FORTRESS MUNICIPAL INCOME FUND, INC.
PROSPECTUS
An open-end, diversified management investment company (a mutual fund) that
seeks a high level of current income exempt from the federal regular income tax
by investing primarily in a professionally managed, diversified portfolio of
municipal bonds.
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 BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in Fortress Municipal Income Fund, Inc. (the "Fund"). Keep this
prospectus for future reference.
The Fund has also filed a Statement of Additional Information dated October 31,
1995, with the Securities and Exchange Commission. The information contained in
the Statement of Additional Information is incorporated by reference into this
prospectus. You may request a copy of the Statement of Additional Information,
which is in paper form only, or a paper copy of this prospectus, if you have
received your prospectus electronically, of charge by calling 1-800-235-4669. To
obtain other information or to make inquiries about the Fund, contact your
financial institution.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated October 31, 1995
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TABLE OF CONTENTS
Summary of Fund Expenses.......................................................1
Financial Highlights...........................................................2
General Information............................................................3
Fortress Investment Program....................................................3
Investment Information.........................................................4
Investment Objective.........................................................4
Investment Policies..........................................................4
Acceptable Investments....................................................4
Characteristics.........................................................5
When-Issued and Delayed
Delivery Transactions...................................................5
Temporary Investments.....................................................5
Other Investment Techniques...............................................5
Portfolio Turnover...........................................................6
Municipal Bonds..............................................................6
Investment Risks.............................................................6
Reducing Risks of Lower-Rated
Securities..............................................................7
Credit Research.........................................................7
Diversification.........................................................7
Economic Analysis.......................................................7
Investment Limitations.......................................................7
Net Asset Value................................................................8
Investing in the Fund..........................................................9
Share Purchases..............................................................9
Through a Financial Institution...........................................9
Directly by Mail..........................................................9
Directly by Wire..........................................................9
Minimum Investment Required..................................................9
What Shares Cost.............................................................9
Dealer Concession........................................................10
Eliminating the Sales Charge................................................10
Quantity Discounts and
Accumulated Purchases..................................................10
Letter of Intent.........................................................11
Reinvestment Privilege...................................................11
Concurrent Purchases.....................................................11
Systematic Investment Program...............................................11
Exchange Privilege..........................................................12
Certificates and Confirmations..............................................12
Dividends and Distributions.................................................12
Redeeming Shares..............................................................13
Through a Financial Institution.............................................13
Directly by Mail............................................................13
Signatures...............................................................13
Receiving Payment........................................................14
Contingent Deferred Sales Charge............................................14
Systematic Withdrawal Program...............................................15
Accounts with Low Balances..................................................15
Fund Information..............................................................16
Management of the Fund......................................................16
Board of Directors.......................................................16
Investment Adviser.......................................................16
Advisory Fees............................................................16
Adviser's Background.....................................................16
Distribution of Fund Shares.................................................17
Distribution and Shareholder Services....................................17
Supplemental Payments to Financial
Institutions...........................................................17
Administration of the Fund..................................................18
Administrative Services..................................................18
Custodian................................................................18
Transfer Agent and Dividend
Disbursing Agent.......................................................18
Independent Auditor......................................................18
Shareholder Information.......................................................19
Voting Rights...............................................................19
Tax Information...............................................................19
Federal Income Tax..........................................................19
Pennsylvania Personal Property Taxes........................................20
Other State and Local Taxes.................................................20
Performance Information.......................................................21
Appendix......................................................................21
Addresses.....................................................................23
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SUMMARY OF FUND EXPENSES
FORTRESS MUNICIPAL INCOME FUND, INC.
<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)........................................................................ 1.00%
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price)........................................................................ None
Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable) (1).................................................. 1.00%
Redemption Fee (as a percentage of amount redeemed, if applicable)........................................... None
Exchange Fee................................................................................................. None
<CAPTION>
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
<S> <C> <C>
Management Fee............................................................................................... 0.60%
12b-1 Fee (2)................................................................................................ 0.00%
Total Other Expenses......................................................................................... 0.48%
Shareholder Services Fee..................................................................... 0.25%
Total Operating Expenses........................................................................... 1.08%
</TABLE>
(1) The contingent deferred sales charge is 1.00% of the lesser of the original
purchase price or the net asset value of shares redeemed within four years
of their purchase date. For a more complete description see "Contingent
Deferred Sales Charge".
(2) The Fund has no present intention of paying or accruing the 12b-1 fee
during the fiscal year ending August 31, 1996. If the Fund were paying or
accruing the 12b-1 fee, the Fund would be able to pay up to 0.25% of its
average daily net assets for the 12b-1 fee. See "Fund Information".
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of the Fund will bear, either
directly or indirectly. For more complete descriptions of the various costs and
expenses, see "Fund Information". Wire-transferred redemptions of less than
$5,000 may be subject to additional fees.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
You would pay the following expenses on a
$1,000 investment, assuming (1) 5% annual return and
(2) redemption at the end of each time period............................. $31 $55 $69 $140
You would pay the following expenses on the same investment, assuming no
redemption................................................................ $21 $44 $69 $140
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
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FINANCIAL HIGHLIGHTS
FORTRESS MUNICIPAL INCOME FUND, INC.
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(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Deloitte & Touche LLP, the Fund's
independent auditors. Their report dated October 13, 1995 on the Fund's
financial statements for the year ended August 31, 1995, and on the following
table for each of the periods presented, is included in the Annual Report dated
August 31, 1995, which is incorporated by reference. This table should be read
in conjunction with the Fund's financial statements and notes thereto, which may
be obtained from the Fund.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995 1994 1993 1992 1991 1990 1989 1988 1987(A)
NET ASSET VALUE, BEGINNING OF
PERIOD $10.56 $ 11.28 $10.78 $ 10.39 $ 10.00 $ 10.23 $ 9.76 $ 10.07 $ 10.00
- -------------------------------
INCOME FROM INVESTMENT
OPERATIONS
- -------------------------------
Net investment income 0.63 0.61 0.62 0.66 0.70 0.72 0.74 0.78 0.26
- -------------------------------
Net realized and unrealized
gain (loss) on investments 0.15 (0.73) 0.51 0.39 0.40 (0.23) 0.49 (0.36) 0.07
- ------------------------------- ----- --------- --------- --------- --------- --------- --------- --------- -----
Total from investment
operations 0.78 (0.12) 1.13 1.05 1.10 0.49 1.23 0.42 0.33
- ------------------------------- ----- --------- --------- --------- --------- --------- --------- --------- -----
LESS DISTRIBUTIONS
- -------------------------------
Distributions from net
investment income (0.63) (0.60) (0.63) (0.66) (0.71) (0.72) (0.76) (0.73) (0.26)
- ------------------------------- ------ --------- --------- --------- --------- --------- --------- --------- ------
NET ASSET VALUE, END OF PERIOD $10.71 $ 10.56 $ 11.28 $ 10.78 $ 10.39 $ 10.00 $ 10.23 $ 9.76 $ 10.07
- ------------------------------- ------ --------- --------- --------- --------- --------- --------- --------- ------
TOTAL RETURN (B) 7.73% (1.06%) 10.86% 10.45% 11.37% 4.98% 13.09% 4.43% 3.48%
- -------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------
Expenses 1.08% 1.09% 1.09% 1.05% 1.02% 1.01% 0.90% 1.02% 0.86%(c)
- -------------------------------
Net investment income 6.18% 5.56% 5.65% 6.18% 6.86% 7.07% 7.27% 8.03% 7.14%(c)
- -------------------------------
Expense waiver/
reimbursement (d) 0.00% 0.00% 0.00% 0.14% 0.33% 0.39% 0.83% 0.70% 0.29%(c)
- -------------------------------
SUPPLEMENTAL DATA
- -------------------------------
Net assets, end of period
(000 omitted) $426,010 $472,232 $458,331 $248,768 $135,628 $89,907 $62,501 $25,151 $22,829
- -------------------------------
Portfolio turnover 13% 27% 7% 14% 18% 24% 24% 34% 0%
- -------------------------------
</TABLE>
(a) Reflects operations for the period from April 10, 1987, (date of initial
public investment) to August 31, 1987. For the peroid from the start of
business, April 1, 1987 to April 9, 1987, net investment income aggregating
$0.01 per share was distributed to the Fund's investment adviser. Such
distribution represented the net investment income of the Fund prior to the
initial public offering of the Fund shares which commenced on April 10,
1987.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) Computed on an annualized basis.
(d) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
Further information about the Fund's performance is contained in the Fund's
Annual Report, dated August 31, 1995, which can be obtained free of charge.
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GENERAL INFORMATION
The Fund was incorporated under the laws of the State of Maryland on November
26, 1986. The Fund is designed primarily for individuals seeking high current
income through a professionally managed, diversified portfolio of lower quality
municipal bonds. A minimum initial investment of $1,500 is required. Fund shares
are sold at net asset value plus an applicable sales charge and are redeemed at
net asset value. However, a contingent deferred sales charge is imposed on
certain shares, other than shares purchased through reinvestment of dividends,
which are redeemed within one to four years of their purchase dates. Fund assets
may be used in connection with the distribution of Fund shares.
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FORTRESS INVESTMENT PROGRAM
This Fund is a member of a family of funds, collectively known as the Fortress
Investment Program (the "Program"). The other funds in the Program are:
American Leaders Fund, Inc., providing growth of capital and income through
high-quality stocks;
California Municipal Income Fund, providing current income exempt from
federal regular income tax and California personal income taxes;
Fortress Adjustable Rate U.S. Government Fund, Inc., providing current income
consistent with lower volatility of principal through a diversified portfolio
of adjustable and floating rate mortgage securities which are issued or
guaranteed by the U.S. government, its agencies or instrumentalities;
Fortress Bond Fund, providing current income primarily through high-quality
corporate debt;
Fortress Utility Fund, Inc., providing high current income and moderate
capital appreciation primarily through equity and debt securities of utility
companies;
Government Income Securities, Inc., providing current income through
long-term U.S. government securities;
Liberty Equity Income Fund, Inc., providing above-average income and capital
appreciation through income producing equity securities;
Limited Term Fund, providing a high level of current income consistent with
minimum fluctuation in principal value;
Limited Term Municipal Fund, providing a high level of current income which
is exempt from federal regular income tax consistent with the preservation of
capital;
Money Market Management, Inc., providing current income consistent with
stability of principal through high-quality money market instruments;
New York Municipal Income Fund, providing current income exempt from federal
regular income tax, New York personal income taxes, and New York City income
taxes;
Ohio Municipal Income Fund, providing current income exempt from federal
regular income tax and Ohio personal income taxes;
Strategic Income Fund, providing high current income through investing in
domestic corporate debt obligations, U.S. government securities, and foreign
government and corporate debt obligations; and
World Utility Fund, providing total return by investing primarily in
securities issued by domestic and foreign companies in the utilities
industry.
Each of the funds may also invest in certain other types of securities as
described in each fund's prospectus.
The Program provides flexibility and diversification for an investor's long-term
investment planning. It enables an investor to meet the challenges of changing
market conditions by offering convenient exchange privileges which give access
to various investment vehicles and by providing the investment services of
proven, professional investment advisers.
