SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
X
Pre-Effective Amendment No.
Post-Effective Amendment No. 17 X
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF
1940 X
Amendment No. 18 X
MUNICIPAL SECURITIES INCOME TRUST
(Exact Name of Registrant as Specified in Charter)
Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779
(Address of Principal Executive Offices)
(412) 288-1900
(Registrant's Telephone Number)
John W. McGonigle, Esquire,
Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779
(Name and Address of Agent for Service)
It is proposed that this filing will become effective:
x immediately upon filing pursuant to paragraph (b)
on _________________ pursuant to paragraph (b)
60 days after filing pursuant to paragraph (a) (i)
on pursuant to paragraph (a) (i).
75 days after filing pursuant to paragraph (a)(ii)
on _________________ pursuant to paragraph (a)(ii) of Rule
485.
If appropriate, check the following box:
This post-effective amendment designates a new effective
date for a previously filed post-effective amendment.
Registrant has filed with the Securities and Exchange
Commission a declaration pursuant to Rule 24f-2 under the
Investment Company Act of 1940, and:
x filed the Notice required by that Rule on October 14,
1994; or
intends to file the Notice required by that Rule on or
about ____________; or
during the most recent fiscal year did not sell any
securities pursuant to Rule 24f-2 under the Investment
Company Act of 1940, and, pursuant to Rule 24f-2(b)(2), need
not file the Notice.
Copies to:
Thomas J. Donnelly, Esquire Charles H. Morin, Esquire
Houston, Houston & Donnelly Dickstein, Shapiro & Morin,
L.L.P.
2510 Centre City Tower 2101 L Street, N.W.
650 Smithfield Street Washington, D.C. 20037
Pittsburgh, Pennsylvania 15222
CROSS-REFERENCE SHEET
This amendment to the Registration Statement of Municipal
Securities Income Trust , which is comprised of ten
portfolios: (1) Pennsylvania Municipal Income Fund (Class A
Shares), (2) Ohio Municipal Income Fund (Fortress Shares) (3)
Michigan Intermediate Municipal Trust, (4) California
Municipal Income Fund (Fortress Shares), (5) New York
Municipal Income Fund (Fortress Shares), (6) Florida Municipal
Income Fund, (7) New Jersey Municipal Income Fund, (8) Texas
Municipal Income Fund, (9) Maryland Municipal Income Fund, and
(10) Virginia Municipal Income Fund, relates only to
portfolios (6), (7), (8), (9), and (10) and is comprised of
the following:
PART A. INFORMATION REQUIRED IN A PROSPECTUS.
Prospectus Heading
(Rule 404(c) Cross
Reference)
Item 1. Cover Page (6-10) Cover Page.
Item 2. Synopsis (6-10) Summary of Fund
Expenses; (6-10) Financial
Highlights.
Item 3. Condensed Financial
Information (6-10) Performance Information.
Item 4. General Description of
Information; (6-10) General Information; (1-
5) Investment Information;
Investment Objective,
Investment Policies, Investment
Limitations; Investment Risks;
(6) Florida Municipal
Securities; (7) New Jersey
Municipal Securities; (8) Texas
Municipal Securities; (9)
Maryland Municipal Securities;
(10) Virginia Municipal
Securities; (6-10) Non-
Diversification.
Item 5. Management of the Fund (6-10) Municipal Securities
Income Trust Information; (6-
10) Management of Municipal
Securities Income Trust; (6-10)
Administration of the Fund.
Item 6. Capital Stock and Other
Securities (6-10) Dividends and
Distributions; Shareholder
Information; Voting Rights;
Massachusetts Partnership Law;
Tax Information; Federal Income
Tax; Other State and Local
Taxes; (6) Florida Taxes;
(7) New Jersey Taxes; (8) Texas
Taxes; (9) Maryland Taxes; (10)
Virginia Taxes.
Item 7. Purchase of Securities
Being Offered (6-10) Net Asset Value; (6-10)
Share Purchases; (6-10) Minimum
Investment Required; (6-10)
What Shares Cost; Certificates
and Confirmations; (6-10)
Eliminating/Reducing the Sales
Charge; (6-10) Systematic
Investment Program.
Item 8. Redemption or Repurchase (6-10) Through a Financial
Institution; (6-10) Directly
from the Fund; (6-10) Directly
by Mail; (6-10) Exchanges for
Shares of Other Funds; (6-10)
Contingent Deferred Sales
Charge; (6-10) Elimination of
Contingent Deferred Sales
Charge; (6-10) Accounts with
Low Balances; (6-10) Systematic
Withdrawal Program; (6-10)
Exchange Privilege; (6-10)
Making an Exchange; (6-10)
Receiving Payment.
Item 9. Pending Legal Proceedings None.
PART B. INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL
INFORMATION.
Item 10. Cover Page (6-10) Cover Page.
Item 11. Table of Contents (6-10) Table of Contents.
Item 12. General Information and
History (6-10) General Information
About the Fund.
Item 13. Investment Objectives
and Policies (6-10) Investment Objectives
and Policies.
Item 14. Management of the Fund (6-10) Municipal Securities
Income Trust Management; (6-10)
Transfer Agent and Dividend
Disbursing Agent.
Item 15. Control Persons and Principal
Holders of Securities Not Applicable.
Item 16. Investment Advisory and Other
Services (6-10) Investment Advisory
Services, Administrative
Services.
Item 17. Brokerage Allocation (6-10) Brokerage Transactions.
Item 18. Capital Stock and Other
Securities Not Applicable.
Item 19. Purchase, Redemption and
Pricing of Securities
Being Offered (6-10) Purchasing Shares; (6-
10) Distribution Plan; (6-10)
Determining Net Asset Value; (6-
10) Redeeming Shares; (6-10)
Exchange Privilege.
Item 20. Tax Status (6-10) Tax Status.
Item 21. Underwriters (6-10) Administrative
Arrangements.
Item 22. Calculation of Performance
Data (6-10) Total Return; Yield; Tax-
Equivalent Yield; Performance
Comparisons.
Item 23. Financial Statements (6-10)
Filed in Part A.
FLORIDA MUNICIPAL INCOME FUND
(A PORTFOLIO OF MUNICIPAL SECURITIES INCOME TRUST)
PROSPECTUS
The shares of Florida Municipal Income Fund (the "Fund") represent
interests in a non-diversified portfolio of securities which is
one of a series of investment portfolios in Municipal Securities
Income Trust (the "Trust"), an open-end management investment
company (a mutual fund). The investment objective of the Fund is
to provide current income which is exempt from federal regular
income tax and to maintain an investment portfolio which will
cause its shares to be exempt from the Florida intangibles tax.
The Fund invests primarily in a portfolio of municipal securities
which are exempt from federal regular income tax and the Florida
intangibles tax ("Florida Municipal Securities"). These securities
include those issued by or on behalf of the State of Florida and
Florida municipalities as well as those issued by states,
territories, and possessions of the United States which are exempt
from federal regular income tax and the Florida intangibles tax.
Effective October 17, 1994, the Fund has ceased offering its
shares for sale, except for dividend reinvestments by existing
shareholders.
THE SHARES OF THE FUND 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 information you should read and know
about investing in the Fund. Keep this prospectus for future
reference.
The Fund has also filed a Statement of Additional Information
dated December 31, 1994 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 free of charge by calling 1-800-235-4669. To obtain
other information or 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 December 31, 1994
TABLE OF CONTENTS ------------------------------------------------
- ------------------------------
SUMMARY OF FUND EXPENSES 1
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS 2
- ------------------------------------------------------
GENERAL INFORMATION 3
- ------------------------------------------------------
INVESTMENT INFORMATION 3
- ------------------------------------------------------
Investment Objective 3
Investment Policies 3
Acceptable Investments 4
Characteristics 4
Participation Interests 4
Variable Rate Municipal Securities 5
Municipal Leases 5
Inverse Floaters 5
Restricted Securities 6
When-Issued and Delayed
Delivery Transactions 6
Futures Contracts and Options to
Buy or Sell Such Contracts 6
Temporary Investments 7
Florida Municipal Securities 7
Investment Risks 8
Non-Diversification 9
Investment Limitations 9
NET ASSET VALUE 9
- ------------------------------------------------------
INVESTING IN THE FUND 9
- ------------------------------------------------------
Share Purchases 9
Through a Financial Institution 9
Directly by Mail 10
Directly by Wire 10
Minimum Investment Required 10
Conversion to Federal Funds 10
What Shares Cost 10
Systematic Investment Program 10
Certificates and Confirmations 11
Dividends and Distributions 11
REDEEMING SHARES 11
- ------------------------------------------------------
Through a Financial Institution 11
Directly by Mail 12
Signatures 12
Receiving Payment 12
Contingent Deferred Sales Charge 13
Elimination of Contingent Deferred
Sales Charge 14
Systematic Withdrawal Program 14
Accounts with Low Balances 14
Exchanges for Shares of Other Funds 14
MUNICIPAL SECURITIES INCOME
TRUST INFORMATION 14
- ------------------------------------------------------
Management of Municipal Securities
Income Trust 14
Board of Trustees 14
Investment Adviser 15
Advisory Fees 15
Adviser's Background 15
Distribution of Fund Shares 15
Distribution Plan 16
Shareholder Services Plan 17
Administration of the Fund 17
Administrative Services 17
Custodian 17
Transfer Agent and
Dividend Disbursing Agent 17
Legal Counsel 17
Independent Auditors 17
Expenses of the Fund 18
SHAREHOLDER INFORMATION 18
- ------------------------------------------------------
Voting Rights 18
Massachusetts Partnership Law 18
TAX INFORMATION 18
- ------------------------------------------------------
Federal Income Tax 18
Florida Intangibles Tax 19
Florida State and Municipal Taxation 19
Other State and Local Taxes 19
PERFORMANCE INFORMATION 19
- ------------------------------------------------------
ADDRESSES
Inside Back Cover
- ------------------------------------------------------
Summary of Fund Expenses
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases (as a percentage of
offering price) None
Maximum Sales Load 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)
0.00%
Redemption Fee (as a percentage of amount redeemed, if
applicable) None
Exchange Fee None
Annual Fund Operating Expenses
(As a percentage of average net assets)
Management Fee (after waiver)(2)
0.00%
12b-1 Fee
0.75%
Total Other Expenses (after expense reimbursement)
1.75%
Shareholder Services Fee
0.25%
Total Fund Operating Expenses (3)
2.50%
(1) Effective December 1, 1994, the contingent deferred sales
charge is waived. The contingent deferred sales charge had
been 3.00% in the first year, declining to 2.00% in the
second year and 0.00% after three years. (See "Contingent
Deferred Sales Charge").
(2) The management fee has been reduced to reflect the
voluntary waiver of the management
fee. The adviser can terminate this voluntary waiver
at any time at its sole discretion. The
maximum management fee is 0.40%.
(3) The Total Fund Operating Expenses in the table above are
based on expenses expected during the
fiscal year ending August 31, 1995. The Total Fund
Operating Expenses were 0.75% for the fiscal
year ended August 31, 1994, and would have been 4.12%
absent the voluntary waiver of the
management fee and the voluntary reimbursement of
certain other operating expenses.
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 "Investing in the Fund" and "Municipal
Securities Income Trust Information". Wire--transferred
redemptions of less than $5,000 may be subject to additional
fees.
Long-term shareholders may pay more than the economic
equivalent of the maximum front-end sales charge permitted
under the rules of the National Association of Securities
Dealers, Inc.
EXAMPLE 1 year 3 years 5 years
10 years
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.....
$56 $99 $133 $284
You would pay the following expenses on the same
investment, assuming no redemption...................
$25 $78 $133 $284
The above example should not be considered a representation
of past or future expenses. Actual expenses may be greater or
less than those shown.
FLORIDA MUNICIPAL INCOME FUND
FINANCIAL HIGHLIGHTS
(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 7, 1994,
on the Fund's Financial Statements for the year ended August 31,
1994, is included in the Annual Report dated August 31, 1994, 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 free of charge.
YEAR ENDED
AUGUST 31,
1994 1993*
Net asset value, beginning of period $10.35 $10.00
Income from investment operations
Net investment income 0.52 0.12
Net realized and unrealized gain on investments
(0.94) 0.36
Total from investment operations (0.42) 0.48
Less distributions
Dividends to shareholders from net investment income (0.52)
(0.12)
Distributions in excess of net investment income (a) (0.05)
(0.01)
Total distributions (0.57) (0.13)
Net asset value, end of period $9.36 $10.35
Total return** (4.13%) 4.83%
Ratios to Average Net Assets
Expenses 0.75% 0.75%(b)
Net investment income 5.18% 5.00%(b)
Expense waiver/reimbursement (c) 3.37% 0.54%(b)
Supplemental Data
Net assets, end of period (000 omitted) $11,635
$3,018
Portfolio turnover rate 33% 0%
*Reflects operations for the period from June 1, 1993 (date of
initial public investment) to August 31, 1993.
**Based on net asset value, which does not reflect the sales load
or contingent deferred sales charge, if applicable.
(a) Distributions are
determined in accordance with income tax regulations which may differ
from generally accepted
accounting principles. These distributions do not represent a return
of capital for federal income
tax purposes.
(b)Computed on an annualized basis.
(c) The voluntary expense
decrease is reflected in both the expense and net investment
income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
FURTHER INFORMATION ABOUT THE FUND'S PERFORMANCE IS CONTAINED IN
THE FUND'S ANNUAL REPORT DATED AUGUST 31, 1994, WHICH CAN BE
OBTAINED FREE OF CHARGE.
GENERAL INFORMATION-----------------------------------------------
- ----
Federated Municipal Income Trust was established as a
Massachusetts business trust under a Declaration of Trust dated
August 6, 1990. On September 16, 1992 (effective date October 31,
1992), the Board of Trustees (the "Trustees") approved changing
the name of the Trust from Federated Municipal Income Trust to
Municipal Securities Income Trust. The Declaration of Trust
permits the Trust to offer separate series of shares of beneficial
interest representing interests in separate portfolios of
securities. The shares in any one portfolio may be offered in
separate classes. With respect to this Fund, as of the date of
this prospectus the Trustees have not established any classes of
shares.
Shares of the Fund are designed for customers of financial
institutions such as broker/dealers, banks, fiduciaries, and
investment advisers as a convenient means of accumulating an
interest in a professionally managed, non-diversified portfolio
investing primarily in Florida Municipal Securities. A minimum
initial investment of $1,500 is required. Under normal
circumstances, subsequent investments must be in amounts of at
least $100. Effective October 17, 1994, however, the Fund has
ceased offering its shares for sale, except for dividend
reinvestments by existing shareholders. The Fund is not likely to
be a suitable investment for non-Florida taxpayers or retirement
plans since Florida Municipal Securities are not likely to produce
competitive after-tax yields for such persons and entities when
compared to other investments.
Except as otherwise noted in this prospectus, shares of the Fund
are sold at net asset value and are redeemed at net asset value.
Under ordinary circumstances, a contingent deferred sales charge
is imposed on certain shares of the Fund which are redeemed within
three full years of the date of purchase. The contingent deferred
sales charge has been waived for all redemptions effective
December 1, 1994. Fund assets may be used in connection with the
distribution of shares of the Fund.
In November 1994, the Fund's distributor notified shareholders
that it would recommend the liquidation of the Fund to the
Trustees of the Trust and advised shareholders that it may be
advisable to consider voluntary redemption of Fund shares because,
among other things, effective October 17, 1994, the Fund had
ceased offering shares for sale and because, effective December 1,
1994, the Fund's adviser would cease the voluntary reimbursement
of operating expenses, thus causing the Fund's expense ratio to
increase significantly. The Fund's distributor also indicated
that it would recommend to the Trustees a transaction involving
the tax-free reorganization of the Fund into another investment
company. The Trustees are expected to consider such proposal in
early 1995 and, if approved by them, it is anticipated that such
matter will be submitted to shareholders for their approval
promptly thereafter.
INVESTMENT INFORMATION--------------------------------------------
- -------
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide current income
which is exempt from federal regular income tax (federal regular
income tax does not include the federal alternative minimum tax)
and to maintain an investment portfolio which will cause its
shares to be exempt from the Florida intangibles 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.
Interest income of the Fund that is exempt from the income tax
described above retains its exempt status when distributed to the
Fund's shareholders. However, income distributed by the Fund may
not necessarily be exempt from state or municipal taxes in states
other than Florida.
INVESTMENT POLICIES
The Fund pursues its investment objective by investing primarily
in securities which are exempt from federal regular income tax and
the Florida intangibles tax. Unless indicated otherwise, the
investment policies of the Fund may be changed by the Trustees
without approval of shareholders. Shareholders will be notified
before any material changes in these policies become effective.
ACCEPTABLE INVESTMENTS. The Fund invests primarily in Florida
Municipal Securities, which are obligations issued by or on behalf
of the State of Florida and Florida municipalities, as well as
those issued by states, territories, and possessions of the United
States and participation interests, as described below, in any of
the above obligations, the interest from which is, in the opinion
of bond counsel for the issuers or in the opinion of officers of
the Fund and/or the investment adviser to the Fund, exempt from
federal regular income tax and the Florida intangibles tax. While
the Fund intends to invest primarily in securities issued by or on
behalf of the State of Florida and its political subdivisions, it
will invest in other securities issued by states, territories, and
possessions of the United States which are exempt from federal
regular income tax and the Florida intangibles tax. The Fund will
invest in such securities in instances where, in the judgment of
the Fund's investment adviser, the supply and yield of such
securities would be beneficial to the Fund's performance.
The Fund currently invests primarily in variable rate municipal
securities, as described below.
The Fund may also engage in put and call options, futures
contracts, and options on futures contracts for hedging purposes.
As a matter of investment policy which cannot be changed without
the approval of shareholders, the Fund invests its assets so that
at least 80% of its annual interest income is exempt from federal
regular income tax.
The prices of fixed income securities fluctuate inversely to the
direction of interest rates.
CHARACTERISTICS. The Florida Municipal Securities which the
Fund buys are investment grade bonds rated, at the time of
purchase, Aaa, Aa, A, or Baa by Moody's Investors Service,
Inc. ("Moody's"), or AAA, AA, A, or BBB by Standard and
Poor's Ratings Group ("S&P") or by Fitch Investors Service,
Inc. ("Fitch"). In certain cases the Fund's adviser may
choose bonds which are unrated if it determines that such
bonds are of comparable quality or have similar
characteristics to investment grade bonds. Bonds rated "BBB"
by S&P or Fitch 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.
If the Fund purchases an investment grade bond, and the
rating of such bond is subsequently downgraded so that the
bond is no longer classified as investment grade, the Fund is
not required to drop the bond from the portfolio, but will
consider whether such action is appropriate. A description of
the rating categories is contained in the Appendix to the
Statement of Additional Information.
PARTICIPATION INTERESTS. The Fund may purchase participation
interests from financial institutions such as commercial
banks, savings and loan associations, and insurance
companies. These participation interests give the Fund an
undivided interest in Florida Municipal Securities. The
financial institutions from which the Fund purchases
participation interests frequently provide or secure
irrevocable letters of credit or guarantees to assure that
the participation interests are of high quality. The Board of
Trustees of the Trust will determine that participation
interests meet the prescribed quality standards for the Fund.
