs (National Gypsum Co.)/(Nationsbank, N.A., Charlotte LOC) 10,000,000 625,000 Pennsylvania EDFA, Revenue Bonds (Series G4) Weekly VRDNs (Metamora Products)/(PNC Bank, N.A. LOC) 625,000 250,000 Pennsylvania EDFA, Revenue Bonds Weekly VRDNs (DDI Pharmaceuticals, Inc.)/(PNC Bank, N.A. LOC) 250,000 250,000 Pennsylvania EDFA, Revenue Bonds Weekly VRDNs (RAM Forest Products)/(PNC Bank, N.A. LOC) 250,000 13,665,000 2 Pennsylvania Housing Finance Authority, (Series 1997-58A), PT-149, 3.75% TOBs (Commerzbank AG, Frankfurt LIQ), Optional Tender 12/10/1998 13,665,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 PENNSYLVANIA-CONTINUED $ 14,430,000 Pennsylvania Housing Finance Authority, MERLOTs (Series K) Weekly VRDNs (Corestates Bank N.A., Philadelphia, PA LIQ) $ 14,430,000 2,905,000 Pennsylvania Housing Finance Authority, PT-119B (Series 1997-56B) Weekly VRDNs (Credit Suisse First Boston, Inc. LIQ) 2,905,000 915,000 Pennsylvania Housing Finance Authority, Section 8 Assisted Residential Development Refunding Bonds (Series 1992A) Weekly VRDNs (CGIC INS)/(Citibank N.A., New York LIQ) 915,000 10,000,000 Pennsylvania State Higher Education Assistance Agency, Student Loan Adjustable Rate Revenue Bonds (Series 1997A) Weekly VRDNs (Student Loan Marketing Association LOC) 10,000,000 6,000,000 Pennsylvania State Higher Education Facilities Authority, (Series 1997 B8), 4.50% TOBs (Wilkes University)/(PNC Bank, N.A. LOC), Mandatory Tender 11/1/1998 6,000,000 10,000,000 2 Philadelphia Authority for Industrial Development, Variable Rate Certificates (Series 1998P-1), 3.75% TOBs (Philadelphia Airport System)/(FGIC INS)/(Bank of America NT and SA, San Francisco LIQ), Optional Tender 8/4/1999 10,000,000 1,760,000 Philadelphia, PA Airport System, 5.25% Bonds (FGIC INS), 6/15/1999 1,775,878 12,900,000 Philadelphia, PA Gas Works, (Series C), 3.05% CP (Canadian Imperial Bank of Commerce, Toronto LOC), Mandatory Tender 2/17/1999 12,900,000 2,450,000 Philadelphia, PA IDA, Refunding Revenue Bonds (Series 1991) Weekly VRDNs (Tom James Co.)/(SunTrust Bank, Nashville LOC) 2,450,000 7,600,000 Philadelphia, PA Redevelopment Authority, Multi-Family Revenue Bonds (Series 1985) Weekly VRDNs (Franklin Town Towers)/(Marine Midland Bank N.A., Buffalo, NY LOC) 7,600,000 4,000,000 Philadelphia, PA School District, (Series B), 4.25% TRANs (PNC Bank, N.A. LOC), 6/30/1999 4,015,801 3,230,000 Philadelphia, PA Water & Wastewater System, (CDC Series 1997Q) Weekly VRDNs (MBIA INS)/(CDC Municipal Products, Inc. LIQ) 3,230,000 5,000,000 Philadelphia, PA Water & Wastewater System, (Series 1997A) PT-1033 Weekly VRDNs (AMBAC INS)/(Merrill Lynch Capital Services, Inc. LOC) 5,000,000 5,000,000 Philadelphia, PA, 4.25% TRANs, 6/30/1999 5,019,565 540,000 Pittsburgh, PA School District, (Series B), 4.10% Bonds (FGIC INS), 9/1/1999 543,716 2,500,000 Red Lion, PA Area School District, 4.05% TRANs, 6/30/1999 2,502,367 1,700,000 Schuylkill County, PA IDA, Manufacturing Facilities Revenue Bonds (Series 1995) Weekly VRDNs (Prime Packing, Inc. Project)/(Corestates Bank N.A., Philadelphia, PA LOC) 1,700,000 1,900,000 Schuylkill County, PA IDA, Variable Rate Demand/Fixed Rate Manufacturing Facilities Revenue Bonds (Series of 1996) Weekly VRDNs (Craftex Mills, Inc.)/(Corestates Bank N.A., Philadelphia, PA LOC) 1,900,000 2,000,000 Shaler Township, PA, 4.18% TANs, 12/31/1998 2,000,251 1,000,000 Southeastern, PA Transportation Authority, 6.00% Bonds (Canadian Imperial Bank of Commerce, Toronto LOC), 6/1/1999 1,016,349 1,000,000 Springfield, PA School District, 3.90% TRANs, 12/31/1998 1,000,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 PENNSYLVANIA-CONTINUED $ 6,000,000 Temple University, Refunding Bonds (Series B), 4.50% Bonds, 5/14/1999 $ 6,023,024 4,245,000 Upper Darby School District, PA, (Drexel Hill), 3.94% TRANs, 6/30/1999 4,248,766 4,000,000 Venango, PA IDA, Resource Recovery Bonds (Series 1993), 3.60% CP (Scrubgrass Power Corp.)/(National Westminster Bank, PLC, London LOC), Mandatory Tender 11/12/1998 4,000,000 2,700,000 Washington County, PA Authority, (Series 1985A) Weekly VRDNs (1985-A Pooled Equipment Lease Program)/(First Union National Bank, Charlotte, N.C. LOC) 2,700,000 1,900,000 Washington County, PA Hospital Authority Weekly VRDNs (Keystone Diversified Management Corp.)/(Mellon Bank N.A., Pittsburgh LOC) 1,900,000 10,700,000 Washington County, PA IDA, Solid Waste Disposal Revenue Bonds (Series 1995) Weekly VRDNs (American Iron Oxide Co. Project)/(Bank of Tokyo-Mitsubishi Ltd. LOC) 10,700,000 950,000 Washington County, PA, IDA (Series 1988) Weekly VRDNs (Coca- Cola Co.)/(Mellon Bank N.A., Pittsburgh LOC) 950,000 835,000 West Cornwall Township, PA Municipal Authority, Revenue Bonds (Series 1995) Weekly VRDNs (Lebanon Valley Brethren Home Project (PA))/(Corestates Bank N.A., Philadelphia, PA LOC) 835,000 9,600,000 Westmoreland County, PA IDA, Guaranteed Variable Rate Revenue Bonds (Series of 1993) Weekly VRDNs (USA Waste Services, Inc.)/(Fleet Bank N.A. LOC) 9,600,000 2,500,000 York County, PA IDA, Limited Obligation Revenue Bonds (Series 1997) Weekly VRDNs (Metal Exchange Corp.)/(Comerica Bank, Detroit, MI LOC) 2,500,000 2,750,000 York County, PA IDA, Variable Rate Demand Ltd. Obligation Revenue Bonds (Series 1996) Weekly VRDNs (Metal Exchange Corp.)/(Comerica Bank, Detroit, MI LOC) 2,750,000 2,125,000 York County, PA Solid Waste & Refuse Authority, 4.75% Bonds (FGIC INS), 12/1/1998 2,126,559 Total Investments (at amortized cost) 3 $ 501,952,489
At October 31, 1998, 40.4% of the total investments at market value were subject to alternative minimum tax. 1 The Fund may only invest in securities rated in one of the two highest short-term rating categories by one or more nationally recognized statistical rating organizations ("NRSROs") or unrated securities of comparable quality. 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, MIG- 1 or MIG-2 by Moody's Investors Service, Inc., or F-1+, F-1, or F-2 by Fitch IBCA, Inc. are all considered rated in one of the two highest short-term rating categories. Securities rated in the highest short-term rating category (and unrated securities of comparable quality) are identified as First Tier securities. Securities rated in the second highest short-term rating category (and unrated securities of comparable quality) are identified as Second Tier securities. The Fund follows applicable regulations in determining whether a security is rated and whether a security rated by multiple NRSROs in different rating categories should be identified as a First or Second Tier security. At October 31, 1998, the portfolio securities were rated as follows: Tier Rating Based on Total Market Value (Unaudited) FIRST TIER SECOND TIER 100.00% 0.00% 2 Denotes a restricted security which is subject to restrictions on resale under Federal Securities laws. At October 31, 1998, these securities amounted to $23,665,000 which represents 4.7% of net assets. 3 Also represents cost for federal tax purposes. Note: The categories of investments are shown as a percentage of net assets ($504,601,894) at October 31, 1998. The following acronyms are used throughout this portfolio: AMBAC -American Municipal Bond Assurance Corporation CGIC -Capital Guaranty Insurance Corporation CP -Commercial Paper EDFA -Economic Development Financing Authority EDRB -Economic Development Revenue Bonds FGIC -Financial Guaranty Insurance Company FSA -Financial Security Assurance GO -General Obligation HDA -Hospital Development Authority IDA -Industrial Development Authority IDRB -Industrial Development Revenue Bond INS -Insured LIQ -Liquidity Agreement LOC -Letter of Credit MBIA -Municipal Bond Investors Assurance MERLOTS -Municipal Exempt Receipts - Liquidity Optional Tender Series PCR -Pollution Control Revenue PLC -Public Limited Company RANs -Revenue Anticipation Notes SA -Support Agreement TANs -Tax Anticipation Notes TOBs -Tender Option Bonds TRANs -Tax and Revenue Anticipation Notes UT -Unlimited Tax VRDNs -Variable Rate Demand Notes See Notes which are an integral part of the Financial Statements Statement of Assets and Liabilities October 31, 1998 ASSETS: Total investments in securities, at amortized cost and value $ 501,952,489 Cash 261,601 Income receivable 3,252,953 Receivable for shares sold 107,408 Prepaid expenses 8,393 Total assets 505,582,844 LIABILITIES: Payable for shares redeemed $ 11,122 Income distribution payable 829,501 Accrued expenses 140,327 Total liabilities 980,950 Net Assets for 504,601,894 shares outstanding $ 504,601,894 NET ASSET VALUE, OFFERING PRICE, AND REDEMPTION PROCEEDS PER SHARE: INSTITUTIONAL SERVICE SHARES: $392,380,805 / 392,380,805 shares outstanding $1.00 CASH SERIES SHARES: $47,940,017 / 47,940,017 shares outstanding $1.00 INSTITUTIONAL SHARES: $64,281,072 / 64,281,072 shares outstanding $1.00
See Notes which are an integral part of the Financial Statements Statement of Operations Year Ended October 31, 1998 INVESTMENT INCOME: Interest $ 15,641,600 EXPENSES: Investment advisory fee $ 2,086,146 Administrative personnel and services fee 314,620 Custodian fees 8,789 Transfer and dividend disbursing agent fees and expenses 109,379 Directors'/Trustees' fees 3,323 Auditing fees 13,019 Legal fees 11,056 Portfolio accounting fees 108,083 Distribution services fee-Cash Series Shares 179,698 Shareholder services fee-Institutional Service Shares 793,433 Shareholder services fee-Cash Series Shares 112,311 Shareholder services fee-Institutional Shares 137,329 Share registration costs 69,634 Printing and postage 35,246 Insurance premiums 21,971 Miscellaneous 5,824 Total expenses 4,009,861 WAIVERS: Waiver of investment advisory fee $ (891,201) Waiver of distribution services fee-Cash Series Shares (22,462) Waiver of shareholder services fee-Institutional Service Shares (158,686) Waiver of shareholder services fee-Institutional Shares (137,329) Total waivers (1,209,678) Net expenses 2,800,183 Net investment income $ 12,841,417
See Notes which are an integral part of the Financial Statements Statement of Changes in Net Assets
YEAR ENDED OCTOBER 31 1998 1997 INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income $ 12,841,417 $ 10,489,997 DISTRIBUTIONS TO SHAREHOLDERS: Distributions from net investment income Institutional Service Shares (9,813,298) (8,169,653) Cash Series Shares (1,215,221) (617,375) Institutional Shares (1,812,898) (1,702,969) Change in net assets resulting from distributions to shareholders (12,841,417) (10,489,997) SHARE TRANSACTION: Proceeds from sale of shares 1,771,726,568 1,340,687,798 Net asset value of shares issued to shareholders in payment of distributions declared 4,355,879 3,168,018 Cost of shares redeemed (1,623,039,093) (1,271,049,376) Change in net assets resulting from share transactions 153,043,354 72,806,440 Change in net assets 153,043,354 72,806,440 NET ASSETS: Beginning of period 351,558,540 278,752,100 End of period $ 504,601,894 $ 351,558,540
See Notes which are an integral part of the Financial Statements Notes to Financial Statements October 31, 1998 ORGANIZATION Federated Municipal Trust (the "Trust") is registered under the Investment Company Act of 1940, as amended (the "Act") as an open-end, management investment company. The Trust consists of 17 portfolios. The financial statements included herein are only those of Pennsylvania Municipal Cash Trust (the "Fund"). The financial statements of the other portfolios are presented separately. The assets of each portfolio are segregated and a shareholder's interest is limited to the portfolio in which shares are held. The Fund offers three classes of shares: Institutional Service Shares, Cash Series Shares, and Institutional Shares. The investment objective of the Fund is current income exempt from federal income tax and the personal income taxes imposed by the Commonwealth of Pennsylvania consistent with stability of principal. 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. 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. RESTRICTED SECURITIES Restricted securities are securities that may only be resold upon registration under federal securities laws or in transactions exempt from such registration. Many restricted securities may be resold in the secondary market in transactions exempt from registration. In some cases, the restricted securities may be resold without registration upon exercise of a demand feature. Such restricted securities may be determined to be liquid under criteria established by the Board of Trustees ("Trustees"). The Fund will not incur any registration costs upon such resales. Restricted securities are valued at amortized cost in accordance with Rule 2a-7 under the Investment Company Act of 1940. Additional information on each restricted security held at October 31, 1998, is as follows: ACQUISITION ACQUISITION SECURITY DATE COST Philadelphia Authority for Industrial Development, Variable Rate Certificates (Series 1998P-1) 8/27/98 $10,000,000 Pennsylvania Housing Finance Authority, (Series 1997-58A) 9/2/98 13,665,000 USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts of assets, liabilities, expenses, and revenues reported in the financial statements. Actual results could differ from those estimated. OTHER Investment transactions are accounted for on the trade date. SHARES OF BENEFICIAL INTEREST The Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest (without par value) for each class of shares. At October 31, 1998, capital paid-in aggregated $504,601,894. Transactions in shares were as follows:
YEAR ENDED OCTOBER 31 1998 1997 INSTITUTIONAL SERVICE SHARES Shares sold 1,209,407,656 1,052,427,056 Shares issued to shareholders in payment of distributions declared 3,071,889 2,495,116 Shares redeemed (1,084,732,294) (1,012,139,333) Net change resulting from Institutional Service share transactions 127,747,251 42,782,839 YEAR ENDED OCTOBER 31 1998 1997 CASH SERIES SHARES Shares sold 158,966,434 71,085,166 Shares issued to shareholders in payment of distributions declared 1,162,158 559,551 Shares redeemed (135,965,506) (67,692,672) Net change resulting from Cash Series share transactions 24,163,086 3,952,045 YEAR ENDED OCTOBER 31 1998 1997 INSTITUTIONAL SHARES Shares sold 403,352,478 217,175,576 Shares issued to shareholders in payment of distributions declared 121,832 113,351 Shares redeemed (402,341,293) (191,217,371) Net change resulting from Institutional share transactions 1,133,017 26,071,556 Net change resulting from share transactions 153,043,354 72,806,440
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES INVESTMENT ADVISORY FEE Federated Management, the Fund's investment adviser (the "Adviser"), receives for its services an annual investment advisory fee equal to 0.50% 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. DISTRIBUTION SERVICES FEE The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b- 1 under the Act. Under the terms of the Plan, the Fund will compensate Federated Securities Corp. ("FSC"), the principal distributor, from the net assets of the Fund to finance activities intended to result in the sale of the Fund's Cash Series Shares. The Plan provides that the Fund may incur distribution expenses up to 0.40% of the average daily net assets of Cash Series Shares, annually, to compensate FSC. The distributor may voluntarily choose to waive any portion of its fee. The distributor can modify or terminate this voluntary waiver at any time at its sole discretion. SHAREHOLDER SERVICES FEE Under the terms of a Shareholder Services Agreement with Federated Shareholder Services ("FSS"), the Fund will pay FSS up to 0.25% of average daily net assets of the Fund for the period. The fee paid to FSS is used to finance certain services for shareholders and to maintain shareholder accounts. FSS may voluntarily choose to waive any portion of its fee. FSS can modify or terminate this voluntary waiver at any time at its sole discretion. TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES FServ, through its subsidiary, Federated Shareholder Services Company ("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. INTERFUND TRANSACTIONS During the period ended October 31, 1998, the Fund engaged in purchase and sale transactions with funds that have a common investment adviser (or affiliated investment advisers), common Directors/Trustees, and/or common Officers. These purchase and sale transactions were made at current market value pursuant to Rule 17a-7 under the Act amounting to $800,160,971 and $690,796,000, respectively. GENERAL Certain of the Officers and Trustees of the Trust are Officers and Directors or Trustees of the above companies. CONCENTRATION OF CREDIT RISK Since the Fund invests a substantial portion of its assets in issuers located in one state, it will be more susceptible to factors adversely affecting issuers of that state than would be a comparable tax-exempt mutual fund that invests nationally. In order to reduce the credit risk associated with such factors, at October 31, 1998, 82.2% of the securities in the portfolio of investments are backed by letters of credit or bond insurance of various financial institutions and financial guaranty assurance agencies. The percentage of investments insured by or supported (backed) by a letter of credit from any one institution or agency did not exceed 8.4% of total investments. 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 Board of Trustees of Federated Municipal Trust and and Shareholders of Pennsylvania Municipal Cash Trust: We have audited the accompanying statement of assets and liabilities of Pennsylvania Municipal Cash Trust (an investment portfolio of Federated Municipal Trust, a Massachusetts business trust), including the schedule of portfolio investments, as of October 31, 1998, the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for the periods presented. These financial statements and financial highlights are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the 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 October 31, 1998, by correspondence with the custodian. 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 Pennsylvania Municipal Cash Trust (an investment portfolio of Federated Municipal Trust) as of October 31, 1998, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and its financial highlights for the periods presented, in conformity with generally accepted accounting principles. Arthur Andersen LLP Boston, Massachusetts December 23, 1998 [Graphic] PROSPECTUS Pennsylvania Municipal Cash Trust A Portfolio of Federated Municipal Trust INSTITUTIONAL SERVICE SHARES December 31, 1998 A Statement of Additional Information (SAI) dated December 31, 1998, is incorporated by reference into this prospectus. To obtain the SAI 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] Pennsylvania Municipal Cash 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. 811-5911 Cusip 314229204 9101005A-SS (12/98) [Graphic] PROSPECTUS Pennsylvania Municipal Cash Trust A Portfolio of Federated Municipal Trust INSTITUTIONAL SERVICE SHARES A money market mutual fund seeking to provide current income exempt from federal regular income tax and the personal income tax imposed by the Commonwealth of Pennsylvania. 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. December 31, 1998 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? 6 How is the Fund Sold? 6 How to Purchase Shares 7 How to Redeem Shares 8 Account and Share Information 10 Who Manages the Fund? 11 Financial Information 12 Report of Independent Public Accountants 30 Risk/Return Summary WHAT IS THE FUND'S INVESTMENT OBJECTIVE? The Fund is a money market fund which seeks to maintain a stable net asset value of $1.00. The Fund's investment objective is current income exempt from federal regular income tax and the personal income tax imposed by the Commonwealth of Pennsylvania consistent with stability of principal. While there is not 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 tax-exempt securities so that the Fund's annual interest income is exempt from federal regular income tax and Pennsylvania dividend and interest income tax. Interest from the Fund's investments may be subject to the federal alternative minimum tax for individuals and corporations. WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND? Because the Fund may invest a significant portion of its assets in securities of a single issuer, an investment in the Fund may involve additional risks compared to a fully diversified money market 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] - See Appendix C-13 Historically, the Fund has maintained a constant $1.00 net asset value per share. The bar chart shows the variability of the Fund's Institutional Service Shares total returns on a yearly basis. The Fund's Institutional Service Shares are not sold subject to a sales charge (load). The total returns displayed above are based upon the net asset value. The Fund's Institutional Service Shares year-to-date total return as of the most recent calendar quarter of September 30, 1998 was 2.32%. Within the period shown in the Chart, the Fund's Institutional Service Shares highest quarterly return was 1.43% (quarter ended December 31, 1990). Its lowest quarterly return was 0.47% (quarter ended March 31, 1994). The Fund's Institutional Service Shares Seven-Day Net Yield as of 12/31/97 was 3.45%. The following table represents the Fund's Institutional Service Shares Average Annual Total Return through 12/31/97. CALENDAR PERIOD FUND 1 Year 3.22% 5 Years 2.88% Start of Performance 1 3.43% 1 The Fund's start of performance date was November 21, 1990. Investors may call the Fund at 1-800-341-7400 to acquire the Seven-Day Net Yield. 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? PENNSYLVANIA MUNICIPAL CASH TRUST FEES AND EXPENSES This table describes the fees and expenses that you may pay if you buy, hold and redeem shares of the Fund's Institutional Service Shares.
SHAREHOLDER FEES 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 a percentage of average net assets) Management Fee 2 0.50% Distribution (12b-1) Fee None Shareholder Services Fee 3 0.25% Other Expenses 0.16% Total Annual Fund Operating Expenses 0.91% 1 Although not contractually obligated to do so, the adviser and shareholder services provider waived certain amounts. These are shown below along with the net expenses the fund actually paid for the fiscal year ended October 31, 1998. Waiver of Fund Expenses 0.26% Total Actual Annual Operating Expenses (after waivers) 0.65% 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 0.29% for the year ended October 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 0.20% for the year ended October 31, 1998.
EXAMPLE The following Example is intended to help you compare the cost of investing in the Fund's Institutional Service Shares with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund's Institutional Service 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 Institutional Service Shares' operating expenses are BEFORE WAIVERS as shown above and remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be: 1 YEAR 3 YEARS 5 YEARS 10 YEARS Expenses assuming no redemption $93 $290 $504 $1,120 What are the Fund's Investment Strategies? The Fund invests in a portfolio of high-quality tax-exempt securities maturing in 13 months or less. The average maturity of the Fund's portfolio, computed on a dollar-weighted basis, will be 90 days or less. The Fund's Adviser performs a fundamental credit analysis to develop an approved list of issuers and securities that meet the Adviser's minimum credit standards. The Adviser targets an average portfolio maturity based upon its interest rate outlook and the tax-exempt securities available. The Adviser structures the portfolio by combining variable rate demand instruments and municipal notes. Depending on the supply of tax-exempt securities, the Adviser generally shortens the portfolio's maturity when it expects interest rates to rise and extends the maturity when it expects interest rates to fall. TEMPORARY DEFENSIVE INVESTMENTS During adverse market conditions the Fund may temporarily depart from its principal investment strategies by investing in securities subject to federal regular income tax and Pennsylvania dividend and interest income tax. Temporary investments will be of comparable quality to other securities in which the Fund invests. This may cause the Fund to give up greater investment returns to maintain the safety of principal. This also may cause the Fund to receive and distribute taxable income to investors. What are the Principal Securities in Which the Fund Invests? TAX-EXEMPT SECURITIES Tax-exempt securities are fixed income securities that pay interest exempt from regular federal income taxes. States, counties, cities and other political subdivisions and authorities typically issue tax-exempt securities. Tax-exempt securities are generally differentiated by their source of repayment. FIXED INCOME SECURITIES Fixed income 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. VARIABLE RATE DEMAND INSTRUMENTS Variable rate demand instruments are tax-exempt securities that require the issuer or a third party, such as a dealer or bank, to repurchase the security for its face value upon demand. The securities also bear interest at a variable rate intended to cause the securities to trade at their face value. The Fund treats demand instruments as short-term securities, even though their stated maturity may extend beyond 13 months. MUNICIPAL NOTES Municipal notes are short-term tax-exempt securities. Many municipalities issue such notes to fund their current operations before collecting taxes or other municipal revenues. Municipalities may also issue notes to fund capital projects prior to issuing long-term bonds. The issuers typically repay the notes at the end of their fiscal year, either with taxes, other revenues or proceeds from newly issued notes or bonds. INVESTMENT 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 rating services or be of comparable quality to securities having such ratings. CREDIT ENHANCEMENT Credit enhancement consists of an arrangement in which a company agrees to pay amounts due on a fixed income security if the issuer defaults. In some cases the company providing credit enhancement makes all payments directly to the security holders and receives reimbursement from the issuer. Normally, the credit enhancer has greater financial resources and liquidity than the issuer. For this reason, the Adviser usually evaluates the credit risk of a fixed income security based solely upon its credit enhancement. What are the Specific Risks of Investing in the Fund? Although there are many factors which may affect an investment in the Fund, the principal risks of investing in a tax-exempt money market fund are described below. CREDIT RISK Credit risk is the possibility that an issuer or a credit enhancer will default (fails to repay interest and principal when due). If an issuer or credit enhancer defaults, the Fund will lose money. Money market funds try to minimize this risk by purchasing higher quality securities. Many fixed income securities receive credit ratings from companies such as Standard & Poor's and Moody's Investor Services. Fixed income securities receive different credit ratings depending on the rating company's assessment of the likelihood of default by the issuer. The lower the credit rating, the greater the credit risk. If the security is unrated, greater reliance is placed on the Adviser's credit assessment. 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. SECTOR RISK Most of the Fund's securities will be invested in issuers located in Pennsylvania. In addition, a substantial part of the Fund's portfolio may be comprised of tax-exempt securities issued or credit enhanced by companies in similar businesses or with other similar characteristics. As a result, the Fund will be more susceptible to any economic, business, political, or other developments which generally affect these issuers. 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 determined net asset value (NAV). The Fund does not charge a sales charge. NAV is determined at 12:00 noon and 1:00 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 offers three share classes: Institutional Shares, Institutional Service Shares and Cash Series Shares each representing interests in a single portfolio of securities. This prospectus relates only to Institutional Service Shares. Each share class has different expenses, which affect their performance. Contact your investment professional or call 1-800-341-7400 for more information concerning the other classes. The Fund's distributor markets the Shares described in this prospectus to institutions acting in an agency or fiduciary capacity or to individuals directly or through investment professionals. The Fund may not be a suitable investment for retirement plans or for non-Pennsylvania taxpayers because it invests in Pennsylvania tax-exempt securities. 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 1:00 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 on the day 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 SYSTEMATIC INVESTMENT PROGRAM Once you have opened an account, you may automatically purchase additional Shares on a regular basis by completing the Systematic Investment Program (SIP) section of the New Account Form or by contacting the Fund or your investment professional. The minimum investment amount for SIPs is $50. BY AUTOMATED CLEARINGHOUSE (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 12:00 noon (Eastern time), your redemption will be wired to you the same day. You will not receive that day's dividend. If you call after 12:00 noon (Eastern time), your redemption will be wired to you the following business day. You will receive that day's dividend. Under limited circumstances, arrangements may be made with the Distributor for same-day payment of redemption proceeds, without that day's dividend, for redemption requests received before 2:00 p.m. (Eastern time). 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 30 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. SYSTEMATIC WITHDRAWAL PROGRAM You may automatically redeem Shares in a minimum amount of $100 on a regular basis. Complete the appropriate section of the New Account Form or an Account Service Options Form or contact your investment professional or the Fund. Your account value must meet the minimum initial investment amount at the time the program is established. This program may reduce, and eventually deplete, your account. Payments should not be considered yield or income. CHECKWRITING You may request checks to redeem your Fund Shares. Your account will continue to receive the daily dividend declared on the Shares being redeemed until a check is presented for payment. DEBIT CARD You may request a debit card account that allows you to redeem Shares. There is an annual fee for this service that the Fund will automatically deduct from your account. 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 CONFIRMATIONS AND ACCOUNT STATEMENTS You will receive confirmation of purchases and redemptions (except for systematic transactions). In addition, you will receive periodic statements reporting all account activity, including systematic transactions, 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, 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. It is anticipated that Fund distributions will be primarily dividends that are exempt from federal income tax, although a portion of the Fund's dividends may not be exempt. Dividends may be subject to state and local taxes, although the Fund's dividends will be exempt from Pennsylvania state personal income tax to the extent they are derived from interest on obligations exempt from Pennsylvania personal income taxes. Capital gains and non-exempt dividends are taxable whether paid in cash or reinvested in the Fund. 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 Management. 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 and/or provide administrative services to more than 300 mutual funds and private accounts, which totaled over $120 billion in assets as of December 31, 1997. Federated was established in 1955 and is one of the largest mutual fund investment managers in the United States with more than 2,000 employees. Over 4,000 investment professionals make Federated Funds available to their customers. ADVISORY FEES The Adviser receives an annual investment advisory fee of 0.50% 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 affect 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-Institutional Service Shares (For a share outstanding throughout each period) Reference is made to the Report of Independent Public Accountants on page 30.
YEAR ENDED OCTOBER 31 1998 1997 1996 1995 1994 NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 INCOME FROM INVESTMENT OPERATIONS: Net investment income 0.03 0.03 0.03 0.03 0.02 LESS DISTRIBUTIONS: Distributions from net investment income (0.03) (0.03) (0.03) (0.03) (0.02) NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 TOTAL RETURN 1 3.15% 3.18% 3.16% 3.44% 2.25% RATIOS TO AVERAGE NET ASSETS: Expenses 0.65% 0.65% 0.65% 0.65% 0.64% Net investment income 3.09% 3.14% 3.12% 3.38% 2.19% Expense waiver/reimbursement 2 0.26% 0.27% 0.27% 0.27% 0.02% SUPPLEMENTAL DATA: Net assets, end of period (000 omitted) $392,381 $264,634 $221,851 $276,407 $229,160
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 October 31, 1998
PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-99.5% 1 PENNSYLVANIA-99.5% $ 4,000,000 Allegheny County, PA HDA, Variable Rate Demand Hospital Revenue Bonds (Series B of 1998), 4.25% TOBs (South Hills Health System)/(PNC Bank, N.A. LOC), Mandatory Tender 3/31/1999 $ 4,007,940 1,010,000 Allegheny County, PA Housing Development Authority, 6.40% Bonds (Children's Hospital of Pittsburgh)/(MBIA INS), 7/1/1999 1,029,663 1,000,000 Allegheny County, PA IDA, (Series 1991) Weekly VRDNs (Mine Safety Appliances Co.)/(Sanwa Bank Ltd., Osaka LOC) 1,000,000 4,560,000 Allegheny County, PA IDA, Commercial Development Revenue Bonds (Series 1992) Weekly VRDNs (Eleven Parkway Center Associates)/(Mellon Bank N.A., Pittsburgh LOC) 4,560,000 5,000,000 Allegheny County, PA IDA, PCR (Series 1992A), 3.05% TOBs (Duquesne Light Power Co.)/(Canadian Imperial Bank of Commerce, Toronto LOC), Mandatory Tender 1/28/1999 5,000,000 3,040,000 Allegheny County, PA IDA, Variable Rate Demand Revenue Bonds (Series A of 1997) Weekly VRDNs (Jewish Community Center)/ (National City, Pennsylvania LOC) 3,040,000 1,795,000 Altoona, PA City Authority, Water Revenue Refunding Bonds (Series 1997) PA-321 Weekly VRDNs (Blair County, PA)/(FGIC INS)/(Merrill Lynch Capital Services, Inc. LIQ) 1,795,000 5,000,000 Beaver County, PA IDA, PCR Refunding Bonds (1992 Series-E), 3.80% CP (Toledo Edison Co.)/(Toronto-Dominion Bank LOC), Mandatory Tender 12/1/1998 5,000,000 5,000,000 Bensalem Township School District, PA, 3.97% TRANs, 6/30/1999 5,000,927 1,055,000 Berks County, PA IDA Weekly VRDNs (ADC Quaker Maid Meats)/ (Corestates Bank N.A., Philadelphia, PA LOC) 1,055,000 575,000 Berks County, PA IDA Weekly VRDNs (Beacon Container)/ (Corestates Bank N.A., Philadelphia, PA LOC) 575,000 520,000 Berks County, PA IDA, (1996 Series A) Weekly VRDNs (Lebanon Valley Mall Co.)/(Meridian Bank, Reading, PA LOC) 520,000 1,500,000 Berks County, PA IDA, (Series 1988) Weekly VRDNs (Arrow Electronics, Inc.)/(Corestates Bank N.A., Philadelphia, PA LOC) 1,500,000 6,000,000 Berks County, PA IDA, (Series 1998) Weekly VRDNs (Eastern Industries, Inc.)/(Dauphin Deposit Bank and Trust LOC) 6,000,000 3,330,000 Berks County, PA IDA, Manufacturing Facilities Revenue Bonds (Series 1996) Weekly VRDNs (Ram Industries, Inc.)/ (Corestates Bank N.A., Philadelphia, PA LOC) 3,330,000 1,585,000 Berks County, PA IDA, Manufacturing Facilities Revenue Bonds (Series 1995) Weekly VRDNs (Grafika Commercial Printing, Inc.)/(Corestates Bank N.A., Philadelphia, PA LOC) 1,585,000 235,000 Berks County, PA IDA, Revenue Bonds (Series 1995A/Subseries A) Weekly VRDNs (Corestates Bank N.A., Philadelphia, PA LOC) 235,000 910,000 Berks County, PA IDA, Revenue Bonds (Series 1995A/Subseries B) Weekly VRDNs (Corestates Bank N.A., Philadelphia, PA LOC) 910,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 PENNSYLVANIA-CONTINUED $ 1,000,000 Bethlehem, PA Area School District, UT GO Bonds, 6.35% Bonds (AMBAC INS), 9/1/1999 $ 1,024,085 2,375,000 Boyertown, PA Area School District, (Series of 1998/99), 4.00% TRANs, 6/30/1999 2,377,272 1,855,000 Bucks County, PA IDA Weekly VRDNs (Double H Plastics, Inc.)/ (Corestates Bank N.A., Philadelphia, PA LOC) 1,855,000 2,560,000 Bucks County, PA IDA Weekly VRDNs (Pennsylvania Associates)/ (Corestates Bank N.A., Philadelphia, PA LOC) 2,560,000 2,865,000 Bucks County, PA IDA, (Series 1991) Weekly VRDNs (Cabot Medical Corp.)/(Corestates Bank N.A., Philadelphia, PA LOC) 2,865,000 3,205,000 Bucks County, PA IDA, Variable Rate Demand/Fixed Rate Revenue Bonds (Series 1997) Weekly VRDNs (Boekel Industries, Inc.)/(Corestates Bank N.A., Philadelphia, PA LOC) 3,205,000 4,000,000 Butler County, PA IDA Weekly VRDNs (Mine Safety Appliances Co.)/(Sanwa Bank Ltd., Osaka LOC) 4,000,000 1,000,000 Butler County, PA IDA, (Series 1992B) Weekly VRDNs (Mine Safety Appliances Co.)/(Sanwa Bank Ltd., Osaka LOC) 1,000,000 1,200,000 Butler County, PA IDA, (Series 1996 A) Weekly VRDNs (Armco, Inc.)/(Chase Manhattan Bank N.A., New York LOC) 1,200,000 2,125,000 Butler County, PA IDA, (Series 1998) Weekly VRDNs (Allegheny Metalworking Corp.)/(National City, Pennsylvania LOC) 2,125,000 2,270,000 Butler County, PA IDA, IDRB (Series 1994) Weekly VRDNs (Lue- Rich Holding Company, Inc. Project)/(ABN AMRO Bank N.V., Amsterdam LOC) 2,270,000 2,250,000 Butler County, PA IDA, IDRB's (Series 1997) Weekly VRDNs (Wise Business Forms, Inc.)/(SouthTrust Bank of Alabama, Birmingham LOC) 2,250,000 6,000,000 Butler County, PA IDA, Variable Rate Demand Revenue Bonds (Series 1996A), 3.80% TOBs (Lutheran Welfare)/(PNC Bank, N.A. LOC), Mandatory Tender 11/1/1998 6,000,000 6,400,000 Cambria County, PA IDA Weekly VRDNs (Cambria Cogeneration)/ (ABN AMRO Bank N.V., Amsterdam LOC) 6,400,000 1,300,000 Carbon County, PA IDA Weekly VRDNs (Summit Management & Utilities, Inc.)/(PNC Bank, N.A. LOC) 1,300,000 5,000,000 Carbon County, PA IDA, Resource Recovery Bonds (Series B), 3.60% CP (Panther Creek)/(National Westminster Bank, PLC, London LOC), Mandatory Tender 11/12/1998 5,000,000 1,290,000 Carbon County, PA IDA, Resource Recovery Bonds (Series B), 3.65% CP (Panther Creek)/(National Westminster Bank, PLC, London LOC), Mandatory Tender 11/16/1998 1,290,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 PENNSYLVANIA-CONTINUED $ 5,000,000 Carbon County, PA IDA, Solid Waste Disposal Revenue Bonds, 4.15% RANs (Horsehead Resource Development, Inc.)/(Chase Manhattan Bank N.A., New York LOC), 12/3/1998 $ 5,000,000 3,060,000 Chartiers Valley Industrial & Commercial Development Authority, Nursing home Revenue Refunding Bonds (Series 1997A) Weekly VRDNs (Woodhaven Convalescent Center)/ (Bank One, Ohio, N.A. LOC) 3,060,000 7,300,000 Clearfield County, PA IDA Weekly VRDNs (Penn Traffic Co.)/ (ABN AMRO Bank N.V., Amsterdam LOC) 7,300,000 2,500,000 Coatsville, PA School District, 4.05% TRANs, 6/30/1999 2,502,367 1,000,000 Commonwealth of Pennsylvania, GO UT Refunding Bonds (First Series A), 6.60% Bonds, 6/1/1999 1,019,654 4,000,000 Commonwealth of Pennsylvania, PA-274 (1st Series of 1997) Weekly VRDNs (AMBAC INS)/(Merrill Lynch Capital Services, Inc. LIQ) 4,000,000 25,000,000 Commonwealth of Pennsylvania, Trust Receipts (Series 1998 FR/RI-A9) Weekly VRDNs (MBIA INS)/(Bayerische Hypotheken-Und Wechsel-Bank AG LIQ) 25,000,000 1,100,000 Cumberland County, PA IDA, Industrial Development Bonds (Series 1994) Weekly VRDNs (Lane Enterprises, Inc. Project)/ (Corestates Bank N.A., Philadelphia, PA LOC) 1,100,000 10,000,000 Cumberland County, PA Municipal Authority, Variable Rate Revenue Bonds (Series 1996 B), 3.75% TOBs (Dickinson College)/ (Mellon Bank N.A., Pittsburgh LOC), Optional Tender 11/2/1998 10,000,000 1,000,000 Dallastown Area School District, PA, GO Bonds (Series 1998) Weekly VRDNs (FGIC INS)/(FGIC Securities Purchase, Inc. LIQ) 1,000,000 14,500,000 Dauphin County, PA General Authority, (Education and Health Loan Program, Series 1997) Weekly VRDNs (AMBAC INS)/(Chase Manhattan Bank N.A., New York LIQ) 14,500,000 15,500,000 Dauphin County, PA General Authority, (Series A of 1997) Weekly VRDNs (Allhealth Pooled Financing Program)/(FSA INS)/ (Credit Suisse First Boston LIQ) 15,500,000 1,000,000 Delaware County Authority, PA, Hospital Revenue Bonds (Series of 1996) Weekly VRDNs (Crozer-Chester Medical Center)/(KBC Bank N.V., Brussels LOC) 1,000,000 10,000,000 Delaware County, PA PCR, (Series 1988A), 3.20% CP (Philadelphia Electric Co.)/(FGIC INS), Mandatory Tender 12/9/1998 10,000,000 3,000,000 Downington Area School District, (Series of 1998/99), 4.04% TRANs, 6/30/1999 3,002,662 12,500,000 Doylestown Hospital Authority, PA, Doylestown Hospital Revenue Bonds Weekly VRDNs (AMBAC INS)/(PNC Bank, N.A. LIQ) 12,500,000 5,000,000 Doylestown Hospital Authority, PA, Hospital Revenue Bonds (Series 1998C) Weekly VRDNs (Doylestown Hospital, PA)/(AMBAC INS)/(PNC Bank, N.A. LIQ) 5,000,000 4,400,000 East Hempfield Township, PA IDA, (Series 1985) Weekly VRDNs (Yellow Freight System)/(Wachovia Bank of Georgia, N.A., Atlanta LOC) 4,400,000 8,500,000 East Hempfield Township, PA IDA, (Series of 1997) Weekly VRDNs (Mennonite Home)/(Dauphin Deposit Bank and Trust LOC) 8,500,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 PENNSYLVANIA-CONTINUED $ 8,505,000 Easton Area School District, PA, (Series 1997) Weekly VRDNs (FGIC INS)/(FGIC Securities Purchase, Inc. LIQ) $ 8,505,000 2,800,000 Erie County, PA Hospital Authority Weekly VRDNs (St. Mary's Hospital Erie, PA)/(PNC Bank, N.A. LOC) 2,800,000 125,000 Erie County, PA IDA, (Series 1985) Weekly VRDNs (R. P-C Value, Inc.)/(PNC Bank, N.A. LOC) 125,000 300,000 Erie County, PA IDA, (Series B) Weekly VRDNs (P.H.B. Project)/(PNC Bank, N.A. LOC) 300,000 4,000,000 Erie County, PA, 4.375% TRANs (PNC Bank, N.A. LOC), 12/31/1998 4,003,643 100,000 Forest County, PA IDA Weekly VRDNs (Industrial Timber & Land Co.)/(National City Bank, Cleveland, OH LOC) 100,000 905,000 Forest County, PA IDA Weekly VRDNs (Marienville Health Care Facility)/(PNC Bank, N.A. LOC) 905,000 2,900,000 Franconia Township, PA IDA, IDRB's (Series 1997A) Weekly VRDNs (Asher's Chocolates)/(Mellon Bank N.A., Pittsburgh LOC) 2,900,000 1,470,000 Franklin County, PA IDA Weekly VRDNs (The Guarriello Limited Partnership)/(PNC Bank, N.A. LOC) 1,470,000 2,400,000 Gettysburg Area Industrial Development Authority, (Series A of 1998) Weekly VRDNs (Hanover Lantern, Inc.)/(First National Bank of Maryland, Baltimore LOC) 2,400,000 4,495,000 Greater Johnstown, PA School District, PA-361 Weekly VRDNs (MBIA INS)/(Merrill Lynch Capital Services, Inc. LIQ) 4,495,000 11,000,000 Lancaster County, PA Hospital Authority, Health Center Revenue Bonds (Series 1996) Weekly VRDNs (Masonic Homes) 11,000,000 3,385,000 Lancaster, PA IDA, (1988 Series C) Weekly VRDNs (Henry Molded Products, Inc.)/(Dauphin Deposit Bank and Trust LOC) 3,385,000 2,295,000 Lancaster, PA IDA, (1998 Series A) Weekly VRDNs (Henry Molded Products, Inc.)/(Dauphin Deposit Bank and Trust LOC) 2,295,000 1,000,000 Lehigh County, PA IDA, Variable Rate Demand Revenue Bonds (Series 1997) Weekly VRDNs (American Manufacturing Co., Inc.)/(Mellon Bank N.A., Pittsburgh LOC) 1,000,000 6,840,000 McKean County, PA IDA, Economic Development Revenue Bonds (Series 1997) Weekly VRDNs (Keystone Powdered Metal Co.)/ (Mellon Bank N.A., Pittsburgh LOC) 6,840,000 290,000 McKean County, PA IDA, Multi-Mode Revenue Refunding Bonds Weekly VRDNs (Bradford Manor, Inc.)/(PNC Bank, N.A. LOC) 290,000 3,300,000 Monroe County, PA IDA, PCR Weekly VRDNs (Cooper Industries, Inc.)/(Sanwa Bank Ltd., Osaka LOC) 3,300,000 3,500,000 Montgomery County, PA IDA, (Series 1984) Weekly VRDNs (Seton Co.)/(First Union National Bank, Charlotte, N.C. LOC) 3,500,000 1,200,000 Montgomery County, PA IDA, (Series 1992) Weekly VRDNs (RJI Limited Partnership)/(Corestates Bank N.A., Philadelphia, PA LOC) 1,200,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 PENNSYLVANIA-CONTINUED $ 1,000,000 Montgomery County, PA IDA, (Series A) Weekly VRDNs (Vari Corp.)/(Dauphin Deposit Bank and Trust LOC) $ 1,000,000 4,250,000 Montgomery County, PA IDA, (Series C) Weekly VRDNs (Vari Corp.)/(Dauphin Deposit Bank and Trust LOC) 4,250,000 2,030,000 Montgomery County, PA IDA, EDRB's (Series 1997) Weekly VRDNs (Palmer International, Inc.)/(Mellon Bank N.A., Pittsburgh LOC) 2,030,000 4,775,000 Moon Township, PA IDA Weekly VRDNs (Airport Hotel Associates)/(National City, Pennsylvania LOC) 4,775,000 3,310,000 Moon Township, PA IDA, Variable Rate Commercial Development Revenue Bond (Series 1995A) Weekly VRDNs (One Thorn Run Center)/(National City, Pennsylvania LOC) 3,310,000 3,000,000 North Penn Health, Hospital and Education Authority, PA, Hospital Revenue Bonds (Series 1998) Weekly VRDNs (North Penn Hospital, PA)/(First Union National Bank, Charlotte, N.C. LOC) 3,000,000 3,850,000 Northampton County, PA IDA, 3.40% CP (Citizens Utilities Co.), Mandatory Tender 2/9/1999 3,850,000 9,000,000 Northampton County, PA IDA, 3.65% CP (Citizens Utilities Co.), Mandatory Tender 1/13/1999 9,000,000 2,542,000 Northampton County, PA IDA, Variable Rate Revenue Bonds (Series 1997) Weekly VRDNs (Ultra-Poly Corp.)/(PNC Bank, N.A. LOC) 2,542,000 1,590,000 Northumberland County PA IDA, Revenue Bonds (Series A of 1995) Weekly VRDNs (Furman Farms, Inc. Project)/(Corestates Bank N.A., Philadelphia, PA LOC) 1,590,000 1,650,000 Pennsylvania EDFA Weekly VRDNs (Cyrogenics, Inc.)/(PNC Bank, N.A. LOC) 1,650,000 2,500,000 Pennsylvania EDFA Weekly VRDNs (Industrial Scientific Corp.)/(Mellon Bank N.A., Pittsburgh LOC) 2,500,000 525,000 Pennsylvania EDFA Weekly VRDNs (Pioneer Fluid)/(PNC Bank, N.A. LOC) 525,000 450,000 Pennsylvania EDFA Weekly VRDNs (RMF Associates)/(PNC Bank, N.A. LOC) 450,000 500,000 Pennsylvania EDFA, (Series B) Weekly VRDNs (Payne Printing Co.)/(PNC Bank, N.A. LOC) 500,000 2,890,000 Pennsylvania EDFA, Economic Development Revenue Bonds (Series 1996C) Weekly VRDNs (Napco, Inc. Project)/(Mellon Bank N.A., Pittsburgh LOC) 2,890,000 10,000,000 Pennsylvania EDFA, Exempt Facilities Revenue Bonds (Series 1997B) Weekly VRDNs (National Gypsum Co.)/(Nationsbank, N.A., Charlotte LOC) 10,000,000 625,000 Pennsylvania EDFA, Revenue Bonds (Series G4) Weekly VRDNs (Metamora Products)/(PNC Bank, N.A. LOC) 625,000 250,000 Pennsylvania EDFA, Revenue Bonds Weekly VRDNs (DDI Pharmaceuticals, Inc.)/(PNC Bank, N.A. LOC) 250,000 250,000 Pennsylvania EDFA, Revenue Bonds Weekly VRDNs (RAM Forest Products)/(PNC Bank, N.A. LOC) 250,000 13,665,000 2 Pennsylvania Housing Finance Authority, (Series 1997-58A), PT-149, 3.75% TOBs (Commerzbank AG, Frankfurt LIQ), Optional Tender 12/10/1998 13,665,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 PENNSYLVANIA-CONTINUED $ 14,430,000 Pennsylvania Housing Finance Authority, MERLOTs (Series K) Weekly VRDNs (Corestates Bank N.A., Philadelphia, PA LIQ) $ 14,430,000 2,905,000 Pennsylvania Housing Finance Authority, PT-119B (Series 1997-56B) Weekly VRDNs (Credit Suisse First Boston, Inc. LIQ) 2,905,000 915,000 Pennsylvania Housing Finance Authority, Section 8 Assisted Residential Development Refunding Bonds (Series 1992A) Weekly VRDNs (CGIC INS)/(Citibank N.A., New York LIQ) 915,000 10,000,000 Pennsylvania State Higher Education Assistance Agency, Student Loan Adjustable Rate Revenue Bonds (Series 1997A) Weekly VRDNs (Student Loan Marketing Association LOC) 10,000,000 6,000,000 Pennsylvania State Higher Education Facilities Authority, (Series 1997 B8), 4.50% TOBs (Wilkes University)/(PNC Bank, N.A. LOC), Mandatory Tender 11/1/1998 6,000,000 10,000,000 2 Philadelphia Authority for Industrial Development, Variable Rate Certificates (Series 1998P-1), 3.75% TOBs (Philadelphia Airport System)/(FGIC INS)/(Bank of America NT and SA, San Francisco LIQ), Optional Tender 8/4/1999 10,000,000 1,760,000 Philadelphia, PA Airport System, 5.25% Bonds (FGIC INS), 6/15/1999 1,775,878 12,900,000 Philadelphia, PA Gas Works, (Series C), 3.05% CP (Canadian Imperial Bank of Commerce, Toronto LOC), Mandatory Tender 2/17/1999 12,900,000 2,450,000 Philadelphia, PA IDA, Refunding Revenue Bonds (Series 1991) Weekly VRDNs (Tom James Co.)/(SunTrust Bank, Nashville LOC) 2,450,000 7,600,000 Philadelphia, PA Redevelopment Authority, Multi-Family Revenue Bonds (Series 1985) Weekly VRDNs (Franklin Town Towers)/(Marine Midland Bank N.A., Buffalo, NY LOC) 7,600,000 4,000,000 Philadelphia, PA School District, (Series B), 4.25% TRANs (PNC Bank, N.A. LOC), 6/30/1999 4,015,801 3,230,000 Philadelphia, PA Water & Wastewater System, (CDC Series 1997Q) Weekly VRDNs (MBIA INS)/(CDC Municipal Products, Inc. LIQ) 3,230,000 5,000,000 Philadelphia, PA Water & Wastewater System, (Series 1997A) PT-1033 Weekly VRDNs (AMBAC INS)/(Merrill Lynch Capital Services, Inc. LOC) 5,000,000 5,000,000 Philadelphia, PA, 4.25% TRANs, 6/30/1999 5,019,565 540,000 Pittsburgh, PA School District, (Series B), 4.10% Bonds (FGIC INS), 9/1/1999 543,716 2,500,000 Red Lion, PA Area School District, 4.05% TRANs, 6/30/1999 2,502,367 1,700,000 Schuylkill County, PA IDA, Manufacturing Facilities Revenue Bonds (Series 1995) Weekly VRDNs (Prime Packing, Inc. Project)/(Corestates Bank N.A., Philadelphia, PA LOC) 1,700,000 1,900,000 Schuylkill County, PA IDA, Variable Rate Demand/Fixed Rate Manufacturing Facilities Revenue Bonds (Series of 1996) Weekly VRDNs (Craftex Mills, Inc.)/(Corestates Bank N.A., Philadelphia, PA LOC) 1,900,000 2,000,000 Shaler Township, PA, 4.18% TANs, 12/31/1998 2,000,251 1,000,000 Southeastern, PA Transportation Authority, 6.00% Bonds (Canadian Imperial Bank of Commerce, Toronto LOC), 6/1/1999 1,016,349 1,000,000 Springfield, PA School District, 3.90% TRANs, 12/31/1998 1,000,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 PENNSYLVANIA-CONTINUED $ 6,000,000 Temple University, Refunding Bonds (Series B), 4.50% Bonds, 5/14/1999 $ 6,023,024 4,245,000 Upper Darby School District, PA, (Drexel Hill), 3.94% TRANs, 6/30/1999 4,248,766 4,000,000 Venango, PA IDA, Resource Recovery Bonds (Series 1993), 3.60% CP (Scrubgrass Power Corp.)/(National Westminster Bank, PLC, London LOC), Mandatory Tender 11/12/1998 4,000,000 2,700,000 Washington County, PA Authority, (Series 1985A) Weekly VRDNs (1985-A Pooled Equipment Lease Program)/(First Union National Bank, Charlotte, N.C. LOC) 2,700,000 1,900,000 Washington County, PA Hospital Authority Weekly VRDNs (Keystone Diversified Management Corp.)/(Mellon Bank N.A., Pittsburgh LOC) 1,900,000 10,700,000 Washington County, PA IDA, Solid Waste Disposal Revenue Bonds (Series 1995) Weekly VRDNs (American Iron Oxide Co. Project)/(Bank of Tokyo-Mitsubishi Ltd. LOC) 10,700,000 950,000 Washington County, PA, IDA (Series 1988) Weekly VRDNs (Coca- Cola Co.)/(Mellon Bank N.A., Pittsburgh LOC) 950,000 835,000 West Cornwall Township, PA Municipal Authority, Revenue Bonds (Series 1995) Weekly VRDNs (Lebanon Valley Brethren Home Project (PA))/(Corestates Bank N.A., Philadelphia, PA LOC) 835,000 9,600,000 Westmoreland County, PA IDA, Guaranteed Variable Rate Revenue Bonds (Series of 1993) Weekly VRDNs (USA Waste Services, Inc.)/(Fleet Bank N.A. LOC) 9,600,000 2,500,000 York County, PA IDA, Limited Obligation Revenue Bonds (Series 1997) Weekly VRDNs (Metal Exchange Corp.)/(Comerica Bank, Detroit, MI LOC) 2,500,000 2,750,000 York County, PA IDA, Variable Rate Demand Ltd. Obligation Revenue Bonds (Series 1996) Weekly VRDNs (Metal Exchange Corp.)/(Comerica Bank, Detroit, MI LOC) 2,750,000 2,125,000 York County, PA Solid Waste & Refuse Authority, 4.75% Bonds (FGIC INS), 12/1/1998 2,126,559 Total Investments (at amortized cost) 3 $ 501,952,489