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INVESTMENT INFORMATION
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide a high level of current
income which is generally exempt from the federal regular income tax (federal
regular income tax does not include the federal alternative minimum tax). The
investment objective cannot be changed without approval of shareholders. While
there is no assurance that the Fund will achieve its investment objective, it
endeavors to do so by following the investment policies described in this
prospectus.
The Fund pursues its investment objective by investing primarily in a
diversified portfolio of municipal bonds. The Fund invests its assets so that at
least 80% of its annual interest income is exempt from federal regular income
tax. The Fund may invest up to but less than 35% of its net assets in lower
quality municipal bonds. These bonds will usually offer higher yields than
higher-rated bonds but involve greater investment risk at the time of issue.
(See "Investment Risks.")
INVESTMENT POLICIES
Unless otherwise designated, the investment policies described below may be
changed by the Board of Directors without shareholder approval. Shareholders
will be notified before any material change in these policies becomes effective.
ACCEPTABLE INVESTMENTS
The Fund invests primarily in municipal bonds. Municipal bonds are debt
obligations issued by or on behalf of states, territories and possessions of the
United States, including the District of Columbia, and their political
subdivisions, agencies and instrumentalities, the interest from
which is exempt from the federal regular income tax. It is likely, however, that
shareholders will be required to include interest from a portion of the
municipal bonds owned by the Fund in calculating the federal individual
alternative minimum tax or the federal alternative minimum tax for corporations.
CHARACTERISTICS
The municipal bonds which the Fund buys are rated Ba or higher by Moody's
Investors Service, Inc. ("Moody's") or rated BB or higher by Standard & Poor's
Ratings Group ("S&P"). The Fund will limit its purchases of municipal bonds
rated Ba and BB (commonly known as "junk bonds") to up to but less than 35% of
its net assets. The Fund may buy bonds which are unrated but which the adviser
judges to be similar in quality to those rated bonds which it purchases. A
description of the ratings categories is contained in the Appendix to this
prospectus.
While the Fund normally will invest its assets in lower quality municipal bonds,
it may invest in higher quality issues, particularly when the difference in
returns between securities of different quality classifications is, and is
expected to remain, very narrow.
WHEN-ISSUED AND DELAYED
DELIVERY TRANSACTIONS
The Fund may purchase securities on a when-issued or delayed delivery basis.
These transactions are arrangements in which the Fund purchases securities with
payment and delivery scheduled for a future time. The seller's failure to
complete these transactions may cause the Fund to miss a price or yield
considered to be advantageous. Settlement dates may be a month or more after
entering into these transactions, and the market values of the securities
purchased may vary from the purchase prices. Accordingly, the Fund may pay
more/less than the market value of the securities on the settlement date.
The Fund may dispose of a commitment prior to settlement if the adviser deems it
appropriate to do so. In addition, the Fund may enter in transactions to sell
its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Fund may realize short-term profits or losses upon the sale of such
commitments.
TEMPORARY INVESTMENTS
The Fund invests its assets so that at least 80% of its annual interest income
is exempt from the federal regular income tax, except when investing for
"defensive" purposes as described below. This policy cannot be changed without
approval of shareholders. From time to time on a temporary basis, or when the
investment adviser determines that market conditions call for a temporary
defensive posture, the Fund may invest in short-term tax-exempt or taxable
temporary investments. These temporary investments include: fixed or variable
rate notes issued by or on behalf of municipal or corporate issuers; obligations
issued or guaranteed by the U.S. government, its agencies or instrumentalities;
other debt securities; commercial paper; certificates of deposit of banks; and
repurchase agreements (arrangements in which the organization selling the Fund a
bond or temporary investment agrees at the time of sale to repurchase it at a
mutually agreed upon time and price).
There are no rating requirements applicable to temporary investments. However,
the investment adviser will limit temporary investments to those it considers to
be of good quality.
OTHER INVESTMENT TECHNIQUES
The Fund may purchase a right to sell a security held by it back to the issuer
or to another party at an agreed upon price at any time during a stated period
or on a certain date. These rights
may be referred to as "liquidity puts" or "standby commitments."
The Fund may also hedge all or a portion of its investments by entering into
futures contracts or options on them. Any gains realized on futures contracts
and options thereon are taxable. The Fund will notify shareholders before it
engages in these futures transactions.
PORTFOLIO TURNOVER
Although the Fund does not intend to invest for the purpose of seeking
short-term profits, securities in its portfolio will be sold whenever the Fund's
investment adviser believes it is appropriate to do so in light of the Fund's
investment objective, without regard to the length of time a particular security
may have been held.
MUNICIPAL BONDS
Municipal bonds are generally issued to finance public works such as airports,
bridges, highways, housing, hospitals, mass transportation projects, schools,
streets, and water and sewer works. Municipal bonds are also issued to repay
outstanding obligations, to raise funds for general operating expenses, and to
make loans to other public institutions and facilities. Certain types of
"private activity" municipal bonds are issued to obtain funding for privately
operated facilities.
There are two categories of municipal bonds: general obligation and revenue.
General obligation bonds are backed by the taxing power of the issuing
municipality. Revenue bonds are backed by the revenues of a project or facility.
Payment of principal and interest on such bonds is dependent solely on the
revenue generated by the facility financed by the bond or other specified
sources of revenue or collateral. Private activity bonds are typically one type
of "revenue" bonds.
In most cases, lower quality bonds are private activity bonds or other revenue
bonds which are not payable from general tax revenues. The Fund may invest more
than 25% of the value of its assets in private activity bonds which may result
in more than 25% of the Fund's assets being invested in one industry. It is also
possible that the Fund may from time to time invest more than 25% of its assets
in health care facilities revenue obligations, housing agency revenue
obligations or electric utility obligations. Economic, business, political and
other developments generally affecting the revenues of issuers in such a market
segment (for example, proposed legislation or pending court decisions affecting
the financing of projects and market factors affecting the demand for their
services or products) may have a general adverse impact on all municipal bonds
in the segment.
The Fund does not intend to purchase securities if, as a result of such
purchase, more than 25% of the value of its total assets would be invested in
the securities of governmental subdivisions located in any one state, territory
or possession of the United States.
INVESTMENT RISKS
The value of the shares will fluctuate. The amount of this fluctuation is
dependent upon the quality and maturity of the municipal bonds in the Fund's
portfolio as well as on market conditions. Generally speaking, the lower
quality, long-term bonds in which the Fund invests have greater fluctuation in
value than high quality, shorter-term bonds.
Municipal bond prices are interest rate sensitive, which means that their value
varies inversely with market interest rates. Thus, if market interest rates have
increased from the time a bond was purchased, the bond, if sold, might be sold
at a price less than its cost. Similarly, if market interest rates have declined
from the time a bond was purchased, the bond, if
sold, might be sold at a price greater than its cost. (In either instance, if
the bond was held
to maturity, no loss or gain normally would
be realized as a result of interim market fluctuations.)
Prices of lower grade bonds also fluctuate with changes in the perceived quality
of the credit of their issuers. Consequently, shares may not be suitable for
persons who cannot assume the somewhat greater risks of capital depreciation
associated with higher tax-exempt income yields. In addition, bonds rated "BBB"
by S&P or "Baa" by Moody's have speculative characteristics. Changes in economic
conditions or other circumstances are more likely to lead to weakened capacity
to make principal and interest payments than higher rated bonds.
A large portion of the Fund's portfolio may be invested in bonds whose interest
payments are from revenues of similar projects (such as housing or hospitals) or
where issuers share the same geographic location. As a result, the Fund may be
more susceptible to similar economic, political or regulatory developments than
would a portfolio of bonds with a greater geographic and project variety. This
susceptibility may result in greater fluctuations in share price.
Many issuers of municipal bonds which have characteristics of rated bonds choose
to not have their obligations rated. Unrated bonds may carry a greater risk and
a higher yield than rated securities. Although unrated bonds are not necessarily
of lower quality, the market for them may not be as broad as that for rated
bonds since many investors rely solely on the major rating agencies for credit
appraisal.
Further, the lower rated or unrated municipal bonds which the Fund may purchase
are frequently traded only in markets where the number of potential purchasers
and sellers is limited. This consideration may have the effect of limiting the
availability of such bonds for the Fund to purchase and may also have the effect
of limiting the ability of the Fund to sell such bonds at their fair value
either to meet redemption requests or to respond to changes in the economy or
the financial markets. The Fund will not invest more than 10% of its total
assets in securities which are not readily marketable.
REDUCING RISKS OF
LOWER-RATED SECURITIES
The Fund's investment adviser believes that the risks of investing in lower
rated securities can be reduced. The professional portfolio management
techniques used by the Fund to attempt to reduce these risks include:
CREDIT RESEARCH
When purchasing bonds, rated or unrated, the Fund's investment adviser performs
its own credit analysis in addition to using recognized rating agencies. This
credit analysis considers the economic feasibility of revenue bond project
financing and general purpose borrowings, the financial condition of the issuer
or guarantor with respect to liquidity, cash flow and ability to meet
anticipated debt service requirements, and political developments that may
affect credit quality.
DIVERSIFICATION
The Fund invests in securities of many different issuers to reduce portfolio
risks.
ECONOMIC ANALYSIS
The Fund's adviser also considers trends in the overall economy, in geographic
areas, in various industries, and in the financial markets.
INVESTMENT LIMITATIONS
The Fund will not:
borrow money directly or through reverse repurchase agreements (arrangements
in
which the Fund sells a portfolio instrument for a percentage of its cash
value with an arrangement to buy it back on a set date) or pledge securities
except, under certain circumstances, the Fund may, exclusive of
custodian intra-day cash advances and the collateralization of such
advances, borrow up to one-third of the value of its total assets and pledge
up to 10% of the value of those assets to secure such borrowings; or
invest more than 10% of its net assets in securities subject to restrictions
on resale under the Securities Act of 1933.
The above investment limitations cannot be changed without shareholder approval.
The following limitations, however, may be changed by the Board of Directors
without shareholder approval. Shareholders will be notified before any material
change in these limitations becomes effective.
The Fund will not:
invest more than 5% of its total assets in securities of one issuer (except
cash and cash items and U.S. government obligations); or
invest more than 5% of its total assets in industrial development bonds of
issuers that have a record of less than three years of continuous operations.
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NET ASSET VALUE
The Fund's net asset value per share fluctuates. It is determined by dividing
the sum of the market value of all securities and all other assets, less
liabilities, by the number of shares outstanding.
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INVESTING IN THE FUND
SHARE PURCHASES
Shares are sold on days on which the New York Stock Exchange is open. Shares of
the Fund may be purchased through an investment dealer who has a sales agreement
with the distributor, Federated Securities Corp., or directly from Federated
Securities Corp. either by mail or wire. The Fund reserves the right to reject
any purchase request.
THROUGH A FINANCIAL INSTITUTION
An investor may call his financial institution (such as a bank or an investment
dealer) to place an order to purchase shares. Purchase orders through a
registered broker/dealer must be received by the broker before 4:00 P.M.
(Eastern time) and must be transmitted by the broker to the Fund before 5:00
P.M. (Eastern time) in order for shares to be purchased at that day's price.
Purchase orders through other financial institutions must be received by the
financial institution and transmitted to the Fund before 4:00 P.M. (Eastern
time) in order for shares to be purchased at that day's price. Orders through a
financial institution are considered received when the Fund is notified of the
purchase order. It is the financial institution's responsibility to transmit
orders promptly.