VARIABLE RATE MUNICIPAL SECURITIES. Some of the Florida
Municipal Securities which the Fund purchases may have
variable interest rates. Variable interest rates are
ordinarily based on a published interest rate, interest rate
index or a similar standard, such as the 91-day U.S. Treasury
bill rate. Many variable rate municipal securities are
subject to payment of principal on demand by the Fund in not
more than seven days. All variable rate municipal securities
will meet the quality standards for the Fund. The Fund's
investment adviser has been instructed by the Trustees to
monitor the pricing, quality, and liquidity of the variable
rate municipal securities, including participation interests
held by the Fund, on the basis of published financial
information and reports of the rating agencies and other
analytical services.
MUNICIPAL LEASES. Municipal leases are obligations issued by
state and local governments or authorities to finance the
acquisition of equipment and facilities and may be considered to
be illiquid. They may take the form of a lease, an installment
purchase contract, a conditional sales contract or a participation
certificate on any of the above.
Also included within the general category of municipal securities
are certain lease obligations or installment purchase contract
obligations and participations therein (hereinafter collectively
called "lease obligations") of municipal authorities or entities.
Although lease obligations do not constitute general obligations
of the municipality for which the municipality's taxing power is
pledged, a lease obligation is ordinarily backed by the
municipality's covenant to budget for, appropriate and make the
payments due under the lease obligation. Interest on lease
obligations is tax-exempt to the same extent as if the
municipality had issued debt obligations to finance the underlying
project or purchase. However, certain lease obligations contain
"non-appropriation" clauses which provide that the municipality
has no obligation to make lease or installment purchase payments
in future years unless money is appropriated for such purpose on a
yearly basis. In addition to the "non-appropriation" risk, these
securities represent a relatively new type of financing that has
not yet developed the depth of marketability associated with more
conventional bonds and some lease obligations may be illiquid.
Although "non-appropriation" lease obligations are generally
secured by the leased property, disposition of the property in the
event of foreclosure might prove difficult. In addition, the tax
treatment of such obligations in the event of non-appropriation is
unclear. The Fund does not intend to invest more than 10% of its
total assets in lease obligations that contain "non-appropriation"
clauses.
In determining the liquidity of municipal lease securities, the
Fund's investment adviser, under the authority delegated by the
Board of Trustees, will base its determination on the following
factors:
- whether the lease can be
terminated by the lessee;
- the potential recovery, if
any, from a sale of the leased property upon termination of
the lease;
- the lessee's general credit
strength (e.g., its debt, administrative,
economic and financial
characteristics and prospects);
- the likelihood that the lessee will discontinue
appropriating funding
for the leased property because the property is no longer
deemed essential to its operations (e.g., the potential for
an "event of non-appropriation"); and
- any credit enhancement or
legal recourse provided upon an event of
non-appropriation or other
termination of the lease.
INVERSE FLOATERS. The Fund may invest in various types of
derivative municipal securities whose interest rates bear an
inverse relationship to the interest rate on another security
or the value of an index ("inverse floaters"). Because
changes in the interest rate on the other security or index
inversely effect the residual interest paid on the inverse
floater, the value of an inverse floater is generally more
volatile than that of a fixed rate bond. Inverse floaters
have interest rate adjustment formulas which generally reduce
or, in the extreme, eliminate the interest paid to the Fund
when short-term interest rates rise, and increase the
interest paid to the Fund when short-term interest rates
fall. Inverse floaters have varying degrees of liquidity, and
the market for these securities is new and relatively
volatile. These securities tend to underperform the market
for fixed rate bonds in a rising interest rate environment,
but tend to outperform the market for fixed rate bonds when
interest rates decline. Shifts in the relationship between
short-term and long-term interest rates may alter this
tendency, however. In return for this volatility, inverse
floaters typically offer the potential for yields exceeding
the yields available on fixed rate bonds with comparable
credit quality and maturity. These securities usually permit
the investor to convert the floating rate to a fixed rate
(normally adjusted downward), and this optional conversion
feature may provide a partial hedge against rising interest
rates if exercised at an opportune time.
RESTRICTED SECURITIES. The Fund may invest up to 10% of its total
assets in restricted securities. Restricted securities are any
securities in which the Fund may otherwise invest pursuant to its
investment objective and policies but which are subject to
restriction on resale under federal securities laws. To the extent
these securities are deemed to be illiquid, the Fund will limit
its purchases, together with other securities considered to be
illiquid, to 15% of its net assets.
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 the transaction
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 into transactions to sell its purchase
commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar
securities at later dates. The Fund may realize short-term
profits or losses upon the sale of such commitments.
FUTURES CONTRACTS AND OPTIONS TO BUY OR SELL SUCH CONTRACTS. The
Fund may utilize bond futures contracts and options to a limited
extent. Specifically, the Fund may enter into futures contracts
provided that not more than 5% of its assets are required as a
futures contract deposit; in addition, the Fund may enter into
futures contracts and options transactions only to the extent that
obligations under such contracts or transactions represent not
more than 20% of the Fund's assets.
Futures contracts and options may be used for several reasons: to
maintain cash reserves while remaining fully invested, to
facilitate trading, to reduce transactions costs, or to seek
higher investment returns when a futures contract is priced more
attractively than the underlying municipal security or index. The
Fund may not use futures contracts or options transactions to
leverage its assets.
For example, in order to remain fully invested in bonds, while
maintaining liquidity to meet potential shareholder redemptions,
the Fund may invest a portion of its assets in a bond futures
contract. Because futures contracts only require a small initial
margin deposit, the Fund would then be able to maintain a cash
reserve to meet potential redemptions, while at the same time
remaining fully invested, although gains from such investments
would be fully taxable. Also, because the transactions costs of
futures contracts and options may be lower than the costs of
investing in bonds directly, it is expected that the use of
futures contracts and options may reduce the Fund's total
transactions costs.
The primary risks associated with the use of futures contracts and
options are: (i) imperfect correlation between the change in
market value of the bonds held by the Fund and the prices of
futures contracts and options; and (ii) possible lack of a liquid
secondary market for a futures contract and the resulting
inability to close a futures position prior to its maturity date.
The risk of imperfect correlation will be minimized by investing
only in those contracts whose price fluctuations are expected to
resemble those of the Fund's underlying securities. The risk that
the Fund will be unable to close out a futures position will be
minimized by entering into such transactions on a national
exchange with an active and liquid secondary market. In general,
the futures market is more liquid than the municipal bond market,
and so by investing in futures, liquidity may be improved.
TEMPORARY INVESTMENTS. From time to time, during periods of other
than normal market conditions, the Fund may invest in short-term
non-Florida Municipal Securities or taxable temporary investments.
These temporary investments include: 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 rated within the investment grade categories
described under "Acceptable Investments--Characteristics" (if
rated) or those which the investment adviser judges to have the
same characteristics as such investment grade securities (if
unrated).
Although the Fund is permitted to make taxable, temporary
investments, there is no current intention of generating income
subject to federal regular income tax or the Florida intangibles
tax.
FLORIDA MUNICIPAL SECURITIES
Florida Municipal Securities are generally issued to finance
public works, such as airports, bridges, highways, housing,
hospitals, mass transportation projects, schools, streets, and
water and sewer works. They are also issued to repay outstanding
obligations, to raise funds for general operating expenses, and to
make loans to other public institutions and facilities.
The two principal classifications of municipal securities are
"general obligation" and "revenue" bonds. General obligation bonds
are secured by the issuer's pledge of its full faith and credit
and taxing power for the payment of principal and interest.
However, interest on and principal of revenue bonds are payable
only from the revenue generated by the facility financed by the
bond or other specified sources of revenue. Revenue bonds do not
represent a pledge of credit or create any debt of or charge
against the general revenues of a municipality or public
authority. Industrial development bonds are typically classified
as revenue bonds.
Industrial development bonds are issued by or on behalf of public
authorities to provide financing aid to acquire sites or construct
and equip facilities for privately or publicly owned corporations.
The availability of this financing encourages these corporations
to locate within the sponsoring communities and thereby increases
local employment.
Municipal securities may carry fixed, floating or inverse floating
rates of interest. Fixed rate securities bear interest at the same
rate from issuance until maturity. The interest rate on floating
rate securities is subject to adjustment based upon changes in
market interest rates or indices, such as a bank's prime rate or a
published market index. The interest rate may be adjusted at
specified intervals or immediately upon any change in the
applicable index rate. The interest rate for most floating rate
securities varies directly with changes in the index rate, so that
the market value of the security will approximate its stated value
at the time of each adjustment. However, inverse floating rate
securities have interest rates that vary inversely with changes in
the applicable index rate, such that the security's interest rate
rises when market interest rates fall and falls when market
interest rates rise. The market value of floating rate securities
is less sensitive than fixed rate securities to changes in market
interest rates. In contrast, the market value of inverse floating
rate securities is more sensitive to market rate changes than
fixed or floating rate securities. The effect of market rate
changes on securities depends upon a variety of factors, including
market expectations as to future changes in interest rates and, in
the case of floating and inverse floating rate securities, the
frequency with which the interest rate is adjusted and the
multiple of the index rate used in making the adjustment.
Most municipal securities pay interest in arrears on a semiannual
or more frequent basis. However, certain securities, typically
known as capital appreciation bonds or zero coupon bonds, do not
provide for any interest payments prior to maturity. Such
securities are normally sold at a discount from their stated
value, or provide for periodic increases in their stated value to
reflect a compounded interest rate. The market value of these
securities is also more sensitive to changes in market interest
rates than securities that provide for current interest payments.
The Fund will not generally invest more than 25% of its total
assets in any one industry. Governmental issuers of municipal
securities are not considered part of any "industry." However,
municipal securities backed only by the assets and revenues of
nongovernmental users may, for this purpose, be deemed to be
related to the industry in which such nongovernmental users
engage, and the 25% limitation would apply to such obligations. It
is nonetheless possible that the Fund may invest more than 25% of
its assets in a broader segment of the municipal securities
market, such as revenue obligations of hospitals and other health
care facilities, housing agency revenue obligations, or airport
revenue obligations. This would be the case only if the Fund
determines that the yields available from obligations in a
particular segment of the market justified the additional risks
associated with a large investment in such segment. Although such
obligations could be supported by the credit of governmental users
or by the credit of nongovernmental users engaged in a number of
industries, economic, business, political and other developments
generally affecting the revenues of such users (for example,
proposed legislation or pending court decisions affecting the
financing of such projects and market factors affecting the demand
for their services or products) may have a general adverse effect
on all municipal securities in such a market segment.
INVESTMENT RISKS
Yields on Florida Municipal Securities depend on a variety of
factors, including: the general conditions of the short-term
municipal note market and the municipal bond market; the size of
the particular offering; the maturity of the obligations; and the
rating of the issue. The ability of the Fund to achieve its
investment objective also depends on the continuing ability of the
issuers of Florida Municipal Securities and demand features, or
the credit enhancers of either, to meet their obligations for the
payment of interest and principal when due. Investing in Florida
Municipal Securities meeting the Fund's quality standards may not
be possible if the State of Florida or its municipalities do not
maintain their current credit ratings. In addition, certain
Florida constitutional amendments, legislative measures, executive
orders, administrative regulations, and voter initiatives could
result in adverse consequences affecting Florida Municipal
Securities. Further, any adverse economic conditions or
developments affecting the State of Florida or its municipalities
could have an impact on the Fund's portfolio.
A further discussion of the risks of a portfolio which invests
largely in Florida Municipal Securities is contained in the
Statement of Additional Information.
NON-DIVERSIFICATION
The Fund is a non-diversified investment portfolio. As such, there
is no limit on the percentage of assets which can be invested in
any single issuer. An investment in the Fund, therefore, will
entail greater risk than investment in a diversified portfolio of
securities because the higher percentage of investments among
fewer issuers may result in greater fluctuation in the total
market value of the Fund's portfolio. Any economic, political, or
regulatory developments affecting the value of the securities in
the Fund's portfolio will have a greater impact on the total value
of the portfolio than would be the case if the portfolio were
diversified among more issuers.
The Fund intends to comply with Subchapter M of the Internal
Revenue Code. This undertaking requires that at the end of each
quarter of the taxable year: (a) with regard to at least 50% of
the Fund's total assets, no more than 5% of its total assets are
invested in the securities of a single issuer; and (b) no more
than 25% of its total assets are invested in the securities of a
single issuer.
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
agreement to buy it back on a set date) or pledge securities
except, under certain circumstances, the Fund may borrow up to one-
third of the value of its total assets and pledge up to 10% of the
value of those assets to secure such borrowings.
The above investment limitation cannot be changed without
shareholder approval. The following limitation, however, can be
changed by the Trustees without shareholder approval. Shareholders
will be notified before any material change in this limitation
becomes effective.
The Fund will not invest more than 5% of its total assets in
industrial development bonds when the payment of principal and
interest is the responsibility of companies (or guarantors, where
applicable) with less than three years of continuous operations,
including the operation of any predecessor.
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.
INVESTING IN THE FUND---------------------------------------------
- ------
SHARE PURCHASES
SHARES OF THE FUND ARE NO LONGER BEING OFFERED FOR SALE. When
shares had been offered for sale, the following requirements and
procedures were applicable to purchases.
Shares are sold on days on which the New York Stock Exchange is
open. Shares may be purchased through an investment dealer which
has a sales agreement with the distributor, or directly from the
distributor, Federated Securities Corp., either by mail or by wire
once an account has been established. 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 of the Fund. Orders through a
financial institution are considered received when the Fund is
notified of the purchase order. Purchase orders through a
registered broker/dealer must be received by the broker before
4:00 P.M. (Boston time) and must be transmitted by the broker to
the Fund before 5:00 P.M. (Boston 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. (Boston
time) in order for shares to be purchased at that day's price. It
is the financial institution's responsibility to transmit orders
promptly.
DIRECTLY BY MAIL. To purchase shares by mail directly from
Federated Securities Corp:
- complete and sign the new account form available from
the Fund;
- enclose a check made payable to Florida Municipal
Income Fund; and
- send both to the transfer agent's bank, State Street
Bank and Trust Company, P.O. Box 8604, Boston, MA 02266-
8604.
Purchases by mail are considered received after payment by check
is converted by State Street Bank and Trust Company 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 State Street Bank receives payment by
wire.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in shares is $1,500. Subsequent
investments must be in amounts of at least $100.
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. State
Street Bank acts as the shareholder's agent in depositing checks
and converting them to federal funds.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an
order is received. The net asset value is determined at 4:00 P.M.
(Boston time), 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, Columbus Day,
Veteran's 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.
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their
investment on a regular basis in a minimum amount of $100. Under
this program, funds may be automatically withdrawn periodically
from the shareholder's checking account and invested in shares at
the net asset value next determined after an order is received by
State Street Bank. A shareholder may apply for participation in
this program through Federated Securities Corp. or his financial
institution.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Services Company
maintains a share account for each share-holder. Share
certificates are not issued unless requested on the application or
by contacting the Fund.
Detailed confirmations of each purchase and redemption are sent to
each shareholder. Monthly statements are sent to report dividends
paid during the month.
DIVIDENDS AND DISTRIBUTIONS
Dividends are declared daily and paid monthly. Dividends include
substantially all of the investment income earned by the Fund,
less its expenses, other than distribution fees made pursuant to
Rule 12b-1 for the sale of Fund shares, which fees currently are
charged to the Fund's paid-in capital for tax purposes. Effective
January 1, 1995, Rule 12b-1 fees will be paid out of Fund income,
rather than paid-in capital. Until January 1, 1995, a certain
portion of dividend distributions may represent distributions in
excess of net investment income. Distributions of any net realized
long-term capital gains will be made at least once every twelve
months. Dividends and distributions are automatically reinvested
on payment dates in additional shares of the Fund at net asset
value unless shareholders request cash payments on the application
or by writing to Federated Services Company.
Shares purchased through a financial institution, for which
payment by wire is received by State Street Bank on the business
day following the order, begin to earn dividends on the day that
the wire payment is received. Otherwise, shares purchased by wire
begin to earn dividends on the business day after wire payment is
received by State Street Bank. Shares purchased by mail, or
through a financial institution, if the financial institution's
payment is by check, begin to earn dividends on the second
business day after the check is received by Federated Services
Company.
Shares earn dividends through the business day on which proper
written redemption instructions are received by Federated Services
Company.
See the section entitled "Tax Information" in this prospectus for
a further discussion of the effect of the payment of distribution
fees made pursuant to Rule 12b-1.
REDEEMING SHARES -------------------------------------------------
- --
The Fund redeems shares at their net asset value next determined
after State Street Bank 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 by 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. (Boston time) and must be transmitted by the broker to
the Fund before 5:00 P.M. (Boston 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.
(Boston 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 be completed.
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. 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.
DIRECTLY BY MAIL
Shareholders may also redeem shares by sending a written request
to State Street Bank, P.O. Box 8604, Boston, MA 02266-8604. This
written request must include the shareholder's name, the Fund name
and class of shares, the account number, and the share or dollar
amount to be redeemed. Shares will be redeemed at their net asset
value next determined after State Street Bank receives the
redemption request.
If share certificates have been issued, they must be properly
endorsed and should be sent by registered or certified mail with
the written request. Shareholders may call the Fund for assistance
in redeeming by mail.
SIGNATURES. Shareholders requesting a redemption of $50,000 or
more, 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 firm of the New York, American, Boston,
Midwest, or Pacific Stock Exchange;
- 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
Under ordinary circumstances, shareholders redeeming shares from
their Fund accounts within three full years of the purchase date of
those shares will be charged a contingent deferred sales charge by
the Fund's distributor. Any applicable contingent deferred sales
charge will be imposed on the lesser of the net asset value of the
redeemed shares at the time of purchase or the net asset value of
the redeemed shares at the time of redemption in accordance with
the following schedule:
CONTINGENT DEFERRED
SHARES HELD SALES CHARGE
Less than one
year...........................................................
3%
More than one year but less than three
years.................... 2%
More than three
years.....................................................
None
Effective December 1, 1994, the Fund's distributor has waived the
imposition of the contingent deferred sales charge on all
redemptions of Fund shares.
The contingent deferred sales charge will be deducted from the
redemption proceeds otherwise payable to the shareholder and will
be retained by the distributor. The contingent deferred sales
charge will not be imposed with respect to: (1) shares acquired
through the reinvestment of dividends or distributions of long-
term capital gains; or (2) shares held for more than three full
years from the date of purchase. Redemptions will be processed in
a manner intended to maximize the amount of redemption which will
not be subject to a contingent deferred sales charge. In computing
the amount of the applicable contingent deferred sales charge,
redemptions are deemed to have occurred in the following order:
(1) shares acquired through the reinvestment of dividends and long-
term capital gains; (2) shares held for more than three full years
from the date of purchase; (3) shares held for fewer than three
years from the date of purchase on a first-in-first-out basis. A
contingent deferred sales charges is not assessed in connection
with an exchange of Fund shares for shares in New Jersey Municipal
Income Fund or Texas Municipal Income Fund, portfolios of the
Trust, or for shares in Multi-State Municipal Income Fund, a
portfolio of Fixed Income Securities, Inc. (see "Exchanges for
Shares of Other Funds"below). Shares of Texas Municipal Income
Fund, New Jersey Municipal Income Fund, and Mutli-State Municipal
Income Fund are no longer being offered for sale. Any contingent
deferred sales charge imposed at the time exchanged-for shares are
redeemed is calculated as if the shareholder had held the shares
from the date on which he became a shareholder of the exchanged-
from shares. Moreover, the contingent deferred sales charge will
be eliminated with respect to certain redemptions (see
"Elimination of Contingent Deferred Sales Charge" below).