At October 31, 1998, 40.4% of the total investments at market value were subject to alternative minimum tax. 1 The Fund may only invest in securities rated in one of the two highest short-term rating categories by one or more nationally recognized statistical rating organizations ("NRSROs") or unrated securities of comparable quality. 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, MIG- 1 or MIG-2 by Moody's Investors Service, Inc., or F-1+, F-1, or F-2 by Fitch IBCA, Inc. are all considered rated in one of the two highest short-term rating categories. Securities rated in the highest short-term rating category (and unrated securities of comparable quality) are identified as First Tier securities. Securities rated in the second highest short-term rating category (and unrated securities of comparable quality) are identified as Second Tier securities. The Fund follows applicable regulations in determining whether a security is rated and whether a security rated by multiple NRSROs in different rating categories should be identified as a First or Second Tier security. At October 31, 1998, the portfolio securities were rated as follows: Tier Rating Based on Total Market Value (Unaudited) FIRST TIER SECOND TIER 100.00% 0.00% 2 Denotes a restricted security which is subject to restrictions on resale under Federal Securities laws. At October 31, 1998, these securities amounted to $23,665,000 which represents 4.7% of net assets. 3 Also represents cost for federal tax purposes. Note: The categories of investments are shown as a percentage of net assets ($504,601,894) at October 31, 1998. The following acronyms are used throughout this portfolio: AMBAC -American Municipal Bond Assurance Corporation CGIC -Capital Guaranty Insurance Corporation CP -Commercial Paper EDFA -Economic Development Financing Authority EDRB -Economic Development Revenue Bonds FGIC -Financial Guaranty Insurance Company FSA -Financial Security Assurance GO -General Obligation HDA -Hospital Development Authority IDA -Industrial Development Authority IDRB -Industrial Development Revenue Bond INS -Insured LIQ -Liquidity Agreement LOC -Letter of Credit MBIA -Municipal Bond Investors Assurance MERLOTS -Municipal Exempt Receipts - Liquidity Optional Tender Series PCR -Pollution Control Revenue PLC -Public Limited Company RANs -Revenue Anticipation Notes SA -Support Agreement TANs -Tax Anticipation Notes TOBs -Tender Option Bonds TRANs -Tax and Revenue Anticipation Notes UT -Unlimited Tax VRDNs -Variable Rate Demand Notes See Notes which are an integral part of the Financial Statements Statement of Assets and Liabilities October 31, 1998 ASSETS: Total investments in securities, at amortized cost and value $ 501,952,489 Cash 261,601 Income receivable 3,252,953 Receivable for shares sold 107,408 Prepaid expenses 8,393 Total assets 505,582,844 LIABILITIES: Payable for shares redeemed $ 11,122 Income distribution payable 829,501 Accrued expenses 140,327 Total liabilities 980,950 Net Assets for 504,601,894 shares outstanding $ 504,601,894 NET ASSET VALUE, OFFERING PRICE, AND REDEMPTION PROCEEDS PER SHARE: INSTITUTIONAL SERVICE SHARES: $392,380,805 / 392,380,805 shares outstanding $1.00 CASH SERIES SHARES: $47,940,017 / 47,940,017 shares outstanding $1.00 INSTITUTIONAL SHARES: $64,281,072 / 64,281,072 shares outstanding $1.00
See Notes which are an integral part of the Financial Statements Statement of Operations Year Ended October 31, 1998 INVESTMENT INCOME: Interest $ 15,641,600 EXPENSES: Investment advisory fee $ 2,086,146 Administrative personnel and services fee 314,620 Custodian fees 8,789 Transfer and dividend disbursing agent fees and expenses 109,379 Directors'/Trustees' fees 3,323 Auditing fees 13,019 Legal fees 11,056 Portfolio accounting fees 108,083 Distribution services fee-Cash Series Shares 179,698 Shareholder services fee-Institutional Service Shares 793,433 Shareholder services fee-Cash Series Shares 112,311 Shareholder services fee-Institutional Shares 137,329 Share registration costs 69,634 Printing and postage 35,246 Insurance premiums 21,971 Miscellaneous 5,824 Total expenses 4,009,861 WAIVERS: Waiver of investment advisory fee $ (891,201) Waiver of distribution services fee-Cash Series Shares (22,462) Waiver of shareholder services fee-Institutional Service Shares (158,686) Waiver of shareholder services fee-Institutional Shares (137,329) Total waivers (1,209,678) Net expenses 2,800,183 Net investment income $ 12,841,417
See Notes which are an integral part of the Financial Statements Statement of Changes in Net Assets
YEAR ENDED OCTOBER 31 1998 1997 INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income $ 12,841,417 $ 10,489,997 DISTRIBUTIONS TO SHAREHOLDERS: Distributions from net investment income Institutional Service Shares (9,813,298) (8,169,653) Cash Series Shares (1,215,221) (617,375) Institutional Shares (1,812,898) (1,702,969) Change in net assets resulting from distributions to shareholders (12,841,417) (10,489,997) SHARE TRANSACTION: Proceeds from sale of shares 1,771,726,568 1,340,687,798 Net asset value of shares issued to shareholders in payment of distributions declared 4,355,879 3,168,018 Cost of shares redeemed (1,623,039,093) (1,271,049,376) Change in net assets resulting from share transactions 153,043,354 72,806,440 Change in net assets 153,043,354 72,806,440 NET ASSETS: Beginning of period 351,558,540 278,752,100 End of period $ 504,601,894 $ 351,558,540
See Notes which are an integral part of the Financial Statements Notes to Financial Statements October 31, 1998 ORGANIZATION Federated Municipal Trust (the "Trust") is registered under the Investment Company Act of 1940, as amended (the "Act") as an open-end, management investment company. The Trust consists of 17 portfolios. The financial statements included herein are only those of Pennsylvania Municipal Cash Trust (the "Fund"). The financial statements of the other portfolios are presented separately. The assets of each portfolio are segregated and a shareholder's interest is limited to the portfolio in which shares are held. The Fund offers three classes of shares: Institutional Service Shares, Cash Series Shares, and Institutional Shares. The investment objective of the Fund is current income exempt from federal income tax and the personal income taxes imposed by the Commonwealth of Pennsylvania consistent with stability of principal. 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. 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. RESTRICTED SECURITIES Restricted securities are securities that may only be resold upon registration under federal securities laws or in transactions exempt from such registration. Many restricted securities may be resold in the secondary market in transactions exempt from registration. In some cases, the restricted securities may be resold without registration upon exercise of a demand feature. Such restricted securities may be determined to be liquid under criteria established by the Board of Trustees ("Trustees"). The Fund will not incur any registration costs upon such resales. Restricted securities are valued at amortized cost in accordance with Rule 2a-7 under the Investment Company Act of 1940. Additional information on each restricted security held at October 31, 1998, is as follows: ACQUISITION ACQUISITION SECURITY DATE COST Philadelphia Authority for Industrial Development, Variable Rate Certificates (Series 1998P-1) 8/27/98 $10,000,000 Pennsylvania Housing Finance Authority, (Series 1997-58A) 9/2/98 13,665,000 USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts of assets, liabilities, expenses, and revenues reported in the financial statements. Actual results could differ from those estimated. OTHER Investment transactions are accounted for on the trade date. SHARES OF BENEFICIAL INTEREST The Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest (without par value) for each class of shares. At October 31, 1998, capital paid-in aggregated $504,601,894. Transactions in shares were as follows:
YEAR ENDED OCTOBER 31 1998 1997 INSTITUTIONAL SERVICE SHARES Shares sold 1,209,407,656 1,052,427,056 Shares issued to shareholders in payment of distributions declared 3,071,889 2,495,116 Shares redeemed (1,084,732,294) (1,012,139,333) Net change resulting from Institutional Service share transactions 127,747,251 42,782,839 YEAR ENDED OCTOBER 31 1998 1997 CASH SERIES SHARES Shares sold 158,966,434 71,085,166 Shares issued to shareholders in payment of distributions declared 1,162,158 559,551 Shares redeemed (135,965,506) (67,692,672) Net change resulting from Cash Series share transactions 24,163,086 3,952,045 YEAR ENDED OCTOBER 31 1998 1997 INSTITUTIONAL SHARES Shares sold 403,352,478 217,175,576 Shares issued to shareholders in payment of distributions declared 121,832 113,351 Shares redeemed (402,341,293) (191,217,371) Net change resulting from Institutional share transactions 1,133,017 26,071,556 Net change resulting from share transactions 153,043,354 72,806,440
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES INVESTMENT ADVISORY FEE Federated Management, the Fund's investment adviser (the "Adviser"), receives for its services an annual investment advisory fee equal to 0.50% 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. DISTRIBUTION SERVICES FEE The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b- 1 under the Act. Under the terms of the Plan, the Fund will compensate Federated Securities Corp. ("FSC"), the principal distributor, from the net assets of the Fund to finance activities intended to result in the sale of the Fund's Cash Series Shares. The Plan provides that the Fund may incur distribution expenses up to 0.40% of the average daily net assets of Cash Series Shares, annually, to compensate FSC. The distributor may voluntarily choose to waive any portion of its fee. The distributor can modify or terminate this voluntary waiver at any time at its sole discretion. SHAREHOLDER SERVICES FEE Under the terms of a Shareholder Services Agreement with Federated Shareholder Services ("FSS"), the Fund will pay FSS up to 0.25% of average daily net assets of the Fund for the period. The fee paid to FSS is used to finance certain services for shareholders and to maintain shareholder accounts. FSS may voluntarily choose to waive any portion of its fee. FSS can modify or terminate this voluntary waiver at any time at its sole discretion. TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES FServ, through its subsidiary, Federated Shareholder Services Company ("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. INTERFUND TRANSACTIONS During the period ended October 31, 1998, the Fund engaged in purchase and sale transactions with funds that have a common investment adviser (or affiliated investment advisers), common Directors/Trustees, and/or common Officers. These purchase and sale transactions were made at current market value pursuant to Rule 17a-7 under the Act amounting to $800,160,971 and $690,796,000, respectively. GENERAL Certain of the Officers and Trustees of the Trust are Officers and Directors or Trustees of the above companies. CONCENTRATION OF CREDIT RISK Since the Fund invests a substantial portion of its assets in issuers located in one state, it will be more susceptible to factors adversely affecting issuers of that state than would be a comparable tax-exempt mutual fund that invests nationally. In order to reduce the credit risk associated with such factors, at October 31, 1998, 82.2% of the securities in the portfolio of investments are backed by letters of credit or bond insurance of various financial institutions and financial guaranty assurance agencies. The percentage of investments insured by or supported (backed) by a letter of credit from any one institution or agency did not exceed 8.4% of total investments. 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 Board of Trustees of Federated Municipal Trust and and Shareholders of Pennsylvania Municipal Cash Trust: We have audited the accompanying statement of assets and liabilities of Pennsylvania Municipal Cash Trust (an investment portfolio of Federated Municipal Trust, a Massachusetts business trust), including the schedule of portfolio investments, as of October 31, 1998, the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for the periods presented. These financial statements and financial highlights are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the 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 October 31, 1998, by correspondence with the custodian. 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 Pennsylvania Municipal Cash Trust (an investment portfolio of Federated Municipal Trust) as of October 31, 1998, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and its financial highlights for the periods presented, in conformity with generally accepted accounting principles. Arthur Andersen LLP Boston, Massachusetts December 23, 1998 [Graphic] PROSPECTUS Pennsylvania Municipal Cash Trust A Portfolio of Federated Municipal Trust INSTITUTIONAL SERVICE SHARES December 31, 1998 A Statement of Additional Information (SAI) dated December 31, 1998, is incorporated by reference into this prospectus. To obtain the SAI 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] Pennsylvania Municipal Cash 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. 811-5911 Cusip 314229204 9101005A-SS (12/98) [Graphic] STATEMENT OF ADDITIONAL INFORMATION Pennsylvania Municipal Cash Trust A Portfolio of Federated Municipal Trust INSTITUTIONAL SHARES INSTITUTIONAL SERVICE SHARES CASH SERIES SHARES This Statement of Additional Information (SAI) is not a prospectus. Read this SAI in conjunction with the prospectuses for Pennsylvania Municipal Cash Trust dated December 31, 1998. Obtain the prospectuses without charge by calling 1- 800-341-7400. CONTENTS How is the Fund Organized? Securities in Which the Fund Invests How is the Fund Sold? Subaccounting Services Redemption in Kind Massachusetts Partnership Law Account and Share Information Tax Information Who Manages and Provides Services to the Fund? How Does the Fund Measure Performance? Who is Federated Investors, Inc.? Investment Ratings Addresses STATEMENT DATED DECEMBER 31, 1998 [Federated Investors Logo] Federated Securities Corp., Distributor, subsidiary of Federated Investors, Inc. Cusip 314229717 Cusip 314229204 Cusip 314229881 9101005B (12/98) How is the Fund Organized? The Fund is a diversified portfolio of Federated Municipal Trust (Trust). The Trust is an open-end, management investment company that was established under the laws of the Commonwealth of Massachusetts on September 1, 1989. The Trust may offer separate series of shares representing interests in separate portfolios of securities. The Board of Trustees (the Board) has established three classes of shares of the Fund, known as Institutional Shares, Institutional Service Shares and Cash Series Shares (Shares). This SAI relates to all of the classes of the above- mentioned Shares. Securities in Which the Fund Invests Securities Descriptions and Techniques In pursuing its investment strategy, the Fund may invest in the following tax- exempt securities for any purpose that is consistent with its investment objective. General Obligation Bonds General obligation bonds are supported by the issuer's full faith and credit. The issuer must levy and collect taxes sufficient to pay principal and interest on the bonds. However, the issuer's authority to levy additional taxes may be limited by its charter or state law. Special Revenue Bonds Special revenue bonds are payable solely from specific revenues received by the issuer. The revenues may consist of specific taxes, assessments, tolls, fees or other types of municipal revenues. For example, a municipality may issue bonds to build a toll road, and pledge the tolls to repay the bonds. Bondholders could not collect from the municipality's general taxes or revenues. Therefore, any shortfall in the tolls could result in a default on the bonds. Private Activity Bonds Private activity bonds are special revenue bonds used to finance private entities. For example, a municipality may issue bonds to finance a new factory to improve its local economy. The municipality would lend the proceeds to the company using the factory, and the company would agree make loan payments sufficient to repay the bonds. The bonds would be payable solely from the company's loan payments, not from any other revenues of the municipality. Therefore, any default on the loan normally would result in a default on the bonds. Municipal Leases Municipalities may enter into leases for equipment or facilities. In order to comply with state public financing laws, these leases are typically subject to annual appropriation. In other words, a municipality may end a lease, without penalty, by not providing for the lease payments in its annual budget. After the lease ends, the lessor (the Fund) can resell the equipment or facility but the Fund may lose money on the sale. The Fund may invest in securities supported by pools of municipal leases. The most common type of lease backed securities are certificates of participation (COPs). However, the Fund may also invest directly in individual leases. Credit Enhancement Common types of credit enhancement include guarantees, letters of credit, bond insurance and surety bonds. Credit enhancement also includes arrangements where securities or other liquid assets secure payment of a fixed income security. If a default occurs, these assets may be sold and the proceeds paid to a security's holders. Either form of credit enhancement reduces credit risks by providing another source of payment for a fixed income security. Investment Ratings A nationally recognized rating service'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 ("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 IBCA, 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 rating service can be treated as being in one of the two highest short-term rating categories; currently, such securities must be rated by two rating services in one of their two highest rating categories. See "Regulatory Compliance." Investment Risks There are many factors which may effect an investment in the Fund. The Fund's principal risks are described in its prospectus. An additional risk factor is outlined below. Tax Risk In order for the interest income from the securities to be exempt from federal regular income tax ("tax-exempt"), tax-exempt securities must meet certain legal requirements. Failure to meet such requirements may cause the interest received and distributed by the fund to shareholders to be taxable. FUNDAMENTAL INVESTMENT POLICIES The Fund invests in tax-exempt securities so that at least 80% of the Fund's annual interest income is exempt from federal regular income tax and Pennsylvania dividend and interest income tax. This policy is fundamental and cannot be changed without shareholder approval. 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 the clearance of transactions. Issuing Senior Securities and Borrowing Money The Fund will not issue senior securities except that the Fund may borrow money in amounts up to one-third of the value of its total assets, including the amounts borrowed. The Fund will not borrow money 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 its total assets are outstanding. Pledging Assets The Fund will not mortgage, pledge, or hypothecate any assets except 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 Pennsylvania tax-exempt securities or temporary investments or enter into repurchase agreements, in accordance with its investment objective, policies and limitations. 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, 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, (including instruments issued by a U.S. branch of a domestic bank or savings and loan having capital, surplus, and undivided profits in excess of $100,000,000 at the time of investment), 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 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 Restricted and Illiquid Securities The Fund may invest in restricted securities. Restricted securities are any securities in which the Fund may invest pursuant to its investment objective and policies but which are subject to restrictions on resale under federal securities law. Under criteria established by the Board, certain restricted securities are determined to be liquid. To the extent that restricted securities are not determined to be liquid the Fund will limit their purchase, together with other illiquid securities, to 10% of its net assets. 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 nationally recognized rating services, 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 Board has 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 Board 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 Board 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 Board 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. 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. RULE 12B-1 PLAN (CASH SERIES SHARES) As a compensation-type plan, the Rule 12b-1 Plan is designed to pay the Distributor (who may then pay investment professionals such as banks, broker/dealers, trust departments of banks, and registered investment advisers) for marketing activities (such as advertising, printing and distributing prospectuses, and providing incentives to investment professionals) to promote sales of Shares so that overall Fund assets are maintained or increased. This helps the Fund achieve economies of scale, reduce per Share expenses, and provide cash for orderly portfolio management and Share redemptions. Also, the Fund's service providers that receive asset-based fees also benefit from stable or increasing Fund assets. The Fund may compensate the Distributor more or less than its actual marketing expenses. In no event will the Fund pay for any expenses of the Distributor that exceed the maximum Rule 12b-1 Plan fee. For some classes of Shares, the maximum Rule 12b-1 Plan fee that can be paid in any one year may not be sufficient to cover the marketing related expenses the Distributor has incurred. Therefore, it may take the Distributor a number of years to recoup these expenses. SHAREHOLDER SERVICES The Fund may pay Federated Shareholder Services Company, a subsidiary of Federated Investors, Inc. (Federated), for providing shareholder services and maintaining shareholder accounts. Federated Shareholder Services Company may select others to perform these services for their customers and may pay them fees. SUPPLEMENTAL PAYMENTS Investment professionals may be paid fees out of the assets of the Distributor and/or Federated Shareholder Services Company (but not out of Fund assets). The Distributor and/or Federated Shareholder Services Company may be reimbursed by the Adviser or its affiliates. Investment professionals receive such fees for providing distribution-related or shareholder services such as sponsoring sales, providing sales literature, conducting training seminars for employees, and engineering sales-related computer software programs and systems. Also, investment professionals may be paid cash or promotional incentives, such as reimbursement of certain expenses relating to attendance at informational meetings about the Fund or other special events at recreational-type facilities, or items of material value. These payments will be based upon the amount of Shares the investment professional sells or may sell and/or upon the type and nature of sales or marketing support furnished by the investment professional. 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 professionals 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 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. 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. 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 Trust have equal voting rights, except that in matters affecting only a particular Fund or class, only Shares of that Fund or class are entitled to vote. Trustees may be removed by the Board or by shareholders at a special meeting. A special meeting of shareholders will be called by the Board upon the written request of shareholders who own at least 10% of the Trust's outstanding shares of all series entitled to vote. As of December 8, 1998, the following shareholders owned of record, beneficially, or both, 5% or more of the outstanding Institutional Shares: Univest & Company, Union National Bank & Trust, Souderton, Pennsylvania, owned approximately 11,619,575 shares (14.61%); Holiday Company, Hollidaysburg Trust Company, Hollidaysburg, Pennsylvania, owned approximately 10,111,503 shares (12.71%); Thomas Heasley & Company, Southwest National Bank of PA, Greensburg, Pennsylvania, owned approximately 7,346,057 shares (9.24%); Jasco & Company, S&T Bank, Indiana, Pennsylvania, owned approximately 5,554,779 shares (6.98%); Key Premier Bank of New York, New York, New York, owned approximately 4,665,193 shares (5.87%); and Rayweb, Erie, Pennsylvania, owned approximately 4,266,760 shares (5.36%). As of December 8, 1998, the following shareholders owned of record, beneficially, or both, 5% or more of the outstanding Institutional Service Shares: Mellon Bank Capital Markets (omnibus accounts), Pittsburgh, Pennsylvania, owned approximately 101,068,088 shares (26.66%); First Union National Bank (trust accounts), Charlotte, North Carolina, owned approximately 76,629,568 shares (20.22%); Plitt & Company, Baltimore, Maryland, owned approximately 70,741,214 shares (18.66%) and Keystone Financial, Inc., Altoona, Pennsylvania, owned approximately 27,495,503 shares (7.25%). As of December 8, 1998, the following shareholders owned of record, beneficially, or both, 5% or more of the outstanding Cash Series Shares: Parker/Hunter, Inc., Pittsburgh, Pennsylvania, owned approximately 22,405,604 shares (44.88%) and BHC Securities, Inc., Philadelphia, Pennsylvania, owned approximately 4,099,510 shares (8.21%). Shareholders owning 25% or more of outstanding Shares may be in control and be able to affect the outcome of certain matters presented for a vote of shareholders. Tax Information FEDERAL INCOME TAX The Fund intends to meet the requirements of Subchapter M of the Internal Revenue Code applicable to regulated investment companies. If these requirements are not met, it will not receive the special tax treatment and will pay federal income tax. The Fund will be treated as a single, separate entity for federal income tax purposes so that income earned and capital gains and losses realized by the Trust's other portfolios will be separate from those realized by the Fund. STATE TAXES Under existing Pennsylvania laws, distributions made by the Fund derived from interest on obligations free from state taxation in Pennsylvania are not subject to Pennsylvania personal income taxes. Distributions made by the Fund will be subject to Pennsylvania personal income taxes to the extent that they are derived from gain realized by the Fund from the sale or exchange of otherwise tax-exempt obligations. Who Manages and Provides Services to the Fund? BOARD OF TRUSTEES The Board is responsible for managing the Trust's business affairs and for exercising all the Trust's powers except those reserved for the shareholders. Information about each Board member is provided below and includes the following data: name, address, birthdate, present position(s) held with the Trust, principal occupations for the past five years and other notable positions held, total compensation received as a Trustee from the Trust for its most recent fiscal year, and the total compensation received from the Federated Fund Complex for the most recent calendar year. The Trust is comprised of 17 Funds and the Federated Fund Complex is comprised of 56 investment companies, whose investment advisers are affiliated with the Fund's Adviser. As of December 8, 1998, 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.
Name Total Birthdate Aggregate Compensation From Address Principal Occupations Compensation Trust and Fund Position With Trust for Past 5 Years From Trust Complex - ------------------------------------------------------------------------------------------------------------------------------------ John F. Donahue##* Chief Executive Officer and Director or Trustee of $0 $0 for the Trust Birthdate: July 28, 1924 the Federated Fund Complex. Chairman and Director, and 56 other Federated Investors Tower Federated Investors, Inc.; Chairman and Trustee, investment 1001 Liberty Avenue Federated Advisers, Federated Management, and companies in the Pittsburgh, PA Federated Research; Chairman and Director, Federated Fund Complex CHAIRMAN and TRUSTEE Research Corp., and Federated Global Research Corp.; Chairman, Passport Research, Ltd. Thomas G. Bigley Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: February 3, 1934 Director, Member of Executive Committee, Children's Trust and 15 Old Timber Trail Hospital of Pittsburgh; formerly: Senior Partner, 56 other Pittsburgh, PA Ernst & Young LLP; Director, MED 3000 Group, Inc.; investment TRUSTEE Director, Member of Executive Committee, University companies in the of Pittsburgh. Fund Complex John T. Conroy, Jr. Director or Trustee of the Federated Fund Complex; $4,484.62 $122,362 for the Birthdate: June 23, 1937 President, Investment Properties Corporation; Senior Trust and Wood/IPC Commercial Dept. Vice President, John R. Wood and Associates, Inc., 56 other John R. Wood and Realtors; Partner or Trustee in private real estate investment Associates, Inc. Realtors ventures in Southwest Florida; formerly: President, companies in the 3255 Tamiami Trail North Naples Property Management, Inc. and Northgate Fund Complex Naples, FL Village Development Corporation. TRUSTEE William J. Copeland Director or Trustee of the Federated Fund Complex; $4,484.62 $122,362 for the Birthdate: July 4, 1918 Director and Member of the Executive Committee, Trust and One PNC Plaza-23rd Floor Michael Baker, Inc.; formerly: Vice Chairman and 56 other Pittsburgh, PA Director, PNC Bank, N.A., and PNC Bank Corp.; investment TRUSTEE Director, Ryan Homes, Inc. companies in the Fund Complex Retired: Director, United Refinery; Director, Forbes Fund; Chairman, Pittsburgh Foundation; Chairman, Pittsburgh Civic Light Opera. James E. Dowd, Esq. Director or Trustee of the Federated Fund Complex; $4,484.62 $122,362 for the Birthdate: May 18, 1922 Attorney-at-law; Director, The Emerging Germany Fund, Trust and 571 Hayward Mill Road Inc. 56 other Concord, MA investment TRUSTEE Retired: President, Boston Stock Exchange, Inc.; companies in the Regional Administrator, United States Securities and Fund Complex Exchange Commission. Lawrence D. Ellis, M.D.* Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: October 11, 1932 Professor of Medicine, University of Pittsburgh; Trust and 3471 Fifth Avenue Medical Director, University of Pittsburgh Medical 56 other Suite 1111 Center - Downtown; Hematologist, Oncologist, and investment Pittsburgh, PA Internist, Presbyterian and Montefiore Hospitals; companies in the TRUSTEE Member, National Board of Trustees, Leukemia Society Fund Complex of America. Edward L. Flaherty, Jr., Director or Trustee of the Federated Fund Complex; $4,484.62 $122,362 for the Esq. # Attorney, of Counsel, Miller, Ament, Henny & Kochuba; Trust and Birthdate: June 18, 1924 Director, Eat'N Park Restaurants, Inc.; formerly: 56 other Miller, Ament, Henny & Counsel, Horizon Financial, F.A., Western Region; investment Kochuba Partner, Meyer and Flaherty. companies in the 205 Ross Street Fund Complex Pittsburgh, PA TRUSTEE Peter E. Madden Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: March 16, 1942 formerly: Representative, Commonwealth of Trust and One Royal Palm Way Massachusetts General Court; President, State Street 56 other 100 Royal Palm Way Bank and Trust Company and State Street Corporation. investment Palm Beach, FL companies in the TRUSTEE Retired: Director, VISA USA and VISA International; Fund Complex Chairman and Director, Massachusetts Bankers Association; Director, Depository Trust Corporation. John E. Murray, Jr., J.D., Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the S.J.D. President, Law Professor, Duquesne University; Trust and Birthdate: December 20, 1932 Consulting Partner, Mollica & Murray. 56 other President, Duquesne investment University Retired: Dean and Professor of Law, University of companies in the Pittsburgh, PA Pittsburgh School of Law; Dean and Professor of Law, Fund Complex TRUSTEE Villanova University School of Law. Wesley W. Posvar Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: September 14, President, World Society of Ekistics, Athens; Trust and 1925 Professor, International Politics; Management 56 other 1202 Cathedral of Learning Consultant; Trustee, Carnegie Endowment for investment University of Pittsburgh International Peace, RAND Corporation, Online companies in the Pittsburgh, PA Computer Library Center, Inc., National Defense Fund Complex TRUSTEE University and U.S. Space Foundation; President Emeritus, University of Pittsburgh; Founding Chairman, National Advisory Council for Environmental Policy and Technology, Federal Emergency Management Advisory Board and Czech Management Center, Prague. Retired: Professor, United States Military Academy; Professor, United States Air Force Academy. Marjorie P. Smuts Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: June 21, 1935 Public Relations/Marketing/Conference Planning. Trust and 4905 Bayard Street 56 other Pittsburgh, PA Retired: National Spokesperson, Aluminum Company of investment TRUSTEE America; business owner. companies in the Fund Complex Glen R. Johnson* Trustee, Federated Investors, Inc.; staff member, $0 $0 for the Trust Birthdate: May 2, 1929 Federated Securities Corp. and Federated Investors Tower 8 other investment 1001 Liberty Avenue companies in the Pittsburgh, PA Fund Complex PRESIDENT and TRUSTEE J. Christopher Donahue##* President or Executive Vice President of the $0 $0 for the Trust Birthdate: April 11, 1949 Federated Fund Complex; Director or Trustee of some and Federated Investors Tower of the Funds in the Federated Fund Complex; President 18 other 1001 Liberty Avenue and Director, Federated Investors, Inc.; President investment Pittsburgh, PA and Trustee, Federated Advisers, Federated companies in the EXECUTIVE VICE PRESIDENT Management, and Federated Research; President and Fund Complex Director, Federated Research Corp. and Federated Global Research Corp.; President, Passport Research, Ltd.; Trustee, Federated Shareholder Services Company; Director, Federated Services Company. Edward C. Gonzales* Trustee or Director of some of the Funds in the $0 $0 for the Trust Birthdate: October 22, 1930 Federated Fund Complex; President, Executive Vice and Federated Investors Tower President and Treasurer of some of the Funds in the 1 other investment 1001 Liberty Avenue Federated Fund Complex; Vice Chairman, Federated companies in the Pittsburgh, PA Investors, Inc.; Vice President, Federated Advisers, Fund Complex EXECUTIVE VICE PRESIDENT 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. John W. McGonigle Executive Vice President and Secretary of the $0 $0 for the Trust Birthdate: October 26, 1938 Federated Fund Complex; Executive Vice President, and Federated Investors Tower Secretary, and Director, Federated Investors, Inc.; 56 other 1001 Liberty Avenue Trustee, Federated Advisers, Federated Management, investment Pittsburgh, PA and Federated Research; Director, Federated Research companies in the EXECUTIVE VICE PRESIDENT Corp. and Federated Global Research Corp.; Director, Fund Complex and SECRETARY Federated Services Company; Director, Federated Securities Corp. Richard J. Thomas Treasurer of the Federated Fund Complex; Vice $0 $0 for the Trust Birthdate: June 17, 1954 President - Funds Financial Services Division, and Federated Investors Tower Federated Investors, Inc.; Formerly: various 56 other 1001 Liberty Avenue management positions within Funds Financial Services investment Pittsburgh, PA Division of Federated Investors, Inc. companies in the TREASURER Fund Complex Richard B. Fisher* President or Vice President of some of the Funds in $0 $0 for the Trust Birthdate: May 17, 1923 the Federated Fund Complex; Director or Trustee of and Federated Investors Tower some of the Funds in the Federated Fund Complex; 6 other investment 1001 Liberty Avenue Executive Vice President, Federated Investors, Inc.; companies in the Pittsburgh, PA Chairman and Director, Federated Securities Corp. Fund Complex VICE PRESIDENT William D. Dawson, III Chief Investment Officer of this Fund and various $0 $0 for the Trust Birthdate: March 3, 1949 other Funds in the Federated Fund Complex; Executive and Federated Investors Tower Vice President, Federated Investment Counseling, 41 other 1001 Liberty Avenue Federated Global Research Corp., Federated Advisers, investment Pittsburgh, PA Federated Management, Federated Research, and companies in the CHIEF INVESTMENT OFFICER Passport Research, Ltd.; Registered Representative, Fund Complex 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. Mary Jo Ochson Senior Portfolio Manager and Vice President of eight $0 $0 for the Birthdate: September 12, investment companies in the Federated Fund Complex; Trust and 1953 Senior Vice President, Federated Investment 7 other investment Federated Investors Tower Counseling, Federated Advisers, Federated Global companies 1001 Liberty Avenue Research Corp., Federated Management, Federated in the Fund Complex Pittsburgh, PA Research, Federated Research Corp. and Passport SENIOR PORTFOLIO Research, Ltd.; Formerly: Vice President, Federated MANAGER/VICE PRESIDENT Advisers, Federated Management, Federated Research, Federated Research Corp. , Passport Research, Ltd. and Federated Global Research Corp. Jeff A. Kozemchak Senior Portfolio Manager and Vice President of four $0 $0 for the Birthdate: January 15, 1960 investment companies in the Federated Fund Complex; Trust and Federated Investors Tower Vice President, Federated Investment Counseling, 3 other investment 1001 Liberty Avenue Federated Advisers, Federated Global Research Corp., companies Pittsburgh, PA Federated Management, Federated Research, Federated in the Fund Complex SENIOR PORTFOLIO Research Corp. and Passport Research, Ltd.; MANAGER/VICE PRESIDENT Formerly: Assistant Vice President and Investment Analyst, Federated Research Corp. and Passport Research, Ltd. ; Assistant Vice President, Federated Advisers, Federated Management and Federated Research.
## Mr. Donahue is the father of J. Christopher Donahue, Executive Vice President of the Trust. 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 Trust, 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 Trust. 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: Maximum Average Aggregate Daily Administrative Fee Net Assets of the Federated Funds - ------------------------------------------------------------------- 0.150 of 1% on the first $250 million 0.125 of 1% on the next $250 million 0.100 of 1% on the next $250 million 0.075 of 1% on assets in excess of $750 million The administrative fee received during any fiscal year shall be at least $125,000 per portfolio and $30,000 per each additional class of shares. Federated Services Company may voluntarily waive a portion of its fee and may reimburse the Fund for expenses. Federated Services Company also provides certain accounting and recordkeeping services with respect to the Fund's portfolio investments for a fee based on Fund assets plus out-of-pocket expenses. CUSTODIAN State Street Bank and Trust Company, Boston, Massachusetts, is custodian for the securities and cash of the Fund. Foreign instruments purchased by the Fund are held by foreign banks participating in a network coordinated by State Street Bank. TRANSFER AGENT AND DIVIDEND DISBURSING AGENT Federated Services Company, through its registered transfer agent subsidiary, Federated Shareholder Services Company, maintains all necessary shareholder records. The Fund pays the transfer agent a fee based on the size, type, and number of accounts and transactions made by shareholders. INDEPENDENT PUBLIC ACCOUNTANTS Arthur Andersen LLP is the independent public accountant for the Fund. FEES PAID BY THE FUND FOR SERVICES For the Year Ended October 31, 1998 1997 1996 - ----------------------------------------------------------------- Advisory Fee Earned $2,086,146 $1,666,725 $1,470,813 - ----------------------------------------------------------------- Advisory Fee Reduction $891,201 $737,288 $647,993 - ----------------------------------------------------------------- Brokerage Commissions $0 $0 $0 - ----------------------------------------------------------------- Administrative Fee $314,620 $251,689 $222,042 - ----------------------------------------------------------------- 12b-1 Fee - ----------------------------------------------------------------- Cash Series Shares $157,236 --- --- - ----------------------------------------------------------------- Shareholder Services Fee - ----------------------------------------------------------------- Institutional Shares $0 --- --- -------------------------------------------------------------- Institutional Service $634,747 --- --- Shares -------------------------------------------------------------- Cash Series Shares $56,705 --- --- -------------------------------------------------------------- Fees are allocated among Classes based on their pro rata share of Fund assets, except for marketing (Rule 12b-1) fees and shareholder services fees, which are borne only by the applicable Class of Shares. If the Fund's expenses are capped at a particular level, the cap does not include reimbursement to the Fund of any expenses incurred by shareholders who use the transfer agent's subaccounting facilities. How Does the Fund Measure Performance? The Fund may advertise Share performance by using the Securities and Exchange Commission's (SEC) standard method for calculating performance applicable to all mutual funds. The SEC also permits this standard performance information to be accompanied by non-standard performance information. Unless otherwise stated, any quoted Share performance reflects the effect of non-recurring charges, such as maximum sales charges, which, if excluded, would increase the total return and yield. The performance of Shares depends upon such variables as: portfolio quality; average portfolio maturity; type and value of portfolio securities; changes in interest rates; changes or differences in the Fund's or any class of Shares' expenses; and various other factors. Share performance fluctuates on a daily basis largely because net earnings and offering price per Share 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 since inception periods ended October 31, 1998. Yield, Effective Yield and Tax-Equivalent Yield given for the Seven-day period ended October 31, 1998.
Share Class Seven-Day Period 1 Year 5 Years Since Inception on August 23, 1995 Institutional Shares - ------------------------------------------------------------------------------------------------------------------------------------ Total Return -- 3.36% -- 3.39% - ------------------------------------------------------------------------------------------------------------------------------------ Yield 2.96% -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Effective Yield 3.00% -- -- -- Tax-Equivalent Yield 5.21% -- -- -- Share Class Seven-Day Period 1 Year 5 Years Since Inception on November 21, 1989 Institutional Service Shares - ------------------------------------------------------------------------------------------------------------------------------------ Total Return -- 3.15% 3.03% 3.43% - ------------------------------------------------------------------------------------------------------------------------------------ Yield 2.76% -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Effective Yield 2.79% -- -- -- Tax-Equivalent Yield 4.84% -- -- -- Share Class Seven-Day Period 1 Year 5 Years Since Inception on January 25, 1991 Cash Series Shares - ------------------------------------------------------------------------------------------------------------------------------------ Total Return -- 2.74% 2.62% 2.70% - ------------------------------------------------------------------------------------------------------------------------------------ Yield 2.36% -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Effective Yield 2.38% -- -- -- Tax-Equivalent Yield 4.13% -- -- --
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. The tax-equivalent yield of Shares is calculated similarly to the yield, but is adjusted to reflect the taxable yield that Shares would have had to earn to equal the actual yield, assuming a specific tax rate. 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. TAX EQUIVALENCY TABLE Set forth below is a sample of a tax-equivalency table that may be used in advertising and sales literature. This table is for illustrative purposes only and is not representative of past or future performance of the Fund. The interest earned by the tax-exempt securities owned by the Fund generally remains free from federal regular income tax and is often free from state and local taxes as well. However, some of the Fund's income may be subject to the federal alternative minimum tax and state and/or local taxes.
TAXABLE YIELD EQUIVALENT FOR 1998 STATE OF PENNSYLVANIA Combined Federal and State Income Tax Bracket: 17.80% 30.80% 33.80% 38.80% 42.40% - ----------------------------------------------------------------------------------------------------------------------------------- Joint Return $1-42,350 $42,351-102,300 $102,301-155,950 $155,951-278,450 OVER $278,450 - ----------------------------------------------------------------------------------------------------------------------------------- Single Return $1-25,350 $25,351-61,400 $61,401-128,100 $128,101-278,450 OVER $278,450 - ----------------------------------------------------------------------------------------------------------------------------------- Tax-Exempt Yield Taxable Yield Equivalent - ----------------------------------------------------------------------------------------------------------------------------------- 1.50% 1.82% 2.17% 2.27% 2.45% 2.60% - ----------------------------------------------------------------------------------------------------------------------------------- 2.00% 2.43% 2.89% 3.02% 3.27% 3.47% - ----------------------------------------------------------------------------------------------------------------------------------- 2.50% 3.04% 3.61% 3.78% 4.08% 4.34% - ----------------------------------------------------------------------------------------------------------------------------------- 3.00% 3.65% 4.34% 4.53% 4.90% 5.21% - ----------------------------------------------------------------------------------------------------------------------------------- 3.50% 4.26% 5.06% 5.29% 5.72% 6.08% - ----------------------------------------------------------------------------------------------------------------------------------- 4.00% 4.87% 5.78% 6.04% 6.54% 6.94% - ----------------------------------------------------------------------------------------------------------------------------------- 4.50% 5.47% 6.50% 6.80% 7.35% 7.81% - ----------------------------------------------------------------------------------------------------------------------------------- 5.00% 6.08% 7.23% 7.55% 8.17% 8.68% - ----------------------------------------------------------------------------------------------------------------------------------- 5.50% 6.69% 7.95% 8.31% 8.99% 9.55% - ----------------------------------------------------------------------------------------------------------------------------------- 6.00% 7.30% 8.67% 9.06% 9.80% 10.42% - -----------------------------------------------------------------------------------------------------------------------------------
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. 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., 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 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, 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, 1997, Federated managed 11 bond funds with approximately $2.1 billion in assets and 22 money market funds with approximately $10.9 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 tax-exempt 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 27 years' experience. As of December 31, 1997, Federated managed 29 equity funds totaling approximately $11.7 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, 1997, Federated managed 11 money market funds and 16 bond funds with assets approximating $17.1 billion and $5.6 billion, respectively. Federated's corporate bond decision making--based on intensive, diligent credit analysis--is backed by over 22 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 $200 billion. Government Funds In the government sector, as of December 31, 1997, Federated manages 9 mortgage- backed, 6 government/agency and 18 government money market mutual funds, with assets approximating $5.9 billion, $1.5 billion and $35 billion, respectively. Federated trades approximately $400 million in U.S. government and mortgage- backed securities daily and places approximately $23 billion in repurchase agreements each day. Federated introduced the first U.S. government fund to invest in U.S. government bond securities in 1969. Federated has been a major force in the short- and intermediate-term government markets since 1982 and currently manages approximately $36 billion in government funds within these maturity ranges. 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, 1997, Federated managed more than $63.1 billion in assets across 51 money market funds, including 18 government, 11 prime and 22 municipal with assets approximating $35 billion, $17.1 billion and $10.9 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 $4 trillion to the more than 6,700 funds available, according to the Investment Company Institute. Federated distributes mutual funds through its subsidiaries for a variety of investment purposes. Specific markets include: FEDERATED CLIENTS OVERVIEW 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. Investment Ratings APPENDIX STANDARD & POOR'S SHORT-TERM MUNICIPAL OBLIGATION RATINGS A Standard & Poor's (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-1+, 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 rated 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. MOODY'S 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 SERVICE, L.P. 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. Addresses PENNSYLVANIA MUNICIPAL CASH TRUST Institutional Shares Institutional Service Shares Cash Series Shares Federated Investors Funds 5800 Corporate Drive Pittsburgh, PA 15237-7000 Distributor Federated Securities Corp. Federated Investors Tower 1001 Liberty Avenue, Pittsburgh, PA 15222-3779 Investment Adviser Federated Management Federated Investors Tower 1001 Liberty Avenue, Pittsburgh, PA 15222-3779 Custodian State Street Bank and Trust Company P.O. Box 8600 Boston, MA 02266-8600 Transfer Agent and Dividend Disbursing Agent Federated Shareholder Services Company P.O. Box 8600 Boston, MA 02266-8600 Independent Public Accountants Arthur Andersen LLP 225 Franklin Street Boston, MA 02110-2812 PROSPECTUS Tennessee Municipal Cash Trust A Portfolio of Federated Municipal Trust INSTITUTIONAL SHARES A money market mutual fund seeking to provide current income exempt from federal regular income tax and the personal income taxes imposed by the State of Tennessee. 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. December 31, 1998 CONTENTS Risk/Return Summary 1 What are the Fund's Fees and Expenses? 2 What are the Fund's Investment Strategies? 3 What are the Principal Securities in Which the Fund Invests? 3 What are the Specific Risks of Investing in the Fund? 4 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 9 Report of Independent Public Accountants 20 Risk/Return Summary WHAT IS THE FUND'S INVESTMENT OBJECTIVE? The Fund is a money market fund which seeks to maintain a stable net asset value of $1.00. The Fund's investment objective is current income exempt from federal regular income tax and the personal income taxes imposed by the State of Tennessee consistent with stability of principal and liquidity. While there is no assurance that the Fund will achieve its investment objective, its 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 tax-exempt securities so that the Fund's annual interest income is exempt from federal regular income tax and the personal income taxes imposed by the State of Tennessee. Interest from the Fund's investments may be subject to the federal alternative minimum tax for individuals and corporations. WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND? Because the Fund may invest a significant portion of its assets in securities of a single issuer, an investment in the Fund may involve additional risks compared to a fully diversified money market 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] - See Appendix A-5 Historically, the Fund has maintained a constant $1.00 net asset value per share. The bar chart shows the variability of the Fund's Institutional Shares Class on a yearly basis. The Fund's Institutional Shares are not sold subject to a sales charge (load). Hence, the total returns displayed above are based upon the net asset value. The Fund's Institutional Shares year-to-date total return as of the most recent calendar quarter of September 30, 1998 was 2.53%. Within the period shown in the Chart, the Fund's Institutional Shares highest quarterly return was 0.91% (quarter ended June 30, 1997). Its lowest quarterly return was 0.80% (quarter ended March 31, 1997). The Fund's Institutional Shares Seven-Day Net Yield as of 12/31/97 was 3.83%. The following table represents the Fund's Institutional Shares Average Annual Total Return through 12/31/97. CALENDAR PERIOD FUND 1 Year 3.50% Start of Performance 1 3.53% 1 The Fund's Shares start of performance date was May 22, 1996. Investors may call the Fund at 1-800-341-7400 to acquire the current Seven- Day Net Yield. While 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? TENNESSEE MUNICIPAL CASH TRUST FEES AND EXPENSES This table describes the fees and expenses that you may pay when you buy, hold and redeem shares of the Fund's Institutional Shares.