The financial institution which maintains investor accounts with the Fund must
do so on a fully disclosed basis unless it accounts for share ownership periods
used in calculating the contingent deferred sales charge (see "Contingent
Deferred Sales Charge"). In addition, advance payments made to financial
institutions may be subject to reclaim by the distributor for accounts
transferred to financial institutions which do not maintain investor accounts on
a fully disclosed basis and do not account for share ownership periods (see
"Supplemental Payments to Financial Institutions").
DIRECTLY BY MAIL
To purchase shares directly from Federated Securities Corp.:
complete and sign the application available from the Fund;
enclose a check made payable to Fortress Municipal Income Fund, Inc.; and
send both to the Fund's transfer agent, Federated Services Company, P.O. Box
8600, Boston, MA 02266-8600.
Purchases by mail are considered received after payment by check is converted by
the transfer agent's bank, State Street Bank, into federal funds. This is
generally the next business day after State Street Bank receives the check.
DIRECTLY BY WIRE
To purchase shares directly from Federated Securities Corp. by Federal Reserve
wire, call the Fund. All information needed will be taken over the telephone,
and the order is considered received when the transfer agent's bank, State
Street Bank, receives payment by wire.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in the Fund is $1,500. Subsequent investments
must be in amounts of at least $100.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received, plus a sales charge of 1% of the offering price (which is 1.01% of the
net amount invested). There is no sales charge for purchases of $1 million or
more. However, those unaffiliated institutions through whom shares are purchased
may charge fees for services provided which may be related to the
ownership of shares. This prospectus should, therefore, be read together with
any agreement between the customer and the institution with regard to services
provided, the fees charged for these services, and any restrictions and
limitations imposed. No sales charge is imposed for shares purchased through
bank trust departments or investment advisers registered under the Investment
Advisers Act of 1940 purchasing on behalf of their clients.
The net asset value is determined as of the close of trading (normally 4:00
p.m., Eastern time) on the New York Stock Exchange, Monday through Friday,
except on: (i) days on which there are not sufficient changes in the value of
the Fund's portfolio securities that its net asset value might be materially
affected; (ii) days during which no shares are tendered for redemption and no
orders to purchase shares are received; or (iii) the following holidays: New
Year's Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day, and Christmas Day.
Under certain circumstances described under "Redeeming Shares," shareholders may
be charged a contingent deferred sales charge by the distributor at the time
shares are redeemed.
DEALER CONCESSION
For sales of shares of the Fund, the distributor will normally receive up to
100% of the sales charge retained by it. The sales charge for shares sold other
than through registered broker/dealers will be retained by Federated Securities
Corp. Federated Securities Corp. may pay fees to banks out of the sales charge
in exchange for sales and/or administrative services performed on behalf of the
bank's customers in connection with the initiation of customer accounts and
purchases of shares.
ELIMINATING THE SALES CHARGE
The sales charge can be eliminated on the purchase of shares through:
quantity discounts and accumulated purchases;
signing a 13-month letter of intent;
using the reinvestment privilege; or
concurrent purchases.
QUANTITY DISCOUNTS AND
ACCUMULATED PURCHASES
There is no sales charge for purchases of $1 million or more. The Fund will
combine purchases made on the same day by the investor, his spouse, and his
children under age 21 when it calculates the sales charge. In addition, the
sales charge is eliminated for purchases of $1 million or more made at one time
by a trustee or fiduciary for a single trust estate or a single fiduciary
account.
If an additional purchase of shares is made, the Fund will consider the previous
purchases still invested in the Fund. For example, if a shareholder already owns
shares having a current value at the public offering price of $900,000, and he
purchases $100,000 or more at the current public offering price, there will be
no sales charge on the additional purchase.
The Fund will also combine purchases for the purpose of reducing the contingent
deferred sales charge imposed on some share redemptions. For example, if a
shareholder already owns shares having a current value at public offering price
of $1 million and purchases an additional $1 million at the current public
offering price, the applicable contingent deferred sales charge would be reduced
to .50% of those additional shares. For more information on the levels of
contingent deferred sales charges and holding periods, see the section entitled
"Contingent Deferred Sales Charge."
To receive the sales charge elimination and/or the contingent deferred sales
charge reduction, Federated Securities Corp. must be notified by the shareholder
in writing or by their financial institution at the time the purchase is made
that shares are already owned or that purchases are being combined. The Fund
will eliminate the sales charge and/or reduce the contingent deferred sales
charge after it confirms the purchases.
LETTER OF INTENT
If a shareholder intends to purchase at least $1 million of shares over the next
13 months, the sales charge may be eliminated by signing a letter of intent to
that effect. This letter of intent includes a provision for a sales charge
elimination depending on the amount actually purchased within the 13-month
period and a provision for the Fund's custodian to hold 1% of the total amount
intended to be purchased in escrow (in shares of the Fund) until such purchase
is completed.
The 1% held in escrow will be applied to the shareholder's account at the end of
the 13-month period unless the amount specified in the letter of intent, which
must be $1 million or more of shares, is not purchased. In this event, an
appropriate number of escrowed shares may be redeemed in order to realize the 1%
sales charge.
This letter of intent also includes a provision for reductions in the contingent
deferred sales charge and holding period depending on the amount actually
purchased within the 13-month period. For more information on the various levels
of contingent deferred sales charges and holding periods, see the section
entitled "Contingent Deferred Sales Charge."
This letter of intent will not obligate the shareholder to purchase shares. The
letter may be dated as of a prior date to include any purchases made within the
past 90 days.
REINVESTMENT PRIVILEGE
If shares have been redeemed in the Fund, the shareholder has a one-time right,
within 120 days, to reinvest the redemption proceeds at the next-determined net
asset value without any sales charge. Federated Securities Corp. must be
notified by the shareholder in writing or by his financial institution of the
reinvestment in order to receive this elimination of the sales charge. If the
shareholder redeems his shares, there may be tax consequences.
CONCURRENT PURCHASES
For purposes of qualifying for a sales charge elimination, a shareholder has the
privilege of combining concurrent purchases of two or more funds in the Program,
the purchase prices of which include a sales charge. For example, if a
shareholder concurrently invested $400,000 in one of the other Fortress Funds
and $600,000 in the Fund, the sales charge would be eliminated.
To receive this sales charge elimination, Federated Securities Corp. must be
notified by the shareholder in writing or by his financial institution at the
time the concurrent purchases are made. The Fund will eliminate the sales charge
after it confirms the purchases.
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their investment on
a regular basis. Under this program, funds may be automatically withdrawn
monthly from the shareholder's checking account and invested in Fund shares at
the net asset value next determined after an order is received by State Street
Bank, plus the 1% sales charge for purchases under $1 million. A shareholder may
apply for participation in this program through Federated Securities Corp.
EXCHANGE PRIVILEGE
Shares in Fortress Municipal Income Fund, Inc. or in other Fortress Funds may be
exchanged for shares in the Program at net asset value without a sales charge
(if previously paid) or a contingent deferred sales charge. The exchange
privilege is available to shareholders residing in any state in which the shares
being acquired may be legally sold.
Shares in certain Federated Funds which are advised by subsidiaries or
affiliates of Federated Investors may also be exchanged for shares at net asset
value (plus a sales charge, if applicable). With the exception of exchanges into
other Fortress Funds, such exchanges may be subject to a contingent deferred
sales charge and possibly a sales charge.
Shareholders using the exchange privilege must exchange shares having a net
asset value which at least meets the minimum investment for the fund into which
the exchange is being made. Shareholders who desire to automatically exchange
shares of a pre-determined amount on a monthly, quarterly, annual or other
periodic basis may take advantage of a systematic exchange privilege. Further
information on these exchange privileges is available by calling Federated
Securities Corp. or the shareholder's financial institution.
Before a financial institution may request exchange by telephone on behalf of a
shareholder, an authorization form permitting the Fund to accept exchange by
telephone must first be completed. Exchange instructions may be recorded. If
reasonable procedures are not followed by the Fund, it may be liable for losses
due to unauthorized or fraudulent telephone instructions.
Exercise of the exchange privilege is treated as a sale for federal income tax
purposes. Depending on the circumstances, a short or long-term capital gain or
loss may be realized. Before making any exchange, a shareholder must receive a
prospectus of the fund for which the exchange is being made.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Services Company maintains a share
account for each shareholder. Share certificates are not issued unless requested
on the application or by contacting the transfer agent.
Detailed confirmations of each purchase or redemption are sent to each
shareholder. Monthly statements are sent to report dividends paid during the
month.
DIVIDENDS AND DISTRIBUTIONS
Dividends are declared and paid monthly to all shareholders invested in the Fund
on the record date. Distributions of any net realized long-term capital gains
will be made at least once every twelve months. Dividends and distributions are
automatically reinvested in additional shares on payment dates at the
ex-dividend date net asset value without a sales charge unless cash payments are
requested by shareholders on the application or by writing to Federated Services
Company.
- --------------------------------------------------------------------------------
REDEEMING SHARES
The Fund redeems shares at their net asset value next determined after Federated
Services Company receives the redemption request. Redemptions will be made on
days on which the Fund computes its net asset value. Redemption requests must be
received in proper form and can be made through a financial institution or
directly from the Fund by written request.
THROUGH A FINANCIAL INSTITUTION
A shareholder may redeem shares calling his financial institution (such as a
bank or an investment dealer) to request the redemption. Shares will be redeemed
at the net asset value next determined after the Fund receives the redemption
request from the financial institution. Redemption requests through a registered
broker/dealer must be received by the broker before 4:00 P.M. (Eastern time) and
must be transmitted by the broker to the Fund before 5:00 P.M. (Eastern time) in
order for shares to be redeemed at that day's net asset value. Redemption
requests through other financial institutions must be received by the financial
institution and transmitted to the Fund before 4:00 P.M. (Eastern time) in order
for shares to be redeemed at that day's net asset value. The financial
institution is responsible for promptly submitting redemption requests and
providing proper written redemption instructions to the Fund. The financial
institution may charge customary fees and commissions for this service. If, at
any time, the Fund shall determine it necessary to terminate or modify this
method of redemption, shareholders will be promptly notified.
Before a financial institution may request redemption by telephone on behalf of
a shareholder, an authorization form permitting the Fund to accept redemption
requests by telephone must first be completed. Telephone redemption instructions
may be recorded. If reasonable procedures are not followed by the Fund, it may
be liable for losses due to unauthorized or fraudulent telephone instructions.
In the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption, such as "Directly by Mail," should be considered.
DIRECTLY BY MAIL
Shareholders may also redeem Shares by sending a written request to Federated
Services Company, P.O. Box 8600, Boston, MA 02266-8600. This written request
must include the shareholder's name, the Fund name, the Fund account number, and
the share or dollar amount to be redeemed. Shares will be redeemed at their net
asset value next determined after the transfer agent receives the redemption
request.
If share certificates have been issued, they should be sent by insured mail with
the written request to: Federated Services Company, 500 Victory Road-2nd Floor,
North Quincy, MA 02171. Shareholders may call the Fund for assistance in
redeeming by mail.
SIGNATURES
Shareholders requesting a redemption of any amount to be sent to an address
other than that on record with the Fund, or a redemption payable other than to
the shareholder of record must have signatures on written redemption requests
guaranteed by:
a trust company or commercial bank whose deposits are insured by the Bank
Insurance Fund ("BIF"), which is administered by the Federal Deposit
Insurance Corporation ("FDIC");
a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchanges;
a savings bank or savings and loan association whose deposits are insured by
the Savings Association Insurance Fund ("SAIF"), which is administered by the
FDIC; or
any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Fund does not accept signatures guaranteed by a notary public.