ELIMINATION OF CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge will be eliminated with
respect to the following redemptions: (1) redemptions following
the death or disability, as defined in Section 72(m)(7) of the
Internal Revenue Code of 1986, of a shareholder; (2) redemptions
in connection with certain distributions from Individual
Retirement Accounts, qualified retirement plans or tax-sheltered
annuities; and (3) involuntary redemptions by the Fund of shares
in shareholder accounts that do not comply with the minimum
balance requirement. In addition, to the extent that the
distributor does not advance commissions to certain financial
institutions for purchases made by certain individuals, no
contingent deferred sales charge will be imposed on redemptions of
shares held by Trustees, employees and sales representatives of
the Fund, the distributor, or affiliates of the Fund or
distributor; employees of any financial institution that sells
shares of the Fund pursuant to a sales agreement with the
distributor; and spouses and children under the age of 21 of the
aforementioned persons. Finally, no contingent deferred sales
charge will be imposed on the redemption of shares originally
purchased through a bank trust department or investment adviser
registered under the Investment Advisers Act of 1940, to the
extent that no commission was advanced for purchases made by such
entities. The Trustees reserve the right to discontinue the
elimination of the contingent deferred sales charge. Shareholders
would be notified of such elimination. Any shares purchased prior
to the termination of such a waiver would have the contingent
deferred sales charge eliminated as provided in the Fund's
prospectus at the time of purchase of such shares. If a
shareholder making a redemption qualifies for an elimination of
the contingent deferred sales charge, the shareholder must notify
Federated Securities Corp. or State Street Bank in writing that he
is entitled to such elimination.
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; the minimum withdrawal amount is $100. 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. A contingent deferred sales charge is
imposed on shares redeemed through this program within three full
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 and pay the proceeds to
the shareholder if the account balance falls below the required
minimum value of $1,500 due to shareholder redemptions. This
requirement does not apply, however, if the balance falls below
$1,500 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.
EXCHANGES FOR SHARES OF OTHER FUNDS
In order to provide greater flexibility to Fund shareholders whose
investment objective has changed, the Fund allows shareholders to
exchange some or all of their Fund shares for shares of New Jersey
Municipal Income Fund and Texas Municipal Income Fund, portfolios
of the Trust, as well as shares of Multi-State Municipal Income
Fund, a portfolio of Fixed Income Securities, Inc., which is also
advised by Federated Advisers. Exchanges are made at net asset
value without being assessed a contingent deferred sales charge on
the exchanged shares. Shares of Texas Municipal Income Fund, New
Jersey Municipal Income Fund, and Muti-State Municipal Income Fund
are no longer being offered for sale.
Shareholders using this privilege must exchange shares having a
net asset value of at least $1,500. Shareholders who desire to
automatically exchange shares of a predetermined amount on a
monthly, quarterly, or annual basis may take advantage of a
systematic exchange privilege. A shareholder may obtain further
information on these exchange privileges by calling Federated
Securities Corp. or his financial institution. Before making an
exchange, a shareholder must receive a prospectus of the fund for
which the exchange is being made.
The ability to exchange shares is available to shareholders
residing in any state in which the shares being acquired may be
legally sold. 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.
MUNICIPAL SECURITIES INCOME TRUST INFORMATION --------------------
- ----------------------
MANAGEMENT OF MUNICIPAL SECURITIES INCOME TRUST
BOARD OF TRUSTEES. Municipal Securities Income Trust is managed
by a Board of Trustees. The Board of Trustees is responsible for
managing the business affairs of Municipal Securities Income Trust
and for exercising all of the powers of Municipal Securities
Income Trust except those reserved for the shareholders. An
Executive Committee of the Board of Trustees handles the Trustees'
responsibilities between meetings of the Trustees.
INVESTMENT ADVISER. Pursuant to an investment advisory contract
with Municipal Securities Income Trust, investment decisions for
the Fund are made by Federated Advisers, the Fund's investment
adviser, subject to direction by the Trustees. The adviser
continually conducts investment research and supervision for the
Fund and is responsible for the purchase and sale of portfolio
instruments, for which it receives an annual fee from the Fund.
ADVISORY FEES. The Fund's adviser receives an annual
investment advisory fee equal to .40 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 or reimbursement 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. Total assets under management or
administration by these and other subsidiaries of Federated
Investors is approximately $70 billion. Federated Investors,
which was founded in 1956 as Federated Investors, Inc.,
develops and manages mutual funds primarily for the financial
industry. Federated Investors' track record of competitive
performance and its disciplined, risk averse investment
philosophy serve approximately 3,500 client institutions
nationwide. Through these same client institutions,
individual shareholders also have access to this same level
of investment expertise.
James D. Roberge and Jonathan C. Conley are the Fund's co-
portfolio managers. James D. Roberge has been the Fund's co-
portfolio manager since June, 1993. Mr. Roberge joined
Federated Investors in 1990 and has been Vice President of
the Fund's investment adviser since October, 1994. Prior to
this Mr. Roberge served as an Assistant Vice President of the
Fund's investment adviser since 1992. From 1990 until 1992,
Mr. Roberge acted as an investment analyst. Mr. Roberge
received his M.B.A. in Finance from Wharton Business School
in 1990.
Jonathan C. Conley has been the Fund's co-portfolio manager
since June, 1993. Mr. Conley joined Federated Investors in
1979 and has been a Vice President of the Fund's investment
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 (the
"Distributor") for shares of the Fund. Federated Securities Corp.
is located at Federated Investors Tower, Pittsburgh, Pennsylvania
15222-3779. It is a Pennsylvania corporation organized on November
14, 1969, and is the principal distributor for a number of
investment companies. Federated Securities Corp. is a subsidiary
of Federated Investors.
DISTRIBUTION PLAN
The Distributor will pay dealers an amount equal to 2% of the net
asset value of Fund shares purchased by their clients or
customers. These payments will be made directly by the Distributor
from its assets, and will not be made from the assets of the Fund.
Pursuant to the provisions of a distribution plan adopted in
accordance with the Investment Company Act Rule 12b-1 (the
"Plan"), the Fund will pay to the Distributor an amount computed
at an annual rate of 0.75 of 1% of the average daily net asset
value of Fund shares to reimburse the Distributor for advancements
paid to dealers and to finance any activity which is principally
intended to result in the sale of shares subject to the Plan. The
Fund will accrue the distribution fee as a liability of the Fund,
and such method of accrual will reduce the Fund's net assets and
net asset value accordingly. See the section entitled "Tax
Information" in this prospectus for a further discussion of the
effect of the payment of distribution fees made pursuant to Rule
12b-1 and the payment of shareholder services fees to financial
institutions for administrative and support services on
distributions (of dividends, etc.) to shareholders.
Because distribution fees to be paid by the Fund to the
Distributor may not exceed an annual rate of 0.75 of 1% of the
Fund's average daily net assets, it will take the Distributor a
number of years to recoup the expenses that it has incurred for
its distribution and distribution related services pursuant to the
Plan.
The Distributor may select financial institutions (such as a
broker/dealer or bank) to provide sales support services as agents
for their clients or customers who beneficially own shares of the
Fund. After a shareholder has been invested in the Fund for a
period of three years, the Distributor will pay financial
institutions a portion of the above-referenced distribution fee,
in an amount up to 0.25 of 1% of the Fund's average daily net
assets based upon the shares owned by the client for a period
exceeding three years. It is anticipated that the payment to the
financial institutions will encourage such financial institutions
to remain knowledgeable about the Fund, encourage further sales of
the Fund, and discourage redemptions for reinvestment in new
products or products compensating the financial institutions at a
higher level.
The Fund's Plan is a compensation type plan. As such, the Fund
makes no payments to the Distributor except as described above.
Therefore, the Fund does not pay for unreimbursed expenses of the
Distributor, including amounts expended by the Distributor in
excess of amounts received by it from the Fund, interest, carrying
or other financing charges in connection with excess amounts
expended, or the Distributor's overhead expenses. However, the
Distributor may be able to recover such amounts or may earn a
profit from future payments made by the Fund under the Plan.
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. In the event the
Glass-Steagall Act is deemed to prohibit depository institutions
from acting in the administrative capacities described above or
should Congress relax current restrictions on depository
institutions, the Board of Trustees will consider appropriate
changes in the services.
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.
SHAREHOLDER SERVICES PLAN
The Fund has adopted a Shareholder Services Plan (the "Services
Plan"). Under the Services Plan, financial institutions will enter
into shareholder service agreements with the Fund to provide
administrative support services to their customers who from time
to time may be owners of record or beneficial owners of Fund
shares. These administrative services may include, but are not
limited to, the provision of personal service and maintenance of
shareholder accounts. In return for providing these support
services, a financial institution may receive payments from the
Fund at a rate not exceeding 0.25 of 1% of the average daily net
assets of Fund shares beneficially owned by the financial
institution's customers for whom it is holder of record or with
whom it has a servicing relationship.
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 daily net assets of all funds advised by
subsidiaries of Federated Investors ("Federated Funds") as
specified below:
Average Aggregate Daily
Net Assets
Maximum Administrative Fee of the
Federated Funds
0.15 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.10 of 1% on the next $250 million
0.075 of 1% on assets in excess of
$750 million
The administrative fee received during any fiscal year shall be at
least $125,000 per portfolio and $30,000 per each additional class
of shares. Federated Administrative Services may choose
voluntarily to waive a portion of its fee.
CUSTODIAN. State Street Bank and Trust Company, Box 8604, Boston,
Massachusetts, is custodian for the securities and cash of the
Fund
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services
Company, Pittsburgh, Pennsylvania, is transfer agent for the
shares of the Fund, and dividend disbursing agent for the Fund.
The fee paid to the transfer agent is based on the size, type and
number of accounts and transactions made by shareholders.
Federated Services Company also maintains the Trust's accounting
records. The fee paid for this service is based on the level of
the Fund's average net assets for the period, plus out-of-pocket
expenses.
LEGAL COUNSEL
Legal counsel is provided by Houston, Houston & Donnelly, 2510
Centre City Tower, Pittsburgh, Pennsylvania, and Dickstein,
Shapiro & Morin, L.L.P., 2101 L Street, N.W., Washington, D.C.
INDEPENDENT AUDITORS
The independent auditors for the Fund are Deloitte & Touche LLP,
Boston, Massachusetts.
EXPENSES OF THE FUND
The Fund pays all of its own expenses and its allocable share of
Trust expenses. These expenses include, but are not limited to,
the costs of: organizing the Trust and continuing its existence;
Trustees' fees; investment advisory and administrative services;
printing prospectuses and other Fund documents for shareholders;
registering the Trust, the Fund and shares of the Fund; taxes and
commissions; issuing, purchasing, repurchasing, and redeeming
shares; fees for custodian, transfer agent, dividend disbursing
agent, shareholder servicing agents, and registrars; printing,
mailing, auditing, accounting, and legal expenses; reports to
shareholders and government agencies; meetings of Trustees and
shareholders and proxy solicitations therefor; insurance premiums;
association membership dues; and such nonrecurring and
extraordinary items as may arise.
SHAREHOLDER INFORMATION ------------------------------------------
- ---
VOTING RIGHTS
Each share of the Fund gives the shareholder one vote in Trustee
elections and other matters submitted to shareholders for vote.
All shares of all classes of each portfolio in the Trust have
equal voting rights except that in matters affecting only a
particular fund or class, only shares of that fund or class are
entitled to vote. As of December 23, 1994, Merrill, Lynch,
Pierce, Fenner & Smith, Jacksonville, Florida owned 70.42% 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.
As a Massachusetts business trust, the Trust is not required to
hold annual shareholder meetings. Shareholder approval will be
sought only for certain changes in the Trust's or the Fund's
operation and for the election of Trustees under certain
circumstances. Trustees may be removed by the Trustees or by
shareholders at a special meeting. A special meeting of the
shareholders for this purpose shall be called by the Trustees upon
the written request of shareholders owning at least 10% of the
outstanding shares of all series in the Trust entitled to vote.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally
liable as partners under Massachusetts law for acts or obligations
of the Trust on behalf of the Fund. To protect shareholders of the
Fund, the Trust has filed legal documents with Massachusetts that
expressly disclaim the liability of shareholders of the Fund for
such acts or obligations of the Trust. These documents require
notice of this disclaimer to be given in each agreement,
obligation, or instrument that the Trust or its Trustees enter
into or sign on behalf of the Fund.
In the unlikely event that a shareholder of the Fund is held
personally liable for the Trust's obligations on behalf of the
Fund, the Trust is required to use the property of the Fund to
protect or compensate the shareholder. On request, the Trust will
defend any claim made and pay any judgment against a shareholder
of the Fund for any act or obligation of the Trust on behalf of
the Fund. Therefore, financial loss resulting from liability as a
shareholder of the Fund will occur only if the Trust cannot meet
its obligations to indemnify shareholders and pay judgments
against them from the assets of the Fund.
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. The Fund will be treated as a single,
separate entity for federal income tax purposes so that income
(including capital gains) and losses realized by the Trust's other
portfolios will not be combined for tax purposes with those
realized by the Fund.
In general, shareholders are not required to pay federal regular
income tax on any dividends received from the Fund that represent
net interest on tax-exempt municipal bonds, although tax-exempt
interest will increase the taxable income of certain recipients of
social security benefits. However, under the Tax Reform Act of
1986, dividends representing net interest income earned on some
municipal bonds may be included in calculating the federal
individual alternative minimum tax or the federal alternative
minimum tax for corporations.
It is anticipated that each monthly distribution of dividends will
exceed the Fund's net investment income as calculated for
financial statement reporting purposes during the applicable
period by an amount substantially equal to the amount of
distribution payments made pursuant to the Plan, and charged to
the Fund's paid-in capital for tax purposes during such period.
The Securities and Exchange Commission requires the Fund to
indicate that such excess amount is being paid to shareholders
from the Fund's paid-in capital. However, the Fund anticipates
that the entire monthly distribution (including the excess amount)
will constitute tax-exempt income to the shareholders for Federal
income tax purposes, except for the proportionate part of the
distribution that may be considered taxable income if the Fund
earns taxable income during the calendar year. Therefore, the Fund
believes that a shareholder should make no adjustment to the tax
cost basis of his existing shareholdings as a result of the
monthly distribution. The Fund also believes that shareholders
reinvesting the monthly distribution should continue to treat the
amount of the entire distribution as the tax cost basis of the
additional shares acquired by reason of such reinvestment.
The Internal Revenue Service ("IRS") has issued a ruling
(effective April 1995) which changes the accounting method which
is applied to distribution related expenses incurred under Rule
12b-1 Plans. The ruling requires the Fund to charge such expenses
to the Fund's investment income. Effective January 1, 1995, the
Fund will change its accounting method accordingly.
The alternative minimum tax, equal to 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 will become
subject to the 20% corporate alternative minimum tax because the
dividends are included in a corporation's "adjusted current
earnings." The corporate alternative 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" are 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.
FLORIDA INTANGIBLES TAX
Shareholders of the Fund that are subject to the Florida
intangibles tax will not be required to include the value of their
Fund shares in their taxable intangible property if all of the
Fund's investments on the annual assessment date are obligations
that would be exempt from such tax if held directly by such
shareholders, such as Florida and U.S. government obligations. As
described above, the Fund will normally attempt to invest
substantially all of its assets in securities which are exempt
from the Florida intangibles tax. Accordingly, the value of the
Fund shares held by a shareholder should under normal
circumstances be exempt from the Florida intangibles tax.
However, if the portfolio consists of any assets which are not so
exempt on the annual assessment date, only the portion of the
shares of the Fund which relate to securities issued by the United
States and its possessions and territories will be exempt from the
Florida intangibles tax, and the remaining portion of such shares
will be fully subject to the intangibles tax, even if they partly
relate to Florida tax exempt securities.
FLORIDA STATE AND MUNICIPAL TAXATION
In a majority of states that have an income tax, dividends paid by
a mutual fund attributable to investments in a particular state's
municipal obligations are exempt from both Federal and such
state's income tax. If Florida were to adopt an income tax in the
future, and assuming that its income tax policy with respect to
mutual funds investing in Florida state and local municipal
obligations would be similar to the general tax policy of other
states, dividends paid by the Fund would be exempt from Florida
state income tax. A constitutional amendment approved by
referendum would be required before an individual income tax could
be imposed.
OTHER STATE AND LOCAL TAXES
Income from the Fund is not necessarily free from regular state
income taxes in states other than Florida or from personal
property taxes. State laws differ on this issue, and shareholders
are urged to consult their own tax advisers regarding the status
of their accounts under state and local tax laws.
PERFORMANCE INFORMATION ------------------------------------------
- -
From time to time the Fund advertises the total return, yield, and
tax-equivalent yield for shares. Total return represents the
change, over a specific period of time, in the value of an
investment in shares after reinvesting all income and capital
gains distributions. It is calculated by dividing that change by
the initial investment and is expressed as a percentage.
The yield of shares is calculated each day by dividing the net
investment income per share (as defined by the Securities and
Exchange Commission) earned by shares over a thirty-day period by
the maximum offering price per share of shares on the last day of
the period. This number is then annualized using semiannual
compounding. The tax-equivalent yield of shares is calculated
similarly to the yield, but is adjusted to reflect the taxable
yield that shares would have had to earn to equal its actual
yield, assuming a specific tax rate. The yield and the tax-
equivalent yield do not necessarily reflect income actually earned
by shares and, therefore, may not correlate to the dividends or
other distributions paid to shareholders.
The performance information reflects the effect of the contingent
deferred sales charge, which, if excluded, would increase the
total return, yield, and tax-equivalent yield.
From time to time, the Fund may advertise its performance using
certain financial publications and/or compare its performance to
certain indices.
ADDRESSES
- -------------------------------------------------------------------
- -----------
Florida Municipal Income Fund Federated Investors Tower
Pittsburgh, Pennsylvania
15222-3779
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania
15222-3779
Investment Adviser
Federated Advisers Federated Investors Tower
Pittsburgh, Pennsylvania
15222-3779
Custodian
State Street Bank and P.O. Box 8604
Trust Company Boston, Massachusetts 02266-
8604
Transfer Agent and Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania
15222-3779
Legal Counsel
Houston, Houston & Donnelly 2510 Centre City Tower
Pittsburgh, Pennsylvania
15222
Legal Counsel
Dickstein, Shapiro & Morin, L.L.P. 2101 L Street, N.W.
Washington, D.C. 20037
Independent Auditors
Deloitte & Touche LLP 125 Summer Street
Boston, Massachusetts 02110-
1617
------------------------------------------------------------------
- ------------------------------
FLORIDA MUNICIPAL
INCOME FUND
PROSPECTUS
A Non-Diversified Portfolio
of Municipal Securities
Income Trust, An Open-End,
Management Investment
Company
December 31, 1994
FEDERATED SECURITIES
CORP.
(LOGO)
----------------------------
-----------------
Distributor
A subsidiary of FEDERATED
INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
(12/94)
Florida Municipal Income Fund
(A Portfolio of Municipal Securities Income Trust)
Statement of Additional Information
This Statement of Additional Information should be read
with the prospectus of Florida Municipal Income Fund (the
"Fund") dated December 31, 1994. This Statement is not a
prospectus itself. To receive a copy of the prospectus
write or call the Fund.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Statement dated December 31, 1994
FEDERATED SECURITIES
CORP.