SHAREHOLDER FEES 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 and Reimbursements) 1 Expenses That are Deducted From Fund Assets (as a percentage of average net assets) Management Fee 2 0.50% Distribution (12b-1) Fee None Shareholder Services Fee 3 0.25% Other Expenses 4 0.58% Total Annual Fund Operating Expense 1.33% 1 Although not contractually obligated to do so, the adviser waived and reimbursed and the shareholder services provider waived certain amounts. These are shown below along with the net expenses the Fund actually paid for the fiscal year ended October 31, 1998. Waiver of Fund Expenses 0.98% Total Actual Annual Operating Expenses after waivers and reimbursements) 0.35% 2 The adviser voluntarily waived the management fee. The adviser can terminate this voluntary waiver at any time. There was no management fee paid by the Fund (after the voluntary waiver) for the year ended October 31, 1998. 3 The shareholder services fee has been voluntarily waived. This voluntary waiver can be terminated at any time. There was no shareholder services fee paid by the Fund (after the voluntary waiver) for the fiscal year ended October 31, 1998. 4 The adviser voluntarily reimbursed certain operating expenses of the Fund. The adviser can terminate this voluntary reimbursement at any time. Total other expenses paid by the Fund (after the voluntary reimbursement) was 0.35% for the year ended October 31, 1998.
EXAMPLE The following Example is intended to help you compare the cost of investing in the Fund's Institutional Shares with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund's Institutional 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 Tennessee Municipal Cash Trust's Institutional Shares' operating expenses are BEFORE WAIVERS as shown above and remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be: 1 YEAR 3 YEARS 5 YEARS 10 YEARS Expenses assuming no redemption $135 $421 $729 $1,601 What are the Fund's Investment Strategies? The Fund invests in a portfolio of high-quality tax-exempt securities maturing in 13 months or less. The average maturity of the Fund's portfolio, computed on a dollar-weighted basis, will be 90 days or less. The Fund's Adviser performs a fundamental credit analysis to develop an approved list of issuers and securities that meet the Adviser's minimum credit standards. The Adviser targets an average portfolio maturity based upon its interest rate outlook and the tax-exempt securities available. The Adviser structures the portfolio by combining variable rate demand instruments and municipal notes. Depending on the supply of tax-exempt securities, the Adviser generally shortens the portfolio's maturity when it expects interest rates to rise and extends the maturity when it expects interest rates to fall. TEMPORARY DEFENSIVE INVESTMENTS During adverse market conditions the Fund may temporarily depart from its principal investment strategies by investing in securities subject to federal regular income tax and the personal income tax imposed by the State of Tennessee. Temporary investments will be of comparable quality to other securities in which the Fund invests. This may cause the Fund to give up greater investment returns to maintain the safety of principal. This also may cause the Fund to receive and distribute taxable income to investors. What are the Principal Securities in Which the Fund Invests? TAX-EXEMPT SECURITIES Tax-exempt securities are fixed income securities that pay interest exempt from regular federal income taxes. States, counties, cities and other political subdivisions and authorities typically issue tax-exempt securities. Tax-exempt securities are generally differentiated by their source of repayment. FIXED INCOME SECURITIES Fixed income 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. VARIABLE RATE DEMAND INSTRUMENTS Variable rate demand instruments are tax-exempt securities that require the issuer or a third party, such as a dealer or bank, to repurchase the security for its face value upon demand. The securities also bear interest at a variable rate intended to cause the securities to trade at their face value. The Fund treats demand instruments as short-term securities, even though their stated maturity may extend beyond 13 months. MUNICIPAL NOTES Municipal notes are short-term tax-exempt securities. Many municipalities issue such notes to fund their current operations before collecting taxes or other municipal revenues. Municipalities may also issue notes to fund capital projects before to issuing long-term bonds. The issuers typically repay the notes at the end of their fiscal year, either with taxes, other revenues or proceeds from newly issued notes or bonds. INVESTMENT 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 rating services or be of comparable quality to securities having such ratings. CREDIT ENHANCEMENT Credit enhancement consists of an arrangement in which a company agrees to pay amounts due on a fixed income security if the issuer defaults. In some cases the company providing credit enhancement makes all payments directly to the security holders and receives reimbursement from the issuer. Normally, the credit enhancer has greater financial resources and liquidity than the issuer. For this reason, the Adviser usually evaluates the credit risk of a fixed income security based solely upon its credit enhancement. What are the Specific Risks of Investing in the Fund? Although there are many factors which may affect an investment in the Fund, the principal risks of investing in a tax-exempt money market fund are described below. CREDIT RISK Credit risk is the possibility that an issuer or a credit enhancer will default (fails to repay interest and principal when due). If an issuer or credit enhancer defaults, the Fund will lose money. Money market funds try to minimize this risk by purchasing higher quality securities. Many fixed income securities receive credit ratings from companies such as Standard & Poor's and Moody's Investor Services. Fixed income securities receive different credit ratings depending on the rating company's assessment of the likelihood of default by the issuer. The lower the credit rating, the greater the credit risk. If the security is unrated, greater reliance is placed on the Adviser's credit assessment. 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. SECTOR RISK Most of the Fund's securities will be invested in issuers located in Tennessee. In addition, a substantial part of the Fund's portfolio may be comprised of tax-exempt securities issued or credit enhanced by companies in similar businesses or with other similar characteristics. As a result, the Fund will be more susceptible to any economic, business, political, or other developments which generally affect these issuers. 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 determined net asset value (NAV). The Fund does not charge a sales charge. NAV is determined at 12:00 noon and 1:00 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 investment 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 offers two share classes: Institutional Shares and Institutional Service Shares each representing interests in a single portfolio of securities. This prospectus relates only to Institutional Shares. Each share class has different expenses, which affect their performance. Contact your investment professional or call 1-800-341-7400 for more information concerning the other class. The Fund's distributor markets the Shares described in this prospectus to institutions acting in an agency or fiduciary capacity or to individuals directly or through investment professionals. The Fund may not be a suitable investment for retirement plans or for non-Tennessee taxpayers because it invests in Tennessee tax-exempt securities. The Distributor and its affiliates may pay out of their assets other 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 1:00 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 on the day 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 CLEARINGHOUSE (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 12:00 noon (Eastern time), your redemption will be wired to you the same day. You will not receive that day's dividend. If you call after 12:00 noon (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. You will receive a redemption amount based on the NAV 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 30 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 CONFIRMATIONS AND ACCOUNT STATEMENTS You will receive confirmation of purchases and redemptions. In addition, 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 the 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, 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. It is anticipated that Fund distributions will be primarily dividends that are exempt from federal income tax, although a portion of the Fund's dividends may not be exempt. Dividends may be subject to state and local taxes, although the Fund's dividends will be exempt from Tennessee state personal income tax to the extent they are derived from interest on obligations exempt from Tennessee personal income taxes. Capital gains and non-exempt dividends are taxable whether paid in cash or reinvested in the Fund. 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 Management. 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 and/or provide administrative services to more than 300 mutual funds and private accounts, which totaled over $120 billion in assets as of December 31, 1997. Federated was established in 1955 and is one of the largest mutual fund investment managers in the United States with more than 2,000 employees. Over 4,000 investment professionals make Federated Funds available to their customers. ADVISORY FEES The Adviser receives an annual investment advisory fee of 0.50% 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 affect 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-Institutional Shares (For a share outstanding throughout each period) Reference is made to the Report of Independent Public Accountants on page 20.
YEAR ENDED OCTOBER 31 1998 1997 1996 1 NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 INCOME FROM INVESTMENT OPERATIONS: Net investment income 0.03 0.03 0.01 LESS DISTRIBUTIONS: Distributions from net investment income (0.03) (0.03) (0.01) NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 TOTAL RETURN 2 3.42% 3.47% 1.59% RATIOS TO AVERAGE NET ASSETS: Expenses 0.35% 0.35% 0.10% 4 Net investment income 3.35% 3.40% 3.57% 4 Expense waiver/reimbursement 3 0.98% 1.11% 1.62% 4 SUPPLEMENTAL DATA: Net assets, end of period (000 omitted) $39,193 $23,048 $17,824
1 Reflects operations for the period from May 22, 1996 (date of initial public investment) to October 31, 1996. 2 Based on net asset value, which does not reflect the sales charge or contingent deferred sales charge, if applicable. 3 This voluntary expense decrease is reflected in both the expense and net investment income ratios shown above. 4 Computed on an annualized basis. See Notes which are an integral part of the Financial Statements Portfolio of Investments October 31, 1998
PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-100.0% 1 TENNESSEE-100.0% $ 2,710,000 Benton County TN IDB, (Series 1996) Weekly VRDNs (Jones Plastic and Engineering Corp.)/(National City Bank, Kentucky LOC) $ 2,710,000 7,000,000 Chattanooga, TN HEFA Weekly VRDNs (Sisken Hospital)/ (Nationsbank of Tennessee LOC) 7,000,000 1,900,000 Dickson County, TN IDB, (Series 1996) Weekly VRDNs (Tennessee Bun Company, LLC Project)/(PNC Bank, N.A. LOC) 1,900,000 2,700,000 Franklin County, TN IDB, IDRB (Series 1997) Weekly VRDNs (Hi-Tech)/(Regions Bank, Alabama LOC) 2,700,000 1,430,000 Greenfield, TN IDB, (Series 1995) Weekly VRDNs (Plastic Products Co. Project)/(Norwest Bank Minnesota, N.A. LOC) 1,430,000 1,500,000 Hamilton County, TN IDB, (Series 1987) Weekly VRDNs (Seaboard Farms Project)/(SunTrust Bank, Atlanta LOC) 1,500,000 1,500,000 Hamilton County, TN, 5.00% Bonds, 5/1/1999 1,509,384 4,200,000 Hawkins County, TN IDB, (Series 1995) Weekly VRDNs (Sekisui Ta Industries, Inc. Project)/(Bank of Tokyo-Mitsubishi Ltd. LOC) 4,200,000 2,900,000 Hendersonville, TN IDB, (Series 1996) Weekly VRDNs (Betty Machine Co. Project)/(First Union National Bank, Charlotte, NC LOC) 2,900,000 1,300,000 Jackson, TN IDB, Solid Waste Facility Bonds (Series 1995) Weekly VRDNs (Florida Steel Corp.)/(Nationsbank, N.A., Charlotte LOC) 1,300,000 3,500,000 Johnson City, TN Health & Education Facilities Board, Adjustable Tender Acquisition Bonds (Series 1998A) Weekly VRDNs (Johnson City Medical Center Hospital)/(MBIA INS)/ (Credit Suisse First Boston LIQ) 3,500,000 800,000 Knox County, TN, 4.30% Bonds, 3/1/1999 801,397 2,000,000 Knox County, TN, GO Refunding Bonds (Series 1998), 3.65% Bonds, 3/1/1999 2,000,000 2,000,000 Maury County, TN HEFA, (Series 1996E) Weekly VRDNs (Southern Healthcare Systems, Inc.)/(Bank One, Texas N.A. LOC) 2,000,000 1,979,000 McMinn County, TN IDB, Industrial Development Bonds (Series 1995) Weekly VRDNs (Creative Fabrication Corp.)/(NBD Bank, Michigan LOC) 1,979,000 5,000,000 Memphis, TN Center City Revenue Finance Corp., (Series 1996A) Weekly VRDNs (South Bluffs)/(National Bank of Commerce, Memphis, TN LOC) 5,000,000 1,000,000 Memphis, TN, General Improvement Refunding Bonds, (Series 1995A) Weekly VRDNs (Westdeutsche Landesbank Girozentrale LOC) 1,000,000 2,000,000 Metropolitan Government Nashville & Davidson County, TN HEFA, Revenue Bonds (Series 1985A), 3.75% TOBs (Vanderbilt University), Optional Tender 1/15/1999 2,000,000 1,500,000 Metropolitan Government Nashville & Davidson County, TN, Series B, 3.60% Bonds (FGIC INS), 1/1/1999 1,500,000 2,000,000 Montgomery Co., TN Public Building Authority, Pooled Financing Revenue Bonds (Series 1996) Weekly VRDNs (Montgomery County Loan)/ (Nationsbank, N.A., Charlotte LOC) 2,000,000 3,800,000 Oak Ridge, TN IDB, Solid Waste Facility Bonds (Series 1996) Weekly VRDNs (M4 Environmental L.P. Project)/(SunTrust Bank, Atlanta LOC) 3,800,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-100.0% 1 TENNESSEE-CONTINUED $ 6,200,000 Roane, TN IDB, (Series 1982) Monthly VRDNs (Fortafil Fibers, Inc. Project)/(ABN AMRO Bank N.V., Amsterdam LOC) $ 6,200,000 2,000,000 Sevier County, TN Public Building Authority, Local Government Improvement Bonds, (Series II-G-2) Weekly VRDNs (Knoxville, TN)/(AMBAC INS)/ (KBC Bank N.V., Brussels LIQ) 2,000,000 1,200,000 Sevier County, TN Public Building Authority, Local Government Public Improvement Bonds, (Series II-G-3) Weekly VRDNs (Maryville, TN)/(AMBAC INS)/(KBC Bank N.V., Brussels LIQ) 1,200,000 2,600,000 Shelby County, TN Health Education & Housing Facilities Board, Multifamily Housing Revenue Bonds (Series 1988) Weekly VRDNs (Arbor Lake Project)/(PNC Bank, N.A. LOC) 2,600,000 1,165,000 Shelby County, TN, (Series A), 4.25% Bonds, 8/1/1999 1,171,783 1,300,000 Sumner County, TN IDB, (Series 1998-0), 4.05% BANs, 6/15/ 1999 1,302,013 2,100,000 Union City, TN IDB, (Series 1995) Weekly VRDNs (Kohler Co.)/ (Wachovia Bank of NC, N.A., Winston-Salem LOC) 2,100,000 2,500,000 Union County, TN IDB, (Series 1995) Weekly VRDNs (Cooper Container Corporation Project)/(SunTrust Bank, Nashville LOC) 2,500,000 Total Investments (at amortized cost) 2 $ 71,803,577
Securities that are subject to Alternative Minimum Tax represent 48.5% of the portfolio as calculated based upon total market value. 1 The Fund may only invest in securities rated in one of the two highest short-term rating categories by nationally recognized statistical rating organizations ("NRSROs") or unrated securities of comparable quality. 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, MIG-1 or MIG-2 by Moody's Investors Service, Inc., or F-1+, F-1, or F-2 by Fitch IBCA, Inc. are all considered rated in one of the two highest short-term rating categories. Securities rated in the highest short-term rating category (and unrated securities of comparable quality) are identified as First Tier securities. Securities rated in the second highest short-term rating category (and unrated securities of comparable quality) are identified as Second Tier securities. The Fund follows applicable regulations in determining whether a security is rated and whether a security rated by multiple NRSROs in different rating categories should be identified as a First or Second Tier security. At October 31, 1998, the portfolio securities were rated as follows: Tier Rating Based on Total Market Value (Unaudited) FIRST TIER SECOND TIER 100.00% 0.00% 2 Also represents cost for federal tax purposes. Note: The categories of investments are shown as a percentage of net assets ($71,785,507) at October 31, 1998. The following acronyms are used throughout this portfolio: AMBAC -American Municipal Bond Assurance Corporation BANs -Bond Anticipation Notes FGIC -Financial Guaranty Insurance Company GO -General Obligation HEFA -Health and Education Facilities Authority IDB -Industrial Development Bond IDRB -Industrial Development Revenue Bond INS -Insured LIQ -Liquidity Agreement LLC -Limited Liability Corporation LOC -Letter of Credit MBIA -Municipal Bond Investors Assurance TOBs -Tender Option Bonds VRDNs -Variable Rate Demand Notes See Notes which are an integral part of the Financial Statements Statement of Assets and Liabilities October 31, 1998
ASSETS: Total investments in securities, at amortized cost and value $ 71,803,577 Cash 245,819 Income receivable 340,683 Receivable for shares sold 43,304 Prepaid expenses 1,218 Deferred organizational costs 15,512 Total assets 72,450,113 LIABILITIES: Payable for shares redeemed $ 561,964 Income distribution payable 78,854 Accrued expenses 23,788 Total liabilities 664,606 Net Assets for 71,785,507 shares outstanding $ 71,785,507 NET ASSET VALUE, OFFERING PRICE, AND REDEMPTION PROCEEDS PER SHARE: INSTITUTIONAL SHARES: $39,192,552 / 39,192,552 shares outstanding $1.00 INSTITUTIONAL SERVICE SHARES: $32,592,955 / 32,592,955 shares outstanding $1.00
See Notes which are an integral part of the Financial Statements Statement of Operations Year Ended October 31, 1998
INVESTMENT INCOME: Interest $ 2,034,356 EXPENSES: Investment advisory fee $ 274,883 Administrative personnel and services fee 155,001 Custodian fees 2,212 Transfer and dividend disbursing agent fees and expenses 42,633 Directors'/Trustees' fees 1,088 Auditing fees 10,817 Legal fees 15,849 Portfolio accounting fees 53,913 Shareholder services fee-Institutional Shares 66,700 Shareholder services fee-Institutional Service Shares 70,754 Share registration costs 21,853 Printing and postage 7,838 Insurance premiums 6,183 Miscellaneous 6,849 Total expenses 736,573 WAIVERS AND REIMBURSEMENTS: Waiver of investment advisory fee $ (274,883) Waiver of shareholder services fee-Institutional Shares (66,700) Reimbursement of other operating expenses (129,398) Total waivers and reimbursements (470,981) Net expenses 265,592 Net investment income $ 1,768,764
See Notes which are an integral part of the Financial Statements Statement of Changes in Net Assets
YEAR ENDED OCTOBER 31 1998 1997 INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income $ 1,768,764 $ 1,437,481 DISTRIBUTIONS TO SHAREHOLDERS: Distributions from net investment income Institutional Shares (895,346) (613,693) Institutional Service Shares (873,418) (823,788) Change in net assets resulting from distributions to shareholders (1,768,764) (1,437,481) SHARE TRANSACTIONS: Proceeds from sale of shares 236,176,586 172,127,656 Net asset value of shares issued to shareholders in payment of distributions declared 704,085 603,094 Cost of shares redeemed (212,767,088) (172,706,532) Change in net assets resulting from share transactions 24,113,583 24,218 Change in net assets 24,113,583 24,218 NET ASSETS: Beginning of period 47,671,924 47,647,706 End of period $ 71,785,507 $ 47,671,924
See Notes which are an integral part of the Financial Statements Notes to Financial Statements October 31, 1998 ORGANIZATION Federated Municipal Trust (the "Trust") is registered under the Investment Company Act of 1940, as amended (the "Act") as an open-end, management investment company. The Trust consists of 17 portfolios. The financial statements included herein are only those of Tennessee Municipal Cash Trust (the "Fund"). The financial statements of the other portfolios are presented separately. The assets of each portfolio are segregated and a shareholder's interest is limited to the portfolio in which shares are held. The Fund offers two classes of shares: Institutional Shares and Institutional Service Shares. The investment objective of the Fund is current income exempt from federal regular income tax and the personal income tax imposed by the State of Tennessee 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. 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) for each class of shares. At October 31, 1998, capital paid-in aggregated $71,785,507. Transactions in shares were as follows:
PERIOD ENDED OCTOBER 31 1998 1997 INSTITUTIONAL SHARES: Shares sold 141,723,370 87,914,045 Shares issued to shareholders in payment of distributions declared 31,344 6,745 Shares redeemed (125,610,011) (82,696,744) Net change resulting from Institutional Share transactions 16,144,703 5,224,046 PERIOD ENDED OCTOBER 31 1998 1997 INSTITUTIONAL SERVICE SHARES: Shares sold 94,453,216 84,213,611 Shares issued to shareholders in payment of distributions declared 672,741 596,349 Shares redeemed (87,157,077) (90,009,788) Net change resulting from Institutional Service Share transactions 7,968,880 (5,199,828) Net change resulting from share transactions 24,113,583 24,218
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES INVESTMENT ADVISORY FEE Federated Management, the Fund's investment adviser (the "Adviser"), receives for its services an annual investment advisory fee equal to 0.50% of the Fund's average daily net assets. The Adviser may voluntarily choose to waive any portion of its fee and/or reimburse certain operating expenses of the Fund. The Adviser can modify or terminate this voluntary waiver and/or reimbursement 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 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 ("FSS"), the Fund will pay FSS up to 0.25% of average daily net assets of the Fund shares for the period. The fee paid to FSS is used to finance certain services for shareholders and to maintain shareholder accounts. FSS may voluntarily choose to waive any portion of its fee. FSS can modify or terminate this voluntary waiver at any time at its sole discretion. TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES FServ, through its subsidiary, Federated Shareholder Services Company ("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. INTERFUND TRANSACTIONS During the period ended October 31, 1998, the Fund engaged in purchase and sale transactions with funds that have a common investment adviser (or affiliated investment advisers), common Directors/Trustees, and/or common Officers. These purchase and sale transactions were made at current market value pursuant to Rule 17a-7 under the Act amounting to $129,215,000 and $115,090,000, respectively. ORGANIZATIONAL EXPENSES Organizational expenses of $24,645 were borne initially by the Adviser. The Fund has reimbursed the Adviser for these expenses. These expense have been deferred and are being amortized over the five-year period following the Fund's effective date. GENERAL Certain of the Officers and Trustees of the Trust are Officers and Directors or Trustees of the above companies. CONCENTRATION OF CREDIT RISK Since the Fund invests a substantial portion of its assets in issuers located in one state, it will be more susceptible to factors adversely affecting issuers of that state than would be a comparable tax-exempt mutual fund that invests nationally. In order to reduce the credit risk associated with such factors, at October 31, 1998, 87.8% of the securities in the portfolio of investments are backed by letters of credit or bond insurance of various financial institutions and financial guaranty assurance agencies. The percentage of investments insured by or supported (backed) by a letter of credit from any one institution or agency did not exceed 14.3% of total investments. 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 BOARD OF TRUSTEES OF FEDERATED MUNICIPAL TRUST AND SHAREHOLDERS OF TENNESSEE MUNICIAPL CASH TRUST: We have audited the accompanying statement of assets and liabilities of Tennessee Municipal Cash Trust (an investment portfolio of Federated Municipal Trust, a Massachusetts business trust), including the schedule of portfolio investments, as of October 31, 1998, the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for the periods presented. These financial statements and financial highlights are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the 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 October 31, 1998, by correspondence with the custodian. 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 Tennessee Municipal Cash Trust (an investment portfolio of Federated Municipal Trust) as of October 31, 1998, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and its financial highlights for the periods presented, in conformity with generally accepted accounting principles. Arthur Andersen LLP Boston, Massachusetts December 23, 1998 [Graphic] PROSPECTUS Tennessee Municipal Cash Trust A Portfolio of Federated Municipal Trust INSTITUTIONAL SHARES December 31, 1998 A Statement of Additional Information (SAI) dated December 31, 1998, is incorporated by reference into this prospectus. To obtain the SAI 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] Tennessee Municipal 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. 811-5911 Cusip 314229642 G01682-01 (12/98) [Graphic] PROSPECTUS Tennessee Municipal Cash Trust A Portfolio of Federated Municipal Trust INSTITUTIONAL SERVICE SHARES A money market mutual fund seeking to provide current income exempt from federal regular income tax and the personal income taxes imposed by the State of Tennessee. 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. December 31, 1998 CONTENTS Risk/Return Summary 1 What are the Fund's Fees and Expenses? 2 What are the Fund's Investment Strategies? 3 What are the Principal Securities in Which the Fund Invests? 3 What are the Specific Risks of Investing in the Fund? 4 What do Shares Cost? 4 How is the Fund Sold? 5 How to Purchase Shares 5 SHAREHOLDER FEES 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 and Reimbursements) 2 Expenses That Are Deducted From Fund Assets (as a percentage of average net assets) Management Fee2 0.50% Distribution (12b-1) Fee None Shareholder Services Fee 0.25% Other Expenses3 0.58% Total Annual Fund Operating Expenses 1.33% 1 Although not contractually obligated to do so, the adviser waived and reimbursed certain amounts. These are shown below along with the net expenses the Fund actually paid for the fiscal year ended October 31, 1998. Waiver of Fund Expenses 0.73% Total Actual Annual Operating Expenses (after waivers and reimbursements) 0.60% 2 The adviser voluntarily waived the management fee. The adviser can terminate this voluntary waiver at any time. There was no management fee paid by the Fund (after the voluntary waiver) for the year ended October 31, 1998. 3 The adviser voluntarily reimbursed certain operating expenses of the Fund. Total other expenes paid by the Fund (after voluntary reimbursement) was 0.60% for the year ended October 31, 1998. EXAMPLE The following Example is intended to help you compare the cost of investing in the Fund's Institutional Service Shares with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund's Institutional Service 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 Institutional Service Shares' operating expenses are BEFORE WAIVERS as estimated above and remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be: 1 YEAR 3 YEARS 5 YEARS 10 YEARS Expenses assuming no redemption $135 $421 $729 $1,601 What are the Fund's Investment Strategies? The Fund invests in a portfolio of high-quality tax-exempt securities maturing in 13 months or less. The average maturity of the Fund's portfolio, computed on a dollar-weighted basis, will be 90 days or less. The Fund's Adviser performs a fundamental credit analysis to develop an approved list of issuers and securities that meet the Adviser's minimum credit standards. The Adviser targets an average portfolio maturity based upon its interest rate outlook and the tax-exempt securities available. The Adviser structures the portfolio by combining variable rate demand instruments and municipal notes. Depending on the supply of tax-exempt securities, the Adviser generally shortens the portfolio's maturity when it expects interest rates to rise and extends the maturity when it expects interest rates to fall. TEMPORARY DEFENSIVE INVESTMENTS During adverse market conditions the Fund may temporarily depart from its principal investment strategies by investing in securities subject to federal regular income tax and the personal income tax imposed by the State of Tennessee. Temporary investments will be of comparable quality to other securities in which the Fund invests. This may cause the Fund to give up greater investment returns to maintain the safety of principal. This also may cause the Fund to receive and distribute taxable income to investors. What are the Principal Securities in Which the Fund Invests? TAX-EXEMPT SECURITIES Tax-exempt securities are fixed income securities that pay interest exempt from regular federal income taxes. States, counties, cities and other political subdivisions and authorities typically issue tax-exempt securities. Tax-exempt securities are generally differentiated by their source of repayment. FIXED INCOME SECURITIES Fixed income 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. VARIABLE RATE DEMAND INSTRUMENTS Variable rate demand instruments are tax-exempt securities that require the issuer or a third party, such as a dealer or bank, to repurchase the security for its face value upon demand. The securities also bear interest at a variable rate intended to cause the securities to trade at their face value. The Fund treats demand instruments as short-term securities, even though their stated maturity may extend beyond 13 months. MUNICIPAL NOTES Municipal notes are short-term tax-exempt securities. Many municipalities issue such notes to fund their current operations before collecting taxes or other municipal revenues. Municipalities may also issue notes to fund capital projects prior to issuing long-term bonds. The issuers typically repay the notes at the end of their fiscal year, either with taxes, other revenues or proceeds from newly issued notes or bonds. INVESTMENT 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 rating services or be of comparable quality to securities having such ratings. CREDIT ENHANCEMENT Credit enhancement consists of an arrangement in which a company agrees to pay amounts due on a fixed income security if the issuer defaults. In some cases the company providing credit enhancement makes all payments directly to the security holders and receives reimbursement from the issuer. Normally, the credit enhancer has greater financial resources and liquidity than the issuer. For this reason, the Adviser usually evaluates the credit risk of a fixed income security based solely upon its credit enhancement. What are the Specific Risks of Investing in the Fund? Although there are many factors which may affect an investment in the Fund, the principal risks of investing in a tax-exempt money market fund are described below. CREDIT RISK Credit risk is the possibility that an issuer or a credit enhancer will default (fails to repay interest and principal when due). If an issuer or credit enhancer defaults, the Fund will lose money. Money market funds try to minimize this risk by purchasing higher quality securities. Many fixed income securities receive credit ratings from companies such as Standard & Poor's and Moody's Investor Services. Fixed income securities receive different credit ratings depending on the rating company's assessment of the likelihood of default by the issuer. The lower the credit rating, the greater the credit risk. If the security is unrated, greater reliance is placed on the Adviser's credit assessment. 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. SECTOR RISK Most of the Fund's securities will be invested in issuers located in Tennessee. In addition, a substantial part of the Fund's portfolio may be comprised of tax-exempt securities issued or credit enhanced by companies in similar businesses or with other similar characteristics. As a result, the Fund will be more susceptible to any economic, business, political, or other developments which generally affect these issuers. 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 determined net asset value (NAV). The Fund does not charge a sales charge. NAV is determined at 12:00 noon and 1:00 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 $10,000. There is no required minimum subsequent investment amount. An account may be opened with a smaller amount as long as the $10,000 minimum is reached within 90 days. An institutional investor's minimum investment 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 offers two share classes: Institutional Shares and Institutional Service Shares each representing interests in a single portfolio of securities. This prospectus relates only to Institutional Service Shares. Each share class has different expenses, which affect their performance. Contact your investment professional or call 1-800-341-7400 for more information concerning the other class. The Fund's distributor markets the Shares described in this prospectus to institutions acting in an agency or fiduciary capacity or to individuals directly or through investment professionals. The Fund may not be a suitable investment for retirement plans or for non-Tennessee taxpayers because it invests in Tennessee tax-exempt securities. The Distributor and its affiliates may pay out of their assets other 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 1:00 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 on the day 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 SYSTEMATIC INVESTMENT PROGRAM Once you have opened an account, you may automatically purchase additional Shares on a regular basis by completing the Systematic Investment Program (SIP) section of the New Account Form or by contacting the Fund or your investment professional. The minimum investment amount for SIPs is $50. BY AUTOMATED CLEARINGHOUSE (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 12:00 noon (Eastern time), your redemption will be wired to you the same day. You will not receive that day's dividends. If you call after 12:00 noon (Eastern time), your redemption will be wired to you the following business day. You will receive that day's dividend. Under limited circumstances, arrangements may be made with the Distributor for same-day payment of redemption proceeds, without that day's dividend, for redemption requests received before 2:00 p.m. (Eastern time). 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 30 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. SYSTEMATIC WITHDRAWAL PROGRAM You may automatically redeem Shares in a minimum amount of $100 on a regular basis. Complete the appropriate section of the New Account Form or an Account Service Options Form or contact your investment professional or the Fund. Your account value must meet the minimum initial investment amount at the time the program is established. This program may reduce, and eventually deplete, your account. Payments should not be considered yield or income. CHECKWRITING You may request checks to redeem your Fund Shares. Your account will continue to receive the daily dividend declared on the Shares being redeemed until a check is presented for payment. DEBIT CARD You may request a debit card account that allows you to redeem Shares. There is an annual fee for this service that the Fund will automatically deduct from your account. 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 CONFIRMATIONS AND ACCOUNT STATEMENTS You will receive confirmation of purchases and redemptions (except for systematic transactions). In addition, you will receive periodic statements reporting all account activity, including systematic transactions, 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 the 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, 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. It is anticipated that Fund distributions will be primarily dividends that are exempt from federal income tax, although a portion of the Fund's dividends may not be exempt. Dividends may be subject to state and local taxes, although the Fund's dividends will be exempt from Tennessee state personal income tax to the extent they are derived from interest on obligations exempt from Tennessee personal income taxes. Capital gains and non-exempt dividends are taxable whether paid in cash or reinvested in the Fund. 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 Management. 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 and/or provide administrative services to more than 300 mutual funds and private accounts, which totaled over $120 billion in assets as of December 31, 1997. Federated was established in 1955 and is one of the largest mutual fund investment managers in the United States with more than 2,000 employees. Over 4,000 investment professionals make Federated Funds available to their customers. ADVISORY FEES The Adviser receives an annual investment advisory fee of 0.50% 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 affect 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-Institutional Service Shares (For a share outstanding throughout each period) Reference is made to the Report of Independent Public Accountants on page 21.
YEAR ENDED OCTOBER 31 1998 1997 1996 1 NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 INCOME FROM INVESTMENT OPERATIONS: Net investment income 0.03 0.03 0.01 LESS DISTRIBUTIONS: Distributions from net investment income (0.03) (0.03) (0.01) NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 TOTAL RETURN 2 3.17% 3.21% 1.48% RATIOS TO AVERAGE NET ASSETS: Expenses 0.60% 0.60% 0.39% 4 Net investment income 3.09% 3.13% 3.26% 4 Expense waiver/reimbursement 3 0.73% 0.86% 1.33% 4 SUPPLEMENTAL DATA: Net assets, end of period (000 omitted) $32,593 $24,624 $29,824
1 Reflects operations for the period from May 22, 1996 (date of initial public investment) to October 31, 1996. 2 Based on net asset value, which does not reflect the sales charge or contingent deferred sales charge, if applicable. 3 This voluntary expense decrease is reflected in both the expense and net investment income ratios shown above. 4 Computed on an annualized basis. See Notes which are an integral part of the Financial Statements Portfolio of Investments October 31, 1998
PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-100.0% 1 TENNESSEE-100.0% $ 2,710,000 Benton County TN IDB, (Series 1996) Weekly VRDNs (Jones Plastic and Engineering Corp.)/(National City Bank, Kentucky LOC) $ 2,710,000 7,000,000 Chattanooga, TN HEFA Weekly VRDNs (Sisken Hospital)/ (Nationsbank of Tennessee LOC) 7,000,000 1,900,000 Dickson County, TN IDB, (Series 1996) Weekly VRDNs (Tennessee Bun Company, LLC Project)/(PNC Bank, N.A. LOC) 1,900,000 2,700,000 Franklin County, TN IDB, IDRB (Series 1997) Weekly VRDNs (Hi-Tech)/(Regions Bank, Alabama LOC) 2,700,000 1,430,000 Greenfield, TN IDB, (Series 1995) Weekly VRDNs (Plastic Products Co. Project)/(Norwest Bank Minnesota, N.A. LOC) 1,430,000 1,500,000 Hamilton County, TN IDB, (Series 1987) Weekly VRDNs (Seaboard Farms Project)/(SunTrust Bank, Atlanta LOC) 1,500,000 1,500,000 Hamilton County, TN, 5.00% Bonds, 5/1/1999 1,509,384 4,200,000 Hawkins County, TN IDB, (Series 1995) Weekly VRDNs (Sekisui Ta Industries, Inc. Project)/(Bank of Tokyo-Mitsubishi Ltd. LOC) 4,200,000 2,900,000 Hendersonville, TN IDB, (Series 1996) Weekly VRDNs (Betty Machine Co. Project)/(First Union National Bank, Charlotte, NC LOC) 2,900,000 1,300,000 Jackson, TN IDB, Solid Waste Facility Bonds (Series 1995) Weekly VRDNs (Florida Steel Corp.)/(Nationsbank, N.A., Charlotte LOC) 1,300,000 3,500,000 Johnson City, TN Health & Education Facilities Board, Adjustable Tender Acquisition Bonds (Series 1998A) Weekly VRDNs (Johnson City Medical Center Hospital)/(MBIA INS)/ (Credit Suisse First Boston LIQ) 3,500,000 800,000 Knox County, TN, 4.30% Bonds, 3/1/1999 801,397 2,000,000 Knox County, TN, GO Refunding Bonds (Series 1998), 3.65% Bonds, 3/1/1999 2,000,000 2,000,000 Maury County, TN HEFA, (Series 1996E) Weekly VRDNs (Southern Healthcare Systems, Inc.)/(Bank One, Texas N.A. LOC) 2,000,000 1,979,000 McMinn County, TN IDB, Industrial Development Bonds (Series 1995) Weekly VRDNs (Creative Fabrication Corp.)/(NBD Bank, Michigan LOC) 1,979,000 5,000,000 Memphis, TN Center City Revenue Finance Corp., (Series 1996A) Weekly VRDNs (South Bluffs)/(National Bank of Commerce, Memphis, TN LOC) 5,000,000 1,000,000 Memphis, TN, General Improvement Refunding Bonds, (Series 1995A) Weekly VRDNs (Westdeutsche Landesbank Girozentrale LOC) 1,000,000 2,000,000 Metropolitan Government Nashville & Davidson County, TN HEFA, Revenue Bonds (Series 1985A), 3.75% TOBs (Vanderbilt University), Optional Tender 1/15/1999 2,000,000 1,500,000 Metropolitan Government Nashville & Davidson County, TN, Series B, 3.60% Bonds (FGIC INS), 1/1/1999 1,500,000 2,000,000 Montgomery Co., TN Public Building Authority, Pooled Financing Revenue Bonds (Series 1996) Weekly VRDNs (Montgomery County Loan)/ (Nationsbank, N.A., Charlotte LOC) 2,000,000 3,800,000 Oak Ridge, TN IDB, Solid Waste Facility Bonds (Series 1996) Weekly VRDNs (M4 Environmental L.P. Project)/(SunTrust Bank, Atlanta LOC) 3,800,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-100.0% 1 TENNESSEE-CONTINUED $ 6,200,000 Roane, TN IDB, (Series 1982) Monthly VRDNs (Fortafil Fibers, Inc. Project)/(ABN AMRO Bank N.V., Amsterdam LOC) $ 6,200,000 2,000,000 Sevier County, TN Public Building Authority, Local Government Improvement Bonds, (Series II-G-2) Weekly VRDNs (Knoxville, TN)/(AMBAC INS)/ (KBC Bank N.V., Brussels LIQ) 2,000,000 1,200,000 Sevier County, TN Public Building Authority, Local Government Public Improvement Bonds, (Series II-G-3) Weekly VRDNs (Maryville, TN)/(AMBAC INS)/(KBC Bank N.V., Brussels LIQ) 1,200,000 2,600,000 Shelby County, TN Health Education & Housing Facilities Board, Multifamily Housing Revenue Bonds (Series 1988) Weekly VRDNs (Arbor Lake Project)/(PNC Bank, N.A. LOC) 2,600,000 1,165,000 Shelby County, TN, (Series A), 4.25% Bonds, 8/1/1999 1,171,783 1,300,000 Sumner County, TN IDB, (Series 1998-0), 4.05% BANs, 6/15/ 1999 1,302,013 2,100,000 Union City, TN IDB, (Series 1995) Weekly VRDNs (Kohler Co.)/ (Wachovia Bank of NC, N.A., Winston-Salem LOC) 2,100,000 2,500,000 Union County, TN IDB, (Series 1995) Weekly VRDNs (Cooper Container Corporation Project)/(SunTrust Bank, Nashville LOC) 2,500,000 Total Investments (at amortized cost) 2 $ 71,803,577
Securities that are subject to Alternative Minimum Tax represent 48.5% of the portfolio as calculated based upon total market value. 1 The Fund may only invest in securities rated in one of the two highest short-term rating categories by nationally recognized statistical rating organizations ("NRSROs") or unrated securities of comparable quality. 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, MIG-1 or MIG-2 by Moody's Investors Service, Inc., or F-1+, F-1, or F-2 by Fitch IBCA, Inc. are all considered rated in one of the two highest short-term rating categories. Securities rated in the highest short-term rating category (and unrated securities of comparable quality) are identified as First Tier securities. Securities rated in the second highest short-term rating category (and unrated securities of comparable quality) are identified as Second Tier securities. The Fund follows applicable regulations in determining whether a security is rated and whether a security rated by multiple NRSROs in different rating categories should be identified as a First or Second Tier security. At October 31, 1998, the portfolio securities were rated as follows: Tier Rating Based on Total Market Value (Unaudited) First Tier Second Tier 100.00% 0.00% 2 Also represents cost for federal tax purposes. Note: The categories of investments are shown as a percentage of net assets ($71,785,507) at October 31, 1998. The following acronyms are used throughout this portfolio: AMBAC -American Municipal Bond Assurance Corporation BANs -Bond Anticipation Notes FGIC -Financial Guaranty Insurance Company GO -General Obligation HEFA -Health and Education Facilities Authority IDB -Industrial Development Bond IDRB -Industrial Development Revenue Bond INS -Insured LIQ -Liquidity Agreement LLC -Limited Liability Corporation LOC -Letter of Credit MBIA -Municipal Bond Investors Assurance TOBs -Tender Option Bonds VRDNs -Variable Rate Demand Notes See Notes which are an integral part of the Financial Statements Statement of Assets and Liabilities October 31, 1998
ASSETS: Total investments in securities, at amortized cost and value $ 71,803,577 Cash 245,819 Income receivable 340,683 Receivable for shares sold 43,304 Prepaid expenses 1,218 Deferred organizational costs 15,512 Total assets 72,450,113 LIABILITIES: Payable for shares redeemed $ 561,964 Income distribution payable 78,854 Accrued expenses 23,788 Total liabilities 664,606 Net Assets for 71,785,507 shares outstanding $ 71,785,507 NET ASSET VALUE, OFFERING PRICE, AND REDEMPTION PROCEEDS PER SHARE: INSTITUTIONAL SHARES: $39,192,552 / 39,192,552 shares outstanding $1.00 INSTITUTIONAL SERVICE SHARES: $32,592,955 / 32,592,955 shares outstanding $1.00
See Notes which are an integral part of the Financial Statements Statement of Operations Year Ended October 31, 1998
INVESTMENT INCOME: Interest $ 2,034,356 EXPENSES: Investment advisory fee $ 274,883 Administrative personnel and services fee 155,001 Custodian fees 2,212 Transfer and dividend disbursing agent fees and expenses 42,633 Directors'/Trustees' fees 1,088 Auditing fees 10,817 Legal fees 15,849 Portfolio accounting fees 53,913 Shareholder services fee-Institutional Shares 66,700 Shareholder services fee-Institutional Service Shares 70,754 Share registration costs 21,853 Printing and postage 7,838 Insurance premiums 6,183 Miscellaneous 6,849 Total expenses 736,573 WAIVERS AND REIMBURSEMENTS: Waiver of investment advisory fee $ (274,883) Waiver of shareholder services fee-Institutional Shares (66,700) Reimbursement of other operating expenses (129,398) Total waivers and reimbursements (470,981) Net expenses 265,592 Net investment income $ 1,768,764
See Notes which are an integral part of the Financial Statements Statement of Changes in Net Assets
YEAR ENDED OCTOBER 31 1998 1997 INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income $ 1,768,764 $ 1,437,481 DISTRIBUTIONS TO SHAREHOLDERS: Distributions from net investment income Institutional Shares (895,346) (613,693) Institutional Service Shares (873,418) (823,788) Change in net assets resulting from distributions to shareholders (1,768,764) (1,437,481) SHARE TRANSACTIONS: Proceeds from sale of shares 236,176,586 172,127,656 Net asset value of shares issued to shareholders in payment of distributions declared 704,085 603,094 Cost of shares redeemed (212,767,088) (172,706,532) Change in net assets resulting from share transactions 24,113,583 24,218 Change in net assets 24,113,583 24,218 NET ASSETS: Beginning of period 47,671,924 47,647,706 End of period $ 71,785,507 $ 47,671,924
See Notes which are an integral part of the Financial Statements NOTES TO FINANCIAL STATEMENTS October 31, 1998 ORGANIZATION Federated Municipal Trust (the "Trust") is registered under the Investment Company Act of 1940, as amended (the "Act") as an open-end, management investment company. The Trust consists of 17 portfolios. The financial statements included herein are only those of Tennessee Municipal Cash Trust (the "Fund"). The financial statements of the other portfolios are presented separately. The assets of each portfolio are segregated and a shareholder's interest is limited to the portfolio in which shares are held. The Fund offers two classes of shares: Institutional Shares and Institutional Service Shares. The investment objective of the Fund is current income exempt from federal regular income tax and the personal income tax imposed by the State of Tennessee 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. 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) for each class of shares. At October 31, 1998, capital paid-in aggregated $71,785,507. Transactions in shares were as follows:
PERIOD ENDED OCTOBER 31 1998 1997 INSTITUTIONAL SERVICE SHARES: Shares sold 94,453,216 84,213,611 Shares issued to shareholders in payment of distributions declared 672,741 596,349 Shares redeemed (87,157,077) (90,009,788) Net change resulting from Institutional Service Share transactions 7,968,880 (5,199,828) PERIOD ENDED OCTOBER 31 1998 1997 INSTITUTIONAL SHARES: Shares sold 141,723,370 87,914,045 Shares issued to shareholders in payment of distributions declared 31,344 6,745 Shares redeemed (125,610,011) (82,696,744) Net change resulting from Institutional Share transactions 16,144,703 5,224,046 Net change resulting from share transactions 24,113,583 24,218
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES INVESTMENT ADVISORY FEE Federated Management, the Fund's investment adviser (the "Adviser"), receives for its services an annual investment advisory fee equal to 0.50% of the Fund's average daily net assets. The Adviser may voluntarily choose to waive any portion of its fee and/or reimburse certain operating expenses of the Fund. The Adviser can modify or terminate this voluntary waiver and/or reimbursement 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 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 ("FSS"), the Fund will pay FSS up to 0.25% of average daily net assets of the Fund shares for the period. The fee paid to FSS is used to finance certain services for shareholders and to maintain shareholder accounts. FSS may voluntarily choose to waive any portion of its fee. FSS can modify or terminate this voluntary waiver at any time at its sole discretion. TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES FServ, through its subsidiary, Federated Shareholder Services Company ("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. INTERFUND TRANSACTIONS During the period ended October 31, 1998, the Fund engaged in purchase and sale transactions with funds that have a common investment adviser (or affiliated investment advisers), common Directors/Trustees, and/or common Officers. These purchase and sale transactions were made at current market value pursuant to Rule 17a-7 under the Act amounting to $129,215,000 and $115,090,000, respectively. ORGANIZATIONAL EXPENSES Organizational expenses of $24,645 were borne initially by the Adviser. The Fund has reimbursed the Adviser for these expenses. These expense have been deferred and are being amortized over the five-year period following the Fund's effective date. GENERAL Certain of the Officers and Trustees of the Trust are Officers and Directors or Trustees of the above companies. CONCENTRATION OF CREDIT RISK Since the Fund invests a substantial portion of its assets in issuers located in one state, it will be more susceptible to factors adversely affecting issuers of that state than would be a comparable tax-exempt mutual fund that invests nationally. In order to reduce the credit risk associated with such factors, at October 31, 1998, 87.8% of the securities in the portfolio of investments are backed by letters of credit or bond insurance of various financial institutions and financial guaranty assurance agencies. The percentage of investments insured by or supported (backed) by a letter of credit from any one institution or agency did not exceed 14.3% of total investments. 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 BOARD OF TRUSTEES OF FEDERATED MUNICIPAL TRUST AND SHAREHOLDERS OF TENNESSEE MUNICIAPL CASH TRUST: We have audited the accompanying statement of assets and liabilities of Tennessee Municipal Cash Trust (an investment portfolio of Federated Municipal Trust, a Massachusetts business trust), including the schedule of portfolio investments, as of October 31, 1998, the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for the periods presented. These financial statements and financial highlights are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the 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 October 31, 1998, by correspondence with the custodian. 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 Tennessee Municipal Cash Trust (an investment portfolio of Federated Municipal Trust) as of October 31, 1998, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and its financial highlights for the periods presented, in conformity with generally accepted accounting principles. Arthur Andersen LLP Boston, Massachusetts December 23, 1998 [Graphic] Tennessee Municipal Cash Trust A Portfolio of Federated Municipal Trust INSTITUTIONAL SERVICE SHARES DECEMBER 31, 1998 Statement of Additional Information (SAI) dated December 31, 1998, is incorporated by reference into this prospectus. To obtain the SAI 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] Tennessee Municipal Cash 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. 811-5911 Cusip 314229634 G01682-02 (12/98) [Graphic] STATEMENT OF ADDITIONAL INFORMATION Tennessee Municipal Cash Trust A Portfolio of Federated Municipal Trust INSTITUTIONAL SHARES INSTITUTIONAL SERVICE SHARES This Statement of Additional Information (SAI) is not a prospectus. Read this SAI in conjunction with the prospectuses for Tennessee Municipal Cash Trust dated December 31, 1998. Obtain the prospectuses without charge by calling 1-800-341-7400. CONTENTS How is the Fund Organized? Securities in Which the Fund Invests How is the Fund Sold? Subaccounting Services Redemption in Kind Massachusetts Partnership Law Account and Share Information Tax Information Who Manages and Provides Services to the Fund? How Does the Fund Measure Performance? Who is Federated Investors, Inc.? Investment Ratings Addresses STATEMENT DATED DECEMBER 31, 1998 [Federated Investors Logo] Federated Securities Corp., Distributor, subsidiary of Federated Investors, Inc. Cusip 314229634 Cusip 314229642 G01682-03 (12/98) How is the Fund Organized? The Fund is a diversified portfolio of Federated Municipal Trust (Trust). The Trust is an open-end, management investment company that was established under the laws of the Commonwealth of Massachusetts on September 1, 1989. The Trust may offer separate series of shares representing interests in separate portfolios of securities. The Board of Trustees (the Board) has established two classes of shares of the Fund, known as Institutional Shares and Institutional Service Shares (Shares). This SAI relates to both of the classes of the above-mentioned Shares. Securities in Which the Fund Invests SECURITIES DESCRIPTIONS AND TECHNIQUES In pursuing its investment strategy, the Fund may invest in the following tax- exempt securities for any purpose that is consistent with its investment objective. General Obligation Bonds General obligation bonds are supported by the issuer's full faith and credit. The issuer must levy and collect taxes sufficient to pay principal and interest on the bonds. However, the issuer's authority to levy additional taxes may be limited by its charter or state law. Special Revenue Bonds Special revenue bonds are payable solely from specific revenues received by the issuer. The revenues may consist of specific taxes, assessments, tolls, fees or other types of municipal revenues. For example, a municipality may issue bonds to build a toll road, and pledge the tolls to repay the bonds. Bondholders could not collect from the municipality's general taxes or revenues. Therefore, any shortfall in the tolls would result in a default on the bonds. Private Activity Bonds Private activity bonds are special revenue bonds used to finance private entities. For example, a municipality may issue bonds to finance a new factory to improve its local economy. The municipality would lend the proceeds to the company using the factory, and the company would agree make loan payments sufficient to repay the bonds. The bonds would be payable solely from the company's loan payments, not from any other revenues of the municipality. Therefore, any default on the loan normally would result in a default on the bonds. Municipal Leases Municipalities may enter into leases for equipment or facilities. In order to comply with state public financing laws, these leases are typically subject to annual appropriation. In other words, a municipality may end a lease, without penalty, by not providing for the lease payments in its annual budget. After the lease ends, the lessor (the Fund) can resell the equipment or facility but the Fund may lose money on the sale. The Fund may invest in securities supported by pools of municipal leases. The most common type of lease backed securities are certificates of participation (COPs). However, the Fund may also invest directly in individual leases. Credit Enhancement Common types of credit enhancement include guarantees, letters of credit, bond insurance and surety bonds. Credit enhancement also includes arrangements where securities or other liquid assets secure payment of a fixed income security. If a default occurs, these assets may be sold and the proceeds paid to a security's holders. Either form of credit enhancement reduces credit risks by providing another source of payment for a fixed income security. INVESTMENT 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 rating service or be of comparable quality to securities having such ratings. A rating service'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 (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 IBCA, 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 rating service can be treated as being in one of the two highest short- term rating categories; currently, such securities must be rated by two rating services in one of their two highest-rating categories. See "Regulatory Compliance." INVESTMENT RISKS There are many factors which may effect an investment in the Fund. The Fund's principal risks are described in its prospectus. An additional risk factor is outlined below. Tax Risk In order for the interest income from the securities to be exempt from federal regular income tax ("tax-exempt"), tax-exempt securities must meet certain legal requirements. Failure to meet such requirements may cause the interest received and distributed by the Fund to shareholders to be taxable. FUNDAMENTAL INVESTMENT POLICIES The Fund invests in tax-exempt securities so that at least 80% of the Fund's annual interest income is exempt from federal regular income tax and the personal income tax imposed by the State of Tennessee. This policy is fundamental and cannot be changed without shareholder approval. INVESTMENT LIMITATIONS The following investment limitations are fundamental, except that no investment limitation of the Fund shall prevent the Fund from investing substantially all of its assets (except for assets which are not considered "investment securities" under the Investment Company Act of 1940, or assets exempted by the SEC) in an open-end investment company with substantially the same investment objectives): 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 its total assets are outstanding. 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 non-publicly issued Tennessee tax-exempt securities or temporary investments or enter into repurchase agreements, in accordance with its investment objective, policies, and limitations or the Trust's 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, except for certain restricted securities which meet the criteria for liquidity as established by the Board. INVESTING IN REAL ESTATE The Fund will not purchase or sell real estate, or real estate limited partnerships, 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 investment 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 except that no investment limitation of the Fund shall prevent the Fund from investing substantially all of its assets (except for assets which are not considered "investment securities" under the Investment Company Act of 1940, or assets exempted by the SEC) in an open-end investment company with substantially the same investment objectives. 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 certain restricted securities not determined to be liquid under criteria established by the Board and repurchase agreements providing for settlement in more than seven days notice. 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 nationally recognized statistical rating organizations, 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 Board has 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 Board 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 Board 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 Board 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. 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 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. 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. 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 Trust have equal voting rights, except that in matters affecting only a particular Fund or class, only Shares of that Fund or class are entitled to vote. Trustees may be removed by the Board or by shareholders at a special meeting. A special meeting of shareholders will be called by the Board upon the written request of shareholders who own at least 10% of the Trust's outstanding shares of all series entitled to vote. As of December 8, 1998, the following shareholders owned of record, beneficially, or both, 5% or more of the outstanding Institutional Shares: First Union Brokerage Services, Brentwood, Tennessee, owned approximately 2,726,316 Shares (6.40%); Chase Manhattan Bank, Brooklyn, New York, owned approximately 2,899,263 Shares (6.80%); Sharp Market & Company, Home Federal Bank FSB, Knoxville, Tennessee, owned approximately 3,713,475 Shares (8.71%); Reep & CO., Pioneer Bank, Chattanooga, Tennessee, owned approximately 8,455,631 Shares (19.84%); Trust Co. of Knoxville, Knoxville, Tennessee, owned approximately 8,275,614 Shares (19.42%); and James A. Massey, Collierville, Tennessee, owned approximately 11,199,616 Shares (26.28%). As of December 8, 1998, the following shareholders owned of record, beneficially, or both, 5% or more of the outstanding Institutional Service Shares: Clarence S. Thomas, Jr. MD, Nashville, Tennessee, owned approximately 1,744,476 Shares (5.37%); Coca Cola Bottling Works of Tullahoma, Inc., Tullahoma, Tennessee, owned approximately 1,739,149 Shares (5.36%); Sam A. Brooks, Jr., Nashville, Tennessee, owned approximately 2,133,704 Shares (6.57%); Derril and Margaret Reeves, Brentwood, Tennessee, owned approximately 2,821,430 Shares (8.69%); Dent Thompson, Nashville, Tennessee, owned approximately 2,909,173 Shares (8.96%); and BHC Securities, Inc., Philadelphia, Pennsylvania, owned approximately 4,731,714 Shares (14.58%). Shareholders owning 25% or more of outstanding Shares may be in control and be able to affect the outcome of certain matters presented for a vote of shareholders. Tax Information FEDERAL INCOME TAX The Fund intends to meet the requirements of Subchapter M of the Internal Revenue Code applicable to regulated investment companies. If these requirements are not met, it will not receive the special tax treatment and will pay federal income tax. The Fund will be treated as a single, separate entity for federal income tax purposes so that income earned and capital gains and losses realized by the Trust's other portfolios will be separate from those realized by the Fund. STATE TAXES Under existing Tennessee law, distributions made by the Fund will not be subject to Tennessee personal income taxes to the extent that such distributions qualify as "exempt-interest dividends" under the Internal Revenue Code, and represent (i) interest on obligations of the state of Tennessee or its political subdivisions; or (ii) interest on certain obligations of the United States, or any agency or instrumentality thereof. To the extent that distributions by the Fund are derived from distributions on other types of obligations, such distributions will be subject to Tennessee personal income taxes. Distributions made by the Fund will be subject to the excise taxes imposed on corporations. Who Manages and Provides Services to the Fund? BOARD OF TRUSTEES The Board is responsible for managing the Trust's business affairs and for exercising all the Trust's powers except those reserved for the shareholders. Information about each Board member is provided below and includes the following data: name, address, birthdate, present position(s) held with the Trust, principal occupations for the past five years and other notable positions held, total compensation received as a Trustee from the Trust for its most recent fiscal year, and the total compensation received from the Federated Fund Complex for the most recent calendar year. The Trust is comprised of 17 Funds and the Federated Fund Complex is comprised of 56 investment companies, whose investment advisers are affiliated with the Fund's Adviser. As of December 8, 1998, 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.