The Fund and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Fund may elect in the future to
limit eligible signature guarantors to institutions that are members of a
signature guarantee program. The Fund and its transfer agent reserve the right
to amend these standards at any time without notice.
RECEIVING PAYMENT
A check for the proceeds is mailed within seven days after receipt of proper
written redemption instructions from a broker or from the shareholder.
CONTINGENT DEFERRED SALES CHARGE
Shareholders redeeming shares from their Fund accounts within certain time
periods of the purchase date of those shares will be charged a contingent
deferred sales charge by the Fund's distributor of the lesser of the original
price or the net asset value of the Shares redeemed as follows:
<TABLE>
<CAPTION>
CONTINGENT
DEFERRED
AMOUNT OF PURCHASE SHARES HELD SALES CHARGE
<S> <C> <C>
4 years or
Up to $1,999,999 less 1%
$2,000,000 to 2 years or
$4,999,999 less .50%
$5,000,000 or more 1 year or less .25%
</TABLE>
In instances in which shares have been acquired in exchange for shares in other
Fortress Funds, (i) the purchase price is the price of the shares when
originally purchased and (ii) the time period during which the shares are held
will run from the date of the original purchase. The contingent deferred sales
charge will not be imposed on shares acquired through: (i) the reinvestment of
dividends or distributions of long-term capital gains; or (ii) the exchange of
shares of Government Income Securities, Inc. where those shares were purchased
during that fund's Charter Offering Period. In computing the amount of
contingent deferred sales charge for accounts with shares subject to a single
holding period, if any, redemptions are deemed to have occurred first of shares
acquired through the reinvestment of dividends and long-term capital gains,
second of purchases of shares occurring prior to the number of years necessary
to satisfy the applicable hold period, and finally of purchases of shares
occurring within the current hold period. For accounts with shares subject to
multiple holding periods, the redemption sequence will be determined first, with
reinvested dividends and long-term capital gains, and second, on a first-in,
first-out basis.
The contingent deferred sales charge will not be imposed when a redemption
results from a return under the following circumstances: (i) a total or partial
distribution from a qualified plan, other than an IRA, Keogh Plan, or a
custodial account, following retirement; (ii) a total or partial distribution
from an IRA, Keogh Plan, or a custodial account, after the beneficial owner
attains age 59-1/2; or (iii) from the death or disability of the beneficial
owner. The exemption from the contingent deferred sales charge for qualified
plans, an IRA, Keogh Plan or a custodial account does not extend to account
transfers, rollovers, and other redemptions made for purposes of reinvestment.
Contingent deferred sales charges are not charged in connection with exchanges
of shares for shares in other Fortress Funds or in connection with redemptions
by the Fund of accounts with low balances. Shares originally purchased through a
bank trust department or investment adviser registered under the Investment
Advisers Act of 1940, as
amended, to the extent that no advanced payments are made for purchases made
through such entities. In addition, shares held in the Fund by a financial
institution for its own account which were originally purchased by the financial
institution directly from the Fund's distributor without a sales charge may be
redeemed without a contingent deferred sales charge. For more information, see
"Supplemental Payments to Financial Institutions."
SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders who desire to receive monthly or quarterly payments of a
predetermined amount may take advantage of the Systematic Withdrawal Program.
Under this program, shares are redeemed to provide for periodic withdrawal
payments in an amount directed by the shareholder. Depending upon the amount of
the withdrawal payments, the amount of dividends paid and capital gains
distributions with respect to shares, and the fluctuation of the net asset value
of shares redeemed under this program, redemptions may reduce, and eventually
deplete, the shareholder's investment in the Fund. For this reason, payments
under this program should not be considered as yield or income on the
shareholder's investment in the Fund. To be eligible to participate in this
program, a shareholder must have invested at least $10,000 in the Fund (at
current offering price).
A shareholder may apply for participation in this program through Federated
Securities Corp. Due to the fact that shares are sold with a sales charge, it is
not advisable for shareholders to be purchasing Shares while participating in
this program.
Contingent deferred sales charges are charged for shares redeemed through this
program within four years of their purchase dates.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem shares in any account, except retirement plans, and pay the proceeds to
the shareholder if the account balance falls below a required minimum value of
$1,000. This requirement does not apply, however, if the balance falls below
$1,000 because of changes in the Fund's net asset value.
Before shares are redeemed to close an account, the shareholder is notified in
writing and allowed 30 days to purchase additional shares to meet the minimum
requirement.
- --------------------------------------------------------------------------------
FUND INFORMATION
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
The Fund is managed by a Board of Directors ("Directors"). The Directors are
responsible for managing the Fund's business affairs and for exercising all the
Fund's powers except those reserved for the shareholders. An Executive Committee
of the Board of Directors handles the Board's responsibilities between meetings
of the Board.
INVESTMENT ADVISER
Investment decisions for the Fund are made by Federated Advisers, the Fund's
investment adviser (the "Adviser"), subject to direction by the Directors. The
Adviser continually conducts investment research and supervision for the Fund
and is responsible for the purchase or sale of portfolio instruments, for which
it receives an annual fee from the Fund.
Both the Corporation and the Adviser have adopted strict codes of ethics
governing the conduct of all employees who manage the Fund and its portfolio
securities. These codes recognize that such persons owe a fiduciary duty to the
Fund's shareholders and must place the interests of shareholders ahead of the
employees' own interest. Among other things, the codes: require preclearance and
periodic reporting of personal securities transactions; prohibit personal
transactions in securities being purchased or sold, or being considered for
purchase or sale, by the Fund; prohibit purchasing securities in initial public
offerings; and prohibit taking profits on securities held for less than sixty
days. Violations of the codes are subject to review by the Board of Directors,
and could result in severe penalties.
ADVISORY FEES
The Adviser receives an annual investment advisory fee equal to .60 of 1% of the
Fund's average daily net assets. The Adviser may voluntarily choose to waive a
portion of its fee or reimburse the fund for certain operating expenses. The
Adviser can terminate this voluntary waiver of its advisory fee at any time at
its sole discretion. The Adviser has also undertaken to reimburse the Fund for
operating expenses in excess of limitations established by certain states.
ADVISER'S BACKGROUND
Federated Advisers, a Delaware business trust organized on April 11, 1989, is a
registered investment adviser under the Investment Advisers Act of 1940. It is a
subsidiary of Federated Investors. All of the Class A (voting) shares of
Federated Investors are owned by a trust, the Trustees of which are John F.
Donahue, Chairman and Trustee of Federated Investors, Mr. Donahue's wife, and
Mr. Donahue's son, J. Christopher Donahue, who is President and Trustee of
Federated Investors.
Federated Advisers and other subsidiaries of Federated Investors serve as
investment advisers to a number of investment companies and private accounts.
Certain other subsidiaries also provide administrative services to a number of
investment companies. With over $72 billion invested across more than 260 funds
under management and/or administration by its subsidiaries, as of December 31,
1994, Federated Investors is one of the largest mutual fund investment managers
in the United States. With more than 1,750 employees, Federated continues to be
led by the management who founded the company in 1955. Federated funds are
presently at work in and through 4,000 financial institutions nationwide. More
than 100,000 investment professionals have selected Federated funds for their
clients.
Jonathan C. Conley has been the Fund's portfolio manager since July 1987. Mr.
Conley joined Federated Investors in 1979 and has been a Vice President of the
Fund's Adviser since 1982. Mr. Conley is a Chartered Financial Analyst and
received his M.B.A. in Finance from the University of Virginia.
DISTRIBUTION OF FUND SHARES
Federated Securities Corp. is the principal distributor for shares of the Fund.
It is a Pennsylvania corporation organized on November 14, 1969, and is the
principal distributor for a number of investment companies. Federated Securities
Corp. is a subsidiary of Federated Investors.
DISTRIBUTION AND
SHAREHOLDER SERVICES
Under a distribution plan adopted in accordance with Investment Company Act Rule
12b-1 (the "Plan"), the distributor may select financial institutions such as
banks, fiduciaries, custodians for public funds, investment advisers and
brokers/dealers to provide sales services or distribution-related support
services as agents for their clients or customers. The Fund is not currently
making payments under the Distribution Plan, nor does it anticipate doing so in
the immediate future.
The distributor will pay financial institutions a fee based upon shares subject
to the Plan and owned by their clients or customers. The schedules of such fees
and the basis upon which such fees will be paid will be determined from time to
time by the Board of Directors of the Fund provided that for any period the
total amount of these fees shall not exceed an annual rate of .25 of 1% of the
average net asset value of shares subject to the Plan held during the period by
clients or customers of financial institutions. The current annual rate of such
fees is .25 of 1%. Any fees paid by the distributor under the Plan, will be
reimbursed from the assets of the Fund.
In addition, the Fund has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, under which
the Fund may make payments up to 0.25 of 1% of the average daily net asset value
of the Fund to obtain certain personal services for shareholders and the
maintenance of shareholder accounts. Under the Shareholder Services Agreement,
Federated Shareholder Services will either perform shareholder services directly
or will select financial institutions to perform shareholder services. Financial
institutions will receive fees based upon shares owned by their clients or
customers. The schedules of such fees and the basis upon which such fees will be
paid will be determined from time to time by the Fund and Federated Shareholder
Services.
SUPPLEMENTAL PAYMENTS TO
FINANCIAL INSTITUTIONS
The distributor will pay brokers and financial institutions, for distribution
and/or administrative services, an amount equal to 1% of the offering price of
the shares acquired by their clients or customers on purchases up to $1,999,999,
.50% of the offering price on purchases of $2,000,000 to $4,999,999, and .25% of
the offering price on purchases of $5,000,000 or more. (This fee is in addition
to the 1% sales charge on purchases of less than $1 million.) Any fees paid by
the distributor pursuant to these administrative arrangements will be reimbursed
by the Adviser. The administrator may elect to receive amounts less than those
stated, which would reduce the stated redemption fee and/or the holding period
used to calculate the fee.
Furthermore, in addition to payments made pursuant to the Plan and Shareholder
Services Agreement, the distributor may pay a supplemental fee from its own
assets to financial institutions as financial assistance for providing
substantial sales services, distribution-related support services, or
shareholder services. The
support may include sponsoring sales, educational and training seminars at
recreational-type facilities for their employees, providing sales literature,
and engineering computer software programs that emphasize the attributes of the
Fund. Such assistance will be predicated upon the amount of shares the financial
institution sells or may sell, and/or upon the type and nature of sales or
marketing support furnished by the financial institution. Any payments made by
the distributor may be reimbursed by the Fund's Adviser or its affiliates.
The Glass-Steagall Act prohibits a depository institution (such as a commercial
bank or a savings and loan association) from being an underwriter or distributor
of most securities. However, in the opinion of the Directors with the advice of
counsel, depository institutions are not prohibited from acting in other
capacities for investment companies, such as the administrative capacities
described above. In the event the Glass-Steagall Act is deemed to prohibit
depository institutions from acting in these capacities, or should Congress
relax current restrictions on depository institutions, the Directors will
consider appropriate changes in the services, but such changes are not expected
to affect the net asset value of the Fund.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state law.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES
Federated Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services (including certain legal and financial
reporting services) necessary to operate the Fund. Federated Administrative
Services provides these at an annual rate which relates to the average aggregate
daily net assets of all funds advised by subsidiaries of Federated Investors
("Federated Funds") as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY NET
ADMINISTRATIVE FEE ASSETS OF THE FEDERATED FUNDS
<S> <C>
.15 of 1% on the first $250 million
.125 of 1% on the next $250 million
.10 of 1% on the next $250 million
.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of shares.