Distributor
A subsidiary of FEDERATED
INVESTORS
General Information About
the Fund 1
Investment Objective and
Policies 1
Acceptable Investments 1
Characteristics 1
Types of Acceptable
Investments 1
Participation Interests 1
Variable-Rate Municipal
Securities 1
Municipal Leases 2
When-Issued and Delayed
Delivery Transactions 2
Repurchase Agreements 2
Reverse Repurchase
Agreements 2
Futures and Options
Transactions 2
Futures Contracts 3
"Margin" in Futures
Transactions 3
Put Options on Financial
Futures Contracts 3
Call Options on Financial
Futures Contracts 4
Risks 4
Portfolio Turnover 5
Investment Limitations 5
Selling Short and Buying
on Margin 5
Issuing Senior Securities
and Borrowing Money 5
Pledging Assets 5
Underwriting 5
Investing in Real Estate 5
Investing in Commodities 5
Lending Cash or
Securities 5
Concentration of
Investments 5
Investing in Issuers
Whose Securities are
Owned by Officers and
Trustees of the Fund 6
Investing in Securities
of Other Investment
Companies 6
Investing in Restricted
Securities 6
Investing in Illiquid
Securities 6
Investing in Put Options 6
Writing Covered Call
Options 6
Investing in New Issuers 6
Investing in Minerals 6
Florida Investment Risks 6
Fund Ownership 10
The Funds 11
Investment Advisory Services 11
Adviser to the Fund 11
Advisory Fees 11
State Expense Limitations 11
Administrative Services 12
Brokerage Transactions 12
Purchasing Shares 12
Distribution and
Shareholder Services
Plans 12
Determining Net Asset Value 13
Valuing Municipal Bonds 13
Use of Amortized Cost 13
Redeeming Shares 13
Redemption in Kind 13
Tax Status 14
The Fund's Tax Status 14
Capital Gains 14
Total Return 14
Yield 14
Tax-Equivalent Yield 15
Tax-Equivalency Table 15
Performance Comparisons 15
Appendix 17
General Information About the Fund
The Fund is a portfolio in Municipal Securities Income Trust
(the "Trust"). Federated Municipal Income Trust was
established as a Massachusetts business trust under a
Declaration of Trust dated August 6, 1990. On September 16,
1992 (effective date October 31, 1992), the Board of Trustees
(the "Trustees") approved changing the name of the Trust from
Federated Municipal Income Trust to Municipal Securities
Income Trust.
Investment Objective and Policies
The Fund's investment objective is to provide current income
which is exempt from federal regular income tax and to
maintain an investment portfolio which will cause its shares
to be exempt from the Florida intangibles tax. The investment
objective cannot be changed without the approval of
shareholders.
Acceptable Investments
The Fund invests primarily in a portfolio of municipal
securities which are exempt from federal regular income tax
and the Florida intangibles tax ("Florida Municipal
Securities"). The municipal securities in which the Fund
invests include the debt obligations issued by or on behalf of
the State of Florida and Florida municipalities as well as
those issued by states, territories, and possessions of the
United States which are exempt from federal regular income tax
and the Florida intangibles tax.
Characteristics
The Florida Municipal Securities in which the Fund
invests have the characteristics set forth in the
prospectus. If ratings made by Moody's Investors Service,
Inc. ("Moody's"), Standard & Poor's Ratings Group (S&P")
or Fitch's Investors Service ("Fitch's") 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.
Types of Acceptable Investments
Examples of Florida Municipal Securities include:
o governmental lease certificates of participation issued
by state or municipal authorities where payment is
secured by installment payments for equipment,
buildings, or other facilities being leased by the
state or municipality;
o municipal notes and tax-exempt commercial paper;
o serial bonds;
o tax anticipation notes sold to finance working capital
needs of municipalities in anticipation of receiving
taxes;
o bond anticipation notes sold in anticipation of the
issuance of long-term bonds;
o pre-refunded municipal bonds whose timely payment of
interest and principal is ensured by an escrow of U.S.
government obligations; and
o general obligation bonds.
Participation Interests
The financial institutions from which the Fund purchases
participation interests frequently provide or secure from
another financial institution irrevocable letters of
credit or guarantees and give the Fund the right to
demand payment of the principal amounts of the
participation interests plus accrued interest on short
notice (usually within seven days).
Variable-Rate Municipal Securities
Variable interest rates generally reduce changes in the
market value of municipal securities from their original
purchase prices. Accordingly, as interest rates decrease
or increase, the potential for capital appreciation or
depreciation is less for variable-rate municipal
securities than for fixed-income obligations. Many
municipal securities with variable interest rates
purchased by the Fund are subject to repayment of
principal (usually within seven days) on the Fund's
demand. The terms of these variable-rate demand
instruments require payment of principal and accrued
interest from the issuer of the municipal obligations,
the issuer of the participation interests, or a guarantor
of either issuer.
Municipal Leases
The Fund may purchase municipal securities in the form of
participation interests which represent undivided
proportional interests in lease payments by a
governmental or non-profit entity. The lease payments and
other rights under the lease provide for and secure the
payments on the certificates. Lease obligations may be
limited by municipal charter or the nature of the
appropriation for the lease. In particular, lease
obligations may be subject to periodic appropriation. If
the entity does not appropriate funds for future lease
payments, the entity cannot be compelled to make such
payments. Furthermore, a lease may provide that the
certificate trustee cannot accelerate lease obligations
upon default. The trustee would only be able to enforce
lease payments as they became due. In the event of a
default or failure of appropriation, it is unlikely that
the trustee would be able to obtain an acceptable
substitute source of payment.
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. 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. 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 during times
of unusual market conditions for defensive purposes and to
maintain liquidity.
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. 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 Trustees.
From time to time, such as when suitable Florida
Municipal Securities are not available, the Fund may
invest a portion of its assets in cash. Any portion of
the Fund's assets maintained in cash will reduce the
amount of assets in Florida Municipal Securities 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.
Futures and Options Transactions
As a means of reducing fluctuations in the net asset
value of shares of the Fund, the Fund may attempt to
hedge all or a portion of its portfolio by buying and
selling financial futures contracts, buying put options
on portfolio securities and put options on financial
futures contracts for portfolio securities, and writing
call options on futures contracts. The Fund also may
write covered call options on portfolio securities to
attempt to increase its current income.
The Fund will maintain its position in securities,
options and segregated cash subject to puts and calls
until the options are exercised, closed, or have expired.
An option position may be closed out over-the-counter or
on an exchange which provides a secondary market for
options of the same series.
Futures Contracts
The Fund may purchase and sell financial futures
contracts to hedge against the effects of changes in the
value of portfolio securities due to anticipated changes
in interest rates and market conditions without
necessarily buying or selling the securities. The Fund
will not engage in futures transactions for speculative
purposes.
A futures contract is a firm commitment by two parties:
the seller who agrees to make delivery of the specific
type of security called for in the contract ("going
short") and the buyer who agrees to take delivery of the
security ("going long") at a certain time in the future.
For example, in the fixed income securities market,
prices move inversely to interest rates. A rise in rates
results in a drop in price. Conversely, a drop in rates
results in a rise in price. In order to hedge its
holdings of fixed income securities against a rise in
market interest rates, the Fund could enter into
contracts to deliver securities at a predetermined price
(i.e., "go short") to protect itself against the
possibility that the prices of its fixed income
securities may decline during the Fund's anticipated
holding period. The Fund could agree to purchase
securities in the future at a predetermined price (i.e.,
"go long") to hedge against a decline in market interest
rates.
"Margin" in Futures Transactions
Unlike the purchase or sale of a security, the Fund does not
pay or receive money upon the purchase or sale of a futures
contract. Rather, the Fund is required to deposit an amount of
"initial margin" in cash or U.S. Treasury bills with its
custodian (or the broker, if legally permitted). The nature of
initial margin in futures transactions is different from that
of margin in securities transactions in that initial margin in
futures transactions does not involve the borrowing of funds
by the Fund to finance the transactions. Initial margin is in
the nature of a performance bond or good faith deposit on the
contract which is returned to the Fund upon termination of the
futures contract, assuming all contractual obligations have
been satisfied.
A futures contract held by the Fund is valued daily at the
official settlement price of the exchange on which it is
traded. Each day the Fund pays or receives cash, called
"variation margin," equal to the daily change in value of the
futures contract. This process is known as "marking to
market." Variation margin does not represent a borrowing or
loan by the Fund, but is instead settlement between the Fund
and the broker of the amount one would owe the other if the
futures contract expired. In computing its daily net asset
value, the Fund will mark to market its open futures
positions.
The Fund is also required to deposit and maintain margin when
it writes call options on futures contracts.
The Fund will comply with the following restrictions when
purchasing and selling futures contracts. First, the Fund will
not participate in futures transactions if the sum of its
initial margin deposits on open contracts will exceed 5% of
the market value of the Fund's total assets, after taking into
account the unrealized profits and losses on those contracts
it has entered into. Second, the Fund will not enter into
these contracts for speculative purposes. Third, since the
Fund does not constitute a commodity pool, it will not market
itself as such, or serve as a vehicle for trading in the
commodities futures or commodity options markets. Connected
with this, the Fund will disclose to all prospective investors
the limitations on its futures and options transactions, and
make clear that these transactions are entered into only for
bona fide hedging purposes, or other permissible purposes
pursuant to regulations promulgated by the Commodity Futures
Trading Commission ("CFTC"). Finally, because the Fund will
submit to the CFTC special calls for information, the Fund
will not register as a commodities pool operator.
Put Options on Financial Futures Contracts
The Fund may purchase listed put options on financial futures
contracts. The Fund would use these options solely to protect
portfolio securities against decreases in value resulting from
market factors such as an anticipated increase in interest
rates.
Unlike entering directly into a futures contract, which
requires the purchaser to buy a financial instrument on a set
date at a specified price, the purchase of a put option on a
futures contract entitles (but does not obligate) its
purchaser to decide on or before a future date whether to
assume a short position at the specified price.
Generally, if the hedged portfolio securities decrease in
value during the term of an option, the related futures
contracts will also decrease in value and the option will
increase in value. In such an event, the Fund will normally
close out its option by selling an identical option. If the
hedge is successful, the proceeds received by the Fund upon
the sale of the second option will be large enough to offset
both the premium paid by the Fund for the original option plus
the decrease in value of the hedged securities.
Alternatively, the Fund may exercise its put option to close
out the position. To do so, it would simultaneously enter into
a futures contract of the type underlying the option (for a
price less than the strike price of the option) and exercise
the option. The Fund would then deliver the futures contract
in return for payment of the strike price. If the Fund neither
closes out nor exercises an option, the option will expire on
the date provided in the option contract, and only the premium
paid for the contract will be lost.
Call Options on Financial Futures Contracts
In addition to purchasing put options on futures, the Fund may
write listed call options on financial futures contracts or
over-the-counter call options on future contracts to hedge its
portfolio against an increase in market interest rates. When
the Fund writes a call option on a futures contract, it is
undertaking the obligation of assuming a short futures
position (selling a futures contract) at the fixed strike
price at any time during the life of the option if the option
is exercised. As market interest rates rise, causing the
prices of futures to decrease, the Fund's obligation under a
call option on a future (to sell a futures contract) costs
less to fulfill, causing the value of the Fund's call option
position to increase.
In other words, as the underlying futures price falls below
the strike price, the buyer of the option has no reason to
exercise the call, so that the Fund keeps the premium received
for the option. This premium can substantially offset the drop
in value of the Fund's portfolio securities.
Prior to the expiration of a call written by the Fund, or
exercise of it by the buyer, the Fund may close out the option
by buying an identical option. If the hedge is successful, the
cost of the second option will be less than the premium
received by the Fund for the initial option. The net premium
income of the Fund will then substantially offset the realized
decrease in value of the hedged securities.
The Fund will not maintain open positions in futures contracts
it has sold or call options it has written on futures
contracts if, in the aggregate, the value of the open
positions (marked to market) exceeds the current market value
of its securities portfolio, plus or minus the unrealized gain
or loss on those open positions, adjusted for the correlation
of volatility between the hedged securities and the futures
contracts. If this limitation is exceeded at any time, the
Fund will take prompt action to close out a sufficient number
of open contracts to bring its open futures and options
positions within this limitation.
Risks
When the Fund uses futures and options on futures as
hedging devices, there is a risk that the prices of the
securities subject to the futures contracts may not
correlate perfectly with the prices of the securities in
the Fund's portfolio. This may cause the futures contract
and any related options to react differently than the
portfolio securities to market changes. In addition, the
Fund's adviser could be incorrect in its expectations
about the direction or extent of market factors such as
stock price movements. In these events, the Fund may lose
money on the futures contract or option.
It is not certain that a secondary market for positions
in futures contracts or for options will exist at all
times. Although the Fund's adviser will consider
liquidity before entering into these transactions, there
is no assurance that a liquid secondary market on an
exchange or otherwise will exist for any particular
futures contract or option at any particular time. The
Fund's ability to establish and close out futures and
options positions depends on this secondary market. The
inability to close out these positions could have an
adverse effect on the Fund's ability to effectively hedge
its portfolio.
To minimize risks, the Fund may not purchase or sell
futures contracts or related options if immediately
thereafter the sum of the amount of margin deposits on
the Fund's existing futures positions and premiums paid
for related options would exceed 5% of the market value
of the Fund's total assets. When the Fund purchases
futures contracts, an amount of cash and cash
equivalents, equal to the underlying commodity value of
the futures contracts (less any related margin deposits),
will be deposited in a segregated account with the Fund's
custodian (or the broker, if legally permitted) to
collateralize the position and thereby insure that the
use of such futures contract is unleveraged. When the
Fund sells futures contracts, it will either own or have
the right to receive the underlying future or security,
or will make deposits to collateralize the position as
discussed above.
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 may trade or dispose of portfolio securities as
considered necessary to meet its investment objective. It is
not anticipated that the portfolio trading engaged in by the
Fund will result in its annual rate of portfolio turnover
exceeding 100%. For the fiscal year ended August 31, 1994 ,
and for the period from June 1, 1993 (date of initial public
investment) to August 31, 1993, the Fund's portfolio turnover
rate was 33% and 0%, respectively.
Investment Limitations
Selling Short and Buying on Margin
The Fund will not sell any securities short or purchase
any securities on margin but may obtain such short-term
credits as may be necessary for clearance of purchases
and sales of securities.
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 to
facilitate management of the portfolio by enabling the
Fund to, for example, meet redemption requests when the
liquidation of portfolio securities is deemed to be
inconvenient or disadvantageous. The Fund will not
purchase any securities while borrowings in excess of 5%
of its total assets are outstanding.
Pledging Assets
The Fund will not mortgage, pledge, or hypothecate its
assets except to secure permitted borrowings. In those
cases, it may mortgage, pledge, or hypothecate assets
having a market value not exceeding 10% of the value of
its total assets at the time of the pledge.
Underwriting
The Fund will not underwrite any issue of securities
except as it may be deemed to be an underwriter under the
Securities Act of 1933 in connection with the sale of
securities in accordance with its investment objective,
policies, and limitations.
Investing in Real Estate
The Fund will not purchase or sell real estate including
limited partnership interests although it may invest in
municipal bonds secured by real estate or interests in
real estate.
Investing in Commodities
The Fund will not purchase or sell commodities, commodity
contracts, or commodity futures contracts except that the
Fund may purchase and sell futures contracts and related
options.
Lending Cash or Securities
The Fund will not lend any of its assets except that it
may acquire publicly or non-publicly issued municipal
bonds or temporary investments or enter into repurchase
agreements in accordance with its investment objective,
policies, and limitations or its Declaration of Trust.
Concentration of Investments
The Fund will not purchase securities if, as a result of
such purchase, 25% or more of the value of its total
assets would be invested in any one industry or in
industrial development bonds or other securities, the
interest upon which is paid from revenues of similar
types of projects. However, the Fund may invest as
temporary investments more than 25% of the value of its
assets in cash or cash items (for purposes of this
limitation, the Fund considers instruments issued by a
U.S. branch of a domestic bank or savings and loan having
capital, surplus, and undivided profits in excess of
$100,000,000 at the time of investment to be "cash
items"), securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities, or
instruments secured by these money market instruments,
i.e., repurchase agreements.
The above investment limitations cannot be changed
without shareholder approval. The following limitations,
however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified
before any material change in these limitations becomes
effective.
Investing in Issuers Whose Securities are Owned by
Officers and Trustees of the Fund
The Fund will not purchase or retain the securities of
any issuer if the officers and Trustees 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.
Investing in Securities of Other Investment Companies
The Fund will not purchase securities of other investment
companies except as part of a merger, consolidation, or
other acquisition.
Investing in Restricted Securities
The Fund will not invest more than 10% of its total
assets in securities subject to restrictions on resale
under the Securities Act of 1933, except for commercial
paper issued under Section 4(2) of the Securities Act of
1933 and certain other restricted securities which meet
the criteria for liquidity as established by the Board of
Trustees.
Investing in Illiquid Securities
The Fund will not invest more than 15% of its net assets
in illiquid obligations, including repurchase agreements
providing for settlement in more than seven days after
notice, and certain restricted securities not determined
by the Trustees to be liquid.
Investing in Put Options
The Fund will not purchase put options on securities,
unless the securities are held in the Fund's portfolio
and not more than 5% of the value of the Fund's total
assets would be invested in premiums on open put options.
Writing Covered Call Options
The Fund will not write call options on securities unless
the securities are held in the Fund's portfolio or unless
the Fund is entitled to them in deliverable form without
further payment or after segregating cash in the amount
of any further payment.
Investing in New Issuers
The Fund will not invest more than 5% of the value of its
total assets in industrial development bonds where the
principal and interest are the responsibility of
companies (or guarantors, where applicable) with less
than three years of continuous operations, including the
operation of any predecessor.
Investing in Minerals
The Fund will not purchase interests in oil, gas, or
other mineral exploration or development programs or
leases, although it may invest in securities of issuers
which invest in or sponsor such programs.
Except with respect to borrowing money, if a percentage
limitation is adhered to at the time of investment, a later
increase or decrease in percentage resulting from any change
in value or net assets will not result in a violation of such
restriction.
The Fund does not expect to borrow money or pledge securities
in excess of 5% of the value of its net assets during the
coming fiscal year.
Florida Investment Risks
The Fund invests in obligations of Florida issuers which
results in the Fund's performance being subject to risks
associated with the overall conditions present within the
state. The following information is a brief summary of the
recent prevailing economic conditions and a general summary of
the state's financial status. This information is based on
official statements relating to securities that have been
offered by Florida issuers and from other sources believed to
be reliable but should not be relied upon as a complete
description of all relevant information.
Florida is the twenty-second largest state with an area of
54,136 square miles and a water area of 4,424 square miles.
The state is 447 miles long and 361 miles wide with a tidal
shoreline of almost 2,300 miles. According to the U.S. Census
Bureau, Florida moved past Illinois in 1986 to become the
fourth most populous state, and as of 1990, had an estimated
population of 13.2 million.