Name Total Birthdate Aggregate Compensation From Address Principal Occupations Compensation Trust and Fund Position With Trust for Past 5 Years From Trust Complex - ------------------------------------------------------------------------------------------------------------------------------------ John F. Donahue##* Chief Executive Officer and Director or Trustee of $0 $0 for the Trust Birthdate: July 28, 1924 the Federated Fund Complex. Chairman and Director, and 56 other Federated Investors Tower Federated Investors, Inc.; Chairman and Trustee, investment 1001 Liberty Avenue Federated Advisers, Federated Management, and companies in the Pittsburgh, PA Federated Research; Chairman and Director, Federated Fund Complex CHAIRMAN and TRUSTEE Research Corp., and Federated Global Research Corp.; Chairman, Passport Research, Ltd. Thomas G. Bigley Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: February 3, 1934 Director, Member of Executive Committee, Children's Trust and 15 Old Timber Trail Hospital of Pittsburgh; formerly: Senior Partner, 56 other Pittsburgh, PA Ernst & Young LLP; Director, MED 3000 Group, Inc.; investment TRUSTEE Director, Member of Executive Committee, University companies in the of Pittsburgh. Fund Complex John T. Conroy, Jr. Director or Trustee of the Federated Fund Complex; $4,484.62 $122,362 for the Birthdate: June 23, 1937 President, Investment Properties Corporation; Senior Trust and Wood/IPC Commercial Dept. Vice President, John R. Wood and Associates, Inc., 56 other John R. Wood and Realtors; Partner or Trustee in private real estate investment Associates, Inc. Realtors ventures in Southwest Florida; formerly: President, companies in the 3255 Tamiami Trail North Naples Property Management, Inc. and Northgate Fund Complex Naples, FL Village Development Corporation. TRUSTEE William J. Copeland Director or Trustee of the Federated Fund Complex; $4,484.62 $122,362 for the Birthdate: July 4, 1918 Director and Member of the Executive Committee, Trust and One PNC Plaza-23rd Floor Michael Baker, Inc.; formerly: Vice Chairman and 56 other Pittsburgh, PA Director, PNC Bank, N.A., and PNC Bank Corp.; investment TRUSTEE Director, Ryan Homes, Inc. companies in the Fund Complex Retired: Director, United Refinery; Director, Forbes Fund; Chairman, Pittsburgh Foundation; Chairman, Pittsburgh Civic Light Opera. James E. Dowd, Esq. Director or Trustee of the Federated Fund Complex; $4,484.62 $122,362 for the Birthdate: May 18, 1922 Attorney-at-law; Director, The Emerging Germany Fund, Trust and 571 Hayward Mill Road Inc. 56 other Concord, MA investment TRUSTEE Retired: President, Boston Stock Exchange, Inc.; companies in the Regional Administrator, United States Securities and Fund Complex Exchange Commission. Lawrence D. Ellis, M.D.* Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: October 11, 1932 Professor of Medicine, University of Pittsburgh; Trust and 3471 Fifth Avenue Medical Director, University of Pittsburgh Medical 56 other Suite 1111 Center - Downtown; Hematologist, Oncologist, and investment Pittsburgh, PA Internist, Presbyterian and Montefiore Hospitals; companies in the TRUSTEE Member, National Board of Trustees, Leukemia Society Fund Complex of America. Edward L. Flaherty, Jr., Director or Trustee of the Federated Fund Complex; $4,484.62 $122,362 for the Esq. # Attorney, of Counsel, Miller, Ament, Henny & Kochuba; Trust and Birthdate: June 18, 1924 Director, Eat 'N Park Restaurants, Inc.; formerly: 56 other Miller, Ament, Henny & Counsel, Horizon Financial, F.A., Western Region; investment Kochuba Partner, Meyer and Flaherty. companies in the 205 Ross Street Fund Complex Pittsburgh, PA TRUSTEE Peter E. Madden Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: March 16, 1942 formerly: Representative, Commonwealth of Trust and One Royal Palm Way Massachusetts General Court; President, State Street 56 other 100 Royal Palm Way Bank and Trust Company and State Street Corporation. investment Palm Beach, FL companies in the TRUSTEE Retired: Director, VISA USA and VISA International; Fund Complex Chairman and Director, Massachusetts Bankers Association; Director, Depository Trust Corporation. John E. Murray, Jr., J.D., Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the S.J.D. President, Law Professor, Duquesne University; Trust and Birthdate: December 20, 1932 Consulting Partner, Mollica & Murray. 56 other President, Duquesne investment University Retired: Dean and Professor of Law, University of companies in the Pittsburgh, PA Pittsburgh School of Law; Dean and Professor of Law, Fund Complex TRUSTEE Villanova University School of Law. Wesley W. Posvar Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: September 14, President, World Society of Ekistics, Athens; Trust and 1925 Professor, International Politics; Management 56 other 1202 Cathedral of Learning Consultant; Trustee, Carnegie Endowment for investment University of Pittsburgh International Peace, RAND Corporation, Online companies in the Pittsburgh, PA Computer Library Center, Inc., National Defense Fund Complex TRUSTEE University and U.S. Space Foundation; President Emeritus, University of Pittsburgh; Founding Chairman, National Advisory Council for Environmental Policy and Technology, Federal Emergency Management Advisory Board and Czech Management Center, Prague. Retired: Professor, United States Military Academy; Professor, United States Air Force Academy. Marjorie P. Smuts Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: June 21, 1935 Public Relations/Marketing/Conference Planning. Trust and 4905 Bayard Street 56 other Pittsburgh, PA Retired: National Spokesperson, Aluminum Company of investment TRUSTEE America; business owner. companies in the Fund Complex Glen R. Johnson* Trustee, Federated Investors, Inc.; staff member, $0 $0 for the Trust Birthdate: May 2, 1929 Federated Securities Corp. and Federated Investors Tower 8 other investment 1001 Liberty Avenue companies in the Pittsburgh, PA Fund Complex PRESIDENT and TRUSTEE J. Christopher Donahue##* President or Executive Vice President of the $0 $0 for the Trust Birthdate: April 11, 1949 Federated Fund Complex; Director or Trustee of some and Federated Investors Tower of the Funds in the Federated Fund Complex; President 18 other 1001 Liberty Avenue and Director, Federated Investors, Inc.; President investment Pittsburgh, PA and Trustee, Federated Advisers, Federated companies in the EXECUTIVE VICE PRESIDENT Management, and Federated Research; President and Fund Complex Director, Federated Research Corp. and Federated Global Research Corp.; President, Passport Research, Ltd.; Trustee, Federated Shareholder Services Company; Director, Federated Services Company. Edward C. Gonzales* Trustee or Director of some of the Funds in the $0 $0 for the Trust Birthdate: October 22, 1930 Federated Fund Complex; President, Executive Vice and Federated Investors Tower President and Treasurer of some of the Funds in the 1 other investment 1001 Liberty Avenue Federated Fund Complex; Vice Chairman, Federated companies in the Pittsburgh, PA Investors, Inc.; Vice President, Federated Advisers, Fund Complex EXECUTIVE VICE PRESIDENT 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. John W. McGonigle Executive Vice President and Secretary of the $0 $0 for the Trust Birthdate: October 26, 1938 Federated Fund Complex; Executive Vice President, and Federated Investors Tower Secretary, and Director, Federated Investors, Inc.; 56 other 1001 Liberty Avenue Trustee, Federated Advisers, Federated Management, investment Pittsburgh, PA and Federated Research; Director, Federated Research companies in the EXECUTIVE VICE PRESIDENT Corp. and Federated Global Research Corp.; Director, Fund Complex and SECRETARY Federated Services Company; Director, Federated Securities Corp. Richard J. Thomas Treasurer of the Federated Fund Complex; Vice $0 $0 for the Trust Birthdate: June 17, 1954 President - Funds Financial Services Division, and Federated Investors Tower Federated Investors, Inc.; Formerly: various 56 other 1001 Liberty Avenue management positions within Funds Financial Services investment Pittsburgh, PA Division of Federated Investors, Inc. companies in the TREASURER Fund Complex Richard B. Fisher* President or Vice President of some of the Funds in $0 $0 for the Trust Birthdate: May 17, 1923 the Federated Fund Complex; Director or Trustee of and Federated Investors Tower some of the Funds in the Federated Fund Complex; 6 other investment 1001 Liberty Avenue Executive Vice President, Federated Investors, Inc.; companies in the Pittsburgh, PA Chairman and Director, Federated Securities Corp. Fund Complex VICE PRESIDENT William D. Dawson, III Chief Investment Officer of this Fund and various $0 $0 for the Trust Birthdate: March 3, 1949 other Funds in the Federated Fund Complex; Executive and Federated Investors Tower Vice President, Federated Investment Counseling, 41 other 1001 Liberty Avenue Federated Global Research Corp., Federated Advisers, investment Pittsburgh, PA Federated Management, Federated Research, and companies in the CHIEF INVESTMENT OFFICER Passport Research, Ltd.; Registered Representative, Fund Complex 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. Mary Jo Ochson Senior Portfolio Manager and Vice President of eight $0 $0 for the Trust Birthdate: September 12, investment companies in the Federated Fund Complex; and 1953 Senior Vice President, Federated Investment 7 other investment Federated Investors Tower Counseling, Federated Advisers, Federated Global companies 1001 Liberty Avenue Research Corp., Federated Management, Federated in the Fund Complex Pittsburgh, PA Research, Federated Research Corp. and Passport SENIOR PORTFOLIO Research, Ltd.; Formerly: Vice President, Federated MANAGER/VICE PRESIDENT Advisers, Federated Management, Federated Research, Federated Research Corp. , Passport Research, Ltd. and Federated Global Research Corp. Jeff A. Kozemchak Senior Portfolio Manager and Vice President of four $0 $0 for the Trust Birthdate: January 15, 1960 investment companies in the Federated Fund Complex; and Federated Investors Tower Vice President, Federated Investment Counseling, 3 other investment 1001 Liberty Avenue Federated Advisers, Federated Global Research Corp., companies Pittsburgh, PA Federated Management, Federated Research, Federated in the Fund Complex SENIOR PORTFOLIO Research Corp. and Passport Research, Ltd.; MANAGER/VICE PRESIDENT Formerly: Assistant Vice President and Investment Analyst, Federated Research Corp. and Passport Research, Ltd. ; Assistant Vice President, Federated Advisers, Federated Management and Federated Research.
## Mr. Donahue is the father of J. Christopher Donahue, Executive Vice President of the Trust. 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 Trust, 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 Trust. 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: Maximum Average Aggregate Daily Administrative Fee Net Assets of the Federated Funds - ----------------------------------------------------------- 0.150 of 1% on the first $250 million 0.125 of 1% on the next $250 million 0.100 of 1% on the next $250 million 0.075 of 1% on assets in excess of $750 million The administrative fee received during any fiscal year shall be at least $125,000 per portfolio and $30,000 per each additional class of shares. Federated Services Company may voluntarily waive a portion of its fee and may reimburse the Fund for expenses. Federated Services Company also provides certain accounting and recordkeeping services with respect to the Fund's portfolio investments for a fee based on Fund assets plus out-of-pocket expenses. CUSTODIAN State Street Bank and Trust Company, Boston, Massachusetts, is custodian for the securities and cash of the Fund. Foreign instruments purchased by the Fund are held by foreign banks participating in a network coordinated by State Street Bank. TRANSFER AGENT AND DIVIDEND DISBURSING AGENT Federated Services Company, through its registered transfer agent subsidiary, Federated Shareholder Services Company, maintains all necessary shareholder records. The Fund pays the transfer agent a fee based on the size, type, and number of accounts and transactions made by shareholders. INDEPENDENT PUBLIC ACCOUNTANTS Arthur Andersen LLP is the independent public accountant for the Fund. FEES PAID BY THE FUND FOR SERVICES For the Year Ended October 31, 1998 1997 1996* - --------------------------------------------------------------- Advisory Fee Earned $274,883 $221,951 $71,830 - --------------------------------------------------------------- Advisory Fee Reduction 274,883 221,951 71,830 - --------------------------------------------------------------- Brokerage Commissions 0 0 0 - --------------------------------------------------------------- Administrative Fee 155,001 154,970 71,571 - --------------------------------------------------------------- Shareholder Services Fee - --------------------------------------------------------------- Institutional Shares 0 --- --- ------------------------------------------------------------ Institutional ------------------------------------------------------------ Service Shares --- 70,754 --- --- ------------------------------------------------------------ Fees are allocated among Classes based on their pro rata share of Fund assets, except for shareholder services fees, which are borne only by the applicable Class of Shares. If the Fund's expenses are capped at a particular level, the cap does not include reimbursement to the Fund of any expenses incurred by shareholders who use the transfer agent's subaccounting facilities. * For the period May 22, 1996 (date of initial public investment) through October 31, 1996. How does the Fund Measure Performance? The Fund may advertise Share performance by using the Securities and Exchange Commission's (SEC) standard method for calculating performance applicable to all mutual funds. The SEC also permits this standard performance information to be accompanied by non-standard performance information. Unless otherwise stated, any quoted Share performance reflects the effect of non-recurring charges, such as maximum sales charges, which, if excluded, would increase the total return and yield. The performance of Shares depends upon such variables as: portfolio quality; average portfolio maturity; type and value of portfolio securities; changes in interest rates; changes or differences in the Fund's or any class of Shares' expenses; and various other factors. Share performance fluctuates on a daily basis largely because net earnings and offering price per Share 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 and since inception periods ended October 31, 1998. Yield, Effective Yield and Tax-Equivalent Yield given for the 7-day period ended October 31, 1998.
Share Class 7-Day Period 1 Year Since Inception on May 22, 1996 - ------------------------------------------------------------------------------------------------------------- Institutional Shares - ------------------------------------------------------------------------------------------------------------- Total Return -- 3.42% 3.47% - ------------------------------------------------------------------------------------------------------------- Yield 3.07% -- -- Effective Yield 3.12% -- -- Tax-Equivalent Yield 5.74% -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Share Class 7-Day Period 1 Year Since Inception on May 22, 1996 - ------------------------------------------------------------------------------------------------------------- Institutional Service Shares - ------------------------------------------------------------------------------------------------------------- Total Return -- 3.17% 3.21% - ------------------------------------------------------------------------------------------------------------- Yield 2.82% -- -- Effective Yield 2.86% -- -- Tax-Equivalent Yield 5.26% -- -- - -------------------------------------------------------------------------------------------------------------
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. The tax-equivalent yield of Shares is calculated similarly to the yield, but is adjusted to reflect the taxable yield that Shares would have had to earn to equal the actual yield, assuming a specific tax rate. 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. TAX EQUIVALENCY TABLE Set forth below is a sample of a tax-equivalency table that may be used in advertising and sales literature. This table is for illustrative purposes only and is not representative of past or future performance of the Fund. The interest earned by the tax-exempt securities owned by the Fund generally remains free from federal regular income tax and is often free from state and local taxes as well. However, some of the Fund's income may be subject to the federal alternative minimum tax and state and/or local taxes.
TAXABLE YIELD EQUIVALENT FOR 1998 STATE OF TENNESSEE - ------------------------------------------------------------------------------------------------------------------------------------ TAX BRACKET: FEDERAL 15.00% 28.00% 31.00% 36.00% 39.60% COMBINED FEDERAL AND STATE 21.00% 34.00% 37.00% 42.00% 45.60% - ------------------------------------------------------------------------------------------------------------------------------------ JOINT $1- $42,351- $102,301- $155,951- OVER RETURN 42,350 102,300 155,950 278,450 $278,450 SINGLE $1- $25,351- $61,401- $128,101- OVER RETURN 25,350 61,400 128,100 278,450 $278,450 - ------------------------------------------------------------------------------------------------------------------------------------ TAX-EXEMPT YIELD TAXABLE YIELD EQUIVALENT - ------------------------------------------------------------------------------------------------------------------------------------ 1.50% 1.90% 2.27% 2.38% 2.59% 2.76% 2.00% 2.53% 3.03% 3.17% 3.45% 3.68% 2.50% 3.16% 3.79% 3.97% 4.31% 4.60% 3.00% 3.80% 4.55% 4.76% 5.17% 5.51% 3.50% 4.43% 5.30% 5.56% 6.03% 6.43% 4.00% 5.06% 6.06% 6.35% 6.90% 7.35% 4.50% 5.70% 6.82% 7.14% 7.76% 8.27% 5.00% 6.33% 7.58% 7.94% 8.62% 9.19% 5.50% 6.96% 8.33% 8.73% 9.48% 10.11% 6.00% 7.59% 9.09% 9.52% 10.34% 11.03%
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. 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. 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 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 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, 1997, Federated managed 11 bond funds with approximately $2.1 billion in assets and 22 money market funds with approximately $10.9 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 tax-exempt 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 27 years' experience. As of December 31, 1997, Federated managed 29 equity funds totaling approximately $11.7 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, 1997, Federated managed 11 money market funds and 16 bond funds with assets approximating $17.1 billion and $5.6 billion, respectively. Federated's corporate bond decision making--based on intensive, diligent credit analysis--is backed by over 22 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 $200 billion. GOVERNMENT FUNDS In the government sector, as of December 31, 1997, Federated manages 9 mortgage- backed, 6 government/ agency and 18 government money market mutual funds, with assets approximating $5.9 billion, $1.5 billion and $35 billion, respectively. Federated trades approximately $400 million in U.S. government and mortgage- backed securities daily and places approximately $23 billion in repurchase agreements each day. Federated introduced the first U.S. government fund to invest in U.S. government bond securities in 1969. Federated has been a major force in the short- and intermediate-term government markets since 1982 and currently manages approximately $36 billion in government funds within these maturity ranges. 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, 1997, Federated managed more than $63.1 billion in assets across 51 money market funds, including 18 government, 11 prime and 22 municipal with assets approximating $35 billion, $17.1 billion and $10.9 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 $4 trillion to the more than 6,700 funds available, according to the Investment Company Institute. Federated distributes mutual funds through its subsidiaries for a variety of investment purposes. Specific markets include: FEDERATED CLIENTS OVERVIEW 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. Investment Ratings APPENDIX STANDARD & POOR'S SHORT-TERM MUNICIPAL OBLIGATION RATINGS A Standard & Poor's (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-1+, 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 rated 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. MOODY'S 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 INVESTOR SERVICE, L.P. 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. Addresses TENNESSEE MUNICIPAL CASH TRUST Institutional Shares Institutional Service Shares Federated Investors Funds 5800 Corporate Drive Pittsburgh, PA 15237-7000 Distributor Federated Securities Corp. Federated Investors Tower 1001 Liberty Avenue, Pittsburgh, PA 15222-3779 Investment Adviser Federated Management Federated Investors Tower 1001 Liberty Avenue, Pittsburgh, PA 15222-3779 Custodian State Street Bank and Trust Company P.O. Box 8600 Boston, MA 02266-8600 Transfer Agent and Dividend Disbursing Agent Federated Shareholder Services Company P.O. Box 8600 Boston, MA 02266-8600 Independent Public Accountants Arthur Andersen LLP 225 Franklin Street Boston, MA 02110-2812 PROSPECTUS Virginia Municipal Cash Trust A Portfolio of Federated Municipal Trust INSTITUTIONAL SHARES A money market mutual fund seeking to provide current income exempt from federal regular income tax and the income tax imposed by the Commonwealth of Virginia. 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. December 31, 1998 CONTENTS Risk/Return Summary 1 What are the Fund's Fees and Expenses? 2 What are the Fund's Investment Strategies? 3 What are the Principal Securities in Which the Fund Invests? 3 What are the Specific Risks of Investing in the Fund? 4 What do Shares Cost? 5 How is the Fund Sold? 5 How to Purchase Shares 6 How to Redeem Shares 7 Account and Share Information 9 Who Manages the Fund? 9 Financial Information 10 Report of Independent Public Accountants 23 Risk/Return Summary WHAT IS THE FUND'S INVESTMENT OBJECTIVE? The Fund is a money market fund which seeks to maintain a stable net asset value of $1.00. The Fund's investment objective is current income exempt from federal regular income tax and the income tax imposed by the Commonwealth of Virginia consistent with stability of principal. 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 tax-exempt securities so that the Fund's annual interest income is exempt from federal regular income tax and Virginia state income tax. Interest from the Fund's investments may be subject to the federal alternative minimum tax for individuals and corporations. WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND? Because the Fund may invest a significant portion of its assets in securities of a single issuer, an investment in the Fund may involve additional risks compared to a fully diversified money market 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] - See Appendix C-14 Historically, the Fund has maintained a constant $1.00 net asset value per Share. The bar chart shows the variability of the Fund's Institutional Shares total returns on a yearly basis. The Fund's Institutional Shares are not sold subject to a sales charge (load). The total returns displayed above are based upon the net asset value. The Fund's Institutional Shares year-to-date total return as of the most recent calendar quarter of September 30, 1998, was 2.40%. Within the period shown in the Chart, the Fund's Institutional Shares highest quarterly return was 0.93% (quarter ended June 30, 1995). its lowest quarterly return was 0.57% (quarter ended March 31, 1994). The Fund's Institutional Shares Seven-Day Net Yield as of 12/31/1997 was 3.60%. The following table represents the Fund's Institutional Shares Average Annual Total Return through 12/31/1997.
CALENDAR PERIOD FUND 1 Year 3.36% Start of Performance 1 3.17%
1 The Fund's Institutional Shares start of performance date was September 16, 1993. Investors may call the Fund at 1-800-341-7400 to acquire the Seven-Day Net Yield. 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? VIRGINIA MUNICIPAL CASH TRUST FEES AND EXPENSES This table describes the fees and expenses that you may pay if you buy, hold and redeem shares of the Fund's Institutional Shares.
SHAREHOLDER FEES 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 a percentage of average net assets) Management Fee 2 0.40% Distribution (12b-1) Fee None Shareholder Services Fee 3 0.25% Other Expenses 0.20% Total Annual Fund Operating Expenses (before waivers) 0.85% 1 Although not contractually obligated to do so, the adviser and shareholder services provider waived certain amounts. These are shown below along with the net expenses the Fund actually paid for the fiscal year ended October 31, 1998. Waiver of Fund Expenses 0.36% Total Actual Annual Fund Operating Expenses (after waivers) 0.49% 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 0.29% for the year ended October 31, 1998. 3 The shareholder services fee has been voluntarily waived. This voluntary waiver can be terminated at any time. There was no shareholder services fee paid by the Fund (after the voluntary waiver) for the year ended October 31, 1998.
EXAMPLE The following Example is intended to help you compare the cost of investing in the Virginia Municipal Cash Trust's Institutional Shares with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund's Institutional 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 Virginia Municipal Cash Trust Institutional Shares' operating expenses are BEFORE WAIVERS as shown above and remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS Expenses assuming no redemption $87 $271 $471 $1,049
What are the Fund's Investment Strategies? The Fund invests in a portfolio of high-quality tax-exempt securities maturing in 13 months or less. The average maturity of the Fund's portfolio, computed on a dollar-weighted basis, will be 90 days or less. The Fund's Adviser performs a fundamental credit analysis to develop an approved list of issuers and securities that meet the Adviser's minimum credit standards. The Adviser targets an average portfolio maturity based upon its interest rate outlook and the tax-exempt securities available. The Adviser structures the portfolio by combining variable rate demand instruments and municipal notes. Depending on the supply of tax-exempt securities, the Adviser generally shortens the portfolio's maturity when it expects interest rates to rise and extends the maturity when it expects interest rates to fall. TEMPORARY DEFENSIVE INVESTMENTS During adverse market conditions the Fund may temporarily depart from its principal investment strategies by investing in securities subject to federal regular income tax and Virginia state income tax. Temporary investments will be of comparable quality to other securities in which the Fund invests. This may cause the Fund to give up greater investment returns to maintain the safety of principal. This also may cause the Fund to receive and distribute taxable income to investors. What are the Principal Securities in Which the Fund Invests? TAX-EXEMPT SECURITIES Tax-exempt securities are fixed income securities that pay interest exempt from regular federal income taxes. States, counties, cities and other political subdivisions and authorities typically issue tax-exempt securities. Tax-exempt securities are generally differentiated by their source of repayment. FIXED INCOME SECURITIES Fixed income 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. VARIABLE RATE DEMAND INSTRUMENTS Variable rate demand instruments are tax-exempt securities that require the issuer or a third party, such as a dealer or bank, to repurchase the security for its face value upon demand. The securities also bear interest at a variable rate intended to cause the securities to trade at their face value. The Fund treats demand instruments as short-term securities, even though their stated maturity may extend beyond 13 months. MUNICIPAL NOTES Municipal notes are short-term tax-exempt securities. Many municipalities issue such notes to fund their current operations before collecting taxes or other municipal revenues. Municipalities may also issue notes to fund capital projects prior to issuing long-term bonds. The issuers typically repay the notes at the end of their fiscal year, either with taxes, other revenues or proceeds from newly issued notes or bonds. INVESTMENT 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 rating services or be of comparable quality to securities having such ratings. CREDIT ENHANCEMENT Credit enhancement consists of an arrangement in which a company agrees to pay amounts due on a fixed income security if the issuer defaults. In some cases the company providing credit enhancement makes all payments directly to the security holders and receives reimbursement from the issuer. Normally, the credit enhancer has greater financial resources and liquidity than the issuer. For this reason, the Adviser usually evaluates the credit risk of a fixed income security based solely upon its credit enhancement. What are the Specific Risks of Investing in the Fund? Although there are many factors which may affect an investment in the Fund, the principal risks of investing in a tax-exempt money market fund are described below. CREDIT RISK Credit risk is the possibility that an issuer or a credit enhancer will default (fails to repay interest and principal when due). If an issuer or credit enhancer defaults, the Fund will lose money. Money market funds try to minimize this risk by purchasing higher quality securities. Many fixed income securities receive credit ratings from companies such as Standard & Poor's and Moody's Investor Services. Fixed income securities receive different credit ratings depending on the rating company's assessment of the likelihood of default by the issuer. The lower the credit rating, the greater the credit risk. If the security is unrated, greater reliance is placed on the Adviser's credit assessment. 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. SECTOR RISK Most of the Fund's securities will be invested in issuers located in Virginia. In addition, a substantial part of the Fund's portfolio may be comprised of tax-exempt securities issued or credit enhanced by companies in similar businesses or with other similar characteristics. As a result, the Fund will be more susceptible to any economic, business, political, or other developments which generally affect these issuers. 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 determined net asset value (NAV). The Fund does not charge a sales charge. NAV is determined at 12:00 noon and 1:00 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 offers two share classes: Institutional Shares and Institutional Service Shares, each representing interests in a single portfolio of securities. This prospectus relates only to Institutional Shares. Each share class has different expenses, which affect their performance. Contact your investment professional or call 1-800-341-7400 for more information concerning the other class. The Fund's Distributor markets the Shares described in this prospectus to institutions acting in an agency or fiduciary capacity or to individuals directly or through investment professionals. The Fund may not be a suitable investment for retirement plans or for non-Virginia taxpayers because it invests in Virginia tax-exempt securities. 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 1:00 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 on the day 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 CLEARINGHOUSE (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 request 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 12:00 noon (Eastern time) your redemption will be wired to you the same day. You will not receive that day's dividend. If you call after 12:00 noon (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 30 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 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 CONFIRMATIONS AND ACCOUNT STATEMENTS You will receive confirmation of purchases and redemptions (except for systematic transactions). In addition, 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, 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. It is anticipated that Fund distributions will be primarily dividends that are exempt from federal income tax, although a portion of the Fund's dividends may not be exempt. Dividends may be subject to state and local taxes, although the Fund's dividends will be exempt from Virginia state personal income tax to the extent they are derived from interest on obligations exempt from Virginia personal income taxes. Capital gains and non-exempt dividends are taxable whether paid in cash or reinvested in the Fund. 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 Management. 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 and/or provide administrative services to more than 300 mutual funds and private accounts, which totaled over $120 billion in assets as of December 31, 1997. Federated was established in 1955 and is one of the largest mutual fund investment managers in the United States with more than 2,000 employees. Over 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 affect 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 - Institutional Shares (For a share outstanding throughout each period) Reference is made to the Report of Independent Public Accountants on page 23.