Federated Administrative Services may choose voluntarily to waive a portion of
its fee.
CUSTODIAN
State Street Bank and Trust Company, Boston, Massachusetts, is custodian for the
securities and cash of the Fund.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Federated Services Company, Boston, Massachusetts, is transfer agent for the
shares of the Fund, and dividend disbursing agent for the Fund.
INDEPENDENT AUDITOR
The independent auditors for the Fund are Deloitte & Touche LLP, Pittsburgh,
Pennsylvania.
- --------------------------------------------------------------------------------
SHAREHOLDER INFORMATION
VOTING RIGHTS
Each share of the Fund is entitled to one vote at all meetings of shareholders.
As of October 3, 1995, Merrill Lynch Pierce Fenner & Smith (as owner of record
holding shares for its clients), Jacksonville, Florida, owned 27.54% of the
voting securities of the Fund, and, therefore, may, for certain purposes, be
deemed to control the Fund and be able to affect the outcome of certain matters
presented for a vote of shareholders.
- --------------------------------------------------------------------------------
TAX INFORMATION
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code applicable to regulated investment companies and to
receive the special tax treatment afforded to such companies. Shareholders are
not required to pay the federal regular income tax on any dividends received
from the Fund that represent net interest on tax-exempt municipal bonds.
However, under the Tax Reform Act of 1986, dividends representing net interest
earned on some municipal bonds may be included in calculating the federal
individual alternative minimum tax or the federal alternative minimum tax for
corporations.
The alternative minimum tax, up to 28% of alternative minimum taxable income for
individuals and 20% for corporations, applies when it exceeds the regular tax
for the taxable year. Alternative minimum taxable income is equal to the regular
taxable income of the taxpayer increased by certain "tax preference" items not
included in regular taxable income and reduced by only a portion of the
deductions allowed in the calculation of the regular tax.
The Tax Reform Act of 1986 treats interest on certain "private activity" bonds
issued after August 7, 1986, as a tax preference item for both individuals and
corporations. Unlike traditional governmental purpose municipal bonds, which
finance roads, schools, libraries, prisons and other public facilities, private
activity bonds provide benefits to private parties. The Fund may purchase all
types of municipal bonds, including private activity bonds. Thus, should it
purchase any such bonds, a portion of the Fund's dividends may be treated as a
tax preference item.
In addition, in the case of a corporate shareholder, dividends of the Fund which
represent interest on municipal bonds may be subject to the 20% corporate
alternative minimum tax because the dividends are included in a corporation's
"adjusted current earnings." The corporate alternate minimum tax treats 75% of
the excess of a taxpayer's pre-tax "adjusted current earnings" over the
taxpayer's alternative minimum taxable income as a tax preference item.
"Adjusted current earnings" is based upon the concept of a corporation's
"earnings and profits." Since "earnings and profits" generally includes the full
amount of any Fund dividend, and alternative minimum taxable income does not
include the portion of the Fund's dividend attributable to municipal bonds which
are not private activity bonds, the difference will be included in the
calculation of the corporation's alternative minimum tax.
Dividends of the Fund representing net interest income earned on some temporary
investments and any realized net short-term gains are taxed as ordinary income.
These tax consequences apply whether dividends are received in cash or as
additional shares. Information on the tax status of dividends and distributions
is provided annually.
PENNSYLVANIA PERSONAL PROPERTY TAXES
Fund shares are exempt from personal property taxes imposed by counties,
municipalities, and school districts.
OTHER STATE AND LOCAL TAXES
Distributions representing net interest received on tax-exempt municipal
securities are not necessarily free from income taxes of any state or local
taxing authority. State laws differ on this issue and shareholders are urged to
consult their own tax advisers.
- --------------------------------------------------------------------------------
PERFORMANCE INFORMATION
From time to time, the Fund advertises its total return, yield, and
tax-equivalent yield.
Total return represents the change, over a specific period of time, in the value
of an investment in the Fund after reinvesting all income and capital gain
distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.
The yield of the Fund is calculated by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by the Fund
over a thirty day period by the maximum offering price per share of the Fund on
the last day of the period. This number is then annualized using semi-annual
compounding. The tax-equivalent yield of the Fund is calculated similarly to the
yield, but is adjusted to reflect the taxable yield that the Fund would have had
to earn to equal its actual yield, assuming a specific tax rate. The yield and
the tax-equivalent yield do not necessarily reflect income actually earned by
the Fund and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
The performance information reflects the effect of the maximum sales charge and
other similar non-recurring charges, such as the contingent deferred sales
charge, which, if excluded, would increase the total return, yield, and tax-
equivalent yield.
From time to time, advertisements for the Fund may refer to ratings, rankings,
and other information in certain financial publications and/or compare the
Fund's performance to certain indices.
- --------------------------------------------------------------------------------
APPENDIX
MUNICIPAL BOND RATING DEFINITIONS
STANDARD AND POOR'S RATINGS GROUP
AAA--Debt rated "AAA" has the highest rating assigned by Standard & Poor's
Ratings Group ("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 higher 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 effect of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Debt rated "BBB" is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB--Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB" rating.
MOODY'S INVESTORS SERVICE, INC.
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.
BAA--Bonds which are rated "Baa" are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA--Bonds which are "Ba" are judged to have speculative elements; their future
cannot be considered as well-assured. Often the protection of interest and
principal payments may be very moderate, and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
- --------------------------------------------------------------------------------
ADDRESSES
Fortress Municipal Income Fund, Inc.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
DISTRIBUTOR
Federated Securities Corporation
Federated Investors Tower
Pittsburgh, PA 15222-3779
INVESTMENT ADVISER
Federated Advisers
Federated Investors Tower
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 Services Company
P.O. Box 8600
Boston, MA 02266-8600
INDEPENDENT AUDITORS
Deloitte & Touche LLP
2500 One PPG Place
Pittsburgh, PA 15222-5401
FORTRESS MUNICIPAL
INCOME FUND, INC.
PROSPECTUS
An Open-End, Diversified
Management Investment Company
October 31, 1995
FEDERATED SECURITIES CORP.
---------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Cusip 349557108
8092709A (10/95)
FORTRESS MUNICIPAL INCOME FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the prospectus
of the Fund dated October 31, 1995. This Statement is not a prospectus
itself. To receive a copy of the prospectus, write or call Fortress
Municipal Income Fund, Inc.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated October 31, 1995
FEDERATED SECURITIES
CORP.
A subsidiary of FEDERATED
INVESTORS
GENERAL INFORMATION ABOUT THE FUND 1 DETERMINING NET ASSET VALUE 13
INVESTMENT OBJECTIVE AND POLICIES1 Valuing Municipal Bonds 13
Acceptable Investments 1 Use of Amortized Cost 13
When-Issued and Delayed Delivery EXCHANGE PRIVILEGE 13
Transactions 1 Reduced Sales Charge 13
Temporary Investments 1 Requirements for Exchange 13
Repurchase Agreements 1 Tax Consequences 13
Reverse Repurchase Agreements 2 Making an Exchange 13
Portfolio Turnover 2 REDEEMING SHARES 14
INVESTMENT LIMITATIONS 2 Redemption In Kind 14
FORTRESS MUNICIPAL INCOME FUND, INC. TAX STATUS 14
MANAGEMENT 5 The Fund's Tax Status 14
Fund Ownership 9 Shareholders' Tax Status 14
Directors Compensation 10 TOTAL RETURN 15
INVESTMENT ADVISORY SERVICES 10 YIELD 15
Adviser to the Fund 10 TAX-EQUIVALENT YIELD 15
Advisory Fees 11 Tax-Equivalency Table 15
ADMINISTRATIVE SERVICES 11 PERFORMANCE COMPARISONS 16
TRANSFER AGENT AND DIVIDEND ABOUT FEDERATED INVESTORS 17
DISBURSING AGENT 11 FINANCIAL STATEMENTS 18
BROKERAGE TRANSACTIONS 11
PURCHASING SHARES 12
Distribution and Shareholder
Services Plan 12
Conversion to Federal Funds 12
PURCHASES BY SALES REPRESENTATIVES,
FUND
DIRECTORS, AND EMPLOYEES 12
GENERAL INFORMATION ABOUT THE FUND
Fortress Municipal Income Fund, Inc. (the "Fund") was incorporated under the
laws of the State of Maryland on November 26, 1986. It is qualified to do
business as a foreign corporation in Pennsylvania.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide a high level of current income
which is generally exempt from federal regular income tax. The objective cannot
be changed without approval of shareholders.
ACCEPTABLE INVESTMENTS
The Fund invests primarily in municipal bonds.
CHARACTERISTICS
The municipal bonds in which the Fund invests have the characteristics set
forth in the prospectus.
If a bond loses its rating or has its rating reduced after the Fund has
purchased it, the Fund is not required to drop the bond from the portfolio,
but may consider doing so. If ratings made by Moody's Investors Service,
Inc. ("Moody's") or Standard & Poor's Ratings Group ("S&P") change because
of changes in those organizations or in their rating systems, the Fund will
try to use comparable ratings as standards in accordance with the
investment policies described in the Fund's prospectus.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an advantageous
price or yield for the Fund. No fees or other expenses, other than normal
transaction costs, are incurred. However, liquid assets of the Fund sufficient
to make payment for the securities to be purchased are segregated on the Fund's
records at the trade date. These assets are marked to market daily and are
maintained until the transaction has been settled. The Fund does not intend to
engage in when-issued and delayed delivery transactions to an extent that would
cause the segregation of more than 20% of the total value of its assets.
TEMPORARY INVESTMENTS
The Fund may also invest in temporary investments from time to time for
defensive purposes. The Fund does not presently intend to invest in temporary
investments other than repurchase agreements.
The Fund might invest in temporary investments:
o as a reaction to market conditions;
o while waiting to invest proceeds of sales of shares or portfolio
securities, although generally proceeds from sales of shares will be
invested in municipal bonds as quickly as possible; or
o in anticipation of redemption requests.
The Fund will not purchase temporary investments (other than securities of the
U.S. government, its agencies or instrumentalities) if, as a result of the
purchase, 25% or more of the value of its total assets would be invested in any
one industry. However, the Fund may, for temporary defensive purposes, invest
25% or more of the value of its assets in cash or cash items, U.S. Treasury
bills or 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.
REPURCHASE AGREEMENTS
Repurchase agreements are arrangements in which banks, broker/dealers and other
recognized financial institutions sell U.S. government securities or
certificates of deposit to the Fund and agree at the time of sale to repurchase
them at a mutually agreed upon time and price within one year from the date of
acquisition. The Fund or its custodian will take possession of the securities
subject to repurchase agreements, and these securities will be marked-to-market
daily. To the extent that the original seller does not repurchase the securities
from the Fund, the Fund could receive less than the repurchase price on any sale
of such securities. In the event that such a defaulting seller filed for
bankruptcy or became insolvent, disposition of such securities by the Fund might
be delayed pending court action. The Fund believes that under the regular
procedures normally in effect for custody of the Fund's portfolio securities
subject to repurchase agreements, a court of competent jurisdiction would rule
in favor of the Fund and allow retention or disposition of such securities. The
Fund may only enter into repurchase agreements with banks and other recognized
financial institutions such as broker/dealers which are found by the Fund's
adviser to be creditworthy pursuant to guidelines established by the Board of
Directors ("Directors"). From time to time, such as when suitable municipal
bonds are not available, the Fund may retain a portion of its assets in cash.