Services and trade continue to be the largest components of
the Florida economy, reflecting the importance of tourism as
well as the need to serve Florida's rapidly growing
population. Agriculture is also an important part of the
economy, particularly citrus fruits. Oranges have been the
principal crop, accounting for 70% of the nation's output.
Manufacturing, although of less significance, is a rapidly
growing component of the economy. The economy also has
substantial insurance, banking, and export participation.
Unemployment rates have historically been below national
averages, but have recently risen above the national rate.
Section 215.32, Florida Statutes, provides that financial
operations of the State of Florida covering all receipts and
expenditures be maintained through the use of three funds--the
General Revenue Fund, the Trust Fund, and the Working Capital
Fund. The General Revenue Fund receives the majority of State
tax revenues. The Working Capital Fund receives revenues in
excess of appropriations and its balances are freely
transferred to the General Revenue Fund as necessary. In
November, 1992, Florida voters approved a constitutional
amendment requiring the state to fund a Budget Stabilization
Fund to 5% of general revenues, with funding to be phased in
over five years beginning in fiscal 1995. The Working Capital
Fund will become the Budget Stabilization Fund. Major sources
of tax revenues to the General Revenue Fund are the sale and
use tax, corporate income tax and beverage tax. These taxes
accounted for 66%, 7%, and 5%, respectively, of total General
Revenue Funds available for fiscal year 1990-91 (July 1-June
30).
The over-dependence on the sensitive sales tax creates
vulnerability to recession. Accordingly, financial operations
have been strained during the past few years, but the state
has responded in a timely manner to maintain budgetary
control.
Hurricane Andrew devastated portions of southern Florida in
August, 1992, costing billions of dollars in emergency relief,
damage, and repair costs. Most of the costs will be absorbed
by insurance and the federal government, with minimal impact
on the financial condition of the state.
Florida's debt structure is complex. Most state debt is
payable from specified taxes and additionally secured by the
full faith and credit of the state. Under the general
obligation pledge, to the extent specified taxes are
insufficient, the state is unconditionally required to make
payment on bonds from all non-dedicated taxes.
The Fund's concentration in securities issued by the state and
its political subdivisions provides a greater level of risk
than a fund which is diversified across numerous states and
municipal entities. The ability of the state or its
municipalities to meet their obligations will depend on the
availability of tax and other revenues; economic, political,
and demographic conditions within the state; and the
underlying condition of the state, and its municipalities.
Municipal Securities Income Trust Management
Officers and Trustees are listed with their addresses, present
positions with Municipal Securities Income Trust, and
principal occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Chairman and Trustee
Chairman and Trustee, Federated Investors, Federated Advisers,
Federated Management, and Federated Research; Chairman and
Director, Federated Research Corp.; Chairman, Passport
Research, Ltd.; Director, AEtna Life and Casualty Company;
Chief Executive Officer and Director, Trustee, or Managing
General Partner of the Funds. Mr. Donahue is the father of J.
Christopher Donahue , Vice President and Trustee of the Trust.
Thomas G. Bigley
28th Floor, One Oxford Center
Pittsburgh, PA
Trustee
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
Trustee
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
Trustee
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.
J. Christopher Donahue *
Federated Investors Tower
Pittsburgh, PA
Vice President and Trustee
President and Trustee, Federated Investors, Federated
Advisers, Federated Management, and Federated Research;
President and Director, Federated 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 Trustee of the Trust.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Trustee
Attorney-at-law; Director, The Emerging Germany Fund, Inc.;
Director, Trustee, or Managing General Partner of the Funds;
formerly, Director, Blue Cross of Massachusetts, Inc.
Lawrence D. Ellis, M.D.
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Trustee
Hematologist, Oncologist, and Internist, Presbyterian and
Montefiore Hospitals; Professor of Medicine and Trustee,
University of Pittsburgh; Director of Corporate Health,
University of Pittsburgh Medical Center; Director, Trustee, or
Managing General Partner of the Funds.
Edward L. Flaherty, Jr.@
5916 Penn Mall
Pittsburgh, PA
Trustee
Attorney-at-law; Partner, 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
225 Franklin Street
Boston, MA
Trustee
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 and Trustee, Lahey
Clinic Foundation, Inc.
Gregor F. Meyer
5916 Penn Mall
Pittsburgh, PA
Trustee
Attorney-at-law; Partner, Meyer and Flaherty; Chairman,
Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.;
Director, Trustee, or Managing General Partner of the Funds;
formerly, Vice Chairman, Horizon Financial, F.A.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Trustee
Professor, Foreign Policy and Management Consultant; Trustee,
Carnegie Endowment for International Peace, RAND Corporation,
Online Computer Library Center, Inc., and U.S. Space
Foundation; Chairman, Czecho Slovak Management Center;
Director, Trustee, or Managing General Partner of the Funds;
President Emeritus, University of Pittsburgh; formerly,
Chairman, National Advisory Council for Environmental Policy
and Technology.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Trustee
Public relations/marketing consultant; Director, Trustee, or
Managing General Partner of the Funds.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Vice President
Executive Vice President and Trustee, Federated Investors;
Director, Federated Research Corp.; Chairman and Director,
Federated Securities Corp.; President or Vice President of
some of the Funds; Director or Trustee of some of the Funds.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Vice President and Treasurer
Vice President, Treasurer, and Trustee, Federated Investors;
Vice President and Treasurer, Federated Advisers, Federated
Management, Federated Research, Federated Research Corp., and
Passport Research, Ltd.; Executive Vice President, Treasurer,
and Director, Federated Securities Corp.; Trustee, Federated
Services Company and Federated Shareholder Services; Chairman,
Treasurer, and Trustee, Federated Administrative Services;
Trustee or Director of some of the Funds; Vice President and
Treasurer of the Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Vice President and Secretary
Vice President, Secretary, General Counsel, and Trustee,
Federated Investors; Vice President, Secretary, and Trustee,
Federated Advisers, Federated Management, and Federated
Research; Vice President and Secretary, Federated Research
Corp. and Passport Research, Ltd.; Trustee, Federated Services
Company; Executive Vice President, Secretary, and Trustee,
Federated Administrative Services; Secretary and Trustee,
Federated Shareholder Services; Executive Vice President and
Director, Federated Securities Corp.; Vice President and
Secretary of the Funds.
* This Trustee 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 Trustees handles the
responsibilities of the Board of Trustees between
meetings of the Board.
Fund Ownership
Officers and Trustees own less than 1% of the Fund's
outstanding shares.
As of December 23, 1994 the following shareholder of record
also owned 5% or more of the outstanding shares of the Fund:
Merrill Lynch, Pierce, Fenner & Smith, Jacksonville, Florida
as record owner holding Fund shares for its clients owned
approximately 98,569.000 shares (70.42%), SouthTrust Estates
and Trust, Tampa, Florida, as record owner holding Fund shares
for its client, owned approximately 15,130.344 shares (10.81%)
and TROBAR, Jacksonville, Florida as record owner holding Fund
shares for its client, owned approximately 9,718.173 shares
(6.94%).
The Funds
"The Funds" and "Funds" mean the following investment
companies: American Leaders Fund, Inc.; Annuity Management
Series; Arrow Funds; Automated Government Money Trust; Cash
Trust Series II; Cash Trust Series, Inc.; DG Investor Series;
Edward D. Jones & Co. Daily Passport Cash Trust; Federated
ARMs Fund; Federated Exchange Fund, Ltd.; Federated GNMA
Trust; Federated Government Trust; Federated Growth Trust;
Federated High Yield Trust; Federated Income Securities Trust;
Federated Income Trust; Federated Index Trust; Federated
Institutional Trust; Federated Intermediate Government Trust;
Federated Master Trust; Federated Municipal Trust; Federated
Short-Intermediate Government Trust; Federated Short-Term
U.S. Government Trust; Federated Stock Trust; Federated Tax-
Free Trust; Federated U.S. Government Bond Fund; 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; Insight Institutional Series,
Inc.; 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; The Medalist
Funds: Money Market Management, Inc.; Money Market Obligations
Trust; Money Market Trust; Municipal Securities Income Trust;
111 Corcoran Funds; Peachtree Funds; The Planters Funds;
Portage Funds; RIMCO Monument Funds; The Shawmut Funds; Short-
Term Municipal Trust; 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; and World
Investment Series, Inc.
Investment Advisory Services
Adviser to the Fund
The Trust's investment adviser is Federated Advisers (the
"Adviser"). It is a subsidiary of Federated Investors. All
the voting securities of Federated Investors are owned by a
trust, the trustees of which are John F. Donahue, his wife and
his son, J. Christopher Donahue.
The Adviser shall not be liable to the Trust, the Fund or any
shareholder of the Fund for any losses that may be sustained
in the purchase, holding, or sale of any security, or for
anything done or omitted by it, except acts or omissions
involving willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties imposed upon it by its
contract with the Fund.
Advisory Fees
For its advisory services, the Adviser receives an annual
investment advisory fee as described in the prospectus. For
the period from June 1, 1993 (date of initial public
investment) to August 31, 1993, the Adviser earned advisory
fees of $1,848 all of which was voluntarily waived. During
the fiscal year ended August 31, 1994, the Adviser earned
advisory fees of $31,280, all of which was voluntarily waived.
State Expense Limitations
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 2.5% per year of the first $30 million
of average net assets, 2% per year of the next $70
million of average net assets, and 1.5% per year of the
remaining average net assets, the adviser will reimburse
the Trust 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, 1994, the Administrators collectively earned
$100,988, all of which was waived. For the fiscal years ended
August 31, 1993 and 1992, respectively, Federated
Administrative Services earned $0 and $0. 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 a 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 Trust's
accounting records. The fee 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 which 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 Board of Trustees. The adviser may select brokers and
dealers who offer brokerage and research services. These
services may be furnished directly to the Fund or to the
adviser and may include:
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 year ended August 31, 1994, and for the period
from June 1, 1993 (date of initial public investment) to
August 31, 1993, the Fund did not pay any brokerage
commissions.
Purchasing Shares
Shares of the Fund are sold at their net asset value on days
the New York Stock Exchange is open for business. Effective
October 17, 1994, the Fund has ceased offering its shares for
sale, except for dividend reinvestment by existing
shareholders. The procedure for purchasing shares is
explained in the prospectus under "Investing in the Fund."
Distribution and Shareholder Services Plans
These arrangements permit the payment of fees to financial
institutions, the distributor, and Federated Shareholder
Services, to stimulate distribution activities and to cause
services to be provided to shareholders by a representative
who has knowledge of the shareholder's particular
circumstances and goals. These activities and services may
include, but are not limited to, marketing efforts; providing
office space, equipment, telephone facilities, and various
clerical, supervisory, computer, and other personnel as
necessary or beneficial to establish and maintain shareholder
accounts and records; processing purchase and redemption
transactions and automatic investments of client account cash
balances; answering routine client inquiries; and assisting
clients in changing dividend options, account designations,
and addresses.
By adopting the Distribution Plan, the Trustees expect that
the 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, 1994, payments in the
amount of $58,653 were made pursuant to the Distribution Plan.
In addition, for this period, payments in the amount of
$18,581 were made pursuant to the Shareholder Services Plan.
Determining Net Asset Value
Net asset value generally changes each day. The days on which
net asset value is calculated for shares are described in the
prospectus.
Valuing Municipal Bonds
The Trustees 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 issue, 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 Trustees 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
Trustees.
Redeeming Shares
The Fund redeems shares at the next computed net asset value
after the Fund receives the redemption request, less any
applicable contingent deferred sales charge. Redemption
procedures and redemption fees are explained in the prospectus
under "Redeeming Shares." Although the transfer agent does not
charge for telephone redemptions, it reserves the right to
charge a fee for the cost of wire-transferred redemptions of
less than $5,000.
Redemption in Kind
Although the Fund intends to redeem shares in cash, it
reserves the right under certain circumstances to pay the
redemption price in whole or in part by a distribution of
securities from the Fund's portfolio. To the extent available,
such securities will be readily marketable.
The Trust is obligated to redeem shares solely in cash up to
$250,000 or 1% of the Fund's net asset value, whichever is
less, for any one shareholder within a 90-day period.
Any redemption beyond this amount will also be in cash unless
the Trustees determine that further cash payments will have a
material adverse effect on remaining shareholders. In such a
case, the Trust will pay all or a portion of the remainder of
the redemption in portfolio instruments, valued in the same
way that net asset value is determined. The portfolio
instruments will be selected in a manner that the Trustees
deem fair and equitable.
Redemption in kind is not as liquid as a cash redemption. If
redemption is made in kind, shareholders receiving their
securities and selling them before their maturity could
receive less than the redemption value of their securities and
could incur certain transactions 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.
Capital Gains
Capital gains or losses may be realized by the Fund 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:
o the availability of higher relative yields;
o differentials in market values;
o new investment opportunities;
o changes in creditworthiness of an issuer; or
o an attempt to preserve gains or limit losses.
Distributions of long-term capital gains are taxed as such,
whether they are taken in cash or reinvested, and regardless
of the length of time that the shareholder has owned shares.
Any loss by a shareholder on 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 return for the one-year period
ended August 31, 1994 was (6.99)%.
Cumulative total return reflects the Fund's total performance
over a specific period of time. This total return assumes and
is reduced by the payment of the maximum sales load. Any
applicable contingent deferred sales charge 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,
1994 was 5.53%.
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 then annualized
using semi-annual compounding. This means that the amount of
income generated during the thirty-day period is assumed to be
generated each month over a twelve-month period and is
reinvested every six months. The yield does not necessarily
reflect income actually earned by the 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, 1994 was 7.68%.
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 tax rate of 28% and assuming that income is
100% tax-exempt.
Tax-Equivalency Table
FEDERAL INCOME TAX BRACKET:
15.00% 28.00% 31.00% 36.00%
39.60%
Joint Return$1-38,000 $38,001-91,850$91,851-140,000$1
40,001-$250,000OVER $250,000
Single Return $1-22,750$22,751-55,100$55,101-115,000$1
15,001-250,000OVER $250,000
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.
Performance Comparisons
The performance of shares depends upon such variables as:
oportfolio quality;
oaverage portfolio maturity;
otype of instruments in which the portfolio is invested;
ochanges in interest rates and market value of portfolio
securities;
ochanges in the Fund's expenses; and
ovarious other factors.
The Fund's performance fluctuates on a daily basis largely
because net earnings and net asset value per share fluctuate
daily. Both net earnings and net asset value per share are
factors in the computation of yield and total return as
described above.
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 offering price. The financial publications and/or
indices which the Fund uses in advertising may include:
oLipper Analytical Services, Inc., ranks funds in various
fund categories 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 "Florida Municipal Debt Funds"
category in advertising and sales literature.
oMorningstar, 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. The 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. In
addition, advertisements and sales literature for the Fund may
include charts and other illustrations that depict the
hypothetical growth of a tax-free investment as compared to a
taxable investment.
Advertising and sales literature for the Fund may include
quotations from the Tax Foundation that illustrate the effect
of taxes on income.
Financial Statements
The financial statements for the fiscal year ended August 31,
1994, are incorporated herein by reference to the annual
report of the Fund dated August 31, 1994 (File No. 811-6165).
A copy of the report may be obtained without charge by
contacting the Fund.
Appendix
Standard and Poor's Ratings Group Municipal Bond Ratings
AAA--Debt rated "AAA" has the highest rating assigned by S& P.
Capacity to pay interest and repay principal is extremely
strong.
AA--Debt rated "AA" has a very strong capacity to pay interest
and repay principal and differs from the 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.
NR--Indicates that no public rating has been requested, that
there is insufficient information on which to base a rating,
or that S&P does not rate a particular type of obligation as a
matter of policy.
Plus (+) or minus (-): The ratings from AA to CCC may be
modified by the addition of a plus or minus sign to show
relative standing within the major rating categories.
Moody's Investors Service, Inc., Municipal Bond Ratings
Aaa--Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and
are generally referred to as "gilt edged." Interest payments
are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of
such issues.
Aa--Bonds which are rated Aa are judged to be of high quality
by all standards. Together with the Aaa group, they comprise
what are generally known as high grade bonds. They are rated
lower than the best bonds because margins of protection may
not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may
be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest
are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
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.
NR--Not rated by Moody's.
Moody's applies numerical modifiers, 1, 2 and 3 in each
generic rating classification from Aa through B in its its
generic rating category; the modifier 1 indicates that the
security ranks in the higher end of its generic ranking
category; the modifier 2 indicates a mid-range ranking; and
the modifier 3 indicates that the issue ranks in the lower end
of its generic rating category.
Fitch Investors Service, Inc. Long-Term Debt Ratings
AAA--Bonds considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally
strong ability to pay interest and repay principal, which is
unlikely to be affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and
repay principal is very strong, although not quite as strong
as bonds rated "AAA". Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these
issuers is generally rated "F-1+."
A--Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay
interest and repay principal is considered to be adequate.
Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these
bonds, and therefore, impair timely payment. The likelihood
that the ratings of these bonds will fall below investment
grade is higher than for bonds with higher ratings.
NR--NR indicates that Fitch does not rate the specific issue.
Plus (+) or Minus (-):
Plus and minus signs are used with a rating symbol to indicate
the relative position of a credit within the rating category.
Plus and minus signs, however, are not used in the AAA
category.
Standard and Poor's Ratings Group Municipal Note Ratings
SP-1--Very strong or strong capacity to pay principal and
interest. Those issues determined to possess overwhelming
safety characteristics will be given a plus sign (+)
designation.
SP-2--Satisfactory capacity to pay principal and interest.
Moody's Investors Service, Inc., Short-Term Loan Ratings
MIG1/VMIG1--This designation denotes best quality. There is a
present strong protection by established cash flows, superior
liquidity support or demonstrated broad based access to the
market for refinancing.
MIG2/VMIG2--This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding
group.
Fitch Investors Service, Inc. Short-Term Debt Ratings
F-1+--Exceptionally Strong Credit Quality. Issues assigned
this rating are regarded as having the strongest degree of
assurance for timely payment.
F-1--Very Strong Credit Quality. Issues assigned this rating
reflect an assurance for timely payment only slightly less in
degree than issues rated F-1+.
F-2--Good Credit Quality. Issues carrying this rating have a
satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as the F-1+ and F-1
categories.
Standard and Poor's Ratings Group Commercial Paper Ratings
A-1--This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to
possess extremely strong safety characteristics are denoted
with a plus sign (+) designation.
A-2--Capacity for timely payment on issues with this
designation is satisfactory. However, the relative degree of
safety is not as high as for issues designated A-1.
Moody's Investors Service, Inc., Commercial Paper Ratings
P-1--Issuers rated PRIME-1 (or related supporting
institutions) have a superior capacity for repayment of short-
term promissory obligations. PRIME-1 repayment capacity will
normally be evidenced by the following characteristics:
Leading market positions in well established industries; High
rates of return on funds employed; Conservative capitalization
structure with moderate reliance on debt and ample asset
protection; broad margins in earning coverage of fixed
financial charges and high internal cash generation; well
established access to a range of financial markets and assured
sources of alternate liquidity.
P-2--Issuers rated PRIME-2 (or related supporting
institutions) have a strong capacity for repayment of short-
term promissory obligations. This will normally be evidenced
by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will
be more subject to variation. Capitalization characteristics,
while still appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained.