YEAR ENDED OCTOBER 31 1998 1997 1996 1995 1994 NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 INCOME FROM INVESTMENT OPERATIONS: Net investment income 0.03 0.03 0.03 0.04 0.03 LESS DISTRIBUTIONS: Distributions from net investment income (0.03) (0.03) (0.03) (0.04) (0.03) NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 TOTAL RETURN 1 3.26% 3.31% 3.24% 3.56% 2.57% RATIOS TO AVERAGE NET ASSETS: Expenses 0.49% 0.49% 0.49% 0.49% 0.33% Net investment income 3.23% 3.26% 3.19% 3.50% 2.56% Expense waiver/reimbursement 2 0.36% 0.36% 0.40% 0.42% 0.37% SUPPLEMENTAL DATA: Net assets, end of period (000 omitted) $24,559 $24,382 $26,302 $22,642 $20,360
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 October 31, 1998
PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-99.7% 1 VIRGINIA-95.8% $ 3,500,000 Alexandria, VA Redevelopment and Housing Authority, Series 1996B Weekly VRDNs (Buckingham Village Apartments)/(First Union National Bank, Charlotte, NC LOC) $ 3,500,000 2,200,000 Amelia County, VA IDA, (Series 1991) Weekly VRDNs (Chambers Waste System)/(Morgan Guaranty Trust Co., New York LOC) 2,200,000 1,900,000 Arlington County, VA Weekly VRDNs (Ballston Public Parking)/ (Citibank N.A., New York LOC) 1,900,000 10,000,000 Campbell County, VA IDA, Solid Waste Disposal Facilities Revenue ACES Weekly VRDNs (Georgia-Pacific Corp.)/(SunTrust Bank, Atlanta LOC) 10,000,000 1,100,000 Carroll County, VA IDA, IDRB (Series 1995) Weekly VRDNs (Kentucky Derby Hosiery Co., Inc. Project)/(Bank One, Kentucky LOC) 1,100,000 1,000,000 Charles County, VA IDA, Solid Waste Disposal Facility Revenue Bonds (Series 1996) Weekly VRDNs (Chambers Development of Virginia, Inc. Project)/(Morgan Guaranty Trust Co., New York LOC) 1,000,000 1,540,000 Charlottesville, VA IDA, IDR Refunding Bonds, 3.80%TOBs (Safeway, Inc.)/(Bankers Trust Co., New York LOC), Mandatory Tender 12/1/1998 1,540,000 2,900,000 Chesapeake, VA IDA, (Series 1986) Weekly VRDNs (Volvo AB)/ (UBS AG LOC) 2,900,000 5,995,000 Chesapeake, VA IDA, Trust Receipts (Series 1998 FR/RI-C10) Weekly VRDNs (Sumitomo Machinery Corp. of America Corp.)/ (Bank of America NT and SA, San Francisco SWP) 5,995,000 2,000,000 Chesterfield County, VA IDA, (Series 1998) Weekly VRDNs (Lumberg, Inc.)/ (Nationsbank, N.A., Charlotte LOC) 2,000,000 5,100,000 Chesterfield County, VA IDA, 3.70% CP (Virginia Electric Power Co.), Mandatory Tender 11/12/1998 5,100,000 5,800,000 Danville, VA IDA, (Series 1997) Weekly VRDNs (Diebold, Inc.)/(Bank One, Ohio, N.A. LOC) 5,800,000 453,000 Dinwiddie County, VA IDA, IDRB (Series 1989) Weekly VRDNs (Tindall Concrete VA, Inc.)/(First Union National Bank, Charlotte, NC LOC) 453,000 5,298,975 Equity Trust III, (1996 Series) Weekly VRDNs (Bayerische Hypotheken-Und Wechsel-Bank AG LOC) 5,298,975 5,000,000 Fairfax County, VA IDA, 1998 Trust Receipts FR/RI-A35 Weekly VRDNs (Fairfax Hospital System)/(National Westminster Bank, PLC, London LIQ)/(United States Treasury PRF) 5,000,000 2,020,000 Fairfax County, VA, (Series A), 6.25% Bonds (United States Treasury PRF), 4/1/1999 (@102) 2,080,514 10,700,000 Falls Church, VA IDA, (Series 1985), 3.95% TOBs (Kaiser Permanente Medical Care Program), Optional Tender 11/1/1998 10,700,000 600,000 Fauquier County, VA IDA, Refunding Revenue Bonds Weekly VRDNs (Warrenton Development Co.)/(Nationsbank, N.A., Charlotte LOC) 600,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 VIRGINIA-CONTINUED $ 7,113,000 Fluvanna County, VA IDA, (Series 1986) Weekly VRDNs (Thomasville Furniture Industries)/(UBS AG LOC) $ 7,113,000 6,170,000 Frederick County, VA IDA, (Series 1997) Weekly VRDNs (Jouan, Inc.)/(Wachovia Bank of NC, N.A., Winston-Salem LOC) 6,170,000 1,875,000 Halifax County, VA IDA, (Series 1998) Weekly VRDNs (Annin & Co., Inc.)/(Chase Manhattan Bank N.A., New York LOC) 1,875,000 11,500,000 Halifax, VA IDA, MMMs, PCR, 3.40% CP (Virginia Electric Power Co.), Mandatory Tender 2/12/1999 11,500,000 3,000,000 Halifax, VA IDA, MMMs, PCR, 3.70% CP (Virginia Electric Power Co.), Mandatory Tender 11/12/1998 3,000,000 1,500,000 Hampton, VA Redevelopment & Housing Authority, (Series 1998) Weekly VRDNs (Township Apartments)/(Amsouth Bank N.A., Birmingham LOC) 1,500,000 1,000,000 Hampton, VA, 7.625% Bonds, 1/15/1999 1,008,012 1,600,000 Hanover County, VA IDA Weekly VRDNs (Fiber-Lam, Inc. Project)/(Nationsbank, N.A., Charlotte LOC) 1,600,000 4,000,000 Henrico County, VA IDA, (Series 1998) Weekly VRDNs (The Hermitage at Cedarfield)/(Nationsbank, N.A., Charlotte LOC) 4,000,000 3,250,000 Loudoun County, VA, (Series 1998), 3.90% TOBs (Signature Flight Support Corp.)/(Bayerische Landesbank Girozentrale LOC), Optional Tender 12/1/1998 3,250,000 3,200,000 Mecklenburg County, VA IDA, IDRB Weekly VRDNs (Harden Manufacturing Corp.)/(Columbus Bank and Trust Co., GA LOC) 3,200,000 3,000,000 Mecklenburg County, VA IDA, IDRB Weekly VRDNs (Smith Land Holdings, L.L.C.)/(Columbus Bank and Trust Co., GA LOC) 3,000,000 7,500,000 Metropolitan Washington, DC Airports Authority, 3.50% CP (Nationsbank, N.A., Charlotte LOC), Mandatory Tender 12/29/ 1998 7,500,000 7,500,000 Metropolitan Washington, DC Airports Authority, 3.60% CP (Nationsbank, N.A., Charlotte LOC), Mandatory Tender 11/17/ 1998 7,500,000 2,600,000 Newport News, VA EDA, (Series 1998) Weekly VRDNs (Jefferson Point Development)/(Credit Suisse First Boston LOC) 2,600,000 4,095,000 Newport News, VA IDA, (Series 1997) Weekly VRDNs (Iceland Seafood Corp.)/(Crestar Bank of Virginia, Richmond LOC) 4,095,000 6,660,000 Newport News, VA Redevelopment & Housing Authority, (PA-152) Weekly VRDNs (Indian Lakes Apartments)/(Merrill Lynch Capital Services, Inc. LIQ)/(Merrill Lynch Capital Services, Inc. LOC) 6,660,000 1,740,000 Newport News, VA, 5.90% Bonds, 1/1/1999 1,746,470 5,000,000 Norfolk, VA IDA, 3.50% CP (Sentara Health Systems Obligation Group), Mandatory Tender 12/17/1998 5,000,000 9,900,000 Portsmouth, VA, 3.78% BANs, 8/15/1999 9,902,702 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 VIRGINIA-CONTINUED $ 1,145,000 Pulaski County, VA IDA, (Series 1995) Weekly VRDNs (Balogh Real Estate Ltd. Partnership Mar-Bal Inc. Project)/(Bank One, Ohio, N.A. LOC) $ 1,145,000 945,000 Richmond, VA IDA, (Series 1997) Weekly VRDNs (PM Beef)/ (U.S. Bank, N.A., Minneapolis LOC) 945,000 10,500,000 Richmond, VA Redevelopment & Housing Authority, (Series B-1) Weekly VRDNs (Richmond, VA Red Tobacco Row)/(Bayerische Landesbank Girozentrale LOC) 10,500,000 6,900,000 Richmond, VA Redevelopment & Housing Authority, (Series B- 10) Weekly VRDNs (Richmond, VA Red Tobacco Row)/(Bayerische Landesbank Girozentrale LOC) 6,900,000 6,000,000 Richmond, VA Redevelopment & Housing Authority, (Series B-2) Weekly VRDNs (Richmond, VA Red Tobacco Row)/(Bayerische Landesbank Girozentrale LOC) 6,000,000 1,500,000 Richmond, VA Redevelopment & Housing Authority, (Series B-3) Weekly VRDNs (Richmond, VA Red Tobacco Row)/(Bayerische Landesbank Girozentrale LOC) 1,500,000 3,160,000 Richmond, VA Redevelopment & Housing Authority, (Series B-5) Weekly VRDNs (Richmond, VA Red Tobacco Row)/(Bayerische Landesbank Girozentrale LOC) 3,160,000 3,555,000 Richmond, VA Redevelopment & Housing Authority, (Series B-6) Weekly VRDNs (Richmond, VA Red Tobacco Row)/(Bayerische Landesbank Girozentrale LOC) 3,555,000 7,000,000 Richmond, VA Redevelopment & Housing Authority, (Series B-9) Weekly VRDNs (Richmond, VA Red Tobacco Row)/(Bayerische Landesbank Girozentrale LOC) 7,000,000 5,795,000 Richmond, VA Redevelopment & Housing Authority, Multi-Family Refunding Revenue Bonds (Series 1997) Weekly VRDNs (Newport Manor)/(Columbus Bank and Trust Co., GA LOC) 5,795,000 290,000 South Hill, VA IDA, (Series 1997) Weekly VRDNs (International Veneer Co., Inc.)/(Bank One, Indiana, N.A. LOC) 290,000 2,500,000 Staunton, VA IDA, (Series 1997) Weekly VRDNs (Diebold, Inc.)/(Bank One, Ohio, N.A. LOC) 2,500,000 2,100,000 Tazewell County, VA IDA, (Series 1993) Weekly VRDNs (Seville Properties Bluefield)/(Huntington National Bank, Columbus, OH LOC) 2,100,000 1,950,000 Virginia Beach, VA IDA, (Series 1993) Weekly VRDNs (Ocean Ranch Motel Corp.)/(Nationsbank, N.A., Charlotte LOC) 1,950,000 7,835,000 Virginia Peninsula Port Authority, Coal Terminal Revenue Refunding Bonds (Series 1987A), 3.00% CP (Dominion Terminal Associates)/(Barclays Bank PLC, London LOC), Mandatory Tender 2/12/1999 7,835,000 3,150,000 Virginia Peninsula Port Authority, Facility Revenue Refunding Bonds (Series 1992), 3.15% CP (CSX Corp.)/(Bank of Nova Scotia, Toronto LOC), Mandatory Tender 1/19/1999 3,150,000 5,000,000 Virginia Peninsula Port Authority, Facility Revenue Refunding Bonds (Series 1992), 3.45% CP (CSX Corp.)/(Bank of Nova Scotia, Toronto LOC), Mandatory Tender 12/18/1998 5,000,000 9,920,000 Virginia Port Authority, MERLOTs (Series 1997M) Weekly VRDNs (MBIA INS)/(Corestates Bank N.A., Philadelphia, PA LIQ) 9,920,000 3,000,000 Virginia Resources Authority, Water and Sewer (Series 1997) Weekly VRDNs (Henrico County, VA)/(Crestar Bank of Virginia, Richmond LIQ) 3,000,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 VIRGINIA-CONTINUED $ 4,700,000 Virginia Small Business Financing Authority Weekly VRDNs (Moses Lake Industries)/(KeyBank, N.A. LOC) $ 4,700,000 5,855,000 Virginia State Housing Development Authority, PT-1096 Weekly VRDNs (Merrill Lynch Capital Services, Inc. LIQ) 5,855,000 1,507,000 Williamsburg, VA IDA, (Series 1988) Weekly VRDNs (Colonial Williamsburg Foundation Museum)/(Nationsbank, N.A., Charlotte LOC) 1,507,000 1,575,000 Winchester, VA IDA, (Series 1995) Weekly VRDNs (Midwesco Filter Resources, Inc. Project)/(Harris Trust & Savings Bank, Chicago LOC) 1,575,000 5,000,000 York County, VA IDA, (Series 1985), 3.70% CP (Virginia Electric Power Co.), Mandatory Tender 11/12/1998 5,000,000 Total 260,269,673 PUERTO RICO-3.9% 5,000,000 Commonwealth of Puerto Rico, (Series 1992A) P-Floats PT-140, 3.65% TOBs (FSA INS)/(Commerzbank AG, Frankfurt LIQ), Mandatory Tender 1/14/1999 5,000,000 2,000,000 Puerto Rico Industrial, Medical & Environmental PCA, (1983 Series A), 4.00% TOBs (Merck & Co., Inc.), Optional Tender 12/1/1998 2,000,319 3,500,000 Puerto Rico Industrial, Medical & Environmental PCA, (Series 1983A), 3.60% TOBs (Reynolds Metals Co.)/(ABN AMRO Bank N.V., Amsterdam LOC), Optional Tender 9/1/1999 3,500,000 Total 10,500,319 Total Investments (at amortized cost) 2 $ 270,769,992
Securities that are subject to Alternative Minimum Tax represent 59.3% of the portfolio as calculated based upon total portfolio market value. 1 The Fund may only invest in securities rated in one of the two highest short-term rating categories by nationally recognized statistical rating organizations ("NRSROs") or unrated securities of comparable quality. 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, MIG-1 or MIG-2 by Moody's Investors Service, Inc., F-1+, F-1, or F-2 by Fitch IBCA, Inc. are all considered rated in one of the two highest short-term rating categories. Securities rated in the highest short-term rating category (and unrated securities of comparable quality) are identified as First Tier securities. Securities rated in the second highest short-term rating category (and unrated securities of comparable quality) are identified as Second Tier securities. The Fund follows applicable regulations in determining whether a security is rated and whether a security rated by multiple NRSROs in different rating categories should be identified as a First or Second Tier security. At October 31, 1998, the portfolio securities were rated as follows: Tier Rating Percentage Based on Total Market Value (Unaudited)
FIRST TIER SECOND TIER 100% 0%
2 Also represents cost for federal tax purposes. Note: The categories of investments are shown as a percentage of net assets ($271,707,056) at October 31, 1998. The following acronyms are used throughout this portfolio:
ACES -Adjustable Convertible Extendable Securities BANs -Bond Anticipation Notes CP -Commercial Paper EDA -Economic Development Authority FSA -Financial Security Assurance IDA -Industrial Development Authority IDR -Industrial Development Revenue IDRB -Industrial Development Revenue Bond INS -Insured LIQ -Liquidity Agreement LOC -Letter of Credit MBIA -Municipal Bond Investors Assurance MERLOTS -Municipal Exempt Receipts - Liquidity Optional Tender Series MMMs -Money Market Municipals PCA -Pollution Control Authority PCR -Pollution Control Revenue PLC -Public Limited Company PRF -Prerefunded SA -Support Agreement TOBs -Tender Option Bonds VRDNs -Variable Rate Demand Notes
See Notes which are an integral part of the Financial Statements Statement of Assets and Liabilities October 31, 1998
ASSETS: Investments in securities, at amortized cost and value $ 270,769,992 Income receivable 1,498,816 Receivable for shares sold 1,168,575 Total assets 273,437,383 LIABILITIES: Payable to Bank $ 240,093 Payable for shares redeemed 1,289,893 Income distribution payable 135,291 Accrued expenses 65,050 Total liabilities 1,730,327 Net Assets for 271,707,056 shares outstanding $ 271,707,056 NET ASSET VALUE, OFFERING PRICE, AND REDEMPTION PROCEEDS PER SHARE: INSTITUTIONAL SHARES: $24,558,505 / 24,558,505 shares outstanding $1.00 INSTITUTIONAL SERVICE SHARES: $247,148,551 / 247,148,551 shares outstanding $1.00
See Notes which are an integral part of the Financial Statements Statement of Operations Year Ended October 31, 1998
INVESTMENT INCOME: Interest $ 9,563,067 EXPENSES: Investment advisory fee $ 1,032,025 Administrative personnel and services fee 194,556 Custodian fees 4,396 Transfer and dividend disbursing agent fees and expenses 134,387 Directors'/Trustees' fees 2,471 Auditing fees 12,692 Legal fees 13,954 Portfolio accounting fees 74,567 Shareholder services fee-Institutional Shares 92,949 Shareholder services fee-Institutional Service Shares 552,066 Share registration costs 45,320 Printing and postage 16,374 Insurance premiums 16,421 Miscellaneous 13,216 Total expenses 2,205,394 WAIVERS: Waiver of investment advisory fee $ (284,795) Waiver of shareholder services fee-Institutional Shares (92,949) Waiver of shareholder services fee-Institutional Service Shares (220,827) Total waivers (598,571) Net expenses 1,606,823 Net investment income $ 7,956,244
See Notes which are an integral part of the Financial Statements Statement of Changes in Net Assets
YEAR ENDED OCTOBER 31 1998 1997 INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income $ 7,956,244 $ 6,903,033 DISTRIBUTIONS TO SHAREHOLDERS: Distributions from net investment income Institutional Shares (1,199,300) (732,930) Institutional Service Shares (6,756,944) (6,170,103) Change in net assets resulting from distributions to shareholders (7,956,244) (6,903,033) SHARE TRANSACTIONS: Proceeds from sale of shares 1,342,458,938 1,311,030,791 Net asset value of shares issued to shareholders in payment of distributions declared 5,993,310 4,912,775 Cost of shares redeemed (1,299,965,431) (1,296,599,777) Change in net assets resulting from share transactions 48,486,817 19,343,789 Change in net assets 48,486,817 19,343,789 NET ASSETS: Beginning of period 223,220,239 203,876,450 End of period $ 271,707,056 $ 223,220,239
See Notes which are an integral part of the Financial Statements Notes to Financial Statements October 31, 1998 ORGANIZATION Federated Municipal Trust (the "Trust") is registered under the Investment Company Act of 1940, as amended (the "Act") as an open-end, management investment company. The Trust consists of 17 portfolios. The financial statements included herein are only those of Virginia Municipal Cash Trust (the "Fund"). The financial statements of the other portfolios are presented separately. The assets of each portfolio are segregated and a shareholder's interest is limited to the portfolio in which shares are held. The Fund offers two classes of shares: Institutional Shares and Institutional Service Shares. The investment objective of the Fund is current income exempt from federal regular income tax and the income tax imposed by the Commonwealth of Virginia consistent with stability of principal. 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. 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 Board of Trustees to issue an unlimited number of full and fractional shares of beneficial interest (without par value) for each class of shares. Transactions in shares were as follows:
YEAR ENDED OCTOBER 31 1998 1997 INSTITUTIONAL SHARES: Shares sold 140,689,593 75,151,387 Shares issued to shareholders in payment of distributions declared 292,839 13,520 Shares redeemed (140,806,137) (77,084,630) Net change resulting from Institutional Share transactions 176,295 (1,919,723) YEAR ENDED OCTOBER 31 1998 1997 INSTITUTIONAL SERVICE SHARES: Shares sold 1,201,769,345 1,235,879,404 Shares issued to shareholders in payment of distributions declared 5,700,471 4,899,255 Shares redeemed (1,159,159,294) (1,219,515,147) Net change resulting from Institutional Service Share transactions 48,310,522 21,263,512 Net change resulting from share transactions 48,486,817 19,343,789
At October 31, 1998, capital paid-in aggregated $271,707,056. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES INVESTMENT ADVISORY FEE Federated Management, 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 ("FSS"), the Fund will pay FSS up to 0.25% of average daily net assets of the Fund for the period. The fee paid to FSS is used to finance certain services for shareholders and to maintain shareholder accounts. FSS may voluntarily choose to waive any portion of its fee. FSS can modify or terminate this voluntary waiver at any time at its sole discretion. TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES FServ, through its subsidiary, Federated Shareholder Services Company ("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. INTERFUND TRANSACTIONS During the period ended October 31, 1998, the Fund engaged in purchase and sale transactions with funds that have a common investment adviser (or affiliated investment advisers), common Directors/Trustees, and/or common Officers. These purchase and sale transactions were made at current market value pursuant to Rule 17a-7 under the Act amounting to $441,610,000 and $448,245,000, respectively. GENERAL Certain of the Officers and Trustees of the Trust are Officers and Directors or Trustees of the above companies. CONCENTRATION OF CREDIT RISK Since the Fund invests a substantial portion of its assets in issuers located in one state, it will be more susceptible to factors adversely affecting issuers of that state than would be a comparable tax-exempt mutual fund that invests nationally. In order to reduce the credit risk associated with such factors, at October 31, 1998, 71.6% of the securities in the portfolio of investments are backed by letters of credit or bond insurance of various financial institutions and financial guaranty assurance agencies. The percentage of investments insured by or supported (backed) by a letter of credit from any one institution or agency did not exceed 17.4% of total investments. 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 BOARD OF TRUSTEES OF FEDERATED MUNICIPAL TRUST AND SHAREHOLDERS OF VIRGINIA MUNICIPAL CASH TRUST: We have audited the accompanying statement of assets and liabilities of Virginia Municipal Cash Trust (an investment portfolio of Federated Municipal Trust, a Massachusetts business trust), including the schedule of portfolio investments, as of October 31, 1998, the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for the periods presented. These financial statements and financial highlights are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the 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 October 31, 1998, by correspondence with the custodian. 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 Virginia Municipal Cash Trust (an investment portfolio of Federated Municipal Trust) as of October 31, 1998, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and its financial highlights for the periods presented, in conformity with generally accepted accounting principles. Arthur Andersen LLP Boston, Massachusetts December 23, 1998 [Graphic] PROSPECTUS Virginia Municipal Cash Trust A Portfolio of Federated Municipal Trust INSTITUTIONAL SHARES December 31, 1998 A Statement of Additional Information (SAI) dated December 31, 1998, is incorporated by reference into this prospectus. To obtain the SAI 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] Virginia Municipal Cash 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. 811-5911 Cusip 314229816 3080591A-IS (12/98) [Graphic] PROSPECTUS Virginia Municipal Cash Trust A Portfolio of Federated Municipal Trust INSTITUTIONAL SERVICE SHARES A money market mutual fund seeking to provide current income exempt from federal regular income tax and the income tax imposed by the Commonwealth of Virginia. 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. December 31, 1998 CONTENTS Risk/Return Summary 1 What are the Fund's Fees and Expenses? 2 What are the Fund's Investment Strategies? 3 What are the Principal Securities in Which the Fund Invests? 3 What are the Specific Risks of Investing in the Fund? 4 What do Shares Cost? 5 How is the Fund Sold? 5 How to Purchase Shares 5 How to Redeem Shares 7 Account and Share Information 9 Who Manages the Fund? 9 Financial Information 10 Report of Independent Public Accountants 23 Risk/Return Summary WHAT IS THE FUND'S INVESTMENT OBJECTIVE? The Fund is a money market fund which seeks to maintain a stable net asset value of $1.00. The Fund's investment objective is current income exempt from federal regular income tax and the income tax imposed by the Commonwealth of Virginia consistent with stability of principal. 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 tax-exempt securities so that the Fund's annual interest income is exempt from federal regular income tax and Virginia state income tax. Interest from the Fund's investments may be subject to the federal alternative minimum tax for individuals and corporations. WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND? Because the Fund may invest a significant portion of its assets in securities of a single issuer, an investment in the Fund may involve additional risks compared to a fully diversified money market 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] - See Appendix C-15 Historically, the Fund has maintained a constant $1.00 net asset value per share. The bar chart shows the variability of the Fund's Institutional Service Shares total returns on a yearly basis. The Fund's Institutional Service Shares are not sold subject to a sales charge (load). The total returns displayed above are based upon the net asset value. The Fund's Institutional Service Shares year-to-date total return as of the most recent calendar quarter of September 30, 1998, was 2.29%. Within the period shown in the Chart, the Fund's Institutional Service Shares highest quarterly return was 0.90% (quarter ended June 30, 1995). Its lowest quarterly return was 0.55% (quarter ended March 31, 1994). The Fund's Institutional Service Shares Seven-Day Net Yield as of 12/31/1997 was 3.45%. The following table represents the Fund's Institutional Service Shares Average Annual Total Return through 12/31/1997.
CALENDAR PERIOD FUND 1 Year 3.21% Start of Performance 1 3.05%
1 The Fund's Institutional Service Shares start of performance date was September 16, 1993. Investors may call the Fund at 1-800-341-7400 to acquire the Seven-Day Net Yield. 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? VIRGINIA MUNICIPAL CASH TRUST FEES AND EXPENSES This table describes the fees and expenses that you may pay if you buy, hold and redeem shares of the Fund's Institutional Service Shares.
SHAREHOLDER FEES 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 a percentage of average net assets) Management Fee 2 0.40% Distribution (12b-1) Fee None Shareholder Services Fee 3 0.25% Other Expenses 0.20% Total Annual Fund Operating Expenses 0.85% 1 Although not contractually obligated to do so, the adviser and the shareholder services provider waived certain amounts. These are shown below along with the net expenses the Fund actually paid for the fiscal year ended October 31, 1998. Waiver of Fund Expenses 0.21% Total Actual Annual Fund Operating Expenses (after waivers) 0.64% 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 0.29% for the year ended October 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 0.15% for the fiscal year ended October 31, 1998.
EXAMPLE The following Example is intended to help you compare the cost of investing in the Virginia Municipal Cash Trust's Institutional Service Shares with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund's Institutional Service 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 Virginia Municipal Cash Trust Institutional Service Shares' operating expenses are BEFORE WAIVERS as estimated above and remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS Expenses assuming no redemption $87 $271 $471 $1,049
What are the Fund's Investment Strategies? The Fund invests in a portfolio of high-quality tax-exempt securities maturing in 13 months or less. The average maturity of the Fund's portfolio, computed on a dollar-weighted basis, will be 90 days or less. The Fund's Adviser performs a fundamental credit analysis to develop an approved list of issuers and securities that meet the Adviser's minimum credit standards. The Adviser targets an average portfolio maturity based upon its interest rate outlook and the tax-exempt securities available. The Adviser structures the portfolio by combining variable rate demand instruments and municipal notes. Depending on the supply of tax-exempt securities, the Adviser generally shortens the portfolio's maturity when it expects interest rates to rise and extends the maturity when it expects interest rates to fall. TEMPORARY DEFENSIVE INVESTMENTS During adverse market conditions the Fund may temporarily depart from its principal investment strategies by investing in securities subject to federal regular income tax and Virginia state income tax. Temporary investments will be of comparable quality to other securities in which the Fund invests. This may cause the Fund to give up greater investment returns to maintain the safety of principal. This also may cause the Fund to receive and distribute taxable income to investors. What are the Principal Securities in Which the Fund Invests? TAX-EXEMPT SECURITIES Tax-exempt securities are fixed income securities that pay interest exempt from regular federal income taxes. States, counties, cities and other political subdivisions and authorities typically issue tax-exempt securities. Tax-exempt securities are generally differentiated by their source of repayment. FIXED INCOME SECURITIES Fixed income 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. VARIABLE RATE DEMAND INSTRUMENTS Variable rate demand instruments are tax-exempt securities that require the issuer or a third party, such as a dealer or bank, to repurchase the security for its face value upon demand. The securities also bear interest at a variable rate intended to cause the securities to trade at their face value. The Fund treats demand instruments as short-term securities, even though their stated maturity may extend beyond 13 months. MUNICIPAL NOTES Municipal notes are short-term tax-exempt securities. Many municipalities issue such notes to fund their current operations before collecting taxes or other municipal revenues. Municipalities may also issue notes to fund capital projects prior to issuing long-term bonds. The issuers typically repay the notes at the end of their fiscal year, either with taxes, other revenues or proceeds from newly issued notes or bonds. INVESTMENT 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 rating services or be of comparable quality to securities having such ratings. CREDIT ENHANCEMENT Credit enhancement consists of an arrangement in which a company agrees to pay amounts due on a fixed income security if the issuer defaults. In some cases the company providing credit enhancement makes all payments directly to the security holders and receives reimbursement from the issuer. Normally, the credit enhancer has greater financial resources and liquidity than the issuer. For this reason, the Adviser usually evaluates the credit risk of a fixed income security based solely upon its credit enhancement. 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 tax-exempt money market fund are described below. CREDIT RISK Credit risk is the possibility that an issuer or a credit enhancer will default (fails to repay interest and principal when due). If an issuer or credit enhancer defaults, the Fund will lose money. Money market funds try to minimize this risk by purchasing higher quality securities. Many fixed income securities receive credit ratings from companies such as Standard & Poor's and Moody's Investor Services. Fixed income securities receive different credit ratings depending on the rating company's assessment of the likelihood of default by the issuer. The lower the credit rating, the greater the credit risk. If the security is unrated, greater reliance is placed on the Adviser's credit assessment. 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. SECTOR RISK Most of the Fund's securities will be invested in issuers located in Virginia. In addition, a substantial part of the Fund's portfolio may be comprised of tax-exempt securities issued or credit enhanced by companies in similar businesses or with other similar characteristics. As a result, the Fund will be more susceptible to any economic, business, political, or other developments which generally affect these issuers. 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 determined net asset value (NAV). The Fund does not charge a sales charge. NAV is determined at 12:00 noon and 1:00 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 offers two share classes: Institutional Shares and Institutional Service Shares, each representing interests in a single portfolio of securities. This prospectus relates only to Institutional Service Shares. Each share class has different expenses, which affect their performance. Contact your investment professional or call 1-800-341-7400 for more information concerning the other class. The Fund's distributor markets the Shares described in this prospectus to institutions acting in an agency or fiduciary capacity or to individuals directly or through investment professionals. The Fund may not be a suitable investment for retirement plans or for non-Virginia taxpayers because it invests in Virginia tax-exempt securities. 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 1:00 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 on the day 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 SYSTEMATIC INVESTMENT PROGRAM Once you have opened an account, you may automatically purchase additional Shares on a regular basis by completing the Systematic Investment Program (SIP) section of the New Account Form or by contacting the Fund or your investment professional. The minimum investment amount for SIPs is $50. BY AUTOMATED CLEARINGHOUSE (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 12:00 noon (Eastern time) your redemption will be wired to you the same day. You will not receive that day's dividend. If you call after 12:00 noon (Eastern time) your redemption will be wired to you the following business day. You will receive that day's dividend. Under limited circumstances, arrangements may be made with the Distributor for same-day payment of redemption proceeds, without that day's dividend, for redemption requests received before 2:00 p.m. (Eastern time). 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 30 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 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. SYSTEMATIC WITHDRAWAL PROGRAM You may automatically redeem Shares on a regular basis by completing the appropriate section of the New Account Form or an Account Service Options Form or by contacting your investment professional or the Fund. Your account value must meet the minimum initial investment amount at the time the program is established. This program may reduce, and eventually deplete, your account. Payments should not be considered yield or income. CHECKWRITING You may request a checking account to redeem your Fund Shares. Your account will continue to receive the daily dividend declared on the Shares to be redeemed until the check is presented for payment. Checks may be made payable only to third-parties and may not be used to redeem Shares or to close your account. DEBIT CARD You may request a debit card account which will permit you to redeem Shares for purchases. A fee will be charged to your account for this service. 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 CONFIRMATIONS AND ACCOUNT STATEMENTS You will receive confirmation of purchases and redemptions (except for systematic transactions). In addition, 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, 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. It is anticipated that Fund distributions will be primarily dividends that are exempt from federal income tax, although a portion of the Fund's dividends may not be exempt. Dividends may be subject to state and local taxes, although the Fund's dividends will be exempt from Virginia state personal income tax to the extent they are derived from interest on obligations exempt from Virginia personal income taxes. Capital gains and non-exempt dividends are taxable whether paid in cash or reinvested in the Fund. 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 Management. 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 and/or provide administrative services to more than 300 mutual funds and private accounts, which totaled over $120 billion in assets as of December 31, 1997. Federated was established in 1955 and is one of the largest mutual fund investment managers in the United States with more than 2,000 employees. Over 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 affect 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-Institutional Service Shares (For a share outstanding throughout each period) Reference is made to the Report of Independent Public Accountants on page 23.
YEAR ENDED OCTOBER 31 1998 1997 1996 1995 1994 NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 INCOME FROM INVESTMENT OPERATIONS: Net investment income 0.03 0.03 0.03 0.03 0.02 LESS DISTRIBUTIONS: Distributions from net investment income (0.03) (0.03) (0.03) (0.03) (0.02) NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 TOTAL RETURN 1 3.11% 3.17% 3.14% 3.46% 2.44% RATIOS TO AVERAGE NET ASSETS: Expenses 0.64% 0.63% 0.59% 0.59% 0.40% Net investment income 3.06% 3.12% 3.10% 3.38% 2.42% Expense waiver/reimbursement 2 0.21% 0.23% 0.30% 0.32% 0.37% SUPPLEMENTAL DATA: Net assets, end of period (000 omitted) $247,149 $198,838 $177,575 $127,083 $100,084
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 October 31, 1998
PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-99.7% 1 VIRGINIA-95.8% $ 3,500,000 Alexandria, VA Redevelopment and Housing Authority, Series 1996B Weekly VRDNs (Buckingham Village Apartments)/(First Union National Bank, Charlotte, NC LOC) $ 3,500,000 2,200,000 Amelia County, VA IDA, (Series 1991) Weekly VRDNs (Chambers Waste System)/(Morgan Guaranty Trust Co., New York LOC) 2,200,000 1,900,000 Arlington County, VA Weekly VRDNs (Ballston Public Parking)/ (Citibank N.A., New York LOC) 1,900,000 10,000,000 Campbell County, VA IDA, Solid Waste Disposal Facilities Revenue ACES Weekly VRDNs (Georgia-Pacific Corp.)/(SunTrust Bank, Atlanta LOC) 10,000,000 1,100,000 Carroll County, VA IDA, IDRB (Series 1995) Weekly VRDNs (Kentucky Derby Hosiery Co., Inc. Project)/(Bank One, Kentucky LOC) 1,100,000 1,000,000 Charles County, VA IDA, Solid Waste Disposal Facility Revenue Bonds (Series 1996) Weekly VRDNs (Chambers Development of Virginia, Inc. Project)/(Morgan Guaranty Trust Co., New York LOC) 1,000,000 1,540,000 Charlottesville, VA IDA, IDR Refunding Bonds, 3.80%TOBs (Safeway, Inc.)/(Bankers Trust Co., New York LOC), Mandatory Tender 12/1/1998 1,540,000 2,900,000 Chesapeake, VA IDA, (Series 1986) Weekly VRDNs (Volvo AB)/ (UBS AG LOC) 2,900,000 5,995,000 Chesapeake, VA IDA, Trust Receipts (Series 1998 FR/RI-C10) Weekly VRDNs (Sumitomo Machinery Corp. of America Corp.)/ (Bank of America NT and SA, San Francisco SWP) 5,995,000 2,000,000 Chesterfield County, VA IDA, (Series 1998) Weekly VRDNs (Lumberg, Inc.)/ (Nationsbank, N.A., Charlotte LOC) 2,000,000 5,100,000 Chesterfield County, VA IDA, 3.70% CP (Virginia Electric Power Co.), Mandatory Tender 11/12/1998 5,100,000 5,800,000 Danville, VA IDA, (Series 1997) Weekly VRDNs (Diebold, Inc.)/(Bank One, Ohio, N.A. LOC) 5,800,000 453,000 Dinwiddie County, VA IDA, IDRB (Series 1989) Weekly VRDNs (Tindall Concrete VA, Inc.)/(First Union National Bank, Charlotte, NC LOC) 453,000 5,298,975 Equity Trust III, (1996 Series) Weekly VRDNs (Bayerische Hypotheken-Und Wechsel-Bank AG LOC) 5,298,975 5,000,000 Fairfax County, VA IDA, 1998 Trust Receipts FR/RI-A35 Weekly VRDNs (Fairfax Hospital System)/(National Westminster Bank, PLC, London LIQ)/(United States Treasury PRF) 5,000,000 2,020,000 Fairfax County, VA, (Series A), 6.25% Bonds (United States Treasury PRF), 4/1/1999 (@102) 2,080,514 10,700,000 Falls Church, VA IDA, (Series 1985), 3.95% TOBs (Kaiser Permanente Medical Care Program), Optional Tender 11/1/1998 10,700,000 600,000 Fauquier County, VA IDA, Refunding Revenue Bonds Weekly VRDNs (Warrenton Development Co.)/(Nationsbank, N.A., Charlotte LOC) 600,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 VIRGINIA-CONTINUED $ 7,113,000 Fluvanna County, VA IDA, (Series 1986) Weekly VRDNs (Thomasville Furniture Industries)/(UBS AG LOC) $ 7,113,000 6,170,000 Frederick County, VA IDA, (Series 1997) Weekly VRDNs (Jouan, Inc.)/(Wachovia Bank of NC, N.A., Winston-Salem LOC) 6,170,000 1,875,000 Halifax County, VA IDA, (Series 1998) Weekly VRDNs (Annin & Co., Inc.)/(Chase Manhattan Bank N.A., New York LOC) 1,875,000 11,500,000 Halifax, VA IDA, MMMs, PCR, 3.40% CP (Virginia Electric Power Co.), Mandatory Tender 2/12/1999 11,500,000 3,000,000 Halifax, VA IDA, MMMs, PCR, 3.70% CP (Virginia Electric Power Co.), Mandatory Tender 11/12/1998 3,000,000 1,500,000 Hampton, VA Redevelopment & Housing Authority, (Series 1998) Weekly VRDNs (Township Apartments)/(Amsouth Bank N.A., Birmingham LOC) 1,500,000 1,000,000 Hampton, VA, 7.625% Bonds, 1/15/1999 1,008,012 1,600,000 Hanover County, VA IDA Weekly VRDNs (Fiber-Lam, Inc. Project)/(Nationsbank, N.A., Charlotte LOC) 1,600,000 4,000,000 Henrico County, VA IDA, (Series 1998) Weekly VRDNs (The Hermitage at Cedarfield)/(Nationsbank, N.A., Charlotte LOC) 4,000,000 3,250,000 Loudoun County, VA, (Series 1998), 3.90% TOBs (Signature Flight Support Corp.)/(Bayerische Landesbank Girozentrale LOC), Optional Tender 12/1/1998 3,250,000 3,200,000 Mecklenburg County, VA IDA, IDRB Weekly VRDNs (Harden Manufacturing Corp.)/(Columbus Bank and Trust Co., GA LOC) 3,200,000 3,000,000 Mecklenburg County, VA IDA, IDRB Weekly VRDNs (Smith Land Holdings, L.L.C.)/(Columbus Bank and Trust Co., GA LOC) 3,000,000 7,500,000 Metropolitan Washington, DC Airports Authority, 3.50% CP (Nationsbank, N.A., Charlotte LOC), Mandatory Tender 12/29/ 1998 7,500,000 7,500,000 Metropolitan Washington, DC Airports Authority, 3.60% CP (Nationsbank, N.A., Charlotte LOC), Mandatory Tender 11/17/ 1998 7,500,000 2,600,000 Newport News, VA EDA, (Series 1998) Weekly VRDNs (Jefferson Point Development)/(Credit Suisse First Boston LOC) 2,600,000 4,095,000 Newport News, VA IDA, (Series 1997) Weekly VRDNs (Iceland Seafood Corp.)/(Crestar Bank of Virginia, Richmond LOC) 4,095,000 6,660,000 Newport News, VA Redevelopment & Housing Authority, (PA-152) Weekly VRDNs (Indian Lakes Apartments)/(Merrill Lynch Capital Services, Inc. LIQ)/(Merrill Lynch Capital Services, Inc. LOC) 6,660,000 1,740,000 Newport News, VA, 5.90% Bonds, 1/1/1999 1,746,470 5,000,000 Norfolk, VA IDA, 3.50% CP (Sentara Health Systems Obligation Group), Mandatory Tender 12/17/1998 5,000,000 9,900,000 Portsmouth, VA, 3.78% BANs, 8/15/1999 9,902,702 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 VIRGINIA-CONTINUED $ 1,145,000 Pulaski County, VA IDA, (Series 1995) Weekly VRDNs (Balogh Real Estate Ltd. Partnership Mar-Bal Inc. Project)/(Bank One, Ohio, N.A. LOC) $ 1,145,000 945,000 Richmond, VA IDA, (Series 1997) Weekly VRDNs (PM Beef)/ (U.S. Bank, N.A., Minneapolis LOC) 945,000 10,500,000 Richmond, VA Redevelopment & Housing Authority, (Series B-1) Weekly VRDNs (Richmond, VA Red Tobacco Row)/(Bayerische Landesbank Girozentrale LOC) 10,500,000 6,900,000 Richmond, VA Redevelopment & Housing Authority, (Series B- 10) Weekly VRDNs (Richmond, VA Red Tobacco Row)/(Bayerische Landesbank Girozentrale LOC) 6,900,000 6,000,000 Richmond, VA Redevelopment & Housing Authority, (Series B-2) Weekly VRDNs (Richmond, VA Red Tobacco Row)/(Bayerische Landesbank Girozentrale LOC) 6,000,000 1,500,000 Richmond, VA Redevelopment & Housing Authority, (Series B-3) Weekly VRDNs (Richmond, VA Red Tobacco Row)/(Bayerische Landesbank Girozentrale LOC) 1,500,000 3,160,000 Richmond, VA Redevelopment & Housing Authority, (Series B-5) Weekly VRDNs (Richmond, VA Red Tobacco Row)/(Bayerische Landesbank Girozentrale LOC) 3,160,000 3,555,000 Richmond, VA Redevelopment & Housing Authority, (Series B-6) Weekly VRDNs (Richmond, VA Red Tobacco Row)/(Bayerische Landesbank Girozentrale LOC) 3,555,000 7,000,000 Richmond, VA Redevelopment & Housing Authority, (Series B-9) Weekly VRDNs (Richmond, VA Red Tobacco Row)/(Bayerische Landesbank Girozentrale LOC) 7,000,000 5,795,000 Richmond, VA Redevelopment & Housing Authority, Multi-Family Refunding Revenue Bonds (Series 1997) Weekly VRDNs (Newport Manor)/(Columbus Bank and Trust Co., GA LOC) 5,795,000 290,000 South Hill, VA IDA, (Series 1997) Weekly VRDNs (International Veneer Co., Inc.)/(Bank One, Indiana, N.A. LOC) 290,000 2,500,000 Staunton, VA IDA, (Series 1997) Weekly VRDNs (Diebold, Inc.)/(Bank One, Ohio, N.A. LOC) 2,500,000 2,100,000 Tazewell County, VA IDA, (Series 1993) Weekly VRDNs (Seville Properties Bluefield)/(Huntington National Bank, Columbus, OH LOC) 2,100,000 1,950,000 Virginia Beach, VA IDA, (Series 1993) Weekly VRDNs (Ocean Ranch Motel Corp.)/(Nationsbank, N.A., Charlotte LOC) 1,950,000 7,835,000 Virginia Peninsula Port Authority, Coal Terminal Revenue Refunding Bonds (Series 1987A), 3.00% CP (Dominion Terminal Associates)/(Barclays Bank PLC, London LOC), Mandatory Tender 2/12/1999 7,835,000 3,150,000 Virginia Peninsula Port Authority, Facility Revenue Refunding Bonds (Series 1992), 3.15% CP (CSX Corp.)/(Bank of Nova Scotia, Toronto LOC), Mandatory Tender 1/19/1999 3,150,000 5,000,000 Virginia Peninsula Port Authority, Facility Revenue Refunding Bonds (Series 1992), 3.45% CP (CSX Corp.)/(Bank of Nova Scotia, Toronto LOC), Mandatory Tender 12/18/1998 5,000,000 9,920,000 Virginia Port Authority, MERLOTs (Series 1997M) Weekly VRDNs (MBIA INS)/(Corestates Bank N.A., Philadelphia, PA LIQ) 9,920,000 3,000,000 Virginia Resources Authority, Water and Sewer (Series 1997) Weekly VRDNs (Henrico County, VA)/(Crestar Bank of Virginia, Richmond LIQ) 3,000,000 PRINCIPAL AMOUNT VALUE SHORT-TERM MUNICIPALS-continued 1 VIRGINIA-CONTINUED $ 4,700,000 Virginia Small Business Financing Authority Weekly VRDNs (Moses Lake Industries)/(KeyBank, N.A. LOC) $ 4,700,000 5,855,000 Virginia State Housing Development Authority, PT-1096 Weekly VRDNs (Merrill Lynch Capital Services, Inc. LIQ) 5,855,000 1,507,000 Williamsburg, VA IDA, (Series 1988) Weekly VRDNs (Colonial Williamsburg Foundation Museum)/(Nationsbank, N.A., Charlotte LOC) 1,507,000 1,575,000 Winchester, VA IDA, (Series 1995) Weekly VRDNs (Midwesco Filter Resources, Inc. Project)/(Harris Trust & Savings Bank, Chicago LOC) 1,575,000 5,000,000 York County, VA IDA, (Series 1985), 3.70% CP (Virginia Electric Power Co.), Mandatory Tender 11/12/1998 5,000,000 Total 260,269,673 PUERTO RICO-3.9% 5,000,000 Commonwealth of Puerto Rico, (Series 1992A) P-Floats PT-140, 3.65% TOBs (FSA INS)/(Commerzbank AG, Frankfurt LIQ), Mandatory Tender 1/14/1999 5,000,000 2,000,000 Puerto Rico Industrial, Medical & Environmental PCA, (1983 Series A), 4.00% TOBs (Merck & Co., Inc.), Optional Tender 12/1/1998 2,000,319 3,500,000 Puerto Rico Industrial, Medical & Environmental PCA, (Series 1983A), 3.60% TOBs (Reynolds Metals Co.)/(ABN AMRO Bank N.V., Amsterdam LOC), Optional Tender 9/1/1999 3,500,000 Total 10,500,319 Total Investments (at amortized cost) 2 $ 270,769,992
Securities that are subject to Alternative Minimum Tax represent 59.3% of the portfolio as calculated based upon total portfolio market value. 1 The Fund may only invest in securities rated in one of the two highest short-term rating categories by nationally recognized statistical rating organizations ("NRSROs") or unrated securities of comparable quality. 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, MIG-1 or MIG-2 by Moody's Investors Service, Inc., F-1+, F-1, or F-2 by Fitch IBCA, Inc. are all considered rated in one of the two highest short-term rating categories. Securities rated in the highest short-term rating category (and unrated securities of comparable quality) are identified as First Tier securities. Securities rated in the second highest short-term rating category (and unrated securities of comparable quality) are identified as Second Tier securities. The Fund follows applicable regulations in determining whether a security is rated and whether a security rated by multiple NRSROs in different rating categories should be identified as a First or Second Tier security. At October 31, 1998, the portfolio securities were rated as follows: Tier Rating Percentage Based on Total Market Value (Unaudited)
FIRST TIER SECOND TIER 100% 0%
2 Also represents cost for federal tax purposes. Note: The categories of investments are shown as a percentage of net assets ($271,707,056) at October 31, 1998. The following acronyms are used throughout this portfolio:
ACES -Adjustable Convertible Extendable Securities BANs -Bond Anticipation Notes CP -Commercial Paper EDA -Economic Development Authority FSA -Financial Security Assurance IDA -Industrial Development Authority IDR -Industrial Development Revenue IDRB -Industrial Development Revenue Bond INS -Insured LIQ -Liquidity Agreement LOC -Letter of Credit MBIA -Municipal Bond Investors Assurance MERLOTS -Municipal Exempt Receipts - Liquidity Optional Tender Series MMMs -Money Market Municipals PCA -Pollution Control Authority PCR -Pollution Control Revenue PLC -Public Limited Company PRF -Prerefunded SA -Support Agreement TOBs -Tender Option Bonds VRDNs -Variable Rate Demand Notes
See Notes which are an integral part of the Financial Statements Statement of Assets and Liabilities October 31, 1998
ASSETS: Investments in securities, at amortized cost and value $ 270,769,992 Income receivable 1,498,816 Receivable for shares sold 1,168,575 Total assets 273,437,383 LIABILITIES: Payable to Bank $ 240,093 Payable for shares redeemed 1,289,893 Income distribution payable 135,291 Accrued expenses 65,050 Total liabilities 1,730,327 Net Assets for 271,707,056 shares outstanding $ 271,707,056 NET ASSET VALUE, OFFERING PRICE, AND REDEMPTION PROCEEDS PER SHARE: INSTITUTIONAL SHARES: $24,558,505 / 24,558,505 shares outstanding $1.00 INSTITUTIONAL SERVICE SHARES: $247,148,551 / 247,148,551 shares outstanding $1.00
See Notes which are an integral part of the Financial Statements Statement of Operations Year Ended October 31, 1998
INVESTMENT INCOME: Interest $ 9,563,067 EXPENSES: Investment advisory fee $ 1,032,025 Administrative personnel and services fee 194,556 Custodian fees 4,396 Transfer and dividend disbursing agent fees and expenses 134,387 Directors'/Trustees' fees 2,471 Auditing fees 12,692 Legal fees 13,954 Portfolio accounting fees 74,567 Shareholder services fee-Institutional Shares 92,949 Shareholder services fee-Institutional Service Shares 552,066 Share registration costs 45,320 Printing and postage 16,374 Insurance premiums 16,421 Miscellaneous 13,216 Total expenses 2,205,394 WAIVERS: Waiver of investment advisory fee $ (284,795) Waiver of shareholder services fee-Institutional Shares (92,949) Waiver of shareholder services fee-Institutional Service Shares (220,827) Total waivers (598,571) Net expenses 1,606,823 Net investment income $ 7,956,244
See Notes which are an integral part of the Financial Statements Statement of Changes in Net Assets
YEAR ENDED OCTOBER 31 1998 1997 INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income $ 7,956,244 $ 6,903,033 DISTRIBUTIONS TO SHAREHOLDERS: Distributions from net investment income Institutional Shares (1,199,300) (732,930) Institutional Service Shares (6,756,944) (6,170,103) Change in net assets resulting from distributions to shareholders (7,956,244) (6,903,033) SHARE TRANSACTIONS: Proceeds from sale of shares 1,342,458,938 1,311,030,791 Net asset value of shares issued to shareholders in payment of distributions declared 5,993,310 4,912,775 Cost of shares redeemed (1,299,965,431) (1,296,599,777) Change in net assets resulting from share transactions 48,486,817 19,343,789 Change in net assets 48,486,817 19,343,789 NET ASSETS: Beginning of period 223,220,239 203,876,450 End of period $ 271,707,056 $ 223,220,239
See Notes which are an integral part of the Financial Statements Notes to Financial Statements October 31, 1998 ORGANIZATION Federated Municipal Trust (the "Trust") is registered under the Investment Company Act of 1940, as amended (the "Act") as an open-end, management investment company. The Trust consists of 17 portfolios. The financial statements included herein are only those of Virginia Municipal Cash Trust (the "Fund"). The financial statements of the other portfolios are presented separately. The assets of each portfolio are segregated and a shareholder's interest is limited to the portfolio in which shares are held. The Fund offers two classes of shares: Institutional Shares and Institutional Service Shares. The investment objective of the Fund is current income exempt from federal regular income tax and the income tax imposed by the Commonwealth of Virginia consistent with stability of principal. 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. 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 Board of Trustees to issue an unlimited number of full and fractional shares of beneficial interest (without par value) for each class of shares. Transactions in shares were as follows:
YEAR ENDED OCTOBER 31 1998 1997 INSTITUTIONAL SERVICE SHARES: Shares sold 1,201,769,345 1,235,879,404 Shares issued to shareholders in payment of distributions declared 5,700,471 4,899,255 Shares redeemed (1,159,159,294) (1,219,515,147) Net change resulting from Institutional Service Share transactions 48,310,522 21,263,512 YEAR ENDED OCTOBER 31 1998 1997 INSTITUTIONAL SHARES: Shares sold 140,689,593 75,151,387 Shares issued to shareholders in payment of distributions declared 292,839 13,520 Shares redeemed (140,806,137) (77,084,630) Net change resulting from Institutional Share transactions 176,295 (1,919,723) Net change resulting from share transactions 48,486,817 19,343,789
At October 31, 1998, capital paid-in aggregated $271,707,056. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES INVESTMENT ADVISORY FEE Federated Management, 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 ("FSS"), the Fund will pay FSS up to 0.25% of average daily net assets of the Fund for the period. The fee paid to FSS is used to finance certain services for shareholders and to maintain shareholder accounts. FSS may voluntarily choose to waive any portion of its fee. FSS can modify or terminate this voluntary waiver at any time at its sole discretion. TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES FServ, through its subsidiary, Federated Shareholder Services Company ("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. INTERFUND TRANSACTIONS During the period ended October 31, 1998, the Fund engaged in purchase and sale transactions with funds that have a common investment adviser (or affiliated investment advisers), common Directors/Trustees, and/or common Officers. These purchase and sale transactions were made at current market value pursuant to Rule 17a-7 under the Act amounting to $441,610,000 and $448,245,000, respectively. GENERAL Certain of the Officers and Trustees of the Trust are Officers and Directors or Trustees of the above companies. CONCENTRATION OF CREDIT RISK Since the Fund invests a substantial portion of its assets in issuers located in one state, it will be more susceptible to factors adversely affecting issuers of that state than would be a comparable tax-exempt mutual fund that invests nationally. In order to reduce the credit risk associated with such factors, at October 31, 1998, 71.6% of the securities in the portfolio of investments are backed by letters of credit or bond insurance of various financial institutions and financial guaranty assurance agencies. The percentage of investments insured by or supported (backed) by a letter of credit from any one institution or agency did not exceed 17.4% of total investments. 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 BOARD OF TRUSTEES OF FEDERATED MUNICIPAL TRUST AND SHAREHOLDERS OF VIRGINIA MUNICIPAL CASH TRUST: We have audited the accompanying statement of assets and liabilities of Virginia Municipal Cash Trust (an investment portfolio of Federated Municipal Trust, a Massachusetts business trust), including the schedule of portfolio investments, as of October 31, 1998, the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for the periods presented. These financial statements and financial highlights are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the 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 October 31, 1998, by correspondence with the custodian. 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 Virginia Municipal Cash Trust (an investment portfolio of Federated Municipal Trust) as of October 31, 1998, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and its financial highlights for the periods presented, in conformity with generally accepted accounting principles. Arthur Andersen LLP Boston, Massachusetts December 23, 1998 [Graphic] PROSPECTUS Virginia Municipal Cash Trust A Portfolio of Federated Municipal Trust INSTITUTIONAL SERVICE SHARES December 31, 1998 A Statement of Additional Information (SAI) dated December 31, 1998, is incorporated by reference into this prospectus. To obtain the SAI 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] Virginia Municipal Cash 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. 811-5911 Cusip 314229824 3080501A-SS (12/98) [Graphic] STATEMENT OF ADDITIONAL INFORMATION VIRGINIA MUNICIPAL CASH TRUST A Portfolio of Federated Municipal Trust INSTITUTIONAL SHARES INSTITUTIONAL SERVICE SHARES This Statement of Additional Information (SAI) is not a prospectus. Read this SAI in conjunction with the prospectuses for Virginia Municipal Cash Trust dated December 31, 1998. Obtain the prospectuses without charge by calling 1-800-341-7400. CONTENTS How is the Fund Organized? Securities in Which the Fund Invests How is the Fund Sold? Subaccounting Services Redemption in Kind Massachusetts Partnership Law Account and Share Information Tax Information Who Manages and Provides Services to the Fund? How Does the Fund Measure Performance? Who is Federated Investors, Inc.? Investment Ratings Addresses STATEMENT DATED DECEMBER 31, 1998 [Federated Investors Logo] Federated Securities Corp., Distributor, subsidiary of Federated Investors, Inc. Cusip 314229816 Cusip 314229824 3080501B (12/98) HOW IS THE FUND ORGANIZED? The Fund is a diversified portfolio of Federated Municipal Trust (Trust). The Trust is an open-end, management investment company that was established under the laws of the Commonwealth of Massachusetts on September 1, 1989. The Trust may offer separate series of shares representing interests in separate portfolios of securities. The Board of Trustees (the Board) has established two classes of shares of the Fund, known as Institutional Shares and Institutional Service Shares (Shares). This SAI relates to all of the classes of the above-mentioned Shares. SECURITIES IN WHICH THE FUND INVESTS SECURITIES DESCRIPTIONS AND TECHNIQUES In pursuing its investment strategy, the Fund may invest in the following tax- exempt securities for any purpose that is consistent with its investment objective. General Obligation Bonds General obligation bonds are supported by the issuer's full faith and credit. The issuer must levy and collect taxes sufficient to pay principal and interest on the bonds. However, the issuer's authority to levy additional taxes may be limited by its charter or state law. Special Revenue Bonds Special revenue bonds are payable solely from specific revenues received by the issuer. The revenues may consist of specific taxes, assessments, tolls, fees or other types of municipal revenues. For example, a municipality may issue bonds to build a toll road, and pledge the tolls to repay the bonds. Bondholders could not collect from the municipality's general taxes or revenues. Therefore, any shortfall in the tolls could result in a default on the bonds. Private Activity Bonds Private activity bonds are special revenue bonds used to finance private entities. For example, a municipality may issue bonds to finance a new factory to improve its local economy. The municipality would lend the proceeds to the company using the factory, and the company would agree make loan payments sufficient to repay the bonds. The bonds would be payable solely from the company's loan payments, not from any other revenues of the municipality. Therefore, any default on the loan normally would result in a default on the bonds. Municipal Leases Municipalities may enter into leases for equipment or facilities. In order to comply with state public financing laws, these leases are typically subject to annual appropriation. In other words, a municipality may end a lease, without penalty, by not providing for the lease payments in its annual budget. After the lease ends, the lessor (the Fund) can resell the equipment or facility but the Fund may lose money on the sale. The Fund may invest in securities supported by pools of municipal leases. The most common type of lease backed securities are certificates of participation (COPs). However, the Fund may also invest directly in individual leases. Credit Enhancement Common types of credit enhancement include guarantees, letters of credit, bond insurance and surety bonds. Credit enhancement also includes arrangements where securities or other liquid assets secure payment of a fixed income security. If a default occurs, these assets may be sold and the proceeds paid to a security's holders. Either form of credit enhancement reduces credit risks by providing another source of payment for a fixed income security. Investment Ratings A nationally recognized rating service'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 ("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 IBCA, 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 rating service can be treated as being in one of the two highest short-term rating categories; currently, such securities must be rated by two rating services in one of their two highest rating categories. See "Regulatory Compliance." INVESTMENT RISKS There are many factors which may effect an investment in the Fund. The Fund's principal risks are described in its prospectus. An additional risk factor is outlined below. Tax Risk In order for the interest income from the securities to be exempt from federal regular income tax ("tax-exempt"), tax-exempt securities must meet certain legal requirements. Failure to meet such requirements may cause the interest received and distributed by the Fund to shareholders to be taxable. FUNDAMENTAL INVESTMENT POLICIES The Fund invests in tax-exempt securities so that at least 80% of the Fund's annual interest income is exempt from federal regular and Virginia state income tax or so that at least 80% of its net assets is invested in obligations, the interest income from which is exempt from federal regular and Virginia state income tax. This policy is fundamental and cannot be changed without shareholder approval. 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 the 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 net 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 its total assets are outstanding. Pledging Assets The Fund will not mortgage, pledge, or hypothecate any assets except 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 its 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 Virginia tax-exempt 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 Real Estate The Fund will not purchase or sell real estate or real estate limited partnerships, 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 (the Fund considers cash items to be instruments issued by a U.S. branch of a domestic bank or savings and loan having capital, surplus, and undivided profits in excess of $100,000,000 at the time of investment), 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 unless authorized by the "vote of a majority of its outstanding voting securities," as defined by the Investment Company Act. The following investment 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 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 Board, and repurchase agreements providing for settlement in more than seven days after notice. 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 nationally recognized rating services 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 ability to participate in volume transactions will be to the benefit of the Fund. DETERMINING MARKET VALUE OF SECURITIES The Board has 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 Board 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 Board 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 Board 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. 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 professionals 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 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. 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. 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 Trust have equal voting rights, except that in matters affecting only a particular Fund or class, only Shares of that Fund or class are entitled to vote. Trustees may be removed by the Board or by shareholders at a special meeting. A special meeting of shareholders will be called by the Board upon the written request of shareholders who own at least 10% of the Trust's outstanding shares of all series entitled to vote. As of December 8, 1998, the following shareholders owned of record, beneficially, or both, 5% or more of the outstanding Institutional Shares: EAMCO, Riggs Bank N.A., Washington, DC, owned approximately 5,985,835 shares (22.08%); Comfort & Co., Old Point National Bank, Newport News, Virginia, owned approximately 5,932,986 shares (21.88%); VATCO, The Trust Company of Virginia, Richmond, Virginia, owned approximately 5,474,564 shares (20.19%); FUBS & CO FBO, Charlotte, North Carolina, owned approximately 1,473,771 shares (5.44%); and Chesnat, Kilmarnock, Virginia, owned approximately 1,365,505 shares (5.04%), As of December 8, 1998, the following shareholders owned of record, beneficially, or both, 5% or more of the outstanding Institutional Service Shares: Scott & Stringfellow, Inc., Richmond, Virginia, owned approximately 86,313,069 shares (33.50%) and First Union Capital Markets Corp., Charlotte, North Carolina, owned approximately 16,303,157 shares (6.33%). Shareholders owning 25% or more of outstanding Shares may be in control and be able to affect the outcome of certain matters presented for a vote of shareholders. TAX INFORMATION FEDERAL INCOME TAX The Fund intends to meet the requirements of Subchapter M of the Internal Revenue Code applicable to regulated investment companies. If these requirements are not met, it will not receive the special tax treatment and will pay federal income tax. The Fund will be treated as a single, separate entity for federal income tax purposes so that income earned and capital gains and losses realized by the Trust's other portfolios will be separate from those realized by the Fund. STATE TAXES Under existing Virginia laws, distributions made by the Fund will not be subject to Virginia income taxes to the extent that such distributions qualify as exempt-interest dividends under the Internal Revenue Code, and represent (i) interest or gain from obligations issued by or on behalf of the Commonwealth of Virginia or any political subdivision thereof; or (ii) interest or gain from obligations issued by a territory or possession of the United States or any political subdivision thereof which federal law exempts from state income taxes. Conversely, to the extent that distributions made by the Fund are attributable to other types of obligations, such distributions will be subject to Virginia income taxes. WHO MANAGES AND PROVIDES SERVICES TO THE FUND? BOARD OF TRUSTEES The Board is responsible for managing the Trust's business affairs and for exercising all the Trust's powers except those reserved for the shareholders. Information about each Board member is provided below and includes the following data: name, address, birthdate, present position(s) held with the Trust, principal occupations for the past five years and other notable positions held, total compensation received as a Trustee from the Trust for its most recent fiscal year, and the total compensation received from the Federated Fund Complex for the most recent calendar year. The Trust is comprised of 17 Funds and the Federated Fund Complex is comprised of 56 investment companies, whose investment advisers are affiliated with the Fund's Adviser. As of December 8, 1998 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.