Any portion of the Fund's assets maintained in cash will reduce the amount of
assets in municipal bonds and thereby reduce the Fund's yield.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements. This transaction is
similar to borrowing cash. In a reverse repurchase agreement, the Fund transfers
possession of a portfolio instrument to another person, such as a financial
institution, broker, or dealer, in return for a percentage of the instrument's
market value in cash, and agrees that on a stipulated date in the future the
Fund will repurchase the portfolio instrument by remitting the original
consideration plus interest at an agreed upon rate. The use of reverse
repurchase agreements may enable the Fund to avoid selling portfolio instruments
at a time when a sale may be deemed to be disadvantageous, but the ability to
enter into reverse repurchase agreements does not ensure that the Fund will be
able to avoid selling portfolio instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated on the Fund's records at the trade date. These assets are marked
to market daily and are maintained until the transaction is settled.
PORTFOLIO TURNOVER
The Fund will not attempt to set or meet a portfolio turnover rate since any
turnover would be incidental to transactions undertaken in an attempt to achieve
the Fund's investment objective. For the fiscal years ended August 31, 1995 and
August 31, 1994, the portfolio turnover rates were 13% and 27%, respectively.
INVESTMENT LIMITATIONS
BUYING ON MARGIN
The Fund will not purchase any securities on margin, but may obtain such
short-term credits as are necessary for clearance of transactions. The
deposit or payment by the Fund of initial or variation margin in connection
with financial futures contracts or related options transactions is not
considered the purchase of a security on margin.
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 are outstanding. During the
period any reverse repurchase agreements are outstanding, but only to the
extent necessary to assure completion of the reverse repurchase agreements,
the Fund will restrict the purchase of portfolio instruments to money
market instruments maturing on or before the expiration date 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 10%
of the value of total assets at the time of the borrowing. Neither the
deposit of underlying securities and other assets in escrow in connection
with the writing of put or call options on municipal bonds nor margin
deposits for the purchase and sale of financial futures contracts and
related options are deemed to be a pledge.
The preceding limitations regarding buying on margin, borrowing money, and
pledging assets do not apply to intra-day cash advances made by the Fund's
custodian, or the grant of a security interest in securities by the Fund to its
custodian to collateralize such intra-day cash advances, in order to enable the
Fund to settle securities purchases or to redeem shares of the Fund.
INVESTING IN REAL ESTATE
The Fund will not buy or sell real estate, although it may invest in
securities of companies 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 COMMODITIES
The Fund will not purchase or sell commodities, except that the Fund may
purchase and sell financial futures contracts and related options.
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 restricted securities which the Fund may purchase pursuant
to its investment objective, policies, and limitations.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets except portfolio securities up to
one-third of the value of its total assets. This shall not prevent the
purchase or holding of municipal bonds, repurchase agreements, or other
transactions which are permitted by the Fund's investment objective and
policies.
SELLING SHORT
The Fund will not sell securities short.
RESTRICTED SECURITIES
The Fund will not invest more than 10% of its net assets in securities
subject to restrictions on resale under the Securities Act of 1933.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will not purchase securities of other investment companies except
as part of a merger, consolidation, or other acquisition.
The above investment limitations cannot be changed without shareholder approval.
The following limitations, however, may be changed by the Directors without
shareholder approval. Shareholders will be notified before any material change
in these limitations becomes effective.
DIVERSIFICATION OF INVESTMENTS
The Fund will not invest more than 5% of its total assets in the securities
of any one issuer (except cash and cash instruments, securities issued or
guaranteed by the U.S. government, its agencies, or instrumentalities or
instruments secured by money market instruments such as repurchase
agreements).
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.
Private activity 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 a private activity 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 its total assets in industrial
development bonds where the payment of principal and interest is the
responsibility of companies with less than three years of operating
history.
INVESTING IN MINERALS
The Fund will not purchase or sell oil, gas, or other mineral exploration
or development programs or leases.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS OF THE FUND
The Fund will not purchase or retain the securities of any issuer if the
Officers and Directors of the Fund or its investment adviser owning
individually more than 1/2 of 1% of the issuer's securities together own
more than 5% of the issuer's securities.
Except with respect to borrowing money, if a percentage limitation is adhered to
at the time of the investment, a later increase or decrease in percentage
resulting from any change in value or net assets will not result in a violation
of such restriction.
During the past fiscal year, the Fund did not (1) purchase or sell options on
securities, as permitted by the investment limitations, without first notifying
shareholders; (2) purchase "liquidity puts" or "standby commitments" as
described in the prospectus, engage in reverse repurchase agreements, or borrow
money in excess of 5% of the value of its total assets; or (3) lend portfolio
securities. The Fund does not expect to engage in any of the above activities
during the coming fiscal year.
For purposes of its policies and limitations, the Fund considers certificates of
deposit and demand and time deposits 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 to be "cash items."
FORTRESS MUNICIPAL INCOME FUND, INC. MANAGEMENT
Officers and Directors are listed with their addresses, present positions with
Fortress Municipal Income Fund, Inc., and principal occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924
Chairman and Director
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated Research
Corp. and Federated Global Research Corp.; Chairman, Passport Research, Ltd.;
Chief Executive Officer and Director, Trustee, or Managing General Partner of
the Funds. Mr. Donahue is the father of J. Christopher Donahue, Executive Vice
President of the Company.
Thomas G. Bigley
28th Floor, One Oxford Centre
Pittsburgh, PA
Birthdate: February 3, 1934
Director
Director, Oberg Manufacturing Co.; Chairman of the Board, Children's Hospital of
Pittsburgh; Director, Trustee, or Managing General Partner of the Funds;
formerly, Senior Partner, Ernst & Young LLP.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
Director
President, Investment Properties Corporation; Senior Vice-President, John R.
Wood and Associates, Inc., Realtors; President, Northgate Village Development
Corporation; Partner or Trustee in private real estate ventures in Southwest
Florida; Director, Trustee, or Managing General Partner of the Funds; formerly,
President, Naples Property Management, Inc.
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Director
Director and Member of the Executive Committee, Michael Baker, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Vice Chairman and
Director, PNC Bank, N.A., and PNC Bank Corp. and Director, Ryan Homes, Inc.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Director
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director, Trustee,
or Managing General Partner of the Funds.
Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Director
Professor of Medicine and Member, Board of Trustees, University of Pittsburgh;
Medical Director, University of Pittsburgh Medical Center - Downtown; Member,
Board of Directors, University of Pittsburgh Medical Center; formerly,
Hematologist, Oncologist, and Internist, Presbyterian and Montefiore Hospitals;
Director, Trustee, or Managing General Partner of the Funds.
Richard B. Fisher *
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
President and Director
Executive Vice President and Trustee, Federated Investors; Chairman and
Director, Federated Securities Corp.; President or Vice President of some of the
Funds; Director or Trustee of some of the Funds.
Edward L. Flaherty, Jr.@
Henny, Kochuba, Meyer and Flaherty
Two Gateway Center - Suite 674
Pittsburgh, PA
Birthdate: June 18, 1924
Director
Attorney-at-law; Shareholder, Henny, Kochuba, Meyer and Flaherty; Director,
Eat'N Park Restaurants, Inc., and Statewide Settlement Agency, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Counsel, Horizon
Financial, F.A., Western Region.
Peter E. Madden
70 Westcliff Road
Westin, MA
Birthdate: March 16, 1942
Director
Consultant; State Representative, Commonwealth of Massachusetts; Director,
Trustee, or Managing General Partner of the Funds; formerly, President, State
Street Bank and Trust Company and State Street Boston Corporation.
Gregor F. Meyer
Henny, Kochuba, Meyer and Flaherty
Two Gateway Center - Suite 674
Pittsburgh, PA
Birthdate: October 6, 1926
Director
Attorney-at-law; Shareholder, Henny, Kochuba, Meyer and Flaherty; Chairman,
Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.; Director, Trustee, or
Managing General Partner of the Funds.
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Director
President, Law Professor, Duquesne University; Consulting Partner, Mollica,
Murray and Hogue; Director, Trustee or Managing General Partner of the Funds.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Director
Professor, International Politics and Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer Library
Center, Inc., and U.S. Space Foundation; Chairman, Czecho Management Center;
Director, Trustee, or Managing General Partner of the Funds; President Emeritus,
University of Pittsburgh; founding Chairman, National Advisory Council for
Environmental Policy and Technology and Federal Emergency Management Advisory
Board.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Director
Public relations/marketing consultant; Conference Coordinator, Non-profit
entities; Director, Trustee, or Managing General Partner of the Funds.
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
Executive Vice President
President and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated Research
Corp. and Federated Global Research Corp.; President, Passport Research, Ltd.;
Trustee, Federated Administrative Services, Federated Services Company, and
Federated Shareholder Services; President or Vice President of the Funds;
Director, Trustee, or Managing General Partner of some of the Funds. Mr. Donahue
is the son of John F. Donahue, Chairman and Director of the Company.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
Vice President and Treasurer
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated Research
Corp., Federated Global Research Corp. and Passport Research, Ltd.; Executive
Vice President and Director, Federated Securities Corp.; Trustee, Federated
Services Company; Chairman, Treasurer, and Trustee, Federated Administrative
Services; Trustee or Director of some of the Funds; Executive Vice President and
Treasurer of the Funds.
David M. Taylor
Federated Investors Tower
Pittsburgh, PA
Birthdate: January 13, 1947
Treasurer
Senior Vice President, Controller, and Trustee, Federated Investors; Controller,
Federated Advisers, Federated Management, Federated Research, Federated Research
Corp., and Passport Research, Ltd.; Vice President, Federated Shareholder
Services; Senior Vice President, Federated Administrative Services; Treasurer of
some of the Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Executive Vice President and Secretary
Executive Vice President, Secretary, General Counsel, and Trustee, Federated
Investors; Trustee, Federated Advisers, Federated Management, and Federated
Research; Director, Federated Research Corp. and Federated Global Research Corp.
; Trustee, Federated Services Company; Executive Vice President, Secretary, and
Trustee, Federated Administrative Services; President and Trustee, Federated
Shareholder Services; Director, Federated Securities Corp.; Executive Vice
President and Secretary of the Funds.
* This Director is deemed to be an "interested person" as defined in the
Investment Company Act of 1940, as amended.