NEW JERSEY MUNICIPAL INCOME FUND
(A PORTFOLIO OF MUNICIPAL SECURITIES INCOME TRUST)
PROSPECTUS
The shares of New Jersey Municipal Income Fund (the "Fund")
represent interests in a non-diversified portfolio of securities
which is one of a series of investment portfolios in Municipal
Securities Income Trust (the "Trust"), an open-end management
investment company (a mutual fund). The investment objective of
the Fund is to provide current income which is exempt from federal
regular income tax and the personal income taxes imposed by the
State of New Jersey and New Jersey municipalities. The Fund
invests primarily in a portfolio of municipal securities which are
exempt from federal regular income tax and New Jersey state and
local income tax ("New Jersey Municipal Securities"). These
securities include those issued by or on behalf of the State of
New Jersey and New Jersey municipalities as well as those issued
by states, territories, and possessions of the United States which
are exempt from federal regular income tax and the personal income
taxes imposed by the State of New Jersey and New Jersey
municipalities. Effective October 17, 1994, the Fund has ceased
offering its shares for sale, except for dividend reinvestments by
existing shareholders.
THE SHARES OF THE FUND 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 information you should read and know
about investing in the Fund. Keep this prospectus for future
reference.
The Fund has also filed a Statement of Additional Information
dated December 31, 1994 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 free of charge by calling 1-800-235-4669. To obtain
other information or 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 December 31, 1994
TABLE OF CONTENTS --------------------------------------------
- ----------------------------------
SUMMARY OF FUND EXPENSES 1
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS 2
- ------------------------------------------------------
GENERAL INFORMATION 3
- ------------------------------------------------------
INVESTMENT INFORMATION 3
- ------------------------------------------------------
Investment Objective 3
Investment Policies 3
Acceptable Investments 4
Characteristics 4
Participation Interests 4
Variable Rate Municipal Securities 4
Municipal Leases 5
Inverse Floaters 5
Restricted Securities 6
When-Issued and Delayed
Delivery Transactions 6
Futures Contracts and Options to
Buy or Sell Such Contracts 6
Temporary Investments 7
New Jersey Municipal Securities 7
Investment Risks 8
Non-Diversification 8
Investment Limitations 9
NET ASSET VALUE 9
- ------------------------------------------------------
INVESTING IN THE FUND 9
- ------------------------------------------------------
Share Purchases 9
Through a Financial Institution 9
Directly by Mail 10
Directly by Wire 10
Minimum Investment Required 10
Conversion to Federal Funds 10
What Shares Cost 10
Systematic Investment Program 10
Certificates and Confirmations 11
Dividends and Distributions 11
REDEEMING SHARES 11
- ------------------------------------------------------
Through a Financial Institution 11
Directly by Mail 12
Signatures 12
Receiving Payment 12
Contingent Deferred Sales Charge 12
Elimination of Contingent Deferred
Sales Charge 13
Systematic Withdrawal Program 14
Accounts with Low Balances 14
Exchanges for Shares of Other Funds 14
MUNICIPAL SECURITIES INCOME
TRUST INFORMATION 15
- ------------------------------------------------------
Management of Municipal Securities
Income Trust 15
Board of Trustees 15
Investment Adviser 15
Advisory Fees 15
Adviser's Background 15
Distribution of Fund Shares 16
Distribution Plan 16
Shareholder Services Plan 17
Administration of the Fund 17
Administrative Services 17
Custodian 17
Transfer Agent and
Dividend Disbursing Agent 17
Legal Counsel 17
Independent Auditors 17
Expenses of the Fund 18
SHAREHOLDER INFORMATION 18
- ------------------------------------------------------
Voting Rights 18
Massachusetts Partnership Law 18
TAX INFORMATION 18
- ------------------------------------------------------
Federal Income Tax 18
New Jersey State and Municipal Taxation 20
Other State and Local Taxes 20
PERFORMANCE INFORMATION 20
- ------------------------------------------------------
ADDRESSES
Inside Back Cover
- ------------------------------------------------------
Summary of Fund Expenses
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases (as a percentage
of offering price) None
Maximum Sales Load 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) 0.00%
Redemption Fee (as a percentage of amount redeemed,
if applicable) None
Exchange Fee None
Annual Fund Operating Expenses
(As a percentage of average net assets)
Management Fee (after waiver)(2) 0.00%
12b-1 Fee 0.75%
Total Other Expenses (after expense reimbursement)
1.75%
Shareholder Services Fee 0.25%
Total Fund Operating Expenses (3)
2.50%
(1) Effective December 1, 1994, the contingent deferred sales
charge is waived. The contingent deferred sales charge had
been 3.00% in the first year, declining to 2.00% in the
second year and 0.00% after three years. (See "Contingent
Deferred Sales Charge").
(2) The management fee has been reduced to reflect the
voluntary waiver of the management fee. The adviser can
terminate this voluntary waiver at any time at its sole
discretion. The maximum management fee is 0.40%.
(3) The Total Fund Operating Expenses in the table above are
based on expenses expected during the fiscal year ending
August 31, 1995. The Total Fund Operating Expenses were
0.75% for the fiscal year ended August 31, 1994, and would
have been 3.97% absent the voluntary waiver of the
management fee and the voluntary reimbursement of certain
other operating expenses.
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 "Investing in the Fund" and "Municipal
Securities Income Trust Information". Wire--transferred
redemptions of less than $5,000 may be subject to additional
fees.
Long-term shareholders may pay more than the economic
equivalent of the maximum front-end sales charge permitted
under the rules of the National Association of Securities
Dealers, Inc.
EXAMPLE 1 year 3 years 5 years 10 years
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..... $56 $99 $133 $284
You would pay the following
expenses on the same $25 $78 $133 $284
investment, assuming no redemption...................
The above example should not be considered a representation
of past or future expenses. Actual expenses may be greater or
less than those shown.
NEW JERSEY MUNICIPAL INCOME FUND
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table has been audited by Deloitte & Touche LLP, the
Fund's independent auditors. Their report dated October 7, 1994,
on the Fund's Financial Statements for the year ended August 31,
1994, is included in the Annual Report dated August 31, 1994, 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 free of charge.
YEAR ENDED
AUGUST 31,
1994 1993*
Net asset value, beginning of period $10.30 $10.00
Income from investment operations
Net investment income 0.51 0.12
Net realized and unrealized gain on
investments (0.78) 0.31
Total from investment operations (0.27) 0.43
Less distributions
Dividends to shareholders from net
investment income (0.51) (0.12)
Distributions in excess of net
investment income (a) (0.05 (0.01)
Total distributions (0.56) (0.13)
Net asset value, end of period $9.47 $10.30
Total return** (2.62%) 4.28%
Ratios to Average Net Assets
Expenses 0.75% 0.75%(b)
Net investment income 5.10% 4.86%(b)
Expense waiver/reimbursement (c) 3.22% 4.00%(b)
Supplemental Data
Net assets, end of period (000 omitted) $11,166
$3,350
Portfolio turnover rate 47% 0%
*Reflects operations for the period from June 1, 1993 (date of
initial public investment) to August 31, 1993.
**Based on net asset value, which does not reflect the sales load
or contingient deferred sales charge, if applicable.
(a)Distributions are determined in accordance with income
taxregulations which may differ from generally accepted
accounting principles. These distributions do not represent a
return of capital for federal income tax purposes.
(b)Computed on an annualized basis.
(c) The voluntary expense decrease is reflected in both the
expense and net investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
FURTHER INFORMATION ABOUT THE FUND'S PERFORMANCE IS CONTAINED IN
THE FUND'S ANNUAL REPORT DATED AUGUST 31, 1994, WHICH CAN BE
OBTAINED FREE OF CHARGE.
GENERAL INFORMATION ----------------------------------------------
- --------------
The Trust was established as a Massachusetts business trust under
a Declaration of Trust dated August 6, 1990. The Declaration of
Trust permits the Trust to offer separate series of shares of
beneficial interest representing interests in separate portfolios
of securities. The shares in any one portfolio may be offered in
separate classes. With respect to this Fund, as of the date of
this prospectus the Board of Trustees ("Trustees") has not
established any classes of shares.
Shares of the Fund are designed for customers of financial
institutions such as broker/dealers, banks, fiduciaries, and
investment advisers as a convenient means of accumulating an
interest in a professionally managed, non-diversified portfolio
investing primarily in New Jersey Municipal Securities. A minimum
initial investment of $1,500 is required. Under normal
circumstances, subsequent investments must be in amounts of at
least $100. Effective October 17, 1994, however, the Fund has
ceased offering its shares for sale, except for dividend
reinvestments by existing shareholders. The Fund is not likely to
be a suitable investment for non-New Jersey taxpayers or
retirement plans since New Jersey Municipal Securities are not
likely to produce competitive after-tax yields for such persons
and entities when compared to other investments.
Except as otherwise noted in this prospectus, shares of the Fund
are sold at net asset value and are redeemed at net asset value.
Under ordinary circumstances, a contingent deferred sales charge
is imposed on certain shares of the Fund which are redeemed within
three full years of the date of purchase. The contingent deferred
sales charge has been waived for all redemptions effective
December 1, 1994. Fund assets may be used in connection with the
distribution of shares of the Fund.
In November 1994, the Fund's distributor notified shareholders
that it would recommend the liquidation of the Fund to the
Trustees of the Trust and advised shareholders that it may be
advisable to consider voluntary redemption of Fund shares because,
among other things, effective October 17, 1994, the Fund had
ceased offering shares for sale and because, effective December 1,
1994, the Fund's adviser would cease the voluntary reimbursement
of operating expenses, thus causing the Fund's expense ratio to
increase significantly. The Fund's distributor also indicated
that it would recommend to the Trustees a transaction involving
the tax-free reorganization of the Fund into another investment
company. The Trustees are expected to consider such proposal in
early 1995 and, if approved by them, it is anticipated that such
matter will be submitted to shareholders for their approval
promptly thereafter.
INVESTMENT INFORMATION -------------------------------------------
- ----------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide current income
which is exempt from federal regular income tax (federal regular
income tax does not include the federal alternative minimum tax)
and the personal income taxes imposed by the state of New Jersey
and New Jersey municipalities. 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.
Interest income of the Fund that is exempt from the income taxes
described above retains its exempt status when distributed to the
Fund's non-corporate shareholders. However, income distributed by
the Fund may not necessarily be exempt from state or municipal
taxes in states other than New Jersey.
INVESTMENT POLICIES
The Fund pursues its investment objective by investing primarily
in securities which are exempt from federal regular income tax and
personal income taxes imposed by the State of New Jersey and New
Jersey municipalities. Unless indicated otherwise, the investment
policies of the Fund may be changed by the Trustees without
approval of shareholders. Shareholders will be notified before any
material changes in these policies become effective.
ACCEPTABLE INVESTMENTS. The Fund invests primarily in New Jersey
Municipal Securities, which are obligations issued by or on behalf
of the State of New Jersey, its political subdivisions, or
agencies, debt obligations of any state, territory, or possession
of the United States, including the District of Columbia, or any
political subdivision of any of these, and participation
interests, as described below, in any of the above obligations,
the interest from which is, in the opinion of bond counsel for the
issuers or in the opinion of officers of the Fund and/or the
investment adviser to the Fund, exempt from both federal regular
income tax and the personal income tax imposed by the State of New
Jersey and New Jersey municipalities. While the Fund intends to
invest primarily in securities issued by or on behalf of the State
of New Jersey and its political subdivisions, it will invest in
other securities issued by states, territories, and possessions of
the United States which are exempt from federal regular income tax
and the personal income taxes imposed by the State of New Jersey
and New Jersey municipalities. The Fund will invest in such
securities in instances where, in the judgment of the Fund's
investment adviser, the supply and yield of such securities would
be beneficial to the Fund's investment performance.
The Fund currently invests primarily in variable rate municipal
securiites, as described below.
The Fund may also engage in put and call options, futures
contracts, and options on futures contracts for hedging purposes.
As a matter of investment policy which cannot be changed without
the approval of shareholders, the Fund invests its assets so that
at least 80% of its annual interest income is exempt from federal
regular income tax and New Jersey state and municipal income tax.
The prices of fixed income securities fluctuate inversely to the
direction of interest rates.
CHARACTERISTICS. The New Jersey Municipal Securities which
the Fund buys are investment grade bonds rated, at the time
of purchase, Aaa, Aa, A, or Baa by Moody's Investors Service,
Inc. ("Moody's"), or AAA, AA, A, or BBB by Standard and
Poor's Ratings Group ("S&P") or by Fitch Investors Service,
Inc. ("Fitch"). In certain cases the Fund's adviser may
choose bonds which are unrated if it determines that such
bonds are of comparable quality or have similar
characteristics to investment grade bonds. Bonds rated "BBB"
by S&P or Fitch 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.
If the Fund purchases an investment grade bond, and the
rating of such bond is subsequently downgraded so that the
bond is no longer classified as investment grade, the Fund is
not required to drop the bond from the portfolio, but will
consider whether such action is appropriate. A description of
the rating categories is contained in the Appendix to the
Statement of Additional Information.
PARTICIPATION INTERESTS. The Fund may purchase participation
interests from financial institutions such as commercial
banks, savings and loan associations, and insurance
companies. These participation interests give the Fund an
undivided interest in New Jersey Municipal Securities. The
financial institutions from which the Fund purchases
participation interests frequently provide or secure
irrevocable letters of credit or guarantees to assure that
the participation interests are of high quality. The Board of
Trustees of the Trust will determine that participation
interests meet the prescribed quality standards for the Fund.
VARIABLE RATE MUNICIPAL SECURITIES. Some of the New Jersey
Municipal Securities which the Fund purchases may have
variable interest rates. Variable interest rates are
ordinarily based on a published interest rate or interest
rate index or a similar standard, such as the 91-day U.S.
Treasury bill rate. Many variable rate municipal securities
are subject to payment of principal on demand by the Fund in
not more than seven days. All variable rate municipal
securities will meet the quality standards for the Fund. The
Fund's investment adviser has been instructed by the Trustees
to monitor the pricing, quality, and liquidity of the
variable rate municipal securities, including participation
interests held by the Fund, on the basis of published
financial information and reports of the rating agencies and
other analytical services.
MUNICIPAL LEASES. Municipal leases are obligations issued by
state and local governments or authorities to finance the
acquisition of equipment and facilities and may be considered to
be illiquid. They may take the form of a lease, an installment
purchase contract, a conditional sales contract or a participation
certificate on any of the above.
Also included within the general category of municipal securities
are certain lease obligations or installment purchase contract
obligations and participations therein (hereinafter collectively
called "lease obligations") of municipal authorities or entities.
Although lease obligations do not constitute general obligations
of the municipality for which the municipality's taxing power is
pledged, a lease obligation is ordinarily backed by the
municipality's covenant to budget for, appropriate and make the
payments due under the lease obligation. Interest on lease
obligations is tax-exempt to the same extent as if the
municipality had issued debt obligations to finance the underlying
project or purchase. However, certain lease obligations contain
"non-appropriation" clauses which provide that the municipality
has no obligation to make lease or installment purchase payments
in future years unless money is appropriated for such purpose on a
yearly basis. In addition to the "non-appropriation" risk, these
securities represent a relatively new type of financing that has
not yet developed the depth of marketability associated with more
conventional bonds and some lease obligations may be illiquid.
Although "non-appropriation" lease obligations are generally
secured by the leased property, disposition of the property in the
event of foreclosure might prove difficult. In addition, the tax
treatment of such obligations in the event of non-appropriation is
unclear. The Fund does not intend to invest more than 10% of its
total assets in lease obligations that contain "non-appropriation"
clauses.
In determining the liquidity of municipal lease securities, the
Fund's investment adviser, under the authority delegated by the
Board of Trustees, will base its determination on the following
factors:
- - whether the lease can be terminated by the lessee;
- - the potential recovery, if any, from a sale of the leased
property upon termination of the lease;
- - the lessee's general credit strength (e.g., its debt,
administrative, economic and financial characteristics and
prospects);
- - the likelihood that the lessee will discontinue appropriating
funding
for the leased property because the property is no longer deemed
essential to its operations (e.g., the potential for an "event of
non-appropriation"); and
- - any credit enhancement or legal recourse provided upon an event
of non-appropriation or other termination of the lease.
INVERSE FLOATERS. The Fund may invest in various types of
derivative municipal securities whose interest rates bear an
inverse relationship to the interest rate on another
security or the value of an index ("inverse floaters").
Because changes in the interest rate on the other security
or index inversely effect the residual interest paid on the
inverse floater, the value of an inverse floater is
generally more volatile than that of a fixed rate bond.
Inverse floaters have interest rate adjustment formulas
which generally reduce or, in the extreme, eliminate the
interest paid to the Fund when short-term interest rates
rise, and increase the interest paid to the Fund when short-
term interest rates fall. Inverse floaters have varying
degrees of liquidity, and the market for these securities is
new and relatively volatile. These securities tend to
underperform the market for fixed rate bonds in a rising
interest rate environment, but tend to outperform the market
for fixed rate bonds when interest rates decline. Shifts in
the relationship between short-term and long-term interest
rates may alter this tendency, however. In return for this
volatility, inverse floaters typically offer the potential
for yields exceeding the yields available on fixed rate
bonds with comparable credit quality and maturity. These
securities usually permit the investor to convert the
floating rate to a fixed rate (normally adjusted downward),
and this optional conversion feature may provide a partial
hedge against rising interest rates if exercised at an
opportune time.
RESTRICTED SECURITIES. The Fund may invest up to 10% of its total
assets in restricted securities. Restricted securities are any
securities in which the Fund may otherwise invest pursuant to its
investment objective and policies but which are subject to
restriction on resale under federal securities laws. To the extent
these securities are deemed to be illiquid, the Fund will limit
its purchases, together with other securities considered to be
illiquid, to 15% of its net assets.
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 the transaction
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 into transactions to sell its purchase
commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar
securities at later dates. The Fund may realize short-term
profits or losses upon the sale of such commitments.
FUTURES CONTRACTS AND OPTIONS TO BUY OR SELL SUCH CONTRACTS. The
Fund may utilize bond futures contracts and options to a limited
extent. Specifically, the Fund may enter into futures contracts
provided that not more than 5% of its assets are required as a
futures contract deposit; in addition, the Fund may enter into
futures contracts and options transactions only to the extent that
obligations under such contracts or transactions represent not
more than 20% of the Fund's assets.
Futures contracts and options may be used for several reasons: to
maintain cash reserves while remaining fully invested, to
facilitate trading, to reduce transactions costs, or to seek
higher investment returns when a futures contract is priced more
attractively than the underlying municipal security or index. The
Fund may not use futures contracts or options transactions to
leverage its assets.
For example, in order to remain fully invested in bonds, while
maintaining liquidity to meet potential shareholder redemptions,
the Fund may invest a portion of its assets in a bond futures
contract. Because futures contracts only require a small initial
margin deposit, the Fund would then be able to maintain a cash
reserve to meet potential redemptions, while at the same time
remaining fully invested, although any gains from such investments
would be fully taxable Also, because the transactions costs of
futures contracts and options may be lower than the costs of
investing in bonds directly, it is expected that the use of
futures contracts and options may reduce the Fund's total
transactions costs.
The primary risks associated with the use of futures contracts and
options are: (i) imperfect correlation between the change in
market value of the bonds held by the Fund and the prices of
futures contracts and options; and (ii) possible lack of a liquid
secondary market for a futures contract and the resulting
inability to close a futures position prior to its maturity date.