Name Total Birthdate Aggregate Compensation Address Principal Occupations Compensation From Trust and Position With Trust for Past 5 Years From Trust Fund Complex - ------------------------------ -------------------------------------------------------- ---------------- ------------------- John F. Donahue##* Chief Executive Officer and Director or Trustee of $0 $0 for the Trust Birthdate: July 28, 1924 the Federated Fund Complex. Chairman and Director, and 56 other Federated Investors Tower Federated Investors, Inc.; Chairman and Trustee, investment 1001 Liberty Avenue Federated Advisers, Federated Management, and companies in the Pittsburgh, PA Federated Research; Chairman and Director, Federated Fund Complex CHAIRMAN and TRUSTEE Research Corp., and Federated Global Research Corp.; Chairman, Passport Research, Ltd. Thomas G. Bigley Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: February 3, 1934 Director, Member of Executive Committee, Children's Trust and 15 Old Timber Trail Hospital of Pittsburgh; formerly: Senior Partner, 56 other Pittsburgh, PA Ernst & Young LLP; Director, MED 3000 Group, Inc.; investment TRUSTEE Director, Member of Executive Committee, University companies in the of Pittsburgh. Fund Complex John T. Conroy, Jr. Director or Trustee of the Federated Fund Complex; $4,484.62 $122,362 for the Birthdate: June 23, 1937 President, Investment Properties Corporation; Senior Trust and Wood/IPC Commercial Dept. Vice President, John R. Wood and Associates, Inc., 56 other John R. Wood and Realtors; Partner or Trustee in private real estate investment Associates, Inc. Realtors ventures in Southwest Florida; formerly: President, companies in the 3255 Tamiami Trail North Naples Property Management, Inc. and Northgate Fund Complex Naples, FL Village Development Corporation. TRUSTEE William J. Copeland Director or Trustee of the Federated Fund Complex; $4,484.62 $122,362 for the Birthdate: July 4, 1918 Director and Member of the Executive Committee, Trust and One PNC Plaza-23rd Floor Michael Baker, Inc.; formerly: Vice Chairman and 56 other Pittsburgh, PA Director, PNC Bank, N.A., and PNC Bank Corp.; investment TRUSTEE Director, Ryan Homes, Inc. companies in the Fund Complex Retired: Director, United Refinery; Director, Forbes Fund; Chairman, Pittsburgh Foundation; Chairman, Pittsburgh Civic Light Opera. James E. Dowd, Esq. Director or Trustee of the Federated Fund Complex; $4,484.62 $122,362 for the Birthdate: May 18, 1922 Attorney-at-law; Director, The Emerging Germany Fund, Trust and 571 Hayward Mill Road Inc. 56 other Concord, MA investment TRUSTEE Retired: President, Boston Stock Exchange, Inc.; companies in the Regional Administrator, United States Securities and Fund Complex Exchange Commission. Lawrence D. Ellis, M.D.* Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: October 11, 1932 Professor of Medicine, University of Pittsburgh; Trust and 3471 Fifth Avenue Medical Director, University of Pittsburgh Medical 56 other Suite 1111 Center - Downtown; Hematologist, Oncologist, and investment Pittsburgh, PA Internist, Presbyterian and Montefiore Hospitals; companies in the TRUSTEE Member, National Board of Trustees, Leukemia Society Fund Complex of America. Edward L. Flaherty, Jr., Director or Trustee of the Federated Fund Complex; $4,484.62 $122,362 for the Esq. # Attorney, of Counsel, Miller, Ament, Henny & Kochuba; Trust and Birthdate: June 18, 1924 Director, Eat'N Park Restaurants, Inc.; formerly: 56 other Miller, Ament, Henny & Counsel, Horizon Financial, F.A., Western Region; investment Kochuba Partner, Meyer and Flaherty. companies in the 205 Ross Street Fund Complex Pittsburgh, PA TRUSTEE Peter E. Madden Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: March 16, 1942 formerly: Representative, Commonwealth of Trust and One Royal Palm Way Massachusetts General Court; President, State Street 56 other 100 Royal Palm Way Bank and Trust Company and State Street Corporation. investment Palm Beach, FL companies in the TRUSTEE Retired: Director, VISA USA and VISA International; Fund Complex Chairman and Director, Massachusetts Bankers Association; Director, Depository Trust Corporation. John E. Murray, Jr., J.D., Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the S.J.D. President, Law Professor, Duquesne University; Trust and Birthdate: December 20, 1932 Consulting Partner, Mollica & Murray. 56 other President, Duquesne investment University Retired: Dean and Professor of Law, University of companies in the Pittsburgh, PA Pittsburgh School of Law; Dean and Professor of Law, Fund Complex TRUSTEE Villanova University School of Law. Wesley W. Posvar Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: September 14, President, World Society of Ekistics, Athens; Trust and 1925 Professor, International Politics; Management 56 other 1202 Cathedral of Learning Consultant; Trustee, Carnegie Endowment for investment University of Pittsburgh International Peace, RAND Corporation, Online companies in the Pittsburgh, PA Computer Library Center, Inc., National Defense Fund Complex TRUSTEE University and U.S. Space Foundation; President Emeritus, University of Pittsburgh; Founding Chairman, National Advisory Council for Environmental Policy and Technology, Federal Emergency Management Advisory Board and Czech Management Center, Prague. Retired: Professor, United States Military Academy; Professor, United States Air Force Academy. Marjorie P. Smuts Director or Trustee of the Federated Fund Complex; $4,076.31 $111,222 for the Birthdate: June 21, 1935 Public Relations/Marketing/Conference Planning. Trust and 4905 Bayard Street 56 other Pittsburgh, PA Retired: National Spokesperson, Aluminum Company of investment TRUSTEE America; business owner. companies in the Fund Complex Glen R. Johnson* Trustee, Federated Investors, Inc.; staff member, $0 $0 for the Trust Birthdate: May 2, 1929 Federated Securities Corp. and 8 other Federated Investors Tower investment 1001 Liberty Avenue companies in the Pittsburgh, PA Fund Complex PRESIDENT and TRUSTEE J. Christopher Donahue##* President or Executive Vice President of the $0 $0 for the Trust Birthdate: April 11, 1949 Federated Fund Complex; Director or Trustee of some and 18 other Federated Investors Tower of the Funds in the Federated Fund Complex; President investment 1001 Liberty Avenue and Director, Federated Investors, Inc.; President companies in the Pittsburgh, PA and Trustee, Federated Advisers, Federated Fund Complex EXECUTIVE VICE PRESIDENT Management, and Federated Research; President and Director, Federated Research Corp. and Federated Global Research Corp.; President, Passport Research, Ltd.; Trustee, Federated Shareholder Services Company; Director, Federated Services Company. Edward C. Gonzales* Trustee or Director of some of the Funds in the $0 $0 for the Trust Birthdate: October 22, 1930 Federated Fund Complex; President, Executive Vice and 1 other Federated Investors Tower President and Treasurer of some of the Funds in the investment 1001 Liberty Avenue Federated Fund Complex; Vice Chairman, Federated companies in the Pittsburgh, PA Investors, Inc.; Vice President, Federated Advisers, Fund Complex EXECUTIVE VICE PRESIDENT 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. John W. McGonigle Executive Vice President and Secretary of the $0 $0 for the Trust Birthdate: October 26, 1938 Federated Fund Complex; Executive Vice President, and 56 other Federated Investors Tower Secretary, and Director, Federated Investors, Inc.; investment 1001 Liberty Avenue Trustee, Federated Advisers, Federated Management, companies in the Pittsburgh, PA and Federated Research; Director, Federated Research Fund Complex EXECUTIVE VICE PRESIDENT Corp. and Federated Global Research Corp.; Director, and SECRETARY Federated Services Company; Director, Federated Securities Corp. Richard J. Thomas Treasurer of the Federated Fund Complex; Vice $0 $0 for the Trust Birthdate: June 17, 1954 President - Funds Financial Services Division, and 56 other Federated Investors Tower Federated Investors, Inc.; Formerly: various investment 1001 Liberty Avenue management positions within Funds Financial Services companies in the Pittsburgh, PA Division of Federated Investors, Inc. Fund Complex TREASURER Richard B. Fisher* President or Vice President of some of the Funds in $0 $0 for the Trust Birthdate: May 17, 1923 the Federated Fund Complex; Director or Trustee of and 6 other Federated Investors Tower some of the Funds in the Federated Fund Complex; investment 1001 Liberty Avenue Executive Vice President, Federated Investors, Inc.; companies in the Pittsburgh, PA Chairman and Director, Federated Securities Corp. Fund Complex VICE PRESIDENT William D. Dawson, III Chief Investment Officer of this Fund and various $0 $0 for the Trust Birthdate: March 3, 1949 other Funds in the Federated Fund Complex; Executive and 41 other Federated Investors Tower Vice President, Federated Investment Counseling, investment 1001 Liberty Avenue Federated Global Research Corp., Federated Advisers, companies in the Pittsburgh, PA Federated Management, Federated Research, and Fund Complex CHIEF INVESTMENT OFFICER Passport Research, Ltd.; Registered Representative, Federated Securities Corp.; Portfolio Manager, Federated Administrative Services; Vice President, Federated Investors, Inc.; Formerly: Executive Vice President and Senior Vice President, Federated Investment Counseling Institutional Portfolio Management Services Division; Senior Vice President, Federated Research Corp., Federated Advisers, Federated Management, Federated Research, and Passport Research, Ltd. Mary Jo Ochson Senior Portfolio Manager and Vice President of eight $0 $0 for the Birthdate: September 12, investment companies in the Federated Fund Complex; Trust and 1953 Senior Vice President, Federated Investment 7 other investment Federated Investors Tower Counseling, Federated Advisers, Federated Global companies in the 1001 Liberty Avenue Research Corp., Federated Management, Federated Fund Complex Pittsburgh, PA Research, Federated Research Corp. and Passport SENIOR PORTFOLIO Research, Ltd.; Formerly: Vice President, Federated MANAGER/VICE PRESIDENT Advisers, Federated Management, Federated Research, Federated Research Corp. , Passport Research, Ltd. and Federated Global Research Corp. Jeff A. Kozemchak Senior Portfolio Manager and Vice President of four $0 $0 for the Birthdate: January 15, 1960 investment companies in the Federated Fund Complex; Trust and Federated Investors Tower Vice President, Federated Investment Counseling, 3 other investment 1001 Liberty Avenue Federated Advisers, Federated Global Research Corp., companies in the Pittsburgh, PA Federated Management, Federated Research, Federated Fund Complex SENIOR PORTFOLIO Research Corp. and Passport Research, Ltd.; MANAGER/VICE PRESIDENT Formerly: Assistant Vice President and Investment Analyst, Federated Research Corp. and Passport Research, Ltd. ; Assistant Vice President, Federated Advisers, Federated Management and Federated Research.
## Mr. Donahue is the father of J. Christopher Donahue, Executive Vice President of the Trust. 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 Trust, 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 Trust. 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:
Maximum Average Aggregate Daily Administrative Fee Net Assets of the Federated Funds - ------------------------------------------------------------- 0.150 of 1% on the first $250 million 0.125 of 1% on the next $250 million 0.100 of 1% on the next $250 million 0.075 of 1% on assets in excess of $750 million
The administrative fee received during any fiscal year shall be at least $125,000 per portfolio and $30,000 per each additional class of shares. Federated Services Company may voluntarily waive a portion of its fee and may reimburse the Fund for expenses. Federated Services Company also provides certain accounting and recordkeeping services with respect to the Fund's portfolio investments for a fee based on Fund assets plus out-of-pocket expenses. CUSTODIAN State Street Bank and Trust Company, Boston, Massachusetts, is custodian for the securities and cash of the Fund. Foreign instruments purchased by the Fund are held by foreign banks participating in a network coordinated by State Street Bank. TRANSFER AGENT AND DIVIDEND DISBURSING AGENT Federated Services Company, through its registered transfer agent subsidiary, Federated Shareholder Services Company, maintains all necessary shareholder records. The Fund pays the transfer agent a fee based on the size, type, and number of accounts and transactions made by shareholders. INDEPENDENT PUBLIC ACCOUNTANTS Arthur Andersen LLP is the independent public accountant for the Fund.
FEES PAID BY THE FUND FOR SERVICES For the Year Ended October 31, 1998 1997 1996 - ------------------------------------------------------------------- Advisory Fee Earned $1,032,025 $881,787 $657,332 - ------------------------------------------------------------------- Advisory Fee Reduction $284,795 $246,296 $243,090 - ------------------------------------------------------------------- Brokerage Commissions $0 $0 $0 - ------------------------------------------------------------------- Administrative Fee $194,556 $166,299 $155,000 - ------------------------------------------------------------------- Shareholder Services Fee - ------------------------------------------------------------------- Institutional Shares $0 --- --- - ------------------------------------------------------------------- Institutional Service Shares $331,239 --- --- - -------------------------------------------------------------------
Fees are allocated among Classes based on their pro rata share of Fund assets, except for marketing fees and shareholder services fees, which are borne only by the applicable Class of Shares. If the Fund's expenses are capped at a particular level, the cap does not include reimbursement to the Fund of any expenses incurred by shareholders who use the transfer agent's subaccounting facilities. HOW DOES THE FUND MEASURE PERFORMANCE? The Fund may advertise Share performance by using the Securities and Exchange Commission's (SEC) standard method for calculating performance applicable to all mutual funds. The SEC also permits this standard performance information to be accompanied by non-standard performance information. Unless otherwise stated, any quoted Share performance reflects the effect of non-recurring charges, such as maximum sales charges, which, if excluded, would increase the total return and yield. The performance of Shares depends upon such variables as: portfolio quality; average portfolio maturity; type and value of portfolio securities; changes in interest rates; changes or differences in the Fund's or any class of Shares' expenses; and various other factors. Share performance fluctuates on a daily basis largely because net earnings and offering price per Share 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 since inception periods ended October 31, 1998. Yield, Effective Yield and Tax-Equivalent Yield given for the Seven-day period ended October 31, 1998.
Share Class Seven-Day Period 1 Year 5 Years Since Inception on September 16, 1993 Institutional Shares - ------------------------------------------------------------------------------------------------------------------------------------ Total Return -- 3.26% 3.19% 3.18% Yield 2.91% -- -- -- Effective Yield 2.95% -- -- -- Tax-Equivalent Yield 5.40% -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------
Share Class Seven-Day Period 1 Year 5 Years Since Inception on September 16, 1993 Institutional Service Shares - ------------------------------------------------------------------------------------------------------------------------------------ Total Return -- 3.11% 3.06% 3.05% Yield 2.76% -- -- -- Effective Yield 2.79% -- -- -- Tax-Equivalent Yield 5.11% -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------
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. The tax-equivalent yield of Shares is calculated similarly to the yield, but is adjusted to reflect the taxable yield that Shares would have had to earn to equal the actual yield, assuming a specific tax rate. 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. TAX EQUIVALENCY TABLE Set forth below is a sample of a tax-equivalency table that may be used in advertising and sales literature. This table is for illustrative purposes only and is not representative of past or future performance of the Fund. The interest earned by the tax-exempt securities owned by the Fund generally remains free from federal regular income tax and is often free from state and local taxes as well. However, some of the Fund's income may be subject to the federal alternative minimum tax and state and/or local taxes.
TAXABLE YIELD EQUIVALENT FOR 1998 STATE OF VIRGINIA - ----------------------------------------------------------------------------------------------------------------------------------- COMBINED FEDERAL AND STATE INCOME TAX BRACKET: 20.75% 33.75% 36.75% 41.75% 45.35% - ----------------------------------------------------------------------------------------------------------------------------------- JOINT $1- $42,351- $102,301- $155,951- OVER RETURN 42,350 102,300 155,950 278,450 $278,450 SINGLE $1- $25,351- $61,401- $128,101- OVER RETURN 25,350 61,400 128,100 278,450 $278,450 - ----------------------------------------------------------------------------------------------------------------------------------- Tax-Exempt Yield Taxable Yield Equivalent - ----------------------------------------------------------------------------------------------------------------------------------- 1.50% 1.89% 2.26% 2.37% 2.58% 2.74% 2.00% 2.52% 3.02% 3.16% 3.43% 3.66% 2.50% 3.15% 3.77% 3.95% 4.29% 4.57% 3.00% 3.79% 4.53% 4.74% 5.15% 5.49% 3.50% 4.42% 5.28% 5.53% 6.01% 6.40% 4.00% 5.05% 6.04% 6.32% 6.87% 7.32% 4.50% 5.68% 6.79% 7.11% 7.73% 8.23% 5.00% 6.31% 7.55% 7.91% 8.58% 9.15% 5.50% 6.94% 8.30% 8.70% 9.44% 10.06% 6.00% 7.57% 9.06% 9.49% 10.30% 10.98%
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. 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., 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 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, 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, 1997, Federated managed 11 bond funds with approximately $2.1 billion in assets and 22 money market funds with approximately $10.9 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 tax-exempt 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 27 years' experience. As of December 31, 1997, Federated managed 29 equity funds totaling approximately $11.7 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, 1997, Federated managed 11 money market funds and 16 bond funds with assets approximating $17.1 billion and $5.6 billion, respectively. Federated's corporate bond decision making--based on intensive, diligent credit analysis--is backed by over 22 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 $200 billion. Government Funds In the government sector, as of December 31, 1997, Federated manages 9 mortgage- backed, 6 government/agency and 18 government money market mutual funds, with assets approximating $5.9 billion, $1.5 billion and $35 billion, respectively. Federated trades approximately $400 million in U.S. government and mortgage- backed securities daily and places approximately $23 billion in repurchase agreements each day. Federated introduced the first U.S. government fund to invest in U.S. government bond securities in 1969. Federated has been a major force in the short- and intermediate-term government markets since 1982 and currently manages approximately $36 billion in government funds within these maturity ranges. 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, 1997, Federated managed more than $63.1 billion in assets across 51 money market funds, including 18 government, 11 prime and 22 municipal with assets approximating $35 billion, $17.1 billion and $10.9 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 $4 trillion to the more than 6,700 funds available, according to the Investment Company Institute. Federated distributes mutual funds through its subsidiaries for a variety of investment purposes. Specific markets include: FEDERATED CLIENTS OVERVIEW 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. INVESTMENT RATINGS APPENDIX STANDARD & POOR'S SHORT-TERM MUNICIPAL OBLIGATION RATINGS A Standard & Poor's (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-1+, 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 rated 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. MOODY'S 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 SERVICE, L.P. 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. ADDRESSES VIRGINIA MUNICIPAL CASH TRUST Institutional Shares Institutional Service Shares Federated Investors Funds 5800 Corporate Drive Pittsburgh, PA 15237-7000 Distributor Federated Securities Corp. Federated Investors Tower 1001 Liberty Avenue, Pittsburgh, PA 15222-3779 Investment Adviser Federated Management Federated Investors Tower 1001 Liberty Avenue, Pittsburgh, PA 15222-3779 Custodian State Street Bank and Trust Company P.O. Box 8600 Boston, MA 02266-8600 Transfer Agent and Dividend Disbursing Agent Federated Shareholder Services Company P.O. Box 8600 Boston, MA 02266-8600 Independent Public Accountants Arthur Andersen LLP 225 Franklin Street Boston, MA 02110-2812 APPENDIX A A1. The graphic presentation displayed here consists of a bar chart representing the annual total returns of Cash Series Shares of Minnesota Municipal Cash Trust as of the calendar year-end for each of seven years. The `y' axis reflects the "% Total Return" beginning with "0.00%" and increasing in increments of 1.00% up to 5.00%. The `x' axis represents calculation periods from the earliest calendar year end of the Cash Series Shares' start of business through the calendar year ended December 31, 1997. The light gray shaded chart features seven distinct vertical bars, each shaded in charcoal, and each visually representing by height the total return percentages for the calendar year stated directly at its base. The calculated total return percentage for the Cash Series Shares for each calendar year is stated directly at the top of each respective bar, for the calendar years 1991 through 1997, the total return percentages were 2.24%, 2.51%, 1.98%, 2.37%, 3.45%, 2.88%, and 3.01%, respectively. A2. The graphic presentation displayed here consists of a bar chart representing the annual total returns of Institutional Shares of Minnesota Municipal Cash Trust as of the calendar year-end for each of seven years. The `y' axis reflects the "% Total Return" beginning with "0.00%" and increasing in increments of 1.00% up to 5.00%. The `x' axis represents calculation periods from the earliest calendar year end of the Institutional Shares' start of business through the calendar year ended December 31, 1997. The light gray shaded chart features seven distinct vertical bars, each shaded in charcoal, and each visually representing by height the total return percentages for the calendar year stated directly at its base. The calculated total return percentage for the Institutional Shares for each calendar year is stated directly at the top of each respective bar, for the calendar years 1995 through 1997, the total return percentages were 4.57%, 2.92%, 2.39%, 2.78%, 3.87%, 3.40%, and 3.53%, respectively. A3. The graphic presentation displayed here consists of a bar chart representing the annual total returns of Institutional Shares of Michigan Municipal Cash Trust as of the calendar year-end for one year. The `y' axis reflects the "% Total Return" beginning with "0.00%" and increasing in increments of 1.00% up to 4.00%. The `x' axis represents calculation periods from the earliest calendar year end of the Institutional Shares' start of business through the calendar year ended December 31, 1997. The light gray shaded chart features one distinct vertical bar, shaded in charcoal, and visually represents by height the total return percentage for the calendar year stated directly at its base. The calculated total return percentage for the Institutional Shares for the calendar year 1997, stated directly at the top of the vertical bar, was 3.47%. A4. The graphic presentation displayed here consists of a bar chart representing the annual total returns of Institutional Service Shares of Michigan Municipal Cash Trust as of the calendar year-end for two years. The `y' axis reflects the "% Total Return" beginning with "0.00%" and increasing in increments of 1.00% up to 4.00%. The `x' axis represents calculation periods from the earliest calendar year end of the Institutional Service Shares' start of business through the calendar year ended December 31, 1997. The light gray shaded chart features two distinct vertical bars, each shaded in charcoal, and each visually representing by height the total return percentages for the calendar year stated directly at its base. The calculated total return percentage for the Institutional Service Shares for each calendar year is stated directly at the top of each respective bar, for the calendar years 1996 and 1997, the total return percentages were 3.18% and 3.31%, respectively. A5. The graphic presentation displayed here consists of a bar chart representing the annual total return of Institutional Shares of Tennessee Municipal Cash Trust as of the calendar year-end for one year. The `y' axis reflects the "% Total Return" beginning with "0.00%" and increasing in increments of 1.00% up to 4.00%. The `x' axis represents calculation periods from the earliest calendar year end of the Institutional Shares' start of business through the calendar year ended December 31, 1997. The light gray shaded chart features one distinct vertical bar, shaded in charcoal, and visually represents by height the total return percentage for the calendar year stated directly at its base. The calculated total return percentage for the Institutional Shares for the calendar year 1997, stated directly at the top of the bar, was 3.50%. A6. The graphic presentation displayed here consists of a bar chart representing the annual total return of Institutional Service Shares of Tennessee Municipal Cash Trust as of the calendar year-end for one year. The `y' axis reflects the "% Total Return" beginning with "0.00%" and increasing in increments of 1.00% up to 4.00%. The `x' axis represents calculation periods from the earliest calendar year end of the Institutional Service Shares' start of business through the calendar year ended December 31, 1997. The light gray shaded chart features one distinct vertical bar, shaded in charcoal, and visually represents by height the total return percentage for the calendar year stated directly at its base. The calculated total return percentage for the Institutional Service Shares for the calendar year 1997, stated directly at the top of each respective bar, was 3.24%. A7. The graphic presentation displayed here consists of a bar chart representing the annual total returns of Boston 1784 Funds Shares as of the calendar year-end for each of four years. The `y' axis reflects the "% Total Return" beginning with 0.00% and increasing in increments of 5.00% up to 10.00%. The `x' axis represents calculation periods from the earliest calendar year end of the Fund's Boston 1784 Funds Shares start of business through the calendar year ended December 31, 1997. The light gray shaded chart features four distinct vertical bars, each shaded in charcoal, and each visually representing by height the total return percentages for the calendar year stated directly at its base. The calculated total return percentage for the Fund's Boston 1784 Funds Shares for each calendar year is stated directly at the top of each respective bar, for the calendar years 1993 through 1997, the total return percentages were: 2.26%, 3.36%, 2.98%, and 3.11%, respectively. A8. The graphic presentation displayed here consists of a bar chart representing the annual total returns of Institutional Service Shares as of the calendar year-end for each of seven years. The `y' axis reflects the "% Total Return" beginning with 0.00% and increasing in increments of 1.00% up to 5.00%. The `x' axis represents calculation periods from the earliest calendar year end of the Fund's Institutional Service Shares start of business through the calendar year ended December 31, 1997. The light gray shaded chart features seven distinct vertical bars, each shaded in charcoal, and each visually representing by height the total return percentages for the calendar year stated directly at its base. The calculated total return percentage for the Fund's Institutional Service Shares for each calendar year is stated directly at the top of each respective bar, for the calendar years 1991 through 1997, the total return percentages were: 4.32%, 2.60%, 1.92%, 2.34%, 3.40%, 3.00% and 3.13%, respectively. APPENDIX B FEDERATED MUNICIPAL TRUST B1 The graphic presentation displayed here consists of a bar chart representing the annual total returns of Alabama Municipal Cash Trust as of the calendar year-ended 1994, 1995, 1996, and 1997. The `y' axis reflects the "% Total Return" beginning with 0% and increasing in increments of 1% up to 4%. The `x' axis represents calculation periods from the earliest calendar year end of the Fund's start of business through the calendar year ended 1997. The light gray shaded chart features four distinct vertical bars, each shaded in charcoal, and each visually representing by height the total return percentages for the calendar year stated directly at its base. The calculated total return percentage for the Fund for each calendar year, stated directly at the top of each respective bar, for the calendar years 1994 through 1997, are 2.71%, 3.67%, 3.16%, and 3.30%, respectively. B2 The graphic presentation displayed here consists of a bar chart representing the annual total returns of Georgia Municipal Cash Trust as of the calendar year-ended 1996 and 1997. The `y' axis reflects the "% Total Return" beginning with 0% and increasing in increments of 1% up to 4%. The `x' axis represents calculation periods from the earliest calendar year end of the Fund's start of business through the calendar year ended 1997. The light gray shaded chart features two distinct vertical bars, each shaded in charcoal, and each visually representing by height the total return percentages for the calendar year, stated directly at its base. The calculated total return percentage for the Fund for each calendar year stated directly at the top of each respective bar, for the calendar years 1996 through 1997, are 3.27%, and 3.42%, respectively. B3 The graphic presentation displayed here consists of a bar chart representing the annual total returns of Maryland Municipal Cash Trust as of the calendar year-ended 1995, 1996 and 1997. The `y' axis reflects the "% Total Return" beginning with 0% and increasing in increments of 1% up to 4%. The `x' axis represents calculation periods from the earliest calendar year end of the Fund's start of business through the calendar year ended 1997. The light gray shaded chart features three distinct vertical bars, each shaded in charcoal, and each visually representing by height the total return percentages for the calendar year, stated directly at its base. The calculated total return percentage for the Fund for each calendar year is stated directly at the top of each respective bar, for the calendar years 1995 through 1997, are 3.38%, 3.05%, and 3.13%, respectively. B4 The graphic presentation displayed here consists of a bar chart representing the annual total returns of North Carolina Municipal Cash Trust as of the calendar year ended 1994, 1995, 1996, and 1997. The `y' axis reflects the "% Total Return" beginning with 0% and increasing in increments of 1% up to 4%. The `x' axis represents calculation periods from the earliest calendar year end of the Fund's start of business through the calendar year ended 1997. The light gray shaded chart features four distinct vertical bars, each shaded in charcoal, and each visually representing by height the total return percentages for the calendar year, stated directly at its base. The calculated total return percentage for the Fund for each calendar year, stated directly at the top of each respective bar, for the calendar years 1994 through 1997, are 2.63%, 3.55%, 3.16%, and 3.27%, respectively. B5 The graphic presentation displayed here consists of a bar chart representing the annual total return of Institutional Shares of New Jersey Municipal Cash Trust as of the calendar year-end for each of seven years from 1991 through 1997. The `y' axis reflects the "% Total Return" beginning with 0% and increasing in increments of 1% up to 5%. The `x' axis represents calculation periods from the earliest calendar year end of the Institutional Shares' start of business through the calendar year ended 1997. The light gray shaded chart features seven distinct vertical bars, each shaded in charcoal, and each visually representing by height the total return percentages for the calendar year stated directly at its base. The calculated total return percentage for the Institutional Shares for each calendar year, stated directly at the top of each respective bar, for the calendar years 1991 through 1997, are 4.20%, 2.71%, 2.16%, 2.46%, 3.51%, 3.10%, and 3.23%, respectively. B6 The graphic presentation displayed here consists of a bar chart representing the annual total return of Institutional Service Shares of New Jersey Municipal Cash Trust as of the calendar year-end for each of seven years from 1991 through 1997. The `y' axis reflects the "% Total Return" beginning with 0% and increasing in increments of 1% up to 5%. The `x' axis represents calculation periods from the earliest calendar year end of the Institutional Service Shares' start of business through the calendar year ended 1997. The light gray shaded chart features seven distinct vertical bars, each shaded in charcoal, and each visually representing by height the total return percentages for the calendar year stated directly at its base. The calculated total return percentage for the Institutional Service Shares for each calendar year, stated directly at the top of each respective bar, for the calendar years 1991 through 1997, are 4.13%, 2.60%, 2.05%, 2.36%, 3.40%, 2.99%, and 3.12%, respectively. Appendix C C1. The graphic presentation displayed here consists of a bar chart representing the annual total return of Institutional Shares of California Municipal Cash Trust as of the calendar year-end for one year. The `y' axis reflects the "% Total Return" beginning with "0.00%" and increasing in increments of 1.00% up to 4.00%. The `x' axis represents calculation periods from the earliest calendar year end of the Institutional Shares start of business through the calendar year ended 1997. The chart features one distinct vertical bar, shaded in charcoal, and visually representing by height the total return percentage for the calendar year stated directly at its base. The calculated total return percentage for the Institutional Shares for the calendar year is stated directly at the top of the respective bar, for the calendar year 1997 was 3.47%. C2. The graphic presentation displayed here consists of a bar chart representing the annual total returns of Institutional Service Shares of California Municipal Cash Trust as of the calendar year-end for each of eight years. The `y' axis reflects the "% Total Return" beginning with "0.00%" and increasing in increments of 2.00% up to 6.00%. The `x' axis represents calculation periods from the earliest calendar year end of the Institutional Service Shares start of business through the calendar year ended 1997. The chart features eight distinct vertical bars, each shaded in charcoal, and each visually representing by height the total return percentages for the calendar year stated directly at its base. The calculated total return percentage for the Institutional Service Shares for each calendar year is stated directly at the top of each respective bar, for the calendar years 1990 through 1997 are 5.31%, 3.92%, 2.47%, 1.94%, 2.35%, 3.41%, 3.17%, and 3.21%, respectively. C3. The graphic presentation displayed here consists of a bar chart representing the annual total returns of Institutional Service Shares of Connecticut Municipal Cash Trust as of the calendar year-end for each of eight years. The `y' axis reflects the "% Total Return" beginning with "0.00%" and increasing in increments of 2.00% up to 6.00%. The `x' axis represents calculation periods from the earliest calendar year end of the Institutional Service Shares start of business through the calendar year ended 1997. The chart features eight distinct vertical bars, each shaded in charcoal, and each visually representing by height the total return percentages for the calendar year stated directly at its base. The calculated total return percentage for the Institutional Service Shares for each calendar year is stated directly at the top of each respective bar, for the calendar years 1990 through 1997 are 5.41%, 3.89%, 2.45%, 1.91%, 2.33%, 3.34%, 2.94%, and 3.05% respectively. C4. The graphic presentation displayed here consists of a bar chart representing the annual total returns of Cash II Shares of Florida Municipal Cash Trust as of the calendar year-end for each of two years. The `y' axis reflects the "% Total Return" beginning with "0.00%" and increasing in increments of 1.00% up to 3.00%. The `x' axis represents calculation periods from the earliest calendar year end of the Cash II Shares start of business through the calendar year ended 1997. The chart features two distinct vertical bars, each shaded in charcoal, and each visually representing by height the total return percentages for the calendar year stated directly at its base. The calculated total return percentage for the Cash II Shares for each calendar year is stated directly at the top of each respective bar, for the calendar years 1996 through 1997 are 2.95% and 2.97%, respectively. C5. The graphic presentation displayed here consists of a bar chart representing the annual total returns of Institutional Shares of Florida Municipal Cash Trust as of the calendar year-end for each of three years. The `y' axis reflects the "% Total Return" beginning with "0.00%" and increasing in increments of 1.00% up to 4.00%. The `x' axis represents calculation periods from the earliest calendar year end of the Institutional Shares start of business through the calendar year ended 1997. The chart features three distinct vertical bars, each shaded in charcoal, and each visually representing by height the total return percentages for the calendar year stated directly at its base. The calculated total return percentage for the Institutional Shares for each calendar year is stated directly at the top of each respective bar, for the calendar years 1995 through 1997 are 3.59%, 3.13%, and 3.23%, respectively. C6. The graphic presentation displayed here consists of a bar chart representing the annual total returns of Cash II Shares of New York Municipal Cash Trust as of the calendar year-end for each of six years. The `y' axis reflects the "% Total Return" beginning with "0.00%" and increasing in increments of 1.00% up to 4.00%. The `x' axis represents calculation periods from the earliest calendar year end of the Cash II Shares start of business through the calendar year ended 1997. The chart features six distinct vertical bars, each shaded in charcoal, and each visually representing by height the total return percentages for the calendar year stated directly at its base. The calculated total return percentage for the Cash II Shares for each calendar year is stated directly at the top of each respective bar, for the calendar years 1992 through 1997 are 2.59%, 1.93%, 2.38%, 3.41%, 2.98%, and 3.12%, respectively. C7. The graphic presentation displayed here consists of a bar chart representing the annual total returns of Institutional Service Shares of New York Municipal Cash Trust as of the calendar year-end for each of ten years. The `y' axis reflects the "% Total Return" beginning with "0.00%" and increasing in increments of 1.00% up to 6.00%. The `x' axis represents calculation periods from the earliest calendar year end of the Institutional Service Shares start of business through the calendar year ended 1997. The chart features ten distinct vertical bars, each shaded in charcoal, and each visually representing by height the total return percentages for the calendar year stated directly at its base. The calculated total return percentage for the Institutional Service Shares for each calendar year is stated directly at the top of each respective bar, for the calendar years 1988 through 1997 are 4.76%, 5.76%, 5.52%, 4.30%, 2.75%, 2.10%, 2.57%, 3.59%, 3.17%, and 3.30%, respectively. C8. The graphic presentation displayed here consists of a bar chart representing the annual total returns of Cash II Shares of Ohio Municipal Cash Trust as of the calendar year-end for each of six years. The `y' axis reflects the "% Total Return" beginning with "0.00%" and increasing in increments of 1.00% up to 4.00%. The `x' axis represents calculation periods from the earliest calendar year end of the Cash II Shares start of business through the calendar year ended 1997. The chart features six distinct vertical bars, each shaded in charcoal, and each visually representing by height the total return percentages for the calendar year stated directly at its base. The calculated total return percentage for the Cash II Shares for each calendar year is stated directly at the top of each respective bar, for the calendar years 1992 through 1997 are 2.64%, 1.97%, 2.30%, 3.35%, 2.88%, and 3.02%, respectively. C9. The graphic presentation displayed here consists of a bar chart representing the annual total return of Institutional Shares of Ohio Municipal Cash Trust as of the calendar year-end for one year. The `y' axis reflects the "% Total Return" beginning with "0.00%" and increasing in increments of 1.00% up to 4.00%. The `x' axis represents calculation periods from the earliest calendar year end of the Institutional Shares start of business through the calendar year ended 1997. The chart features one distinct vertical bar, shaded in charcoal, and visually representing by height the total return percentage for the calendar year stated directly at its base. The calculated total return percentage for the Institutional Shares for the calendar year is stated directly at the top of the respective bar, for the calendar year 1997 was 3.53%. C10. The graphic presentation displayed here consists of a bar chart representing the annual total returns of Institutional Service Shares of Ohio Municipal Cash Trust as of the calendar year-end for each of six years. The `y' axis reflects the "% Total Return" beginning with "0.00%" and increasing in increments of 1.00% up to 4.00%. The `x' axis represents calculation periods from the earliest calendar year end of the Institutional Service Shares start of business through the calendar year ended 1997. The chart features six distinct vertical bars, each shaded in charcoal, and each visually representing by height the total return percentages for the calendar year stated directly at its base. The calculated total return percentage for the Institutional Service Shares for each calendar year is stated directly at the top of each respective bar, for the calendar years 1992 through 1997 are 2.95%, 2.27%, 2.61%, 3.66%, 3.19%, and 3.33 respectively. C11. The graphic presentation displayed here consists of a bar chart representing the annual total returns of Cash Series Shares of Pennsylvania Municipal Cash Trust as of the calendar year-end for each of seven years. The `y' axis reflects the "% Total Return" beginning with "0.00%" and increasing in increments of1.00% up to 5.00%. The `x' axis represents calculation periods from the earliest calendar year end of the Cash Series Shares start of business through the calendar year ended 1997. The chart features seven distinct vertical bars, each shaded in charcoal, and each visually representing by height the total return percentages for the calendar year stated directly at its base. The calculated total return percentage for the Cash Series Shares for each calendar year is stated directly at the top of each respective bar, for the calendar years 1991 through 1997 are 4.16%, 2.40%, 1.76%, 2.04%, 3.06%, 2.68%, and 2.81%, respectively. C12. The graphic presentation displayed here consists of a bar chart representing the annual total returns of Institutional Shares of Pennsylvania Municipal Cash Trust as of the calendar year-end for each of two years. The `y' axis reflects the "% Total Return" beginning with "0.00%" and increasing in increments of 1.00% up to 4.00%. The `x' axis represents calculation periods from the earliest calendar year end of the Institutional Shares start of business through the calendar year ended 1997. The chart features two distinct vertical bars, each shaded in charcoal, and each visually representing by height the total return percentages for the calendar year stated directly at its base. The calculated total return percentage for the Institutional Shares for each calendar year is stated directly at the top of each respective bar, for the calendar years 1996 through 1997 are 3.30% and 3.42%, respectively. C13. The graphic presentation displayed here consists of a bar chart representing the annual total returns of Institutional Service Shares of Pennsylvania Municipal Cash Trust as of the calendar year-end for each of eight years. The `y' axis reflects the "% Total Return" beginning with "0.00%" and increasing in increments of 1.00% up to 6.00%. The `x' axis represents calculation periods from the earliest calendar year end of the Institutional Service Shares start of business through the calendar year ended 1997. The chart features eight distinct vertical bars, each shaded in charcoal, and each visually representing by height the total return percentages for the calendar year stated directly at its base. The calculated total return percentage for the Institutional Service Shares for each calendar year is stated directly at the top of each respective bar, for the calendar years 1990 through 1997 are 5.68%, 4.36%, 2.81%, 2.16%, 2.45%, 3.48%, 3.09%, and 3.22% respectively. C14. The graphic presentation displayed here consists of a bar chart representing the annual total returns of Institutional Shares of Virginia Municipal Cash Trust as of the calendar year-end for each of four years. The `y' axis reflects the "% Total Return" beginning with "0.00%" and increasing in increments of 0.80% up to 4.00%. The `x' axis represents calculation periods from the earliest calendar year end of the Institutional Shares start of business through the calendar year ended 1997. The chart features four distinct vertical bars, each shaded in charcoal, and each visually representing by height the total return percentages for the calendar year stated directly at its base. The calculated total return percentage for the Institutional Shares for each calendar year is stated directly at the top of each respective bar, for the calendar years 1994 through 1997 are 2.73%, 3.59%, 3.17%, and 3.36% respectively. C15. The graphic presentation displayed here consists of a bar chart representing the annual total returns of Institutional Service Shares of Virginia Municipal Cash Trust as of the calendar year-end for each of four years. The `y' axis reflects the "% Total Return" beginning with "0.00%" and increasing in increments of 0.80% up to 4.00%. The `x' axis represents calculation periods from the earliest calendar year end of the Institutional Service Shares start of business through the calendar year ended 1997. The chart features four distinct vertical bars, each shaded in charcoal, and each visually representing by height the total return percentages for the calendar year stated directly at its base. The calculated total return percentage for the Institutional Service Shares for each calendar year is stated directly at the top of each respective bar, for the calendar years 1994 through 1997 are 2.60%, 3.49%, 3.07%, and 3.21% respectively. PART C. OTHER INFORMATION. Item 23. Exhibits: (a) Conformed copy of Declaration of Trust of the Registrant (i) Conformed copies of amendments to the Declaration of Trust: Amendment No. 1 does not exist;(31) Amendment No. 2 dated March 16, 1990; (31) Amendment No. 3 dated August 1, 1990; (31) Amendment No. 4 dated September 1, 1989; (7) Amendment No. 5 dated December 12, 1990; (31) Amendment No. 6 dated March 21, 1991; (31) Amendment No. 7 dated August 26, 1991; (31) Amendment No. 8 dated February 13, 1992; (31) Amendment No. 9 dated November 9, 1992; (31) Amendment No. 10 dated November 18, 1992; (12) Amendment No. 11 dated May 24, 1993; (31) Amendment No. 12 dated Nov. 22, 1993; (17) Amendment No. 13 dated February 24, 1994; (17) Amendment No. 14 dated August 25, 1994; (20) Amendment No. 15 dated August 25, 1994; (31) Amendment No. 16 dated May 18, 1995; (31) Amendment No. 17 dated November 14, 1995; (28) Amendment No. 18 dated February 29, 1996; (31) Amendment No. 19 dated November 25, 1996; (34) Amendment No. 20 dated April 7, 1997; (34) Amendment No. 21 dated February 23, 1998; (34) (b) Copy of By-Laws of the Registrant; (7) (i) Copy of Amendment No. 1 to By-Laws dated November 18, 1997; (35) (ii) Copy of Amendment No. 2 to By-Laws dated February 23, 1998; (35) (iii) Copy of Amendment No. 3 to By-Laws dated February 27, 1998; (35) (iv) Copy of Amendment No. 4 to By-Laws dated May 12, 1998; (35) - ----------- 7. Response is incorporated by reference to Registrant's Post-Effective Amendment No. 6 on Form N-1A filed on November 6, 1990 (File Nos. 33-31259 and 811-5911). 12. Response is incorporated by reference to Registrant's Post-Effective Amendment No. 14 on Form N-1A filed on December 23, 1992 (File Nos. 33-31259 and 811-5911). 17. Response is incorporated by reference to Registrant's Post-Effective Amendment No. 22 on Form N-1A filed on March 2, 1994 (File Nos. 33-31259 and 811-5911). 20. Response is incorporated by reference to Registrant's Post-Effective Amendment No. 30 on Form N-1A filed on September 19, 1994 (File Nos. 33-31259 and 811-5911). 28. Response is incorporated by reference to Registrant's Post-Effective Amendment No. 39 on Form N-1A filed on December 22, 1995 (Filed Nos. 33-31259 and 811-5911). 31. Response is incorporated by reference to Registrants Post-Effective Amendment No. 43 on Form N-1A filed on November 29, 1996 (File Nos. 33-31259 and 811-5911). 34. Response is incorporated by reference to Registrant's Pre- Effective Amendment No. 46 on Form N-1A filed on March 16, 1998 (File Nos. 33-31259 and 811-5911). 