@ Member of the Executive Committee. The Executive Committee of the Board
of Directors handles the responsibilities of the Board of Directors
between meetings of the Board.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: American Leaders Fund, Inc.; Annuity Management Series;
Arrow Funds; Automated Government Money Trust; Blanchard Funds; Blanchard
Precious Metals, Inc.; Cash Trust Series II; Cash Trust Series, Inc.; DG
Investor Series; Edward D. Jones & Co. Daily Passport Cash Trust; Federated ARMs
Fund; Federated Equity Funds; Federated Exchange Fund, Ltd.; Federated GNMA
Trust; Federated Government Trust; Federated High Yield Trust; Federated Income
Securities Trust; Federated Income Trust; Federated Index Trust; Federated
Institutional Trust; Federated Master Trust; Federated Municipal Trust;
Federated Short-Term Municipal Trust; Federated Short-Term U.S. Government
Trust; Federated Stock Trust; Federated Tax-Free Trust; Federated Total Return
Series, Inc.; Federated U.S. Government Bond Fund; Federated U.S. Government
Securities Fund: 1-3 Years; Federated U.S, Government Securities Fund: 3-5
Years; First Priority Funds; Fixed Income Securities, Inc.; Fortress Adjustable
Rate U.S. Government Fund, Inc.; Fortress Municipal Income Fund, Inc.; Fortress
Utility Fund, Inc.; Fund for U.S. Government Securities, Inc.; Government Income
Securities, Inc.; High Yield Cash Trust; Insurance Management Series;
Intermediate Municipal Trust; International Series, Inc.; Investment Series
Funds, Inc.; Investment Series Trust; Liberty Equity Income Fund, Inc.; Liberty
High Income Bond Fund, Inc.; Liberty Municipal Securities Fund, Inc.; Liberty
U.S. Government Money Market Trust; Liberty Term Trust, Inc. - 1999; Liberty
Utility Fund, Inc.; Liquid Cash Trust; Managed Series Trust; Money Market
Management, Inc.; Money Market Obligations Trust; Money Market Trust; Municipal
Securities Income Trust; Newpoint Funds; 111 Corcoran Funds; Peachtree Funds;
The Planters Funds; RIMCO Monument Funds; The Shawmut Funds; Star Funds; The
Starburst Funds; The Starburst Funds II; Stock and Bond Fund, Inc.; Sunburst
Funds; Targeted Duration Trust; Tax-Free Instruments Trust; Trademark Funds;
Trust for Financial Institutions; Trust For Government Cash Reserves; Trust for
Short-Term U.S. Government Securities; Trust for U.S. Treasury Obligations; The
Virtus Funds; World Investment Series, Inc.
FUND OWNERSHIP
Officers and Directors own less than 1% of the Fund's outstanding shares.
Merrill Lynch Pierce Fenner & Smith, Jacksonville, Florida, as record owner
holding Fund shares for its clients, owned approximately 10,893,330 shares
(27.5%) of the Fund as of October 3, 1995.
DIRECTORS COMPENSATION
AGGREGATE
NAME , COMPENSATION
POSITION WITH FROM TOTAL COMPENSATION PAID
CORPORATION CORPORATION*# FROM FUND COMPLEX +
John F. Donahue $ -0- $-0- for the Corporation and
Chairman and Director 68 other investment companies in the
Fund Complex
Thomas G. Bigley $1,453 $20,688 for the Corporation and
Director 49 other investment companies in the
Fund Complex
John T. Conroy, Jr. $1,583 $117,202 for the Corporation and
Director 64 other investment companies in the
Fund Complex
William J. Copeland $1,583 $117,202 for the Corporation and
Director 64 other investment companies in the
Fund Complex
James E. Dowd $1,583 $117,202 for the Corporation and
Director 64 other investment companies in the
Fund Complex
Lawrence D. Ellis, M.D. $1,453 $106,460 for the Corporation and
Director 64 other investment companies in the
Fund Complex
Richard B. Fisher $-0- $-0- for the Corporation and
President and Director 8 other investment companies in the
Fund Complex
Edward L. Flaherty, Jr. $1,583 $117,202 for the Corporation and
Director 64 other investment companies in the
Fund Complex
Peter E. Madden $1,231 $90,563 for the Corporation and
Director 64 other investment companies in the
Fund Complex
Gregor F. Meyer $1,453 $106,460 for the Corporation and
Director 64 other investment companies in the
Fund Complex
John E. Murray, Jr. $1,083 $-0- for the Corporation and
Director 64 other investment companies in the
Fund Complex
Wesley W. Posvar $1,453 $106,460 for the Corporation and
Director 64 other investment companies in the
Fund Complex
Marjorie P. Smuts $1,453 $106,460 for the Corporation and
Director 64 other investment companies in the
Fund Complex
*Information is furnished for the fiscal year ended August 31, 1995.
#The aggregate compensation is provided for the Corporation which is comprised
of one portfolio.
+The information is provided for the last calendar year.
INVESTMENT ADVISORY SERVICES
ADVISER TO THE FUND
The Fund's investment adviser is Federated Advisers (the "Adviser"). It is a
subsidiary of Federated Investors. All of the voting securities of Federated
Investors are owned by a trust, the trustees of which are John F. Donahue, his
wife and his son, J. Christopher Donahue.
The Adviser shall not be liable to the Fund or any shareholder for any losses
that may be sustained in the purchase, holding, or sale of any security or for
anything done or omitted by it, except acts or omissions involving willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
imposed upon it by its contract with the Fund.
ADVISORY FEES
For its advisory services, Federated Advisers receives an annual investment
advisory fee as described in the prospectus. During the fiscal years ended
August 31, 1995, 1994, and 1993, the Fund's Adviser earned $2,576,669,
$2,908,854, and $2,017,241, respectively.
STATE EXPENSE LIMITATION
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are
registered for sale in those states. If the Fund's normal operating
expenses (including the investment advisory fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses) exceed
2-1/2% per year of the first $30 million of average net assets, 2% per year
of the next $70 million of average net assets, and 1-1/2% per year of the
remaining average net assets, the Adviser will reimburse the Fund for its
expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this expense
limitation, the investment advisory fee paid will be reduced by the amount
of the excess, subject to an annual adjustment. If the expense limitation
is exceeded, the amount to be reimbursed by the Adviser will be limited, in
any single fiscal year, by the amount of the investment advisory fee.
This arrangement is not part of the advisory contract and may be amended or
rescinded in the future.
ADMINISTRATIVE SERVICES
Federated Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for a fee as described in the
prospectus. Prior to March 1, 1994, Federated Administrative Services, Inc.,
also a subsidiary of Federated Investors, served as the Fund's administrator.
(For purposes of this Statement of Additional Information, Federated
Administrative Services and Federated Administrative Services, Inc., may
hereinafter collectively be referred to as, the "Administrators".) For the
fiscal year ended August 31, 1995, Federated Administrative Services earned
$325,090. For the fiscal year ended August 31, 1994, the Administrators
collectively earned $458,072. For the fiscal year ended August 31, 1993,
Federated Administrative Services, Inc., earned $395,122. Dr. Henry J. Gailliot,
an officer of Federated Advisers, the Adviser to the Fund, holds approximately
20%, of the outstanding common stock and serves as director of Commercial Data
Services, Inc., a company which provides computer processing services to
Federated Administrative Services.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Federated Services Company serves as transfer agent and dividend disbursing
agent for the Fund. The fee is based on the size, type and number of accounts
and transactions made by shareholders.
Federated Services Company also maintains the Corporation's accounting records.
The fee is based on the level of the Fund's average net assets for the period
plus out-of-pocket expenses.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally use those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. The Adviser makes
decisions on portfolio transactions and selects brokers and dealers subject to
review by the Directors.
The Adviser may select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to the Fund or to the Adviser
and may include:
o advice as to the advisability of investing in securities;
o security analysis and reports;
o economic studies;
o industry studies;
o receipt of quotations for portfolio evaluations; and
o similar services.
The Adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions charged
by such persons are reasonable in relationship to the value of the brokerage and
research services provided.
Research services provided by brokers may be used by the adviser or by
affiliates of Federated Investors in advising Federated Funds and other
accounts. To the extent that receipt of these services may supplant services for
which the adviser or its affiliates might otherwise have paid, it would tend to
reduce their expenses.
For the fiscal years ended August 31, 1995, 1994, and 1993, the Fund paid no
brokerage commissions on brokerage transactions.
PURCHASING SHARES
Except under certain circumstances described in the prospectus, shares are sold
at their net asset value plus a sales charge on days the New York Stock Exchange
is open for business. The procedure for purchasing shares of the Fund is
explained in the prospectus under "Investing in the Fund."
DISTRIBUTION PLAN AND SHAREHOLDER SERVICES AGREEMENT
These arrangements permit the payment of fees to financial institutions, the
distributor, and Federated Shareholder Services, to stimulate distribution
activities and to cause services to be provided to shareholders by a
representative who has knowledge of the shareholder's particular circumstances
and goals. These activities and services may include, but are not limited to,
marketing efforts; providing office space, equipment, telephone facilities, and
various clerical, supervisory, computer, and other personnel as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries; and assisting
clients in changing dividend options, account designations, and addresses.
By adopting the Distribution Plan, the Board of Directors expects that the Fund
will be able to achieve a more predictable flow of cash for investment purposes
and to meet redemptions. This will facilitate more efficient portfolio
management and assist the Fund in pursuing its investment objectives. By
identifying potential investors whose needs are served by the Fund's objectives,
and properly servicing these accounts, it may be possible to curb sharp
fluctuations in rates of redemptions and sales.
Other benefits, which may be realized under either arrangement, may include: (1)
providing personal services to shareholders; (2) investing shareholder assets
with a minimum of delay and administrative detail; and (3) enhancing shareholder
recordkeeping systems; and (4) responding promptly to shareholders' requests and
inquiries concerning their accounts.
For the fiscal period ending August 31, 1995, no payments were made pursuant to
the Distribution Plan. In addition, for this period, the Fund paid shareholder
services fees in the amount of $1,073,612, of which $16,649 was waived.
CONVERSION TO FEDERAL FUNDS
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be in
federal funds or be converted into federal funds before shareholders begin to
earn dividends. Federated Services Company acts as the shareholder's agent in
depositing checks and converting them to federal funds.
PURCHASES BY SALES REPRESENTATIVES, FUND DIRECTORS, AND EMPLOYEES
Directors, employees, and sales representatives of the Fund, Federated Advisers,
and Federated Securities Corp. or their affiliates, or any investment dealer who
has a sales agreement with Federated Securities Corp., and their spouses and
children under 21, may buy shares at net asset value without a sales charge.
Shares may also be sold without a sales charge to trusts or pension or profit-
sharing plans for these persons.
These sales are made with the purchaser's written assurance that the purchase is
for investment purposes and that the securities will not be resold except
through redemption by the Fund.
DETERMINING NET ASSET VALUE
Net asset value generally changes each day. The days on which net asset value is
calculated by the Fund are described in the prospectus.
VALUING MUNICIPAL BONDS
The Directors use an independent pricing service to value municipal bonds. The
independent pricing service takes into consideration yield, stability, risk,
quality, coupon rate, maturity, type of issuer, trading characteristics, special
circumstances of a security or trading market, and any other factors or market
data it considers relevant in determining valuations for normal institutional
size trading units of debt securities and does not rely exclusively on quoted
prices.
USE OF AMORTIZED COST
The Directors have decided that the fair value of debt securities authorized to
be purchased by the Fund with remaining maturities of 60 days or less at the
time of purchase shall be their amortized cost value, unless the particular
circumstances of the security indicate otherwise. Under this method, portfolio
instruments and assets are valued at the acquisition cost as adjusted for
amortization of premium or accumulation of discount rather than at current
market value. The Executive Committee continually assesses this method of
valuation and recommends changes where necessary to assure that the Fund's
portfolio instruments are valued at their fair value as determined in good faith
by the Directors.