The risk of imperfect correlation will be minimized by investing
only in those contracts whose price fluctuations are expected to
resemble those of the Fund's underlying securities. The risk that
the Fund will be unable to close out a futures position will be
minimized by entering into such transactions on a national
exchange with an active and liquid secondary market. In general,
the futures market is more liquid than the municipal bond market,
and so by investing in futures, liquidity may be improved.
TEMPORARY INVESTMENTS. From time to time, during periods of other
than normal market conditions, the Fund may invest in short-term
non-New Jersey Municipal Securities or taxable temporary
investments. These temporary investments include: 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 rated within the investment grade categories
described under "Acceptable Investments--Characteristics" (if
rated) or those which the investment adviser judges to have the
same characteristics as such investment grade securities (if
unrated).
Although the Fund is permitted to make taxable, temporary
investments, there is no current intention of generating income
subject to federal regular income tax or personal income taxes
imposed by the State of New Jersey or New Jersey municipalities.
NEW JERSEY MUNICIPAL SECURITIES
New Jersey Municipal Securities are generally issued to finance
public works, such as airports, bridges, highways, housing,
hospitals, mass transportation projects, schools, streets, and
water and sewer works. They are also issued to repay outstanding
obligations, to raise funds for general operating expenses, and to
make loans to other public institutions and facilities.
The two principal classifications of municipal securities are
"general obligation" and "revenue" bonds. General obligation bonds
are secured by the issuer's pledge of its full faith and credit
and taxing power for the payment of principal and interest.
However, interest on and principal of revenue bonds are payable
only from the revenue generated by the facility financed by the
bond or other specified sources of revenue. Revenue bonds do not
represent a pledge of credit or create any debt of or charge
against the general revenues of a municipality or public
authority. Industrial development bonds are typically classified
as revenue bonds.
Industrial development bonds are issued by or on behalf of public
authorities to provide financing aid to acquire sites or construct
and equip facilities for privately or publicly owned corporations.
The availability of this financing encourages these corporations
to locate within the sponsoring communities and thereby increases
local employment.
Municipal securities may carry fixed, floating or inverse floating
rates of interest. Fixed rate securities bear interest at the same
rate from issuance until maturity. The interest rate on floating
rate securities is subject to adjustment based upon changes in
market interest rates or indices, such as a bank's prime rate or a
published market index. The interest rate may be adjusted at
specified intervals or immediately upon any change in the
applicable index rate. The interest rate for most floating rate
securities varies directly with changes in the index rate, so that
the market value of the security will approximate its stated value
at the time of each adjustment. However, inverse floating rate
securities have interest rates that vary inversely with changes in
the applicable index rate, such that the security's interest rate
rises when market interest rates fall and falls when market
interest rates rise. The market value of floating rate securities
is less sensitive than fixed rate securities to changes in market
interest rates. In contrast, the market value of inverse floating
rate securities is more sensitive to market rate changes than
fixed or floating rate securities. The effect of market rate
changes on securities depends upon a variety of factors, including
market expectations as to future changes in interest rates and, in
the case of floating and inverse floating rate securities, the
frequency with which the interest rate is adjusted and the
multiple of the index rate used in making the adjustment.
Most municipal securities pay interest in arrears on a semiannual
or more frequent basis. However, certain securities, typically
known as capital appreciation bonds or zero coupon bonds, do not
provide for any interest payments prior to maturity. Such
securities are normally sold at a discount from their stated
value, or provide for periodic increases in their stated value to
reflect a compounded interest rate. The market value of these
securities is also more sensitive to changes in market interest
rates than securities that provide for current interest payments.
The Fund will not generally invest more than 25% of its total
assets in any one industry. Governmental issuers of municipal
securities are not considered part of any "industry." However,
municipal securities backed only by the assets and revenues of
nongovernmental users may, for this purpose, be deemed to be
related to the industry in which such nongovernmental users
engage, and the 25% limitation would apply to such obligations. It
is nonetheless possible that the Fund may invest more than 25% of
its assets in a broader segment of the municipal securities
market, such as revenue obligations of hospitals and other health
care facilities, housing agency revenue obligations, or airport
revenue obligations. This would be the case only if the Fund
determines that the yields available from obligations in a
particular segment of the market justified the additional risks
associated with a large investment in such segment. Although such
obligations could be supported by the credit of governmental users
or by the credit of nongovernmental users engaged in a number of
industries, economic, business, political and other developments
generally affecting the revenues of such users (for example,
proposed legislation or pending court decisions affecting the
financing of such projects and market factors affecting the demand
for their services or products) may have a general adverse effect
on all municipal securities in such a market segment.
INVESTMENT RISKS
Yields on New Jersey Municipal Securities depend on a variety of
factors including, but not limited to: the general conditions of
the short-term municipal note market and the municipal bond
market; the size of the particular offering; the maturity of the
obligations; and the rating of the issue. Further, any adverse
economic conditions or developments affecting the state of New
Jersey or its cities could impact the Fund's portfolio. The
ability of the Fund to achieve its investment objective also
depends on the continuing ability of the issuers of New Jersey
Municipal Securities and participation interests, or the
guarantors of either, to meet their obligations for the payment of
interest and principal when due. Investing in New Jersey Municipal
Securities which meet the Fund's quality standards may not be
possible if the state and cities of New Jersey do not maintain
their current credit ratings. An expanded discussion of the
current economic risks associated with the purchase of New Jersey
municipal securities is contained in the Statement of Additional
Information.
NON-DIVERSIFICATION
The Fund is a non-diversified investment portfolio. As such, there
is no limit on the percentage of assets which can be invested in
any single issuer. An investment in the Fund, therefore, will
entail greater risk than investment in a diversified portfolio of
securities because the higher percentage of investments among
fewer issuers may result in greater fluctuation in the total
market value of the Fund's portfolio. Any economic, political, or
regulatory developments affecting the value of the securities in
the Fund's portfolio will have a greater impact on the total value
of the portfolio than would be the case if the portfolio were
diversified among more issuers.
The Fund intends to comply with Subchapter M of the Internal
Revenue Code. This undertaking requires that at the end of each
quarter of the taxable year: (a) with regard to at least 50% of
the Fund's total assets, no more than 5% of its total assets are
invested in the securities of a single issuer; and (b) no more
than 25% of its total assets are invested in the securities of a
single issuer.
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
agreement to buy it back on a set date) or pledge securities
except, under certain circumstances, the Fund may borrow up to one-
third of the value of its total assets and pledge up to 10% of the
value of those assets to secure such borrowings.
The above investment limitation cannot be changed without
shareholder approval. The following limitation, however, can be
changed by the Trustees without shareholder approval. Shareholders
will be notified before any material change in this limitation
becomes effective.
The Fund will not invest more than 5% of its total assets in
industrial development bonds when the payment of principal and
interest is the responsibility of companies (or guarantors, where
applicable) with less than three years of continuous operations,
including the operation of any predecessor.
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.
INVESTING IN THE FUND --------------------------------------------
- ------
SHARE PURCHASES
SHARES OF THE FUND ARE NO LONGER BEING OFFERED FOR SALE. When
shares had been offered for sale, the following requirements and
procedures were applicable to purchases.
Shares are sold on days on which the New York Stock Exchange is
open. Shares may be purchased through an investment dealer which
has a sales agreement with the distributor, or directly from the
distributor, Federated Securities Corp., either by mail or by
wire, once an account has been established. 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 of the Fund. Orders through a
financial institution are considered received when the Fund is
notified of the purchase order. Purchase orders through a
registered broker/dealer must be received by the broker before
4:00 P.M. (Boston time) and must be transmitted by the broker to
the Fund before 5:00 P.M. (Boston 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. (Boston
time) in order for shares to be purchased at that day's price. It
is the financial institution's responsibility to transmit orders
promptly.
DIRECTLY BY MAIL. To purchase shares by mail directly from
Federated Securities Corp:
- complete and sign the new account form available from the
Fund;
- enclose a check made payable to New Jersey Municipal Income
Fund; and
- send both to the transfer agent's bank, State Street Bank
and Trust Company, P.O. Box 8604, Boston, MA 02266-8604.
Purchases by mail are considered received after payment by check
is converted by State Street Bank and Trust Company 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 State Street Bank receives payment by
wire.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in shares is $1,500. Subsequent
investments must be in amounts of at least $100.
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. State
Street Bank acts as the shareholder's agent in depositing checks
and converting them to federal funds.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an
order is received. The net asset value is determined at 4:00 P.M.
(Boston time), 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, Columbus Day,
Veteran's 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.
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their
investment on a regular basis in a minimum amount of $100. Under
this program, funds may be automatically withdrawn periodically
from the shareholder's checking account and invested in shares at
the net asset value next determined after an order is received by
State Street Bank. A shareholder may apply for participation in
this program through Federated Securities Corp. or his financial
institution.
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 Fund.
Detailed confirmations of each purchase and redemption are sent to
each shareholder. Monthly statements are sent to report dividends
paid during the month.
DIVIDENDS AND DISTRIBUTIONS
Dividends are declared daily and paid monthly. Dividends include
substantially all of the investment income earned by the Fund,
less its expenses, other than distribution fees made pursuant to
Rule 12b-1 for the sale of Fund shares, which fees currently are
charged to the Fund's paid-in capital for tax purposes. Effective
January 1, 1995, Rule 12b-1 fees will be paid out of Fund income,
rather than paid-in capital. Until January 1, 1995, a certain
portion of dividend distributions may represent a return of paid-
in capital. Distributions of any net realized long-term capital
gains will be made at least once every twelve months. Dividends
and distributions are automatically reinvested on payment dates in
additional shares of the Fund at net asset value unless
shareholders request cash payments on the application or by
writing to Federated Services Company.
Shares purchased through a financial institution, for which
payment by wire is received by State Street Bank on the business
day following the order, begin to earn dividends on the day that
the wire payment is received. Otherwise, shares purchased by wire
begin to earn dividends on the business day after wire payment is
received by State Street Bank. Shares purchased by mail, or
through a financial institution, if the financial institution's
payment is by check, begin to earn dividends on the second
business day after the check is received by Federated Services
Company.
Shares earn dividends through the business day on which proper
written redemption instructions are received by Federated Services
Company.
See the section entitled "Tax Information" in this prospectus for
a further discussion of the effect of the payment of distribution
fees made pursuant to Rule 12b-1.
REDEEMING SHARES -------------------------------------------------
- ----------------
The Fund redeems shares at their net asset value determined after
State Street Bank 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 by 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. (Boston time) and must be transmitted by the broker to
the Fund before 5:00 P.M. (Boston 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.
(Boston 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 be completed.
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. Telephone redemption instructions
may be recorded.
If reasonable procedures are not followed by the Fund, it may be
liable for unauthorized or fraudulent telephone instructions.
DIRECTLY BY MAIL
Shareholders may also redeem shares by sending a written request
to State Street Bank, P.O. Box 8604, Boston, MA 02266-8604. This
written request must include the shareholder's name, the Fund name
and class of shares, the account number, and the share or dollar
amount to be redeemed. Shares will be redeemed at their net asset
value next determined after State Street Bank receives the
redemption request.
If share certificates have been issued, they must be properly
endorsed and should be sent by registered or certified mail with
the written request. Shareholders may call the Fund for assistance
in redeeming by mail.
SIGNATURES. Shareholders requesting a redemption of $50,000 or
more, 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 firm of the New York, American, Boston,
Midwest, or Pacific Stock Exchange;
- 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
Under ordinary circumstances, shareholders redeeming shares from
their Fund accounts within three full years of the purchase date
of those shares will be charged a contingent deferred sales charge
by the Fund's distributor. Any applicable contingent deferred
sales charge will be imposed on the lesser of the net asset value
of the redeemed shares at the time of purchase or the net asset
value of the redeemed shares at the time of redemption in
accordance with the following schedule:
CONTINGENT DEFERRED
SHARES HELD SALES CHARGE
Less than one
year...........................................................
3%
More than one year but less than three
years.................... 2%
More than three
years.....................................................
None
Effective December 1, 1994, the Fund's distributor has waived the
imposition of the contingent deferred sales charge on all
redemptions of Fund shares.
The contingent deferred sales charge will be deducted from the
redemption proceeds otherwise payable to the shareholder and will
be retained by the distributor. The contingent deferred sales
charge will not be imposed with respect to: (1) shares acquired
through the reinvestment of dividends or distributions of longterm
capital gains; or (2) shares held for more than three full years
from the date of purchase. Redemptions will be processed in a
manner intended to maximize the amount of redemption which will
not be subject to a contingent deferred sales charge. In computing
the amount of the applicable contingent deferred sales charge,
redemptions are deemed to have occurred in the following order:
(1) shares acquired through the reinvestment of dividends and long-
term capital gains; (2) shares held for more than three full years
from the date of purchase; (3) shares held for fewer than three
years from the date of purchase on a first-in-first-out basis. A
contingent deferred sales charges is not assessed in connection
with an exchange of Fund shares for shares in Texas Municipal
Income Fund or Florida Municipal Income Fund, portfolios of the
Trust, or for shares in Multi-State Municipal Income Fund, a
portfolio of Fixed Income Securities, Inc. (see "Exchanges for
Shares of Other Funds" below). Shares of Texas Municipal Income
Fund, Florida Municipal Income Fund, and Multi-State Municipal
Income Fund are no longer being offered for sale. Any contingent
deferred sales charge imposed at the time exchanged-for shares are
redeemed is calculated as if the shareholder had held the shares
from the date on which he became a shareholder of the exchanged-
from shares. Moreover, the contingent deferred sales charge will
be eliminated with respect to certain redemptions (see
"Elimination of Contingent Deferred Sales Charge" below).
ELIMINATION OF CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge will be eliminated with
respect to the following redemptions: (1) redemptions following
the death or disability, as defined in Section 72(m)(7) of the
Internal Revenue Code of 1986, of a shareholder; (2) redemptions
in connection with certain distributions from Individual
Retirement Accounts, qualified retirement plans or tax-sheltered
annuities; and (3) involuntary redemptions by the Fund of shares
in shareholder accounts that do not comply with the minimum
balance requirement. In addition, to the extent that the
distributor does not advance commissions to certain financial
institutions for purchases made by certain individuals, no
contingent deferred sales charge will be imposed on redemptions of
shares held by Trustees, employees and sales representatives of
the Fund, the distributor, or affiliates of the Fund or
distributor; employees of any financial institution that sells
shares of the Fund pursuant to a sales agreement with the
distributor; and spouses and children under the age of 21 of the
aforementioned persons. Finally, no contingent deferred sales
charge will be imposed on the redemption of shares originally
purchased through a bank trust department or investment adviser
registered under the Investment Advisers Act of 1940, to the
extent that no commission was advanced for purchases made by such
entities. The Trustees reserve the right to discontinue the
elimination of the contingent deferred sales charge. Shareholders
would be notified of such elimination. Any shares purchased prior
to the termination of such a waiver would have the contingent
deferred sales charge eliminated as provided in the Fund's
prospectus at the time of purchase of such shares. If a
shareholder making a redemption qualifies for an elimination of
the contingent deferred sales charge, the shareholder must notify
Federated Securities Corp. or State Street Bank in writing that he
is entitled to such elimination.
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; the minimum withdrawal amount is $100. 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. A contingent deferred sales charge is
imposed on shares redeemed through this program within three full
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 and pay the proceeds to
the shareholder if the account balance falls below the required
minimum value of $1,500 due to shareholder redemptions. This
requirement does not apply, however, if the balance falls below
$1,500 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.
EXCHANGES FOR SHARES OF OTHER FUNDS
In order to provide greater flexibility to Fund shareholders whose
investment objective has changed, the Fund allows shareholders to
exchange some or all of their Fund shares for shares of Texas
Municipal Income Fund and Florida Municipal Income Fund,
portfolios of the Trust, as well as shares of Multi-State
Municipal Income Fund, a portfolio of Fixed Income Securities,
Inc., which is also advised by Federated Advisers. Exchanges are
made at net asset value without being assessed a contingent
deferred sales charge on the exchanged shares. Shares of Texas
Municipal Income Fund, Florida Municipal Income Fund, and Multi-
State Municipal Income Fund are no longer being offered for sale.
Shareholders using this privilege must exchange shares having a
net asset value of at least $1,500. Shareholders who desire to
automatically exchange shares of a predetermined amount on a
monthly, quarterly, or annual basis may take advantage of a
systematic exchange privilege. A shareholder may obtain further
information on these exchange privileges by calling Federated
Securities Corp. or his financial institution. Before making an
exchange, a shareholder must receive a prospectus of the fund for
which the exchange is being made.
The ability to exchange shares is available to shareholders
residing in any state in which the shares being acquired may be
legally sold. 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.
MUNICIPAL SECURITIES INCOME TRUST INFORMATION --------------------
- --------------
MANAGEMENT OF MUNICIPAL SECURITIES INCOME TRUST
BOARD OF TRUSTEES. Municipal Securities Income Trust is managed
by a Board of Trustees. The Board of Trustees is responsible for
managing the business affairs of Municipal Securities Income Trust
and for exercising all of the powers of Municipal Securities
Income Trust except those reserved for the shareholders. An
Executive Committee of the Board of Trustees handles the Trustees'
responsibilities between meetings of the Trustees.
INVESTMENT ADVISER. Pursuant to an investment advisory contract
with Municipal Securities Income Trust, investment decisions for
the Fund are made by Federated Advisers, the Fund's investment
adviser, subject to direction by the Trustees. The adviser
continually conducts investment research and supervision for the
Fund and is responsible for the purchase and sale of portfolio
instruments, for which it receives an annual fee from the Fund.
ADVISORY FEES. The Fund's adviser receives an annual
investment advisory fee equal to .40 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 or reimbursement 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. Total assets under management or
administration by these and other subsidiaries of Federated
Investors is approximately $70 billion. Federated Investors,
which was founded in 1956 as Federated Investors, Inc.,
develops and manages mutual funds primarily for the financial
industry. Federated Investors' track record of competitive
performance and its disciplined, risk averse investment
philosophy serve approximately 3,500 client institutions
nationwide. Through these same client institutions,
individual shareholders also have access to this same level
of investment expertise.
James D. Roberge and Jonathan C. Conley are the Fund's co-
portfolio managers. James D. Roberge has been the Fund's co-
portfolio manager since June, 1993. Mr. Roberge joined
Federated Investors in 1990 and has been Vice President of
the Fund's investment adviser since October, 1994. Prior to
this Mr. Roberge served as an Assistant Vice President of the
Fund's investment adviser since 1992. From 1990 until 1992,
Mr. Roberge acted as an investment analyst. Mr. Roberge
received his M.B.A. in Finance from Wharton Business School
in 1990.
Jonathan C. Conley has been the Fund's co-portfolio manager
since June, 1993. Mr. Conley joined Federated Investors in
1979 and has been a Vice President of the Fund's investment
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 (the
"Distributor") for shares of the Fund. Federated Securities
Corp. is located at Federated Investors Tower, Pittsburgh,
Pennsylvania 15222-3779. It is a Pennsylvania corporation
organized on November 14, 1969, and is the principal
distributor for a number of investment companies. Federated
Securities Corp. is a subsidiary of Federated Investors.
DISTRIBUTION PLAN
The Distributor will pay dealers an amount equal to 2% of the
net asset value of Fund shares purchased by their clients or
customers. These payments will be made directly by the
Distributor from its assets, and will not be made from the
assets of the Fund.