35. Response is incorporated by reference to Registrant's Post- Effective Amendment No. 47 on Form N-1A filed on October 28, 1998 (File Nos. 33-31259 and 811-5911). (c) (i) Copy of Specimen Certificates for Shares of Beneficial Interest of Alabama Municipal Cash Trust, Minnesota Municipal Cash Trust (Cash Series Shares and Institutional Shares), Pennsylvania Municipal Cash Trust (Cash Series Shares and Institutional Service Shares), Virginia Municipal Cash Trust (Institutional Service Shares and Institutional Shares), North Carolina Municipal Cash Trust, Ohio Municipal Cash Trust (Cash II Shares and Institutional Shares), Massachusetts Municipal Cash Trust (Institutional Service Shares and BayFunds Shares), and New Jersey Municipal Cash Trust (Institutional Shares and Institutional Service Shares); (16) (ii) Copy of Specimen Certificate for Maryland Municipal Cash Trust; (17) (iii) Copy of Specimen Certificate for Florida Municipal Cash Trust; (20) (iv) Copy of Specimen Certificate for Michigan Municipal Cash Trust; (24) (v) Copy of Specimen Certificate for Pennsylvania Municipal Cash Trust (Institutional Shares); (25) (vi) Copy of Specimen Certificate for Georgia Municipal Cash Trust; (26) (vii) Copy of Specimen Certificates for Tennessee Municipal Cash Trust (Institutional Shares and Institutional Service Shares); (30) (viii) Copy of Specimen Certificates for Pennsylvania Municipal Cash Trust and Connecticut Municipal Cash Trust; (2) (ix) Copy of Specimen Certificate for Ohio Municipal Cash Trust (Institutional Service Shares); (9) - ---------------- 2. Response is incorporated by reference to Registrants Pre-Effective Amendment No. 1 on Form N-1A filed on October 31, 1989 (File Nos. 33-31259 and 811-5911). 9. Response is incorporated by reference to Registrants Post-Effective Amendment No. 10 on Form N-1A filed on January 24, 1991 (File Nos. 33-31259 and 811-5911). 16. Response is incorporated by reference to Registrant's Post-Effective Amendment No. 21 on Form N-1A filed on December 29, 1993 (File Nos. 33-31259 and 811-5911). 17. Response is incorporated by reference to Registrant's Post-Effective Amendment No. 22 on Form N-1A filed on March 2, 1994 (File Nos. 33-31251 and 811-5911). 20. Response is incorporated by reference to Registrant's Post-Effective Amendment No. 30 on Form N-1A filed on September 19, 1994 (File Nos. 33-31251 and 811-5911). 24. Response is incorporated by reference to Registrant's Post-Effective Amendment No. 34 on Form N-1A filed on April 13, 1995 (File Nos. 33-31251 and 811-5911). 25. Response is incorporated by reference to Registrant's Post-Effective Amendment No. 35 on Form N-1A filed on May 19, 1995 (File Nos. 33-31251 and 811-5911). 26. Response is incorporated by reference to Registrants Post-Effective Amendment No. 36 on Form N-1A filed on May 31, 1995 (File Nos. 33-31259 and 811-5911). 30. Response is incorporated by reference to Registrants Post-Effective Amendment No. 42 on Form N-1A filed on February 29, 1996 (File Nos. 33-31251 and 811-5911). (x) Copy of Speciman Certificates for California Municipal Cash Trust (Institutional Shares and Institutional Service Shares), Michigan Municipal Cash Trust (Institutional Shares and Institutional Service Shares), and Ohio Municipal Cash Trust (Institutional Shares and Institutional Service Shares); (33) (xi) Copy of Specimen Certificate for Arizona Municipal Cash Trust (Institutional Service Shares); (34) (d) Conformed copy of Investment Advisory Contract of the Registrant; (7) (i) Conformed copies of exhibits to Investment Advisory Contract: Exhibit G for Virginia Municipal Cash Trust; (18) Exhibit H for Alabama Municipal Cash Trust; (19) Exhibit I for North Carolina Municipal Cash Trust; (19) Exhibit J for Maryland Municipal Cash Trust; (19) Exhibit K for New York Municipal Cash Trust; (22) Exhibit L for California Municipal Cash Trust; (22) Exhibit M for Florida Municipal Cash Trust; (31) Exhibit N for Georgia Municipal Cash Trust; (27) Exhibit O for Michigan Municipal Cash Trust; (27) Exhibit P for Tennessee Municipal Cash Trust;(31) Exhibit Q for Arizona Municipal Cash Trust; (34) (e) Conformed copy of Distributor's Contract of the registrant;(7) (i) Conformed copies of exhibits to the Distributor's Contract: Exhibit A for Massachusetts Municipal Cash Trust (Institutional Service Shares); (9) Exhibit B for Pennsylvania Municipal Cash Trust (Institutional Service Shares); (9) Exhibit C for Connecticut Municipal Cash Trust (Institutional Service Shares); (9) Exhibit D for Minnesota Municipal Cash Trust (Institutional Shares); (9) Exhibit E for New Jersey Municipal Cash Trust (Institutional Shares); (31) - -------------- 7. Response is incorporated by reference to Registrant's Post-Effective Amendment No. 6 on Form N-1A filed on November 6, 1990 (File Nos. 33-31259 and 811-5911). 9. Response is incorporated by reference to Registrants Post-Effective Amendment No. 10 on Form N-1A filed on January 24, 1991 (File Nos. 33-31259 and 811-5911). 18. Response is incorporated by reference to Registrants Post-Effective Amendment No. 26 on Form N-1A filed on June 1, 1994 (File Nos. 33-31259 and 811-5911). 19. Response is incorporated by reference to Registrants Post-Effective Amendment No. 28 on Form N-1A filed on June 28, 1994 (File Nos. 33-31259 and 811-5911). 22. Response is incorporated by reference to Registrant's Post-Effective Amendment No. 32 on Form N-1A filed on December 28, 1994 (File Nos. 33-31259 and 811-5911). 27. Response is incorporated by reference to Registrant's Post-Effective Amendment No. 37 on Form N-1A filed on July 18, 1995 (File Nos. 33-31259 and 811-5911). 31. Response is incorporated by reference to Registrant's Post- Effective Amendment No. 43 on Form N-1A filed November 29, 1996 (File Nos. 33-31259 and 811-5911). 33. Response is incorporated by reference to Registrants Post-Effective Amendment No. 45 on Form N-1A filed on December 19, 1997 (File Nos. 33-31259 and 811-5911). 34. Response is incorporated by reference to Registrant's Pre-Effective Amendment No. 46 on Form N-1A filed March 16, 1998 (File Nos. 33-31259 and 811-5911). Exhibit F for New Jersey Municipal Cash Trust (Institutional Service Shares; (31) Exhibit G for Pennsylvania Municipal Cash Trust (Cash Series Shares); (31) Exhibit H does not exist; Exhibit I for Minnesota Municipal Cash Trust (Cash Series Shares); (31) Exhibit J does not exist; Exhibit K for Ohio Municipal Cash Trust (Institutional Service Shares); (31) Exhibit L for Ohio Municipal Cash Trust (Cash II Shares); (31) Exhibit M; (22) Exhibit N for Virginia Municipal Cash Trust; (19) Exhibit O for Alabama Municipal Cash Trust; (19) Exhibit P for North Carolina Municipal Cash Trust; (19) Exhibit Q for Maryland Municipal Cash Trust; (19) Exhibit R for New York Municipal Cash Trust (Cash II Shares); (21) Exhibit S for New York Municipal Cash Trust (Institutional Service Shares); (21) Exhibit T for California Municipal Cash Trust; (21) Exhibit U for Florida Municipal Cash Trust; (22) Exhibit W for Michigan Municipal Cash Trust; (27) Exhibit X for Pennsylvania Municipal Cash Trust (Institutional Shares); (27) Exhibit Y for Florida Municipal Cash Trust (Cash II Shares); (29) Exhibit Z for California Municipal Cash Trust (Institutional Shares); (31) Exhibit AA for Michigan Municipal Cash Trust (Institutional Shares); (31) Exhibit BB for Ohio Municipal Cash Trust (Institutional Shares); (31) Exhibit CC for Tennessee Municipal Cash Trust (Institutional Shares); (31) - ------------------------------- 19. Response is incorporated by reference to Registrant's Post- Effective Amendment No. 28 on Form N-1A filed on June 28, 1994(File Nos. 33-31259 and 811-5911). 21. Response is incorporated by reference to Registrant's Post-Effective Amendment No. 31 on Form N-1A filed on October 24, 1994 (File Nos. 33-31259 and 811-5911). 22. Response is incorporated by reference to Registrant's Post-Effective Amendment No. 32 on Form N-1A filed on December 28, 1994 (File Nos. 33-31259 and 811-5911). 27. Response is incorporated by reference to Registrant's Post-Effective Amendment No. 37 on Form N-1A filed on July 18, 1995 (File Nos. 33-31259 and 811-5911). 29 Response is incorporated by reference to Registrant's Post-Effective Amendment No. 40 on Form N-1A filed on January 30, 1996. (File Nos. 33-31259 and 811-5911). 31. Response is incorporated by reference to Registrant's Post- Effective Amendment No. 43 on Form N-1A filed November 29, 1996 (File Nos. 33-31259 and 811-5911). Exhibit DD for Tennessee Municipal Cash Trust (Institutional Service Shares); (31) Exhibit EE for Arizona Municipal Cash Trust (Institutional Service Shares); (34) (ii) The Registrant hereby incorporates the conformed copy of the specimen Mutual Funds Sales and Service Agreement; Mutual Funds Service Agreement and Plan Trustee/Mutual Funds Service Agreement from Item 24(b)6 of the Cash Trust Series II Registration Statement on Form N-1A, filed with the Commission on July 24, 1995. (File Nos. 33-38550 and 811-6269); (f) Not applicable; (g) (i) Conformed copy of Custodian Agreement of the Registrant; (22) (ii) Copy of Exhibit 1 to the Custodian Agreement; (27) (iii) Conformed copy of Custodian Fee Schedule; (33) (h) (i) Conformed copy of Amended and Restated Agreement for Fund Accounting, Shareholder Recordkeeeping, and Custody Services Procurement (including Exhibit 1); (+) (ii) Conformed copy of Sub-Transfer Agency Agreement of the Registrant (Massachusetts Municipal Cash Trust--1784 Fund Shares only); (32) (iii) Conformed copy of Shareholder Services Agreement of the Registrant (Massachusetts Municipal Cash Trust--1784 Fund Shares only); (15) (iv) Conformed copy of Shareholder Services Agreement of the Registrant; (22) (v) Conformed copy of Amended and Restated Shareholder Services Agreement; (33) (vi) The response and exhibits described in Item 24(b)(6) are hereby incorporated by reference; (vii) Conformed copy of Administrative Services Agreement of the Registrant; (22) (viii) Form of Schwab Master Services Agreement (Ohio Municipal Cash Trust-Cash II Shares only); (31) (viv) Conformed copy of License Agreement (Massachusetts Municipal Cash Trust-1784 Funds Shares only);(32) - --------- 15. Response is incorporated by reference to Registrant's Post-Effective Amendment No. 18 on Form N-1A filed on October 1, 1993 (File Nos. 33-31259 and 811-5911). 22. Response is incorporated by reference to Registrant's Post-Effective Amendment No. 32 on Form N-1A filed on December 28, 1994 (File Nos. 33-31259 and 811-5911). 27. Response is incorporated by reference to Registrant's Post-Effective Amendment No. 37 on Form N-1A filed on July 18, 1995 (File Nos. 33-31259 and 811-5911). 31. Response is incorporated by reference to Registrant's Post-Effective Amendment No. 43 on Form N-1A filed on November 29, 1996 (File Nos. 33-31259 and 811-5911). 32. Response is incorporated by reference to Registrant's Post-Effective Amendment No. 44 on Form N-1A filed on December 23, 1996 (File Nos. 33-31259 and 811-5911). 33. Response is incorporated by reference to Registrants Post-Effective Amendment No. 45 on Form N-1A filed on December 19, 1997 (File Nos. 33-31259 and 811-5911). 34. Response is incorporated by reference to Registrant's Pre-Effective Amendment No. 46 on Form N-1A filed on March 16, 1998 (File Nos. 33-31259 and 811-5911). (x) Conformed copy of Shareholder Services Agreement for Massachusetts Municipal Cash Trust (Boston 1784 Funds Shares);(35) (i) Conformed copy of Opinion and Consent of Counsel as to the legality of shares being registered; (5) (j) Conformed copy of Consent of Independent Public Accountants; (+) (k) Not applicable; (l) Conformed copy of Initial Capital Understanding; (2) (m) (i) Copy of Rule 12b-1 Plan of the Registrant through and including Exhibit F (7); Additional Exhibits to the Rule 12b-1 Plan have been executed to reflect the coverage of subsequently created portfolios and/or classes under these documents. Because these exhibits are substantially identical but differ only as to the Fund name, dates, and any other Fund - specific information, pursuant to Rule 8b- 31 of the Investment Company Act they need not be filed.; (ii) Conformed copies of exhibits to 12b-1 Plan of the Registrant: Exhibit G for Ohio Municipal Cash Trust (Cash II Shares); (31) Exhibit H for New York Municipal Cash Trust (Cash II Shares);(21) Exhibit I for New York Municipal Cash Trust (Institutional Service Shares); (21) Exhibit J for Florida Municipal Cash Trust; (22) Exhibit K for Florida Municipal Cash Trust (Cash II Shares); (29) - ---------------------- + All exhibits have been filed electronically. 2. Response is incorporated by reference to Registrant's Pre-Effective Amendment No. 1 on Form N-1A filed on October 31, 1989 (File Nos. 33-31259 and 811-5911). 5. Response is incorporated by reference to Registrant's Post-Effective Amendment No. 3 on Form N-1A filed August 3, 1990 (File Nos. 33-31259 and 811-5911). 21. Response is incorporated by reference to Registrant's Post-Effective Amendment No. 31 on Form N-1A filed on October 24, 1994 (File Nos. 33-31259 and 811-5911). 22. Response is incorporated by reference to Registrant's Post-Effective Amendment No. 32 on Form N-1A filed on December 28, 1994 (File Nos. 33-31259 and 811-5911). 29. Response is incorporated by reference to Registrant's Post-Effective Amendment No. 40 on Form N-1A filed on January 30, 1996. (File Nos. 33-31259 and 811-5911). 31. Response is incorporated by reference to Registrant's Post- Effective Amendment No. 43 on Form N-1A filed on November 29, 1996 (File Nos. 33-31259 and 811-5911). 32. Response is incorporated by reference to Registrant's Post-Effective Amendment No. 44 on Form N-1A filed on December 23, 1996 (File Nos. 33-31259 and 811-5911). 33. Response is incorporated by reference to Registrants Post-Effective Amendment No. 45 on Form N-1A filed on December 19, 1997 (File Nos. 33-31259 and 811-5911). 35. Response is incorporated by reference to Registrant's Post-Effective Amendment No. 47 on Form N-1A filed October 28, 1998 (File Nos. 33-31259 and 811-5911). (iii) The response and exhibits described in Item 24 (b) (6) are hereby incorporated by reference. (n) Copy of Financial Data Schedules; (+) (o) The Registrant hereby incorporates the conformed copy of the specimen Multiple Class Plan from Item 24(b)(18) of the World Investment Series, Inc. Registration Statement on Form N-1A, filed with the Commission on January 26, 1996. (File Nos. 33-52149 and 811-07141); (p) Conformed copy of Power of Attorney; (32) (i) Amendment to Schedule 1 to Limited Power of Attorney dated March 1, 1998 (34). (ii) Conformed copy of Power of Attorney of Chief Investment Officer of the Registrant; (+) (iii) Conformed copy of Power of Attorney of Treasurer of the Registrant; (+) Item 24. Persons Controlled by or Under Common Control with the Fund: None Item 25. Indemnification: (3) Item 26. Business and Other Connections of the Investment Adviser: For a description of the other business of the investment adviser, see the section entitled "Who Manages the Fund" in Part A. The affiliations with the Registrant of three of the Trustees and two of the Officers of the investment adviser are included in Part B of this Registration Statement under "Who Manages and Provides Services to the Fund." The remaining Trustee of the investment adviser, his position with the investment adviser, and, in parentheses, his principal occupation is: Mark D. Olson (Partner, Wilson, Halbrook & Bayard), 107 W. Market Street, Georgetown, Delaware 19947. The remaining Officers of the investment adviser are: Executive Vice Presidents: William D. Dawson, III Henry A. Frantzen J. Thomas Madden - ---------------------- + All exhibits have been filed electronically. 3. Response is incorporated by reference to Registrant's Post- Effective Amendment No. 1 on Form N-1A filed on March 22, 1990 (File Nos. 33-31259 and 811-5911). 32. Response is incorporated by reference to Registrant's Post-Effective Amendment No. 44 on Form N-1A filed on December 23, 1996 (File Nos. 33-31259 and 811-5911). 33. Response is incorporated by reference to Registrants Post-Effective Amendment No. 45 on Form N-1A filed on December 19, 1997 (File Nos. 33-31259 and 811-5911). 34. Response is incorporated by reference to Registrant's Pre- Effective Amendment No. 46 on Form N-1A filed on March 16, 1998 (File Nos. 33-31259 and 811-5911). Senior Vice Presidents: Peter R. Anderson Drew J. Collins Jonathan C. Conley Deborah A. Cunningham Mark E. Durbiano J. Alan Minteer Susan M. Nason Mary Jo Ochson Vice Presidents: J. Scott Albrecht Joseph M. Balestrino Randall S. Bauer David F. Belton David A. Briggs Kenneth J. Cody Alexandre de Bethmann Michael P. Donnelly Linda A. Duessel Donald T. Ellenberger Kathleen M. Foody-Malus Thomas M. Franks Edward C. Gonzales James E. Grefenstette Susan R. Hill Stephen A. Keen Robert K. Kinsey Robert M. Kowit Jeff A. Kozemchak Marian R. Marinack Sandra L. McInerney Robert J. Ostrowski Charles A. Ritter Scott B. Schermerhorn Frank Semack Aash M. Shah William F. Stotz Tracy P. Stouffer Edward J. Tiedge Paige M. Wilhelm Jolanta M. Wysocka Assistant Vice Presidents: Todd A. Abraham Stefanie L. Bachhuber Arthur J. Barry Micheal W. Casey Robert E. Cauley Donna M. Fabiano John T. Gentry William R. Jamison Constantine Kartsonsas Robert M. Marsh Joseph M. Natoli Keith J. Sabol Michael W. Sirianni Gregg S. Tenser Secretary: Stephen A. Keen Treasurer: Thomas R. Donahue Assistant Secretaries: Thomas R. Donahue Richard B. Fisher Christine I. McGonigle Assistant Treasurer: Richard B. Fisher The business address of each of the Officers of the investment adviser is Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, Pennsylvania 15222-3779. These individuals are also officers of a majority of the investment advisers to the investment companies in the Federated Fund Complex described in Part B of this Registration Statement. Item 27. Principal Underwriters: (a) Federated Securities Corp. the Distributor for shares of the Registrant, acts as principal underwriter for the following open-end investment companies, including the Registrant: Automated Government Money Trust; Cash Trust Series II; Cash Trust Series, Inc.; CCB Funds; DG Investor Series; Edward D. Jones & Co. Daily Passport Cash Trust; Federated Adjustable Rate U.S. Government Fund, Inc.; Federated American Leaders Fund, Inc.; Federated ARMs Fund; Federated Core Trust; Federated Equity Funds; Federated Equity Income Fund, Inc.; Federated Fund for U.S. Government Securities, Inc.; Federated GNMA Trust; Federated Government Income Securities, Inc.; Federated Government Trust; Federated High Income Bond Fund, Inc.; Federated High Yield Trust; Federated Income Securities Trust; Federated Income Trust; Federated Index Trust; Federated Institutional Trust; Federated Insurance Series; Federated 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.; Fixed Income Securities, Inc.; Independence One Mutual Funds; Intermediate Municipal Trust; International Series, Inc.; Investment Series Funds, Inc.; Liberty U.S. Government Money Market Trust; Liquid Cash Trust; Managed Series Trust; Marshall Funds, Inc.; Money Market Management, Inc.; Money Market Obligations Trust; Money Market Obligations Trust II; Money Market Trust; Municipal Securities Income Trust; Newpoint Funds; Regions Funds; RIGGS Funds; SouthTrust Funds; Tax-Free Instruments Trust; The Planters Funds; The Wachovia Funds; The Wachovia Municipal Funds; Tower Mutual Funds; Trust for Government Cash Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S. Treasury Obligations; Vision Group of Funds, Inc.; World Investment Series, Inc.; Blanchard Funds; Blanchard Precious Metals Fund, Inc.; High Yield Cash Trust; Investment Series Trust; Peachtree Funds; Star Funds; Targeted Duration Trust; The Virtus Funds; Trust for Financial Institutions; Federated Securities Corp. also acts as principal underwriter for the following closed-end investment company: Liberty Term Trust, Inc.- 1999.
(b) (1) (2) (3) Name and Principal Positions and Offices Positions and Offices Business Address With Distributor With Registrant Richard B. Fisher Director, Chairman, Chief Vice President Federated Investors Tower Executive Officer, Chief 1001 Liberty Avenue Operating Officer, Asst. Pittsburgh, PA 15222-3779 Secretary and Asst. Treasurer, Federated Securities Corp. Edward C. Gonzales Director, Executive Vice Executive Vice Federated Investors Tower President, Federated, President 1001 Liberty Avenue Securities Corp. Pittsburgh, PA 15222-3779 Thomas R. Donahue Director, Assistant Secretary -- Federated Investors Tower and Assistant Treasurer 1001 Liberty Avenue Federated Securities Corp. Pittsburgh, PA 15222-3779 James F. Getz President-Broker/Dealer, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 John B. Fisher President-Institutional Sales, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 David M. Taylor Executive Vice President -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 Mark W. Bloss Senior Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 Richard W. Boyd Senior Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 Laura M. Deger Senior Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 Theodore Fadool, Jr. Senior Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 Bryant R. Fisher Senior Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 (1) (2) (3) Name and Principal Positions and Offices Positions and Offices Business Address With Distributor With Registrant Christopher T. Fives Senior Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 James S. Hamilton Senior Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 James M. Heaton Senior Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 Keith Nixon Senior Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 Solon A. Person, IV Senior Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 Timothy C. Pillion Senior Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 Thomas E. Territ Senior Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 Ernest G. Anderson Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 Teresa M. Antoszyk Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 John B. Bohnet Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 Jane E. Broeren-Lambesis Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 David J. Callahan Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 (1) (2) (3) Name and Principal Positions and Offices Positions and Offices Business Address With Distributor With Registrant Mary J. Combs Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 R. Edmond Connell, Jr. Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 R. Leonard Corton, Jr. Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 Kevin J. Crenny Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 Daniel T. Culbertson Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 G. Michael Cullen Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 Marc C. Danile Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 William C. Doyle Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 Jill Ehrenfeld Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 Mark D. Fisher Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 Joseph D. Gibbons Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 John K. Goettlicher Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 (1) (2) (3) Name and Principal Positions and Offices Positions and Offices Business Address With Distributor With Registrant Craig S. Gonzales Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 Raymond Hanley Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 Bruce E. Hastings Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 Beth A. Hetzel Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 James E. Hickey Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 Charlene H. Jennings Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 H. Joseph Kennedy Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 Michael W. Koenig Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 Michael R. Manning Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 Mark J. Miehl Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 Richard C. Mihm Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 J. Michael Miller Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 (1) (2) (3) Name and Principal Positions and Offices Positions and Offices Business Address With Distributor With Registrant Alec H. Neilly Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 Thomas A. Peters III Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 Robert F. Phillips Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 Richard A. Recker Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 Eugene B. Reed Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 Paul V. Riordan Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 John Rogers Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 Brian S. Ronayne Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 Thomas S. Schinabeck Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 Edward L. Smith Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 David W. Spears Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 John A. Staley Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 (1) (2) (3) Name and Principal Positions and Offices Positions and Offices Business Address With Distributor With Registrant Colin B. Starks Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 Jeffrey A. Stewart Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 William C. Tustin Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 Paul A. Uhlman Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 Miles J. Wallace Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 John F. Wallin Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 Richard B. Watts Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 Edward J. Wojnarowski Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 Michael P. Wolff Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 Edward R. Bozek Assistant Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 Terri E. Bush Assistant Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 Beth C. Dell Assistant Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 (1) (2) (3) Name and Principal Positions and Offices Positions and Offices Business Address With Distributor With Registrant David L. Immonen Assistant Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 Renee L. Martin Assistant Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 Robert M. Rossi Assistant Vice President, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 Matthew S. Hardin Secretary, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 Denis McAuley Treasurer, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779 Leslie K. Ross Assistant Secretary, -- Federated Investors Tower Federated Securities Corp. 1001 Liberty Avenue Pittsburgh, PA 15222-3779
(c) Not applicable Item 28. Location of Accounts and Records: Registrant Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 (Notices should be sent to the Agent for Service at above address.) Federated Investors Funds 5800 Corporate Drive Pittsburgh, PA 15237-7000 Federated Shareholder Services Company Federated Investors Tower ("Transfer Agent and Dividend 1001 Liberty Avenue Disbursing Agent ") Pittsburgh, PA 15222-3779 Federated Services Company Federated Investors Tower ("Administrator") 1001 Liberty Avenue Pittsburgh, PA 15222-3779 Federated Management Federated Investors Tower ("Adviser") 1001 Liberty Avenue Pittsburgh, PA 15222-3779 State Street Bank and Trust Company P.O. Box 8600 ("Custodian") Boston, MA 02266-8600 Item 29. Management Services: Not applicable. Item 30. Undertakings: Registrant hereby undertakes to comply with the provisions of Section 16(c) of the 1940 Act with respect to the removal of Trustees and the calling of special shareholder meetings by shareholders. SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant, FEDERATED MUNICIPAL TRUST, cerifies that it meets all of the requirements for effectiveness of this Amendment to its Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused this Amendment to its Registration Statement to be signed on its behalf by the undersigned, duly authorized, in the City of Pittsburgh and Commonwealth of Pennsylvania, on the 30th day of December, 1998. FEDERATED MUNICIPAL TRUST BY: /s/ Anthony R. Bosch Anthony R. Bosch, Assistant Secretary Attorney in Fact for John F. Donahue December 30, 1998 Pursuant to the requirements of the Securities Act of 1933, this Amendment to its Registration Statement has been signed below by the following person in the capacity and on the date indicated: NAME TITLE DATE By: /s/ Anthony R. Bosch Anthony R. Bosch Attorney In Fact December 30, 1998 ASSISTANT SECRETARY For the Persons Listed Below NAME TITLE John F. Donahue* Chairman and Trustee (Chief Executive Officer) William D. Dawson, III* Chief Investment Officer Glen R. Johnson* President and Trustee John W. McGonigle* Executive Vice President and Secretary Richard J. Thomas* Treasurer (Principal Financial and Accounting Officer) Thomas G. Bigley* Trustee John T. Conroy, Jr.* Trustee William J. Copeland* Trustee James E. Dowd, Esq.* Trustee Lawrence D. Ellis, M.D.* Trustee Edward L. Flaherty, Jr., Esq.* Trustee Peter E. Madden* Trustee John E. Murray, Jr., J.D., S.J.D.* Trustee Wesley W. Posvar* Trustee Marjorie P. Smuts* Trustee * By Power of Attorney EX-99.ADMINOMNI 2 Exhibit h under Form N-1A Exhibit 10 under Item 601/Reg. S-K AMENDED & RESTATED AGREEMENT FOR FUND ACCOUNTING SERVICES, ADMINISTRATIVE SERVICES, TRANSFER AGENCY SERVICES AND CUSTODY SERVICES PROCUREMENT AGREEMENT made as of March 1, 1996, and amended and restated as of September 1, 1997, by and between those investment companies listed on Exhibit 1 as may be amended from time to time, having their principal office and place of business at Federated Investors Tower, Pittsburgh, PA 15222-3779 (the "Investment Company"), on behalf of the portfolios (individually referred to herein as a "Fund" and collectively as "Funds") of the Investment Company, and FEDERATED SERVICES COMPANY, a Pennsylvania corporation, having its principal office and place of business at Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779 on behalf of itself and its subsidiaries (the "Company"). WHEREAS, the Investment Company is registered as an open-end management investment company under the Investment Company Act of 1940, as amended (the "1940 Act"), with authorized and issued shares of capital stock or beneficial interest ("Shares"); WHEREAS, the Investment Company may desire to retain the Company as fund accountant to provide fund accounting services (as herein defined) including certain pricing, accounting and recordkeeping services for each of the Funds, including any classes of shares issued by any Fund ("Classes") if so indicated on Exhibit 1, and the Company desires to accept such appointment; WHEREAS, the Investment Company may desire to appoint the Company as its administrator to provide it with administrative services (as herein defined), if so indicated on Exhibit, and the Company desires to accept such appointment; WHEREAS, the Investment Company may desire to appoint the Company as its transfer agent and dividend disbursing agent to provide it with transfer agency services (as herein defined) if so indicated on Exhibit 1, and agent in connection with certain other activities, and the Company desires to accept such appointment; and WHEREAS, the Investment Company may desire to appoint the Company as its agent to select, negotiate and subcontract for custodian services from an approved list of qualified banks if so indicated on Exhibit 1, and the Company desires to accept such appointment; and NOW THEREFORE, in consideration of the premises and mutual covenants herein contained, and intending to be legally bound hereby, the parties hereto agree as follows: SECTION ONE: FUND ACCOUNTING. ARTICLE 1. APPOINTMENT. The Investment Company hereby appoints the Company to provide certain pricing and accounting services to the Funds, and/or the Classes, for the period and on the terms set forth in this Agreement. The Company accepts such appointment and agrees to furnish the services herein set forth in return for the compensation as provided in Article 3 of this Section. ARTICLE 2. THE COMPANY'S DUTIES. Subject to the supervision and control of the Investment Company's Board of Trustees or Directors ("Board"), the Company will assist the Investment Company with regard to fund accounting for the Investment Company, and/or the Funds, and/or the Classes, and in connection therewith undertakes to perform the following specific services; A. Value the assets of the Funds using: primarily, market quotations, including the use of matrix pricing, supplied by the independent pricing services selected by the Company in consultation with the adviser, or sources selected by the adviser, and reviewed by the board; secondarily, if a designated pricing service does not provide a price for a security which the Company believes should be available by market quotation, the Company may obtain a price by calling brokers designated by the investment adviser of the fund holding the security, or if the adviser does not supply the names of such brokers, the Company will attempt on its own to find brokers to price those securities; thirdly, for securities for which no market price is available, the Pricing Committee of the Board will determine a fair value in good faith. Consistent with Rule 2a-4 of the 40 Act, estimates may be used where necessary or appropriate. The Company's obligations with regard to the prices received from outside pricing services and designated brokers or other outside sources, is to exercise reasonable care in the supervision of the pricing agent. TheCompany is not the guarantor of the securities prices received from such agents and the Company is not liable to the Fund for potential errors in valuing a Fund's assets or calculating the net asset value per share of such Fund or Class when the calculations are based upon such prices. All of the above sources of prices used as described are deemed by the Company to be authorized sources of security prices. The Company provides daily to the adviser the securities prices used in calculating the net asset value of the fund, for its use in preparing exception reports for those prices on which the adviser has comment. Further, upon receipt of the exception reports generated by the adviser, the Company diligently pursues communication regarding exception reports with the designated pricing agents; B. Determine the net asset value per share of each Fund and/or Class, at the time and in the manner from time to time determined by the Board and as set forth in the Prospectus and Statement of Additional Information ("Prospectus") of each Fund; C. Calculate the net income of each of the Funds, if any; D. Calculate realized capital gains or losses of each of the Funds resulting from sale or disposition of assets, if any; E. Maintain the general ledger and other accounts, books and financial records of the Investment Company, including for each Fund, and/or Class, as required under Section 31(a) of the 1940 Act and the Rules thereunder in connection with the services provided by the Company; F. Preserve for the periods prescribed by Rule 31a-2 under the 1940 Act the records to be maintained by Rule 31a-1 under the 1940 Act in connection with the services provided by the Company. The Company further agrees that all such records it maintains for the Investment Company are the property of the Investment Company and further agrees to surrender promptly to the Investment Company such records upon the Investment Company's request; G. At the request of the Investment Company, prepare various reports or other financial documents in accordance with generally accepted accounting principles as required by federal, state and other applicable laws and regulations; and H. Such other similar services as may be reasonably requested by the Investment Company. The foregoing, along with any additional services that the Company shall agree in writing to perform for the Investment Company under this Section One, shall hereafter be referred to as "Fund Accounting Services." ARTICLE 3. COMPENSATION AND ALLOCATION OF EXPENSES. A. The Funds will compensate the Company for Fund Accounting Services in accordance with the fees agreed upon from time to time between the parties hereto. Such fees do not include out-of-pocket disbursements of the Company for which the Funds shall reimburse the Company. Out-of-pocket disbursements shall include, but shall not be limited to, the items agreed upon between the parties from time to time. B. The Fund and/or the Class, and not the Company, shall bear the cost of: custodial expenses; membership dues in the Investment Company Institute or any similar organization; transfer agency expenses; investment advisory expenses; Prospectuses, reports and notices; administrative expenses; interest on borrowed money; brokerage commissions; taxes and fees payable to federal, state and other governmental agencies; fees of Trustees or Directors of the Investment Company; independent auditors expenses; legal and audit department expenses billed to the Company for work performed related to the Investment Company, the Funds, or the Classes; law firm expenses; organizational expenses; or other expenses not specified in this Article 3 which may be properly payable by the Funds and/or Classes. C. The compensation and out-of-pocket expenses attributable to the Fund shall be accrued by the Fund and shall be paid to the Company no less frequently than monthly, and shall be paid daily upon request of the Company. The Company will maintain detailed information about the compensation and out-of-pocket expenses by Fund and Class. D. Any schedule of compensation agreed to hereunder, as may be adjusted from time to time, shall be dated and signed by a duly authorized officer of the Investment Company and/or the Funds and a duly authorized officer of the Company. E. The fee for the period from the effective date of this Agreement with respect to a Fund or a Class to the end of the initial month shall be prorated according to the proportion that such period bears to the full month period. Upon any termination of this Agreement before the end of any month, the fee for such period shall be prorated according to the proportion which such period bears to the full month period. For purposes of determining fees payable to the Company, the value of the Fund's net assets shall be computed at the time and in the manner specified in the Fund's Prospectus. F. The Company, in its sole discretion, may from time to time subcontract to, employ or associate with itself such person or persons as the Company may believe to be particularly suited to assist it in performing Fund Accounting Services. Such person or persons may be affiliates of the Company, third-party service providers, or they may be officers and employees who are employed by both the Company and the Investment Company; provided, however, that the Company shall be as fully responsible to each Fund for the acts and omissions of any such subcontractor as it is for its own acts and omissions. The compensation of such person or persons shall be paid by the Company and no obligation shall be incurred on behalf of the Investment Company, the Funds, or the Classes in such respect. SECTION TWO: ADMINISTRATIVE SERVICES. ARTICLE 4. APPOINTMENT. The Investment Company hereby appoints the Company as Administrator for the period on the terms and conditions set forth in this Agreement. The Company hereby accepts such appointment and agrees to furnish the services set forth in Article 5 of this Agreement in return for the compensation set forth in Article 9 of this Agreement. ARTICLE 5. THE COMPANY'S DUTIES. As Administrator, and subject to the supervision and control of the Board and in accordance with Proper Instructions (as defined hereafter) from the Investment Company, the Company will provide facilities, equipment, and personnel to carry out the following administrative services for operation of the business and affairs of the Investment Company and each of its portfolios: A. prepare, file, and maintain the Investment Company's governing documents and any amendments thereto, including the Charter (which has already been prepared and filed), the By-laws and minutes of meetings of the Board and Shareholders; B. prepare and file with the Securities and Exchange Commission and the appropriate state securities authorities the registration statements for the Investment Company and the Investment Company's shares and all amendments thereto, reports to regulatory authorities and shareholders, prospectuses, proxy statements, and such other documents all as may be necessary to enable the Investment Company to make a continuous offering of its shares; C. prepare, negotiate, and administer contracts (if any) on behalf of the Investment Company with, among others, the Investment Company's investment advisers and distributors, subject to any applicable restrictions of the Board or the 1940 Act; D. calculate performance data of the Investment Company for dissemination to information services covering the investment company industry; E. prepare and file the Investment Company's tax returns; F. coordinate the layout and printing of publicly disseminated prospectuses and reports; G. perform internal audit examinations in accordance with a charter to be adopted by the Company and the Investment Company; H. assist with the design, development, and operation of the Investment Company and the Funds; I. provide individuals reasonably acceptable to the Board for nomination, appointment, or election as officers of the Investment Company, who will be responsible for the management of certain of the Investment Company's affairs as determined by the Investment Company's Board; and J. consult with the Investment Company and its Board on matters concerning the Investment Company and its affairs. The foregoing, along with any additional services that the Company shall agree in writing to perform for the Investment Company under this Section Two, shall hereafter be referred to as "Administrative Services." ARTICLE 6. RECORDS. The Company shall create and maintain all necessary books and records in accordance with all applicable laws, rules and regulations, including but not limited to records required by Section 31(a) of the Investment Company act of 1940 and the rules thereunder, as the same may be amended from time to time, pertaining to the Administrative Services performed by it and not otherwise created and maintained by another party pursuant to contract with the Investment Company. Where applicable, such records shall be maintained by the Company for the periods and in the places required by Rule 31a-2 under the 1940 Act. The books and records pertaining to the Investment Company which are in the possession of the Company shall be the property of the Investment Company. The Investment Company, or the Investment Company's authorized representatives, shall have access to such books and records at all times during the Company's normal business hours. Upon the reasonable request of the Investment Company, copies of any such books and records shall be provided promptly by the Company to the Investment Company or the Investment Company's authorized representatives. ARTICLE 7. DUTIES OF THE FUND. The Fund assumes full responsibility for the preparation, contents and distribution of its own offering document and for complying with all applicable requirements the 1940 Act, the Internal Revenue Code, and any other laws, rules and regulations of government authorities having jurisdiction. ARTICLE 8. EXPENSES. The Company shall be responsible for expenses incurred in providing office space, equipment, and personnel as may be necessary or convenient to provide the Administrative Services to the Investment Company, including the compensation of the Company employees who serve as trustees or directors or officers of the Investment Company. The Investment Company shall be responsible for all other expenses incurred by the Company on behalf of the Investment Company, including without limitation postage and courier expenses, printing expenses, travel expenses, registration fees, filing fees, fees of outside counsel and independent auditors, or other professional services, organizational expenses, insurance premiums, fees payable to persons who are not the Company's employees, trade association dues, and other expenses properly payable by the Funds and/or the Classes. ARTICLE 9. COMPENSATION. For the Administrative Services provided, the Investment Company hereby agrees to pay and the Company hereby agrees to accept as full compensation for its services rendered hereunder an administrative fee at an annual rate per Fund, as specified below. The compensation and out of pocket expenses attributable to the Fund shall be accrued by the Fund and paid to the Company no less frequently than monthly, and shall be paid daily upon request of the Company. The Company will maintain detailed information about the compensation and out of pocket expenses by the Fund. MAX. ADMIN. AVERAGE DAILY NET ASSETS FEE OF THE FUNDS .150% on the first $250 million .125% on the next $250 million .100% on the next $250 million .075% on assets in excess of $750 million (Average Daily Net Asset break-points are on a complex-wide basis) However, in no event shall the administrative fee received during any year of the Agreement be less than, or be paid at a rate less than would aggregate $125,000 per Fund and $30,000 per Class. The minimum fee set forth above in this Article 9 may increase annually upon each March 1 anniversary of this Agreement over the minimum fee during the prior 12 months, as calculated under this agreement, in an amount equal to the increase in Pennsylvania Consumer Price Index (not to exceed 6% annually) as last reported by the U.S. Bureau of Labor Statistics for the twelve months immediately preceding such anniversary. ARTICLE 10. RESPONSIBILITY OF ADMINISTRATOR. A. The Company shall not be liable for any error of judgment or mistake of law or for any loss suffered by the Investment Company in connection with the matters to which this Agreement relates, except a loss resulting from willful misfeasance, bad faith or gross negligence on its part in the performance of its duties or from reckless disregard by it of its obligations and duties under this Agreement. The Company shall be entitled to rely on and may act upon advice of counsel (who may be counsel for the Investment Company) on all matters, and shall be without liability for any action reasonably taken or omitted pursuant to such advice. Any person, even though also an officer, director, trustee, partner, employee or agent of the Company, who may be or become an officer, director, trustee, partner, employee or agent of the Investment Company, shall be deemed, when rendering services to the Investment Company or acting on any business of the Investment Company (other than services or business in connection with the duties of the Company hereunder) to be rendering such services to or acting solely for the Investment Company and not as an officer, director, trustee, partner, employee or agent or one under the control or direction of the Company even though paid by the Company. B. The Company shall be kept indemnified by the Investment Company and be without liability for any action taken or thing done by it in performing the Administrative Services in accordance with the above standards. In order that the indemnification provisions contained in this Article 10 shall apply, however, it is understood that if in any case the Investment Company may be asked to indemnify or hold the Company harmless, the Investment Company shall be fully and promptly advised of all pertinent facts concerning the situation in question, and it is further understood that the Company will use all reasonable care to identify and notify the Investment Company promptly concerning any situation which presents or appears likely to present the probability of such a claim for indemnification against the Investment Company. The Investment Company shall have the option to defend the Company against any claim which may be the subject of this indemnification. In the event that the Investment Company so elects, it will so notify the Company and thereupon the Investment Company shall take over complete defense of the claim, and the Company shall in such situation initiate no further legal or other expenses for which it shall seek indemnification under this Article. The Company shall in no case confess any claim or make any compromise in any case in which the Investment Company will be asked to indemnify the Company except with the Investment Company's written consent. SECTION THREE: TRANSFER AGENCY SERVICES. ARTICLE 11. TERMS OF APPOINTMENT. Subject to the terms and conditions set forth in this Agreement, the Investment Company hereby appoints the Company to act as, and the Company agrees to act as, transfer agent and dividend disbursing agent for each Fund's Shares, and agent in connection with any accumulation, open-account or similar plans provided to the shareholders of any Fund ("Shareholder(s)"), including without limitation any periodic investment plan or periodic withdrawal program. ARTICLE 12. DUTIES OF THE COMPANY. The Company shall perform the following services in accordance with Proper Instructions as may be provided from time to time by the Investment Company as to any Fund: A. Purchases (1) The Company shall receive orders and payment for the purchase of shares and promptly deliver payment and appropriate documentation therefore to the custodian of the relevant Fund, (the "Custodian"). The Company shall notify the Fund and the Custodian on a daily basis of the total amount of orders and payments so delivered. (2) Pursuant to purchase orders and in accordance with the Fund's current Prospectus, the Company shall compute and issue the appropriate number of Shares of each Fund and/or Class and hold such Shares in the appropriate Shareholder accounts. (3) In the event that any check or other order for the purchase of Shares of the Fund and/or Class is returned unpaid for any reason, the Company shall debit the Share account of the Shareholder by the number of Shares that had been credited to its account upon receipt of the check or other order, promptly mail a debit advice to the Shareholder, and notify the Fund and/or Class of its action. In the event that the amount paid for such Shares exceeds proceeds of the redemption of such Shares plus the amount of any dividends paid with respect to such Shares, the Fund and/the Class or its distributor will reimburse the Company on the amount of such excess. B. Distribution (1) Upon notification by the