EXCHANGE PRIVILEGE
The Securities and Exchange Commission has issued an order exempting the Fund
from certain provisions of the Investment Company Act of 1940. As a result, Fund
shareholders are allowed to exchange all or some of their shares for shares in
other Fortress Funds or certain Federated Funds which are sold with a sales
charge different from that of the Fund's or with no sales charge and which are
advised by subsidiaries or affiliates of Federated Investors. These exchanges
are made at net asset value plus the difference between the Fund's sales charge
already paid and any sales charge of the fund into which the shares are to be
exchanged, if higher.
The order also allows certain other funds, including funds that are not advised
by subsidiaries or affiliates of Federated Investors which do not have a sales
charge, to exchange their shares for Fund shares on a basis other than their
current offering price. These exchanges may be made to the extent that such
shares were acquired in a prior exchange, at net asset value, for shares of a
Federated Fund carrying a sales charge.
REDUCED SALES CHARGE
If a shareholder making such an exchange qualifies for a reduction or
elimination of the sales charge, the shareholder must notify Federated
Securities Corp. or State Street Bank in writing.
REQUIREMENTS FOR EXCHANGE
Shareholders using this privilege must exchange shares having a net asset value
of at least $1,500. Before the exchange, the shareholder must receive a
prospectus of the fund for which the exchange is being made. This privilege is
available to shareholders residing in any state in which the fund shares being
acquired may be sold. Upon receipt of proper instructions and required
supporting documents, shares submitted for exchange are redeemed and the
proceeds invested in shares of the other fund.
Further information on the exchange privilege and prospectuses for Fortress
Funds or certain Federated Funds are available by calling the Fund.
TAX CONSEQUENCES
Exercise of this exchange privilege is treated as a sale for federal income tax
purposes. Depending upon the circumstances, a short or long-term capital gain or
loss may be realized.
MAKING AN EXCHANGE
Instructions for exchanges for Fortress Funds or certain Federated Funds must be
given in writing by the shareholder. Written instructions may require a
signature guarantee.
REDEEMING SHARES
The Fund redeems shares at the next computed net asset value after the Fund
receives the redemption request. Redemption procedures are explained in the
prospectus under "Redeeming Shares." Although the transfer agent does not charge
for telephone redemptions, the transfer agent's bank reserves the right to
charge a fee for the cost of wire-transferred redemptions of less than $5,000.
Certain shares redeemed within one to four years of purchase may be subject to a
contingent deferred sales charge. The amount of the contingent deferred sales
charge is based upon the amount of the administrative fee paid at the time of
purchase by the distributor to the administrator for services rendered, and the
length of time the investor remains a shareholder in the Fund. Should
administrators elect to receive an advance payment that is less than that stated
in the prospectus for servicing a particular shareholder, the contingent
deferred sales charge and/or holding period for that particular shareholder will
be reduced accordingly.
REDEMPTION IN KIND
The Fund is obligated to redeem shares solely in cash up to $250,000, or 1% of
the Fund's net asset value, whichever is less, for any one shareholder within a
90-day period.
Any redemption beyond this amount will also be in cash unless the Directors
determine that payments should be in kind. In such a case, the Fund will pay all
or a portion of the remainder of the redemption in portfolio instruments, valued
in the same way as the Fund determines net asset value. The portfolio
instruments will be selected in a manner that the Directors deem fair and
equitable.
Redemption in kind is not as liquid as a cash redemption. If redemption is made
in kind, shareholders receiving their securities and selling them before their
maturity could receive less than the redemption value of their securities and
could incur certain transaction costs.
TAX STATUS
THE FUND'S TAX STATUS
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, the Fund must, among other
requirements:
o derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;
o derive less than 30% of its gross income from the sale of securities held
less than three months;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income earned during
the year.
SHAREHOLDERS' TAX STATUS
No portion of any income dividend paid by the Fund is eligible for the dividends
received deduction available to corporations.
CAPITAL GAINS
Capital gains or losses may be realized on the sale of portfolio securities
and as a result of discounts from par value on securities held to maturity.
Sales would generally be made because of:
othe availability of higher relative yields;
odifferentials in market values;
onew investment opportunities;
ochanges in creditworthiness of an issuer; or
oan attempt to preserve gains or limit losses.
Distribution of long-term capital gains are taxed as such, whether they are
taken in cash or reinvested and regardless of the length of time the
shareholder has owned the shares. Any loss by a shareholder on Fund shares
held for less than six months and sold after a capital gains distribution
will be treated as a long-term capital loss to the extent of the capital
gains distribution.
TOTAL RETURN
The Fund's average annual total returns for the one-year and five-year periods
ended August 31, 1995 and the period from April 10, 1987 (effective date of the
Fund's registration statement) to August 31, 1995 were 5.53%, 7.55% and 7.58%,
respectively.
The average annual total return for the Fund is the average compounded rate of
return for a given period that would equate a $1,000 initial investment to the
ending redeemable value of that investment. The ending redeemable value is
computed by multiplying the number of shares owned at the end of the period by
the net asset value per share at the end of the period. The number of shares
owned at the end of the period is based on the number of shares purchased at the
beginning of the period with $1,000, less any applicable sales charge, adjusted
over the period by any additional shares, assuming the monthly reinvestment of
all dividends and distributions. Any applicable redemption fee is deducted from
the ending value of the investment based on the lesser of the original purchase
price or the net asset value of shares redeemed.
YIELD
The Fund's yield for the thirty-day period ended August 31, 1995 was 5.76%.
The yield for the Fund is determined by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by the Fund
over a thirty-day period by the maximum offering price per share of the Fund on
the last day of the period. This value is annualized using semi-annual
compounding. This means that the amount of income generated during the thirty-
day period is assumed to be generated each month over a 12-month period and is
reinvested every six months. The yield does not necessarily reflect income
actually earned by the Fund because of certain adjustments required by the
Securities and Exchange Commission and, therefore, may not correlate to the
dividends or other distributions paid to shareholders. To the extent that
financial institutions and broker/dealers charge fees in connection with
services provided in conjunction with an investment in the Fund, performance
will be reduced for those shareholders paying those fees.
TAX-EQUIVALENT YIELD
The Fund's tax-equivalent yield for the thirty-day period ended August 31, 1995
was 8.00%.
The tax-equivalent yield of the Fund is calculated similarly to the yield, but
is adjusted to reflect the taxable yield that the Fund would have had to earn to
equal its actual yield, assuming a 28% tax rate (the maximum effective federal
rate for individuals) and assuming that income is 100% tax-exempt.
TAX-EQUIVALENCY TABLE
The Fund may also use a tax-equivalency table in advertising and sales
literature. The interest earned by the municipal bonds in the Fund's portfolio
generally remains free from federal regular income tax,* and is often free from
state and local taxes as well. As the table below indicates, a "tax-exempt"
investment is an attractive choice for investors, particularly in times of
narrow spreads between tax-free and taxable yields.
TAXABLE YIELD EQUIVALENT FOR 1995
MULTISTATE MUNICIPAL FUNDS
FEDERAL INCOME TAX BRACKET:
15.00% 28.00% 31.00% 36.00% 39.60%
JOINT $1- $39,001- $94,251- $143,601- OVER
RETURN 39,000 94,250 143,600 256,500 256,500
SINGLE $1- $23,351- $56,551- $117,951- OVER
RETURN 23,350 56,550 117,950 256,500 256,500
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. 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 Fund shares.
* Some portion of the Fund's income may be subject to the federal
alternative minimum tax and state and local income taxes.
PERFORMANCE COMPARISONS
The Fund's performance depends upon such variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio securities;
o changes in Fund expenses; and
o various other factors.
The Fund's 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.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute offering price. The financial
publications and/or indices which the Fund uses in advertising may include:
o LIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes
the reinvestment of all capital gains distributions and income dividends
and takes into account any change in net asset value over a specific period
of time. From time to time, the Fund will quote its Lipper ranking in the
high yield municipal bond funds category in advertising and sales
literature.
o LEHMAN BROTHERS REVENUE BOND INDEX is a total return performance benchmark
for the long-term, investment grade, revenue bond market. Returns and
attributes for the index are calculated semi-monthly.
o MORNINGSTAR, INC., an independent rating service, is the publisher of the
bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000
NASDAQ-listed mutual funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and ratings are effective for
two weeks.
Advertisements and other sales literature for the Fund may quote total returns
which are calculated on non-standardized base periods. These total returns
represent the historic change in the value of an investment in the Fund based on
monthly reinvestment of dividends over a specified period of time.
Advertisements may quote performance information which does not reflect the
effect of the sales charge.
ABOUT FEDERATED INVESTORS
Federated is dedicated to meeting investor needs which is reflected in its
investment decision making-structured, straightforward, and consistent. This
has resulted in a history of competitive performance with a range of
competitive investment products that have gained the confidence of thousands
of clients and their customers.
The company's disciplined security selection process is firmly rooted in
sound methodologies backed by fundamental and technical research. Investment
decisions are made and executed by teams of portfolio managers, analysts, and
traders dedicated to specific market sectors.
In the municipal sector, as of December 31, 1994, Federated managed 18 bond
funds with approximately $1.9 billion in assets and 18 money market funds
with approximately $6.6 billion in total assets. In 1976, Federated
introduced one of the first municipal bond mutual funds in the industry and
is now one of the largest institutional buyers of municipal securities.
J. Thomas Madden, Executive Vice President, oversees Federated's equity and
high yield corporate bond management while William D. Dawson, Executive Vice
President, oversees Federated's domestic fixed income management. Henry A.
Frantzen, Executive Vice President, oversees the management of Federated's
international portfolios.
MUTUAL FUND MARKET
Twenty-seven percent of American households are pursuing their financial
goals through mutual funds. These investors, as well as businesses and
institutions, have entrusted over $2 trillion to the more than 5,500 funds
available.*
Federated Investors, through its subsidiaries, distributes mutual funds for a
variety of investment applications. Specific markets include:
INSTITUTIONAL
Federated meets the needs of more than 4,000 institutional clients nationwide
by managing and servicing separate accounts and mutual funds for a variety of
applications, including defined benefit and defined contribution programs,
cash management, and asset/liability management. Institutional clients
include corporations, pension funds, tax-exempt entities,
foundations/endowments, insurance companies, and investment and financial
advisors. The marketing effort to these institutional clients is headed by
John B. Fisher, President, Institutional Sales Division.
*source: Investment Company Institute
TRUST ORGANIZATIONS
Other institutional clients include close relationships with more than 1,500
banks and trust organizations. Virtually all of the trust divisions of the
top 100 bank holding companies use Federated funds in their clients'
portfolios. The marketing effort to trust clients is headed by Mark R.
Gensheimer, Executive Vice President, Bank Marketing & Sales.
BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES
Federated mutual funds are available to consumers through major brokerage
firms nationwide--including 200 New York Stock Exchange firms--supported by
more wholesalers than any other mutual fund distributor. The marketing effort
to these firms is headed by James F. Getz, President, Broker/Dealer Division.
FINANCIAL STATEMENTS
The financial statements for the Fund for the fiscal year ended
August 31, 1995, are incorporated herein by reference to the Annual
Report to Shareholders of the Fund dated August 31, 1995.
Cusip 349557108