Funds of the declaration of any distribution to Shareholders, the Company shall act as Dividend Disbursing Agent for the Funds in accordance with the provisions of its governing document and the then-current Prospectus of the Fund. The Company shall prepare and mail or credit income, capital gain, or any other payments to Shareholders. As the Dividend Disbursing Agent, the Company shall, on or before the payment date of any such distribution, notify the Custodian of the estimated amount required to pay any portion of said distribution which is payable in cash and request the Custodian to make available sufficient funds for the cash amount to be paid out. The Company shall reconcile the amounts so requested and the amounts actually received with the Custodian on a daily basis. If a Shareholder is entitled to receive additional Shares by virtue of any such distribution or dividend, appropriate credits shall be made to the Shareholder's account; and (2) The Company shall maintain records of account for each Fund and Class and advise the Investment Company, each Fund and Class and its Shareholders as to the foregoing. C. Redemptions and Transfers (1) The Company shall receive redemption requests and redemption directions and, if such redemption requests comply with the procedures as may be described in the Fund Prospectus or set forth in Proper Instructions, deliver the appropriate instructions therefor to the Custodian. The Company shall notify the Funds on a daily basis of the total amount of redemption requests processed and monies paid to the Company by the Custodian for redemptions. (2) At the appropriate time upon receiving redemption proceeds from the Custodian with respect to any redemption, the Company shall pay or cause to be paid the redemption proceeds in the manner instructed by the redeeming Shareholders, pursuant to procedures described in the then-current Prospectus of the Fund. (3) If any certificate returned for redemption or other request for redemption does not comply with the procedures for redemption approved by the Fund, the Company shall promptly notify the Shareholder of such fact, together with the reason therefor, and shall effect such redemption at the price applicable to the date and time of receipt of documents complying with said procedures. (4) The Company shall effect transfers of Shares by the registered owners thereof. (5) The Company shall identify and process abandoned accounts and uncashed checks for state escheat requirements on an annual basis and report such actions to the Fund. D. Recordkeeping (1) The Company shall record the issuance of Shares of each Fund, and/or Class, and maintain pursuant to applicable rules of the Securities and Exchange Commission ("SEC") a record of the total number of Shares of the Fund and/or Class which are authorized, based upon data provided to it by the Fund, and issued and outstanding. The Company shall also provide the Fund on a regular basis or upon reasonable request with the total number of Shares which are authorized and issued and outstanding, but shall have no obligation when recording the issuance of Shares, except as otherwise set forth herein, to monitor the issuance of such Shares or to take cognizance of any laws relating to the issue or sale of such Shares, which functions shall be the sole responsibility of the Funds. (2) The Company shall establish and maintain records pursuant to applicable rules of the SEC relating to the services to be performed hereunder in the form and manner as agreed to by the Investment Company or the Fund to include a record for each Shareholder's account of the following: (a) Name, address and tax identification number (and whether such number has been certified); (b) Number of Shares held; (c) Historical information regarding the account, including dividends paid and date and price for all transactions; (d) Any stop or restraining order placed against the account; (e) Information with respect to withholding in the case of a foreign account or an account for which withholding is required by the Internal Revenue Code; (f) Any dividend reinvestment order, plan application, dividend address and correspondence relating to the current maintenance of the account; (g) Certificate numbers and denominations for any Shareholder holding certificates; (h) Any information required in order for the Company to perform the calculations contemplated or required by this Agreement. (3) The Company shall preserve any such records required to be maintained pursuant to the rules of the SEC for the periods prescribed in said rules as specifically noted below. Such record retention shall be at the expense of the Company, and such records may be inspected by the Fund at reasonable times. The Company may, at its option at any time, and shall forthwith upon the Fund's demand, turn over to the Fund and cease to retain in the Company's files, records and documents created and maintained by the Company pursuant to this Agreement, which are no longer needed by the Company in performance of its services or for its protection. If not so turned over to the Fund, such records and documents will be retained by the Company for six years from the year of creation, during the first two of which such documents will be in readily accessible form. At the end of the six year period, such records and documents will either be turned over to the Fund or destroyed in accordance with Proper Instructions. E. Confirmations/Reports (1) The Company shall furnish to the Fund periodically the following information: (a) A copy of the transaction register; (b) Dividend and reinvestment blotters; (c) The total number of Shares issued and outstanding in each state for "blue sky" purposes as determined according to Proper Instructions delivered from time to time by the Fund to the Company; (d) Shareholder lists and statistical information; (e) Payments to third parties relating to distribution agreements, allocations of sales loads, redemption fees, or other transaction- or sales-related payments; (f) Such other information as may be agreed upon from time to time. (2) The Company shall prepare in the appropriate form, file with the Internal Revenue Service and appropriate state agencies, and, if required, mail to Shareholders, such notices for reporting dividends and distributions paid as are required to be so filed and mailed and shall withhold such sums as are required to be withheld under applicable federal and state income tax laws, rules and regulations. (3) In addition to and not in lieu of the services set forth above, the Company shall: (a) Perform all of the customary services of a transfer agent, dividend disbursing agent and, as relevant, agent in connection with accumulation, open-account or similar plans (including without limitation any periodic investment plan or periodic withdrawal program), including but not limited to: maintaining all Shareholder accounts, mailing Shareholder reports and Prospectuses to current Shareholders, withholding taxes on accounts subject to back-up or other withholding (including non-resident alien accounts), preparing and filing reports on U.S. Treasury Department Form 1099 and other appropriate forms required with respect to dividends and distributions by federal authorities for all Shareholders, preparing and mailing confirmation forms and statements of account to Shareholders for all purchases and redemptions of Shares and other conformable transactions in Shareholder accounts, preparing and mailing activity statements for Shareholders, and providing Shareholder account information; and (b) provide a system which will enable the Fund to monitor the total number of Shares of each Fund (and/or Class) sold in each state ("blue sky reporting"). The Fund shall by Proper Instructions (i) identify to the Company those transactions and assets to be treated as exempt from the blue sky reporting for each state and (ii) verify the classification of transactions for each state on the system prior to activation and thereafter monitor the daily activity for each state. The responsibility of the Company for each Fund's (and/or Class's) state blue sky registration status is limited solely to the recording of the initial classification of transactions or accounts with regard to blue sky compliance and the reporting of such transactions and accounts to the Fund as provided above. F. Other Duties (1) The Company shall answer correspondence from Shareholders relating to their Share accounts and such other correspondence as may from time to time be addressed to the Company; (2) The Company shall prepare Shareholder meeting lists, mail proxy cards and other material supplied to it by the Fund in connection with Shareholder meetings of each Fund; receive, examine and tabulate returned proxies, and certify the vote of the Shareholders; (3) The Company shall establish and maintain faclities and procedures for safekeeping of check forms and facsimile signature imprinting devices, if any; and for the preparation or use, and for keeping account of, such forms and devices. The foregoing, along with any additional services that the Company shall agree in writing to perform for the Investment Company under this Section Three, shall hereafter be referred to as "Transfer Agency Services." ARTICLE 13. DUTIES OF THE INVESTMENT COMPANY. A. Compliance The Investment Company or Fund assume full responsibility for the preparation, contents and distribution of their own and/or their classes' Prospectus and for complying with all applicable requirements of the Securities Act of 1933, as amended (the "1933 Act"), the 1940 Act and any laws, rules and regulations of government authorities having jurisdiction. B. Distributions The Fund shall promptly inform the Company of the declaration of any dividend or distribution on account of any Fund's shares. ARTICLE 14. COMPENSATION AND EXPENSES. A. Annual Fee For performance by the Company pursuant to Section Three of this Agreement, the Investment Company and/or the Fund agree to pay the Company an annual maintenance fee for each Shareholder account as agreed upon between the parties and as may be added to or amended from time to time. Such fees may be changed from time to time subject to written agreement between the Investment Company and the Company. Pursuant to information in the Fund Prospectus or other information or instructions from the Fund, the Company may sub-divide any Fund into Classes or other sub-components for recordkeeping purposes. The Company will charge the Fund the same fees for each such Class or sub-component the same as if each were a Fund. B. Reimbursements In addition to the fee paid under Article 7A above, the Investment Company and/or Fund agree to reimburse the Company for out-of-pocket expenses or advances incurred by the Company for the items agreed upon between the parties, as may be added to or amended from time to time. In addition, any other expenses incurred by the Company at the request or with the consent of the Investment Company and/or the Fund, will be reimbursed by the appropriate Fund. C. Payment The compensation and out-of-pocket expenses shall be accrued by the Fund and shall be paid to the Company no less frequently than monthly, and shall be paid daily upon request of the Company. The Company will maintain detailed information about the compensation and out-of-pocket expenses by Fund and Class. D. Any schedule of compensation agreed to hereunder, as may be adjusted from time to time, shall be dated and signed by a duly authorized officer of the Investment Company and/or the Funds and a duly authorized officer of the Company. SECTION FOUR: CUSTODY SERVICES PROCUREMENT. ARTICLE 15. APPOINTMENT. The Investment Company hereby appoints Company as its agent to evaluate and obtain custody services from a financial institution that (i) meets the criteria established in Section 17(f) of the 1940 Act and (ii) has been approved by the Board as eligible for selection by the Company as a custodian (the "Eligible Custodian"). The Company accepts such appointment. ARTICLE 16. THE COMPANY AND ITS DUTIES. Subject to the review, supervision and control of the Board, the Company shall: A. evaluate and obtain custody services from a financial institution that meets the criteria established in Section 17(f) of the 1940 Act and has been approved by the Board as being eligible for selection by the Company as an Eligible Custodian; B. negotiate and enter into agreements with Eligible Custodians for the benefit of the Investment Company, with the Investment Company as a party to each such agreement. The Company may, as paying agent, be a party to any agreement with any such Eligible Custodian; C. establish procedures to monitor the nature and the quality of the services provided by Eligible Custodians; D. monitor and evaluate the nature and the quality of services provided by Eligible Custodians; E. periodically provide to the Investment Company (i) written reports on the activities and services of Eligible Custodians; (ii) the nature and amount of disbursements made on account of the each Fund with respect to each custodial agreement; and (iii) such other information as the Board shall reasonably request to enable it to fulfill its duties and obligations under Sections 17(f) and 36(b) of the 1940 Act and other duties and obligations thereof; F. periodically provide recommendations to the Board to enhance Eligible Custodian's customer services capabilities and improve upon fees being charged to the Fund by Eligible Custodian; and The foregoing, along with any additional services that Company shall agree in writing to perform for the Fund under this Section Four, shall hereafter be referred to as "Custody Services Procurement." ARTICLE 17. FEES AND EXPENSES. A. Annual Fee For the performance of Custody Services Procurement by the Company pursuant to Section Four of this Agreement, the Investment Company and/or the Fund agree to compensate the Company in accordance with the fees agreed upon from time to time. B. Reimbursements In addition to the fee paid under Section 11A above, the Investment Company and/or Fund agree to reimburse the Company for out-of-pocket expenses or advances incurred by the Company for the items agreed upon between the parties, as may be added to or amended from time to time. In addition, any other expenses incurred by the Company at the request or with the consent of the Investment Company and/or the Fund, will be reimbursed by the appropriate Fund. C. Payment The compensation and out-of-pocket expenses shall be accrued by the Fund and shall be paid to the Company no less frequently than monthly, and shall be paid daily upon request of the Company. The Company will maintain detailed information about the compensation and out-of-pocket expenses by Fund. D. Any schedule of compensation agreed to hereunder, as may be adjusted from time to time, shall be dated and signed by a duly authorized officer of the Investment Company and/or the Funds and a duly authorized officer of the Company. ARTICLE 18. REPRESENTATIONS. The Company represents and warrants that it has obtained all required approvals from all government or regulatory authorities necessary to enter into this arrangement and to provide the services contemplated in Section Four of this Agreement. SECTION FIVE: GENERAL PROVISIONS. ARTICLE 19. PROPER INSTRUCTIONS. As used throughout this Agreement, a "Proper Instruction" means a writing signed or initialed by one or more person or persons as the Board shall have from time to time authorized. Each such writing shall set forth the specific transaction or type of transaction involved. Oral instructions will be deemed to be Proper Instructions if (a) the Company reasonably believes them to have been given by a person previously authorized in Proper Instructions to give such instructions with respect to the transaction involved, and (b) the Investment Company, or the Fund, and the Company promptly cause such oral instructions to be confirmed in writing. Proper Instructions may include communications effected directly between electro-mechanical or electronic devices provided that the Investment Company, or the Fund, and the Company are satisfied that such procedures afford adequate safeguards for the Fund's assets. Proper Instructions may only be amended in writing. ARTICLE 20. ASSIGNMENT. Except as provided below, neither this Agreement nor any of the rights or obligations under this Agreement may be assigned by either party without the written consent of the other party. A. This Agreement shall inure to the benefit of and be binding upon the parties and their respective permitted successors and assigns. B. With regard to Transfer Agency Services, the Company may without further consent on the part of the Investment Company subcontract for the performance of Transfer Agency Services with (1) its subsidiary, Federated Shareholder Service Company, a Delaware business trust, which is duly registered as a transfer agent pursuant to Section 17A(c)(1) of the Securities Exchange Act of 1934, as amended, or any succeeding statute ("Section 17A(c)(1)"); or (2) such other provider of services duly registered as a transfer agent under Section 17A(c)(1) as Company shall select. The Company shall be as fully responsible to the Investment Company for the acts and omissions of any subcontractor as it is for its own acts and omissions. C. With regard to Fund Accounting Services, Administrative Services and Custody Procurement Services, the Company may without further consent on the part of the Investment Company subcontract for the performance of such services with Federated Administrative Services, a wholly-owned subsidiary of the Company. D. The Company shall upon instruction from the Investment Company subcontract for the performance of services under this Agreement with an Agent selected by the Investment Company, other than as described in B. and C. above; provided, however, that the Company shall in no way be responsible to the Investment Company for the acts and omissions of the Agent. ARTICLE 21. DOCUMENTS. A. In connection with the appointment of the Company under this Agreement, the Investment Company shall file with the Company the following documents: (1) A copy of the Charter and By-Laws of the Investment Company and all amendments thereto; (2) A copy of the resolution of the Board of the Investment Company authorizing this Agreement; (3) Printed documentation from the recordkeeping system representing outstanding Share certificates of the Investment Company or the Funds; (4) All account application forms and other documents relating to Shareholders accounts; and (5) A copy of the current Prospectus for each Fund. B. The Fund will also furnish from time to time the following documents: (1) Each resolution of the Board of the Investment Company authorizing the original issuance of each Fund's, and/or Class's Shares; (2) Each Registration Statement filed with the SEC and amendments thereof and orders relating thereto in effect with respect to the sale of Shares of any Fund, and/or Class; (3) A certified copy of each amendment to the governing document and the By-Laws of the Investment Company; (4) Certified copies of each vote of the Board authorizing officers to give Proper Instructions to the Custodian and agents for fund accountant, custody services procurement, and shareholder recordkeeping or transfer agency services; (5) Such other certifications, documents or opinions which the Company may, in its discretion, deem necessary or appropriate in the proper performance of its duties; and (6) Revisions to the Prospectus of each Fund. ARTICLE 22. REPRESENTATIONS AND WARRANTIES. A. Representations and Warranties of the Company The Company represents and warrants to the Fund that: (1) it is a corporation duly organized and existing and in good standing under the laws of the Commonwealth of Pennsylvania; (2) It is duly qualified to carry on its business in each jurisdiction where the nature of its business requires such qualification, and in the Commonwealth of Pennsylvania; (3) it is empowered under applicable laws and by its Articles of Incorporation and By-Laws to enter into and perform this Agreement; (4) all requisite corporate proceedings have been taken to authorize it to enter into and perform its obligations under this Agreement; (5) it has and will continue to have access to the necessary facilities, equipment and personnel to perform its duties and obligations under this Agreement; (6) it is in compliance with federal securities law requirements and in good standing as an administrator and fund accountant; and B. Representations and Warranties of the Investment Company The Investment Company represents and warrants to the Company that: (1) It is an investment company duly organized and existing and in good standing under the laws of its state of organization; (2) It is empowered under applicable laws and by its Charter and By-Laws to enter into and perform its obligations under this Agreement; (3) All corporate proceedings required by said Charter and By-Laws have been taken to authorize it to enter into and perform its obligations under this Agreement; (4) The Investment Company is an open-end investment company registered under the 1940 Act; and (5) A registration statement under the 1933 Act will be effective, and appropriate state securities law filings have been made and will continue to be made, with respect to all Shares of each Fund being offered for sale. ARTICLE 23. STANDARD OF CARE AND INDEMNIFICATION. A. Standard of Care With regard to Sections One, Three and Four, the Company shall be held to a standard of reasonable care in carrying out the provisions of this Contract. The Company shall be entitled to rely on and may act upon advice of counsel (who may be counsel for the Investment Company) on all matters, and shall be without liability for any action reasonably taken or omitted pursuant to such advice, provided that such action is not in violation of applicable federal or state laws or regulations, and is in good faith and without negligence. B. Indemnification by Investment Company The Company shall not be responsible for and the Investment Company or Fund shall indemnify and hold the Company, including its officers, directors, shareholders and their agents, employees and affiliates, harmless against any and all losses, damages, costs, charges, counsel fees, payments, expenses and liabilities arising out of or attributable to: (1) The acts or omissions of any Custodian, Adviser, Sub-adviser or other party contracted by or approved by the Investment Company or Fund, (2) The reliance on or use by the Company or its agents or subcontractors of information, records and documents in proper form which (a) are received by the Company or its agents or subcontractors and furnished to it by or on behalf of the Fund, its Shareholders or investors regarding the purchase, redemption or transfer of Shares and Shareholder account information; (b) are received by the Company from independent pricing services or sources for use in valuing the assets of the Funds; or (c) are received by the Company or its agents or subcontractors from Advisers, Sub-advisers or other third parties contracted by or approved by the Investment Company of Fund for use in the performance of services under this Agreement; (d) have been prepared and/or maintained by the Fund or its affiliates or any other person or firm on behalf of the Investment Company. (3) The reliance on, or the carrying out by the Company or its agents or subcontractors of Proper Instructions of the Investment Company or the Fund. (4) The offer or sale of Shares in violation of any requirement under the federal securities laws or regulations or the securities laws or regulations of any state that such Shares be registered in such state or in violation of any stop order or other determination or ruling by any federal agency or any state with respect to the offer or sale of such Shares in such state. Provided, however, that the Company shall not be protected by this Article 23.B. from liability for any act or omission resulting from the Company's willful misfeasance, bad faith, negligence or reckless disregard of its duties or failure to meet the standard of care set forth in 23.A. above. C. Reliance At any time the Company may apply to any officer of the Investment Company or Fund for instructions, and may consult with legal counsel with respect to any matter arising in connection with the services to be performed by the Company under this Agreement, and the Company and its agents or subcontractors shall not be liable and shall be indemnified by the Investment Company or the appropriate Fund for any action reasonably taken or omitted by it in reliance upon such instructions or upon the opinion of such counsel provided such action is not in violation of applicable federal or state laws or regulations. The Company, its agents and subcontractors shall be protected and indemnified in recognizing stock certificates which are reasonably believed to bear the proper manual or facsimile signatures of the officers of the Investment Company or the Fund, and the proper countersignature of any former transfer agent or registrar, or of a co-transfer agent or co-registrar. D. Notification In order that the indemnification provisions contained in this Article 23 shall apply, upon the assertion of a claim for which either party may be required to indemnify the other, the party seeking indemnification shall promptly notify the other party of such assertion, and shall keep the other party advised with respect to all developments concerning such claim. The party who may be required to indemnify shall have the option to participate with the party seeking indemnification in the defense of such claim. The party seeking indemnification shall in no case confess any claim or make any compromise in any case in which the other party may be required to indemnify it except with the other party's prior written consent. ARTICLE 24. TERM AND TERMINATION OF AGREEMENT. This Agreement shall be effective from September 1, 1997, and shall continue until February 28, 2003 (`Term"). Thereafter, the Agreement will continue for 18 month terms. The Agreement can be terminated by either party upon 18 months notice to be effective as of the end of such 18 month period. In the event, however, of willful misfeasance, bad faith, negligence or reckless disregard of its duties by the Company, the Investment Company has the right to terminate the Agreement upon 60 days written notice, if Company has not cured such willful misfeasance, bad faith, negligence or reckless disregard of its duties within 60 days. The termination date for all original or after-added Investment companies which are, or become, a party to this Agreement. shall be coterminous. Investment Companies that merge or dissolve during the Term, shall cease to be a party on the effective date of such merger or dissolution. Should the Investment Company exercise its rights to terminate, all out-of-pocket expenses associated with the movement of records and materials will be borne by the Investment Company or the appropriate Fund. Additionally, the Company reserves the right to charge for any other reasonable expenses associated with such termination. The provisions of Articles 10 and 23 shall survive the termination of this Agreement. ARTICLE 25. AMENDMENT. This Agreement may be amended or modified by a written agreement executed by both parties. ARTICLE 26. INTERPRETIVE AND ADDITIONAL PROVISIONS. In connection with the operation of this Agreement, the Company and the Investment Company may from time to time agree on such provisions interpretive of or in addition to the provisions of this Agreement as may in their joint opinion be consistent with the general tenor of this Agreement. Any such interpretive or additional provisions shall be in a writing signed by both parties and shall be annexed hereto, PROVIDED that no such interpretive or additional provisions shall contravene any applicable federal or state regulations or any provision of the Charter. No interpretive or additional provisions made as provided in the preceding sentence shall be deemed to be an amendment of this Agreement. ARTICLE 27. GOVERNING LAW. This Agreement shall be construed and the provisions hereof interpreted under and in accordance with the laws of the Commonwealth of Massachusetts ARTICLE 28. NOTICES. Except as otherwise specifically provided herein, Notices and other writings delivered or mailed postage prepaid to the Investment Company at , , or to the Company at Federated Investors Tower, Pittsburgh, Pennsylvania, 15222-3779, or to such other address as the Investment Company or the Company may hereafter specify, shall be deemed to have been properly delivered or given hereunder to the respective address. ARTICLE 29. COUNTERPARTS. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original. ARTICLE 30. LIMITATIONS OF LIABILITY OF TRUSTEES AND SHAREHOLDERS OF THE COMPANY. The execution and delivery of this Agreement have been authorized by the Trustees of the Company and signed by an authorized officer of the Company, acting as such, and neither such authorization by such Trustees nor such execution and delivery by such officer shall be deemed to have been made by any of them individually or to impose any liability on any of them personally, and the obligations of this Agreement are not binding upon any of the Trustees or Shareholders of the Company, but bind only the appropriate property of the Fund, or Class, as provided in the Declaration of Trust. ARTICLE 31. MERGER OF AGREEMENT. This Agreement constitutes the entire agreement between the parties hereto and supersedes any prior agreement with respect to the subject hereof whether oral or written. ARTICLE 32. SUCCESSOR AGENT. If a successor agent for the Investment Company shall be appointed by the Investment Company, the Company shall upon termination of this Agreement deliver to such successor agent at the office of the Company all properties of the Investment Company held by it hereunder. If no such successor agent shall be appointed, the Company shall at its office upon receipt of Proper Instructions deliver such properties in accordance with such instructions. In the event that no written order designating a successor agent or Proper Instructions shall have been delivered to the Company on or before the date when such termination shall become effective, then the Company shall have the right to deliver to a bank or trust company, which is a "bank" as defined in the 1940 Act, of its own selection, having an aggregate capital, surplus, and undivided profits, as shown by its last published report, of not less than $2,000,000, all properties held by the Company under this Agreement. Thereafter, such bank or trust company shall be the successor of the Company under this Agreement. ARTICLE 33. FORCE MAJEURE. The Company shall have no liability for cessation of services hereunder or any damages resulting therefrom to the Fund as a result of work stoppage, power or other mechanical failure, natural disaster, governmental action, communication disruption or other impossibility of performance. ARTICLE 34. ASSIGNMENT; SUCCESSORS. This Agreement shall not be assigned by either party without the prior written consent of the other party, except that either party may assign all of or a substantial portion of its business to a successor, or to a party controlling, controlled by, or under common control with such party. Nothing in this Article 34 shall prevent the Company from delegating its responsibilities to another entity to the extent provided herein. ARTICLE 35. SEVERABILITY. In the event any provision of this Agreement is held illegal, void or unenforceable, the balance shall remain in effect. ARTICLE 36. LIMITATIONS OF LIABILITY OF TRUSTEES AND SHAREHOLDERS OF THE INVESTMENT COMPANY. The execution and delivery of this Agreement have been authorized by the Trustees of the Investment Company and signed by an authorized officer of the Investment Company, acting as such, and neither such authorization by such Trustees nor such execution and delivery by such officer shall be deemed to have been made by any of them individually or to impose any liability on any of them personally, and the obligations of this Agreement are not binding upon any of the Trustees or Shareholders of the Investment Company, but bind only the property of the Fund, or Class, as provided in the Declaration of Trust. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in their names and on their behalf under their seals by and through their duly authorized officers, as of the day and year first above written. INVESTMENT COMPANIES (LISTED ON EXHIBIT 1) By: /S/ S. ELLIOTT COHAN Name: S. Elliott Cohan Title: Assistant Secretary FEDERATED SERVICES COMPANY By: /S/ THOMAS J. WARD Name: Thomas J. Ward Title: Secretary EXHIBIT 1 CONTRACT DATE INVESTMENT COMPANY 3/1/96 FEDERATED MUNICIPAL TRUST 3/1/96 Alabama Municipal Cash Trust 5/30/98 Arizona Municipal Cash Trust 5/30/98 Institutional Service Shares 3/1/96 California Municipal Cash Trust 3/1/96 Institutional Service Shares 3/1/96 Institutional Shares 3/1/96 Connecticut Municipal Cash Trust 3/1/96 Institutional Service Shares 3/1/96 Florida Municipal Cash Trust 3/1/96 Cash II Shares 3/1/96 Institutional Shares 3/1/96 Georgia Municipal Cash Trust 3/1/96 Maryland Municipal Cash Trust 3/1/96 Massachusetts Municipal Cash Trust 5/27/97 Boston 1784 Fund Shares 3/1/96 Institutional Service Shares 3/1/96 Michigan Municipal Cash Trust 3/1/96 Institutional Service Shares 3/1/96 Institutional Shares 3/1/96 Minnesota Municipal Cash Trust 3/1/96 Cash Series Shares 3/1/96 Institutional Shares 3/1/96 New Jersey Municipal Cash Trust 3/1/96 Institutional Service Shares 3/1/96 Institutional Shares 3/1/96 New York Municipal Cash Trust 3/1/96 Cash II Shares 3/1/96 Institutional Service Shares 3/1/96 North Carolina Municipal Cash Trust 3/1/96 Ohio Municipal Cash Trust 3/1/96 Cash II Shares 3/1/96 Institutional Service Shares 3/1/96 Institutional Shares 3/1/96 Pennsylvania Municipal Cash Trust 3/1/96 Cash Series Shares 3/1/96 Institutional Service Shares 3/1/96 Institutional Shares 5/14/96 Tennessee Municipal Cash Trust 5/14/96 Institutional Service Shares 5/14/96 Institutional Shares 3/1/96 Virginia Municipal Cash Trust 3/1/96 Institutional Service Shares 3/1/96 Institutional Shares EX-99.CONSENT 3 Exhibit j under N-1A Exhibit 23 under Item 601 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use in Post-Effective Amendment No. 49 to Form N-1A Registration Statement of Federated Municipal Trust of our reports dated December 23, 1998, on the financial statements as of October 31, 1998, of Alabama Municipal Cash Trust, Arizona Municipal Cash Trust, California Municipal Cash Trust, Connecticut Municipal Cash Trust, Florida Municipal Cash Trust, Georgia Municipal Cash Trust, Maryland Municipal Cash Trust, Massachusetts Municipal Cash Trust, Michigan Municipal Cash Trust, Minnesota Municipal Cash Trust, New Jersey Municipal Cash Trust, New York Municipal Cash Trust, North Carolina Municipal Cash Trust, Ohio Municipal Cash Trust, Pennsylvania Municipal Cash Trust, Tennessee Municipal Cash Trust and Virginia Municipal Cash Trust (the seventeen portfolios comprising Federated Municipal Trust), included in or made a part of this registration statement. ARTHUR ANDERSEN LLP Boston, Massachusetts December 23, 1998 EX-99.POWEROFATTY 4 Exhibit p(ii) under Form N-1A Exhibit 24 under Item 601/Reg. S-K POWER OF ATTORNEY Each person whose signature appears below hereby constitutes and appoints the Secretary and Assistant Secretary of FEDERATED MUNICIPAL TRUST and each of them, their true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution for them and in their names, place and stead, in any and all capacities, to sign any and all documents to be filed with the Securities and Exchange Commission pursuant to the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Company Act of 1940, by means of the Securities and Exchange Commission's electronic disclosure system known as EDGAR; and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to sign and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as each of them might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue thereof. SIGNATURES TITLE DATE /s/ William D. Dawson Chief Investment Officer December 15, 1998 William D. Dawson Sworn to and subscribed before me this 15th day of December, 1998. /s/ Cheri S. Good Cheri S. Good Notary Public EX-99.POWEROFATTY 5 Exhibit p(iii) under Form N-1A Exhibit 24 under Item 601/Reg. S-K POWER OF ATTORNEY Each person whose signature appears below hereby constitutes and appoints the Secretary and Assistant Secretary of FEDERATED MUNICIPAL TRUST and each of them, their true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution for them and in their names, place and stead, in any and all capacities, to sign any and all documents to be filed with the Securities and Exchange Commission pursuant to the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Company Act of 1940, by means of the Securities and Exchange Commission's electronic disclosure system known as EDGAR; and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to sign and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as each of them might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue thereof. SIGNATURES TITLE DATE /s/ Richard J. Thomas Treasurer December 11, 1998 Richard J. Thomas (Principal Financial and Accounting Officer) Sworn to and subscribed before me this 11th day of December, 1998. /s/ Cheri S. Good Cheri S. Good Notary Public EX-27.FDS 6
6 08 Alabama Municipal Cash Trust 12-mos Oct-31-1998 Oct-31-1998 188,770,229 188,770,229 1,290,706 31,389 0 190,092,324 0 0 267,715 267,715 0 189,824,609 189,824,609 223,647,211 0 0 0 0 0 189,824,609 0 7,066,520 0 (1,046,729) 6,019,791 0 0 6,019,791 0 (6,019,791) 0 0 436,920,174 (473,995,552) 3,252,776 (33,822,602) 0 0 0 0 944,018 0 1,752,348 188,821,147 1.000 0.030 0.000 (0.030) 0.000 0.000 1.000 0.55 0 0.000
EX-27.FDS 7
6 17 Arizona Municipal Cash Trust 5-mos Oct-31-1998 Oct-31-1998 33,745,354 33,745,354 241,347 772,895 0 34,759,596 0 0 31,850 31,850 0 34,727,746 34,727,746 0 0 0 0 0 0 34,727,746 0 171,083 0 (15,504) 155,579 0 0 155,579 0 (155,579) 0 0 46,101,572 (11,472,228) 98,402 34,727,746 0 0 0 0 24,043 0 121,687 12,273,513 1.000 0.010 0.000 (0.010) 0.000 0.000 1.000 0.32 0 0.000
EX-27.FDS 8
6 122 California Municipal Cash Trust Institutional Shares 12-MOS Oct-31-1998 Oct-31-1998 403,158,715 403,158,715 2,922,550 273,872 0 406,355,137 0 0 1,578,755 1,578,755 0 0 41,574,195 41,955,794 0 0 0 0 0 404,776,382 0 12,277,274 0 (1,669,323) 10,607,951 0 0 10,607,951 0 (1,346,145) 0 0 117,311,375 (117,704,612) 11,638 128,056,215 0 0 0 0 1,757,809 0 3,269,784 41,447,345 1.000 0.030 0.000 (0.030) 0.000 0.000 1.000 0.25 0 0.000
EX-27.FDS 9
6 121 California Municipal Cash Trust Institutional Serv. Shares 12-MOS Oct-31-1998 Oct-31-1998 403,158,715 403,158,715 2,922,550 273,872 0 406,355,137 0 0 1,578,755 1,578,755 0 0 363,202,187 234,764,373 0 0 0 0 0 404,776,382 0 12,277,274 0 (1,669,323) 10,607,951 0 0 10,607,951 0 (9,261,806) 0 0 1,284,549,045 (1,161,835,907) 5,730,676 128,056,215 0 0 0 0 1,757,809 0 3,269,784 310,194,310 1.000 0.030 0.000 (0.030) 0.000 0.000 1.000 0.50 0 0.000
EX-27.FDS 10
6 01 Connecticut Municipal Cash Trust 12-MOS Oct-31-1998 Oct-31-1998 338,792,058 338,792,058 805,231 595,526 0 340,192,815 0 0 620,170 620,170 0 0 339,566,645 271,316,429 0 0 0 0 0 339,566,645 0 11,490,107 0 (1,964,299) 9,525,808 0 0 9,525,808 0 (9,525,808) 0 0 1,057,554,443 (992,493,610) 3,189,470 68,250,303 0 0 0 0 1,625,027 0 2,917,217 324,101,467 1.000 0.030 0.000 (0.030) 0.000 0.000 1.000 0.60 0 0.000
EX-27.FDS 11
6 102 Florida Municipal Cash Trust Cash II Shares 12-mos Oct-31-1998 Oct-31-1998 227,807,956 227,807,956 1,298,157 703,638 0 229,809,751 0 0 776,761 776,761 0 229,032,990 71,839,407 62,755,913 0 0 0 0 0 229,032,990 0 18,486,082 0 (3,328,574) 15,157,508 0 0 15,157,508 0 (3,365,435) 0 0 645,934,032 (636,998,304) 147,766 (313,583,423) 0 0 0 0 2,032,071 0 4,308,067 118,874,063 1.000 0.030 0.000 (0.030) 0.000 0.000 1.000 0.85 0 0.000
EX-27.FDS 12
6 101 Florida Municipal Cash Trust Institutional Shares 12-mos Oct-31-1998 Oct-31-1998 227,807,956 227,807,956 1,298,157 703,638 0 229,809,751 0 0 776,761 776,761 0 229,032,990 157,193,583 479,860,500 0 0 0 0 0 229,032,990 0 18,486,082 0 (3,328,574) 15,157,508 0 0 15,157,508 0 (11,792,073) 0 0 1,551,253,164 (1,881,610,584) 7,690,503 (313,583,423) 0 0 0 0 2,032,071 0 4,308,067 398,469,482 1.000 0.030 0.000 (0.030) 0.000 0.000 1.000 0.58 0 0.000
EX-27.FDS 13
6 15 Georgia Municipal Cash Trust 12-MOS Oct-31-1998 Oct-31-1998 166,504,382 166,504,382 1,518,134 294,519 0 168,317,035 0 0 219,250 219,250 0 0 168,097,785 121,858,203 0 0 0 0 0 168,097,785 0 6,464,815 0 (839,694) 5,625,121 0 0 5,625,121 0 (5,625,121) 0 0 632,771,755 (590,290,954) 3,758,781 46,239,582 0 0 0 0 856,835 0 1,591,555 57,438,572 1.000 0.030 0.000 (0.030) 0.000 0.000 1.000 0.49 0 0.000
EX-27.FDS 14
6 022 Massachusetts Municipal Cash Trust - Boston 1784 Shares 12-mos Oct-31-1998 Oct-31-1998 415,491,295 415,491,295 3,420,690 627,279 0 419,539,264 0 0 596,173 596,173 0 418,943,091 162,557,451 73,837,285 0 0 0 0 0 418,943,091 0 12,817,374 0 (2,029,169) 10,788,205 0 0 10,788,205 0 (4,064,367) 0 0 247,362,338 (162,709,764) 4,067,592 203,236,452 0 0 0 0 1,810,446 0 3,331,465 136,702,067 1.000 0.030 0.000 (0.030) 0.000 0.000 1.000 0.57 0 0.000
EX-27.FDS 15
6 021 Massachusetts Municipal Cash Trust-ISS 12-mos Oct-31-1998 Oct-31-1998 415,491,295 415,491,295 3,420,690 627,279 0 419,539,264 0 0 596,173 596,173 0 418,943,091 256,385,640 141,869,354 0 0 0 0 0 418,943,091 0 12,817,374 0 (2,029,169) 10,788,205 0 0 10,788,205 0 (6,723,838) 0 0 943,828,322 (830,885,045) 1,573,009 203,236,452 0 0 0 0 1,810,446 0 3,331,465 225,404,452 1.000 0.030 0.000 (0.030) 0.000 0.000 1.000 0.55 0 0.000
EX-27.FDS 16
6 13 Maryland Municipal Cash Trust 12-MOS Oct-31-1998 Oct-31-1998 66,970,546 66,970,546 341,130 222,565 0 67,534,241 1,348,764 0 49,157 1,397,921 0 0 66,136,320 45,574,763 0 0 0 0 0 66,136,320 0 2,129,415 0 (404,488) 1,724,927 0 0 1,724,927 0 (1,724,927) 0 0 162,453,813 (143,324,566) 1,432,310 20,561,557 0 0 0 0 287,116 0 697,346 57,438,572 1.000 0.030 0.000 (0.030) 0.000 0.000 1.000 0.70 0 0.000
EX-27.FDS 17
6 142 Michigan Municipal Cash Trust - Institutional Shares 12-mos Oct-31-1998 Oct-31-1998 204,693,197 204,693,197 1,624,736 622,936 0 206,940,869 1,700,000 0 687,939 2,387,939 0 204,552,930 19,563,824 13,370,278 0 0 0 0 0 204,552,930 0 6,985,867 0 (1,033,279) 5,952,588 0 0 5,952,588 0 (539,765) 0 0 78,879,030 (72,720,480) 34,996 44,077,305 0 0 0 0 938,574 0 1,843,324 16,324,699 1.000 0.030 0.000 (0.030) 0.000 0.000 1.000 0.40 0 0.000
EX-27.FDS 18
6 141 Michigan Municipal Cash Trust - Institutional Service Shares 12-mos Oct-31-1998 Oct-31-1998 204,693,197 204,693,197 1,624,736 622,936 0 206,940,869 1,700,000 0 687,939 2,387,939 0 204,552,930 184,989,106 147,105,347 0 0 0 0 0 204,552,930 0 6,985,867 0 (1,033,279) 5,952,588 0 0 5,952,588 0 (5,412,823) 0 0 767,269,962 (733,578,344) 4,192,141 44,077,305 0 0 0 0 938,574 0 1,843,324 171,374,133 1.000 0.030 0.000 (0.030) 0.000 0.000 1.000 0.56 0 0.000
EX-27.FDS 19
6 032 Minnesota Municipal Cash Trust - Cash Series Shares 12-mos Oct-31-1998 Oct-31-1998 533,291,212 533,291,212 3,967,556 13,090 0 537,271,858 0 0 1,165,646 1,165,646 0 536,106,212 207,598,987 221,226,925 0 0 0 0 0 536,106,212 0 20,018,457 0 (2,853,912) 17,164,545 0 0 17,164,545 0 (7,009,332) 0 0 648,659,025 (669,138,653) 6,851,690 106,513,794 0 0 0 0 2,168,395 0 5,588,338 242,211,082 1.000 0.030 0.000 (0.030) 0.000 0.000 1.000 0.80 0 0.000
EX-27.FDS 20
6 031 Minnesota Municipal Cash Trust - Institutional Shares 12-mos Oct-31-1998 Oct-31-1998 533,291,212 533,291,212 3,967,556 13,090 0 537,271,858 0 0 1,165,646 1,165,646 0 536,106,212 328,507,225 208,365,493 0 0 0 0 0 536,106,212 0 20,018,457 0 (2,853,912) 17,164,545 0 0 17,164,545 0 (10,155,213) 0 0 743,424,803 (623,646,203) 363,132 106,513,794 0 0 0 0 2,168,395 0 5,588,338 299,873,928 1.000 0.030 0.000 (0.030) 0.000 0.000 1.000 0.30 0 0.000
EX-27.FDS 21
6 09 North Carolina Municipal Cash Trust 12-mos Oct-31-1998 Oct-31-1998 210,574,434 210,574,434 1,356,394 317,698 0 212,248,526 0 0 137,823 137,823 0 212,110,703 212,110,703 172,635,784 0 0 0 0 0 212,110,703 0 6,673,495 0 (1,069,815) 5,603,680 0 0 5,603,680 0 (5,603,680) 0 0 1,078,743,485 (1,043,902,913) 4,634,347 39,474,919 0 0 0 0 899,911 0 1,699,147 179,982,200 1.000 0.030 0.000 (0.030) 0.000 0.000 1.000 0.59 0 0.000
EX-27.FDS 22
6 041 New Jersey Municipal Cash Trust Institutional Shares 12-MOS Oct-31-1998 Oct-31-1998 170,011,255 170,011,255 6,805,345 236,760 0 177,053,360 5,387,007 0 393,468 5,780,475 0 0 106,032,438 112,406,741 0 0 0 0 0 171,272,885 0 7,523,204 0 (1,218,691) 6,304,513 0 0 6,304,513 0 (4,351,312) 0 0 453,405,235 (459,822,649) 43,111 4,327,746 0 0 0 0 831,577 0 1,797,031 141,768,779 1.000 0.030 0.000 (0.030) 0.000 0.000 1.000 0.55 0 0.000
EX-27.FDS 23
6 042 New Jersey Municipal Cash Trust Institutional Serv. Shares 12-MOS Oct-31-1998 Oct-31-1998 170,011,255 170,011,255 6,805,345 236,760 0 177,053,360 5,387,007 0 393,468 5,780,475 0 0 65,240,447 54,538,398 0 0 0 0 0 171,272,885 0 7,523,204 0 (1,218,691) 6,304,513 0 0 6,304,513 0 (1,953,201) 0 0 217,162,372 (207,693,139) 1,232,816 4,327,746 0 0 0 0 831,577 0 1,797,031 66,126,003 1.000 0.030 0.000 (0.030) 0.000 0.000 1.000 0.65 0 0.000
EX-27.FDS 24
6 112 New York Municipal Cash Trust - Cash II Shares 12-mos Oct-31-1998 Oct-31-1998 552,063,482 552,063,482 6,673,948 0 0 558,737,430 0 0 1,769,274 1,769,274 0 556,968,156 43,956,691 21,401,855 0 0 0 0 0 556,968,156 0 20,643,421 0 (3,117,897) 17,525,524 0 0 17,525,524 0 (893,271) 0 0 164,753,848 (142,918,616) 719,604 111,392,556 0 0 0 0 2,250,094 0 5,900,126 30,023,008 1.000 0.030 0.000 (0.030) 0.000 0.000 1.000 0.71 0 0.000
EX-27.FDS 25
6 111 New York Municipal Cash Trust - Institutional Service Shares 12-mos Oct-31-1998 Oct-31-1998 552,063,482 552,063,482 6,673,948 0 0 558,737,430 0 0 1,769,274 1,769,274 0 556,968,156 513,011,465 424,173,745 0 0 0 0 0 556,968,156 0 20,643,421 0 (3,117,897) 17,525,524 0 0 17,525,524 0 (16,632,253) 0 0 2,064,643,976 (1,982,393,236) 6,586,980 111,392,556 0 0 0 0 2,250,094 0 5,900,126 532,500,577 1.000 0.030 0.000 (0.030) 0.000 0.000 1.000 0.55 0 0.000
EX-27.FDS 26
6 052 Ohio Municipal Cash Trust Cash II Shares 12-mos Oct-31-1998 Oct-31-1998 566,006,031 566,006,031 3,661,355 361,802 0 570,029,188 0 0 791,813 791,813 0 569,237,375 342,946,498 245,328,833 0 0 0 0 0 569,237,375 0 16,793,463 0 (3,260,777) 13,532,686 0 0 13,532,686 0 (8,076,502) 0 0 1,005,297,220 (915,569,899) 7,890,344 0 0 0 0 0 1,795,830 0 4,685,678 282,618,117 1.000 0.030 0.000 (0.030) 0.000 0.000 1.000 0.87 0 0.000
EX-27.FDS 27
6 053 Ohio Municipal Cash Trust Institutional Shares 12-mos Oct-31-1998 Oct-31-1998 566,006,031 566,006,031 3,661,355 361,802 0 570,029,188 0 0 791,813 791,813 0 569,237,375 131,394,933 55,710,419 0 0 0 0 0 569,237,375 0 16,793,463 0 (3,260,777) 13,532,686 0 0 13,532,686 0 (2,814,708) 0 0 841,971,973 (766,384,422) 96,964 0 0 0 0 0 1,795,830 0 4,685,678 82,944,925 1.000 0.030 0.000 (0.030) 0.000 0.000 1.000 0.38 0 0.000
EX-27.FDS 28
6 051 Ohio Municipal Cash Trust Institutional Service Shares 12-mos Oct-31-1998 Oct-31-1998 566,006,031 566,006,031 3,661,355 361,802 0 570,029,188 0 0 791,813 791,813 0 569,237,375 94,895,944 80,619,487 0 0 0 0 0 569,237,375 0 16,793,463 0 (3,260,777) 13,532,686 0 0 13,532,686 0 (2,641,476) 0 0 311,583,533 (297,884,069) 576,992 0 0 0 0 0 1,795,830 0 4,685,678 83,394,487 1.000 0.030 0.000 (0.030) 0.000 0.000 1.000 0.57 0 0.000
EX-27.FDS 29
6 062 Pennsylvania Municipal Cash Trust - Cash Series Shares 12-mos Oct-31-1998 Oct-31-1998 501,952,489 501,952,489 9,430,618 8,393 0 511,391,500 0 0 6,789,606 6,789,606 0 504,601,894 47,940,017 23,776,931 0 0 0 0 0 504,601,894 0 15,641,600 0 (2,800,183) 12,841,417 0 0 12,841,417 0 (1,215,221) 0 0 158,966,434 (135,965,506) 1,162,158 153,043,354 0 0 0 0 2,086,146 0 4,009,861 45,012,438 1.000 0.030 0.000 (0.030) 0.000 0.000 1.000 1.05 0 0.000
EX-27.FDS 30
6 063 Pennsylvania Municipal Cash Trust - Institutional Shares 12-mos Oct-31-1998 Oct-31-1998 501,952,489 501,952,489 9,430,618 8,393 0 511,391,500 0 0 6,789,606 6,789,606 0 504,601,894 64,281,072 63,148,055 0 0 0 0 0 504,601,894 0 15,641,600 0 (2,800,183) 12,841,417 0 0 12,841,417 0 (1,812,898) 0 0 403,352,478 (402,341,293) 121,832 153,043,354 0 0 0 0 2,086,146 0 4,009,861 54,851,280 1.000 0.030 0.000 (0.030) 0.000 0.000 1.000 0.45 0 0.000
EX-27.FDS 31
6 061 Pennsylvania Municipal Cash Trust-ISS 12-mos Oct-31-1998 Oct-31-1998 501,952,489 501,952,489 9,430,618 8,393 0 511,391,500 0 0 6,789,606 6,789,606 0 504,601,894 392,380,805 264,633,554 0 0 0 0 0 504,601,894 0 15,641,600 0 (2,800,183) 12,841,417 0 0 12,841,417 0 (9,813,298) 0 0 1,209,407,656 (1,084,732,294) 3,071,889 153,043,354 0 0 0 0 2,086,146 0 4,009,861 317,371,868 1.000 0.030 0.000 (0.030) 0.000 0.000 1.000 0.65 0 0.000
EX-27.FDS 32
6 161 Tennessee Municipal Cash Trust Institutional Shares 12-mos Oct-31-1998 Oct-31-1998 71,803,577 71,803,577 486,613 159,923 0 72,450,113 0 0 664,606 664,606 0 71,785,507 39,192,552 23,047,849 0 0 0 0 0 71,785,507 0 2,034,356 0 (265,592) 1,768,764 0 0 1,768,764 0 (895,346) 0 0 141,723,370 (126,610,011) 31,344 24,113,583 0 0 0 0 274,883 0 736,573 26,710,460 1.000 0.030 0.000 (0.030) 0.000 0.000 1.000 0.35 0 0.000
EX-27.FDS 33
6 162 Tennessee Municipal Cash Trust Institutional Service Shares 12-mos Oct-31-1998 Oct-31-1998 71,803,577 71,803,577 486,613 159,923 0 72,450,113 0 0 664,606 664,606 0 71,785,507 32,592,955 24,624,075 0 0 0 0 0 71,785,507 0 2,034,356 0 (265,592) 1,768,764 0 0 1,768,764 0 (873,418) 0 0 94,453,215 (87,157,076) 672,741 24,113,583 0 0 0 0 274,883 0 736,573 28,290,726 1.000 0.030 0.000 (0.030) 0.000 0.000 1.000 0.60 0 0.000
EX-27.FDS 34
6 071 Virginia Municipal Cash Trust Institutional Shares 12-mos Oct-31-1998 Oct-31-1998 270,769,992 270,769,992 2,667,391 0 0 273,437,383 0 0 1,730,327 1,730,327 0 271,707,056 24,558,505 24,382,210 0 0 0 0 0 271,707,056 0 9,563,067 0 (1,606,823) 7,956,244 0 0 7,956,244 0 (1,199,300) 0 0 140,689,593 (140,806,137) 292,839 48,486,817 0 0 0 0 1,032,025 0 2,205,394 37,107,111 1.000 0.030 0.000 (0.030) 0.000 0.000 1.000 0.50 0 0.000
EX-27.FDS 35
6 072 Virginia Municipal Cash Trust Institutional Service Shares 12-mos Oct-31-1998 Oct-31-1998 270,769,992 270,769,992 2,667,391 0 0 273,437,383 0 0 1,730,327 1,730,327 0 271,707,056 247,148,551 198,838,029 0 0 0 0 0 271,707,056 0 9,563,067 0 (1,606,823) 7,956,244 0 0 7,956,244 0 (6,756,944) 0 0 1,201,769,345 (1,159,159,294) 5,700,471 48,486,817 0 0 0 0 1,032,025 0 2,205,394 220,890,841 1.000 0.030 0.000 (0.030) 0.000 0.000 1.000 0.64 0 0.000
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