Pursuant to the provisions of a distribution plan adopted in
accordance with the Investment Company Act Rule 12b-1 (the
"Plan"), the Fund will pay to the Distributor an amount
computed at an annual rate of 0.75 of 1% of the average daily
net asset value of Fund shares to reimburse the Distributor
for advancements paid to dealers and to finance any activity
which is principally intended to result in the sale of shares
subject to the Plan. The Fund will accrue the distribution
fee as a liability of the Fund, and such method of accrual
will reduce the Fund's net assets and net asset value
accordingly. See the section entitled "Tax Information" in
this prospectus for a further discussion of the effect of the
payment of distribution fees made pursuant to Rule 12b-1 and
the payment of shareholder services fees to financial
institutions for administrative and support services on
distributions (of dividends, etc.) to shareholders.
Because distribution fees to be paid by the Fund to the
Distributor may not exceed an annual rate of 0.75 of 1% of
the Fund's average daily net assets, it will take the
Distributor a number of years to recoup the expenses that it
has incurred for its distribution and distribution related
services pursuant to the Plan.
The Distributor may select financial institutions (such as a
broker/dealer or bank) to provide sales support services as
agents for their clients or customers who beneficially own
shares of the Fund. After a shareholder has been invested in
the Fund for a period of three years, the Distributor will
pay financial institutions a portion of the above-referenced
distribution fee, in an amount up to 0.25 of 1% of the Fund's
average daily net assets based upon the shares owned by the
client for a period exceeding three years. It is anticipated
that the payment to the financial institutions will encourage
such financial institutions to remain knowledgeable about the
Fund, encourage further sales of the Fund, and discourage
redemptions for reinvestment in new products or products
compensating the financial institutions at a higher level.
The Fund's Plan is a compensation type plan. As such, the
Fund makes no payments to the Distributor except as described
above. Therefore, the Fund does not pay for unreimbursed
expenses of the Distributor, including amounts expended by
the Distributor in excess of amounts received by it from the
Fund, interest, carrying or other financing charges in
connection with excess amounts expended, or the Distributor's
overhead expenses. However, the Distributor may be able to
recover such amounts or may earn a profit from future
payments made by the Fund under the Plan.
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. In the event the
Glass-Steagall Act is deemed to prohibit depository institutions
from acting in the administrative capacities described above or
should Congress relax current restrictions on depository
institutions, the Board of Trustees will consider appropriate
changes in the services.
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.
SHAREHOLDER SERVICES PLAN
The Fund has adopted a Shareholder Services Plan (the "Services
Plan"). Under the Services Plan, financial institutions will enter
into shareholder service agreements with the Fund to provide
administrative support services to their customers who from time
to time may be owners of record or beneficial owners of Fund
shares. These administrative services may include, but are not
limited to, the provision of personal service and maintenance of
shareholder accounts. In return for providing these support
services, a financial institution may receive payments from the
Fund at a rate not exceeding 0.25 of 1% of the average daily net
assets of Fund shares beneficially owned by the financial
institution's customers for whom it is holder of record or with
whom it has a servicing relationship.
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 daily net assets of all funds advised by
subsidiaries of Federated Investors ("Federated Funds") as
specified below:
Average Aggregate Daily
Net Assets
Maximum Administrative Fee of the
Federated Funds
0.15 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.10 of 1% on the next $250 million
0.075 of 1% on assets in excess of
$750 million
The administrative fee received during any fiscal year shall be at
least $125,000 per portfolio and $30,000 per each additional class
of shares. Federated Administrative Services may choose
voluntarily to waive a portion of its fee.
CUSTODIAN. State Street Bank and Trust Company, Box 8604, Boston,
Massachusetts, is custodian for the securities and cash of the
Fund.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services
Company, Pittsburgh, Pennsylvania, is transfer agent for the
shares of the Fund, and dividend disbursing agent for the Fund.
The fee paid to the transfer agent is based on the size, type and
number of accounts and transactions made by shareholders.
Federated Services Company also maintains the Trust's accounting
records. The fee paid for this service is based on the level of
the Fund's average net assets for the period, plus out-of-pocket
expenses.
LEGAL COUNSEL
Legal counsel is provided by Houston, Houston & Donnelly, 2510
Centre City Tower, Pittsburgh, Pennsylvania, and Dickstein,
Shapiro & Morin, L.L.P., 2101 L Street, N.W., Washington, D.C.
INDEPENDENT AUDITORS
The independent auditors for the Fund are Deloitte & Touche LLP,
Boston, Massachusetts.
EXPENSES OF THE FUND
The Fund pays all of its own expenses and its allocable share of
Trust expenses. These expenses include, but are not limited to,
the costs of: organizing the Trust and continuing its existence;
Trustees' fees; investment advisory and administrative services;
printing prospectuses and other Fund documents for shareholders;
registering the Trust, the Fund and shares of the Fund; taxes and
commissions; issuing, purchasing, repurchasing, and redeeming
shares; fees for custodian, transfer agent, dividend disbursing
agent, shareholder servicing agents, and registrars; printing,
mailing, auditing, accounting, and legal expenses; reports to
shareholders and government agencies; meetings of Trustees and
shareholders and proxy solicitations therefor; insurance premiums;
association membership dues; and such nonrecurring and
extraordinary items as may arise.
SHAREHOLDER INFORMATION --------------------------------
VOTING RIGHTS
Each share of the Fund gives the shareholder one vote in Trustee
elections and other matters submitted to shareholders for vote.
All shares of all classes of each portfolio in the Trust have
equal voting rights except that in matters affecting only a
particular fund or class, only shares of that fund or class are
entitled to vote. As of December 23, 1994, Merrill, Lynch,
Pierce, Fenner & Smith, Jacksonville, Florida owned 50.65% 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.
As a Massachusetts business trust, the Trust is not required to
hold annual shareholder meetings. Shareholder approval will be
sought only for certain changes in the Trust's or the Fund's
operation and for the election of Trustees under certain
circumstances. Trustees may be removed by the Trustees or by
shareholders at a special meeting. A special meeting of the
shareholders for this purpose shall be called by the Trustees upon
the written request of shareholders owning at least 10% of the
outstanding shares of all series in the Trust entitled to vote.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally
liable as partners under Massachusetts law for acts or obligations
of the Trust on behalf of the Fund. To protect shareholders of the
Fund, the Trust has filed legal documents with Massachusetts that
expressly disclaim the liability of shareholders of the Fund for
such acts or obligations of the Trust. These documents require
notice of this disclaimer to be given in each agreement,
obligation, or instrument that the Trust or its Trustees enter
into or sign on behalf of the Fund.
In the unlikely event that a shareholder of the Fund is held
personally liable for the Trust's obligations on behalf of the
Fund, the Trust is required to use the property of the Fund to
protect or compensate the shareholder. On request, the Trust will
defend any claim made and pay any judgment against a shareholder
of the Fund for any act or obligation of the Trust on behalf of
the Fund. Therefore, financial loss resulting from liability as a
shareholder of the Fund will occur only if the Trust cannot meet
its obligations to indemnify shareholders and pay judgments
against them from the assets of the Fund.
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. The Fund will be treated as a single,
separate entity for federal income tax purposes so that income
(including capital gains) and losses realized by the Trust's other
portfolios will not be combined for tax purposes with those
realized by the Fund.
In general, shareholders are not required to pay federal regular
income tax on any dividends received from the Fund that represent
net interest on tax-exempt municipal bonds, although tax-exempt
interest will increase the taxable income of certain recipients of
social security benefits. However, under the Tax Reform Act of
1986, dividends representing net interest income earned on some
municipal bonds may be included in calculating the federal
individual alternative minimum tax or the federal alternative
minimum tax for corporations.
It is anticipated that each monthly distribution of dividends will
exceed the Fund's net investment income as calculated for
financial statement reporting purposes during the applicable
period by an amount substantially equal to the amount of
distribution payments made pursuant to the Plan, and charged to
the Fund's paid-in capital for tax purposes during such period.
The Securities and Exchange Commission requires the Fund to
indicate that such excess amount is being paid to shareholders
from the Fund's paid-in capital. However, the Fund anticipates
that the entire monthly distribution (including the excess amount)
will constitute tax-exempt income to the shareholders for Federal
income tax purposes, except for the proportionate part of the
distribution that may be considered taxable income if the Fund
earns taxable income during the calendar year. Therefore, the Fund
believes that a shareholder should make no adjustment to the tax
cost basis of his existing shareholdings as a result of the
monthly distribution. The Fund also believes that shareholders
reinvesting the monthly distribution should continue to treat the
amount of the entire distribution as the tax cost basis of the
additional shares acquired by reason of such reinvestment.
The Internal Revenue Service ("IRS") has issued a ruling
(effective April 1995) which changes the accounting method which
is applied to distribution related expenses incurred under Rule
12b-1 Plans. The ruling requires the Fund to charge such expenses
to the Fund's investment income. Effective January 1, 1995, the
Fund will change its accounting method accordingly.
The alternative minimum tax, equal 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 will become
subject to the 20% corporate alternative minimum tax because the
dividends are included in a corporation's "adjusted current
earnings." The corporate alternative 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" are 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.
NEW JERSEY STATE AND MUNICIPAL TAXATION
To the extent that dividends paid by the Fund are "exempt-interest
dividends" as determined for federal income tax purposes and are
derived from interest that the Fund receives that is exempt from
federal regular income tax and from the personal income taxes
imposed by the state of New Jersey, such dividends are not subject
to the personal income taxes imposed by the State of New Jersey on
individuals, estates and trusts. Other distributions from the Fund
are generally subject to the personal income taxes imposed by the
state of New Jersey and any surcharge based thereon.
None of the Fund's distributions will generally be exempt from the
state of New Jersey taxes payable by shareholders of the Fund that
are corporations, although certain distributions may be eligible
for the 50% dividend subtraction. Additionally, shares of the Fund
will be included in a corporate shareholder's investment capital
in determining its liability, if any, for such taxes.
Shares of the Fund will not be subject to any New Jersey property
taxes.
OTHER STATE AND LOCAL TAXES
Income from the Fund is not necessarily free from regular state
income taxes in states other than New Jersey or from personal
property taxes. State laws differ on this issue, and shareholders
are urged to consult their own tax advisers regarding the status
of their accounts under state and local tax laws.
PERFORMANCE INFORMATION ---------------------------
From time to time the Fund advertises the total return, yield, and
tax-equivalent yield for shares. Total return represents the
change, over a specific period of time, in the value of an
investment in shares after reinvesting all income and capital
gains distributions. It is calculated by dividing that change by
the initial investment and is expressed as a percentage.
The yield of shares is calculated by dividing the net investment
income per share (as defined by the Securities and Exchange
Commission) earned by shares over a thirty-day period by the
maximum offering price per share of shares on the last day of the
period. This number is then annualized using semi-annual
compounding. The tax-equivalent yield of shares is calculated
similarly to the yield, but is adjusted to reflect the taxable
yield that shares would have had to earn to equal its actual
yield, assuming a specific tax rate. The yield and the tax-
equivalent yield do not necessarily reflect income actually earned
by shares and, therefore, may not correlate to the dividends or
other distributions paid to shareholders.
The performance information reflects the effect of the contingent
deferred sales charge, which, if excluded, would increase the
total return, yield, and tax-equivalent yield.
From time to time, the Fund may advertise its performance using
certain financial publications and/or compare its performance to
certain indices.
ADDRESSES
- ------------------------------------------------------------------------------
New Jersey Municipal Income Fund Federated Investors
Tower
Pittsburgh, Pennsylvania
15222-3779
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania
15222-3779
Investment Adviser
Federated Advisers Federated Investors Tower
Pittsburgh, Pennsylvania
15222-3779
Custodian
State Street Bank and P.O. Box 8604
Trust Company Boston, Massachusetts 02266-
8604
Transfer Agent and Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania
15222-3779
Legal Counsel
Houston, Houston & Donnelly 2510 Centre City Tower
Pittsburgh, Pennsylvania
15222
Legal Counsel
Dickstein, Shapiro & Morin, L.L.P. 2101 L Street, N.W.
Washington, D.C. 20037
Independent Auditors
Deloitte & Touche LLP 125 Summer Street
Boston, Massachusetts 02110-
1617
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- ------------------------------
NEW JERSEY MUNICIPAL
INCOME FUND
PROSPECTUS
A Non-Diversified
Portfolio of Municipal
Securities Income
Trust, An Open-End,
Management Investment
Company
December 31,
1994
FEDERATED
SECURITIES CORP.
(LOGO)
----------------------
----------------------
-
Distributor
A subsidiary of
FEDERATED INVESTORS
FEDERATED
INVESTORS TOWER
PITTSBURGH, PA
15222-3779
12/94
New Jersey Municipal Income Fund
(A Portfolio of Municipal Securities Income Trust)
Statement of Additional Information
This Statement of Additional Information should be read
with the prospectus of New Jersey Municipal Income Fund
(the "Fund") dated December 31, 1994. This Statement is
not a prospectus itself. To receive a copy of the
prospectus write or call the Fund.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Statement dated December 31, 1994
FEDERATED SECURITIES
CORP.
Distributor
A Subsidiary of
Federated Investors
General Information About
the Fund 1
Investment Objective and
Policies 1
Acceptable Investments 1
Characteristics 1
Types of Acceptable
Investments 1
Participation Interests 1
Variable-Rate Municipal
Securities 1
Municipal Leases 2
When-Issued and Delayed
Delivery Transactions 2
Temporary Investments 2
Futures and Options
Transactions 2
Futures Contracts 2
"Margin" in Futures
Transactions 2
Put Options on Financial
Futures Contracts 3
Call Options on Financial
Futures Contracts 3
Risks 4
Repurchase Agreements 4
Reverse Repurchase
Agreements 4
Portfolio Turnover 5
Investment Limitations 5
Selling Short and Buying
on Margin 5
Issuing Senior Securities
and Borrowing Money 5
Pledging Assets 5
Underwriting 5
Investing in Real Estate 5
Investing in Commodities 5
Lending Cash or
Securities 5
Concentration of
Investments 5
Investing in Issuers
Whose Securities are
Owned by Officers and
Trustees of the Fund 6
Investing in Securities
of Other Investment
Companies 6
Investing in Restricted
Securities 6
Investing in Illiquid
Securities 6
Investing in Put Options 6
Writing Covered Call
Options 6
Investing in New Issuers 6
Investing in Minerals 6
New Jersey Investment
Risks 6
Fund Ownership 10
The Funds 10
Investment Advisory Services 11
Adviser to the Fund 11
Advisory Fees 11
State Expense Limitations 11
Administrative Services 11
Brokerage Transactions 12
Purchasing Shares 12
Distribution and
Shareholder Services
Plans 12
Determining Net Asset Value 13
Valuing Municipal Bonds 13
Use of Amortized Cost 13
Redeeming Shares 13
Redemption in Kind 13
Tax Status 14
The Fund's Tax Status 14
Capital Gains 14
Total Return 14
Yield 14
Tax-Equivalent Yield 15
Tax-Equivalency Table 15
Performance Comparisons 16
Financial Statements 16
Appendix 17
General Information About the Fund
The Fund is a portfolio in Municipal Securities Income Trust
(the "Trust"). Federated Municipal Income Trust was
established as a Massachusetts business trust under a
Declaration of Trust dated August 6, 1990. On September 16,
1992 (effective date October 31, 1992), the Board of Trustees
(the "Trustees") approved changing the name of the Trust from
Federated Municipal Income Trust to Municipal Securities
Income Trust.
Investment Objective and Policies
The Fund's investment objective is to provide current income
which is exempt from federal regular income tax and the
personal income taxes imposed by the state of New Jersey and
New Jersey municipalities. The investment objective cannot be
changed without the approval of shareholders.
Acceptable Investments
The Fund invests primarily in a portfolio of municipal
securities which are exempt from federal income tax and the
personal income taxes imposed by the state of New Jersey and
New Jersey municipalities ("New Jersey Municipal Securities").
The municipal securities in which the Fund invests include
those issued by or on behalf of the State of New Jersey and
New Jersey municipalities as well as those issued by states,
territories, and possessions of the United States which are
exempt from federal regular income tax and the personal income
taxes imposed by the State of New Jersey and New Jersey
municipalities.
Characteristics
The New Jersey Municipal Securities in which the Fund
invests have the characteristics set forth in the
prospectus. If ratings made by Moody's Investors Service,
Inc. ("Moody's"), Standard & Poor's Ratings Group ("S&P")
or Fitch Investors Service ("Fitch's") 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.
Types of Acceptable Investments
Examples of New Jersey Municipal Securities include:
ogovernmental lease certificates of participation issued
by state or municipal authorities where payment is
secured by installment payments for equipment, buildings,
or other facilities being leased by the state or
municipality;
omunicipal notes and tax-exempt commercial paper;
oserial bonds;
otax anticipation notes sold to finance working capital
needs of municipalities in anticipation of receiving
taxes;
obond anticipation notes sold in anticipation of the
issuance of long-term bonds;
opre-refunded municipal bonds whose timely payment of
interest and principal is ensured by an escrow of U.S.
government obligations; and
ogeneral obligation bonds.
Participation Interests
The financial institutions from which the Fund purchases
participation interests frequently provide or secure from
another financial institution irrevocable letters of
credit or guarantees and give the Fund the right to
demand payment of the principal amounts of the
participation interests plus accrued interest on short
notice (usually within seven days).
Variable-Rate Municipal Securities
Variable interest rates generally reduce changes in the
market value of municipal securities from their original
purchase prices. Accordingly, as interest rates decrease
or increase, the potential for capital appreciation or
depreciation is less for variable-rate municipal
securities than for fixed-income obligations. Many
municipal securities with variable interest rates
purchased by the Fund are subject to repayment of
principal (usually within seven days) on the Fund's
demand. The terms of these variable-rate demand
instruments require payment of principal and accrued
interest from the issuer of the municipal obligations,
the issuer of the participation interests, or a guarantor
of either issuer.
Municipal Leases
The Fund may purchase municipal securities in the form of
participation interests which represent undivided
proportional interests in lease payments by a
governmental or non-profit entity. The lease payments and
other rights under the lease provide for and secure the
payments on the certificates. Lease obligations may be
limited by municipal charter or the nature of the
appropriation for the lease. In particular, lease
obligations may be subject to periodic appropriation. If
the entity does not appropriate funds for future lease
payments, the entity cannot be compelled to make such
payments. Furthermore, a lease may provide that the
certificate trustee cannot accelerate lease obligations
upon default. The trustee would only be able to enforce
lease payments as they became due. In the event of a
default or failure of appropriation, it is unlikely that
the trustee would be able to obtain an acceptable
substitute source of payment.
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. 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. 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 during times
of unusual market conditions for defensive purposes and to
maintain liquidity.
Futures and Options Transactions
As a means of reducing fluctuations in the net asset value of
shares of the Fund, the Fund may attempt to hedge all or a
portion of its portfolio by buying and selling financial
futures contracts, buying put options on portfolio securities
and put options on financial futures contracts for portfolio
securities, and writing call options on futures contracts. The
Fund also may write covered call options on portfolio
securities to attempt to increase its current income.
The Fund will maintain its position in securities, options and
segregated cash subject to puts and calls until the options
are exercised, closed, or have expired. An option position may
be closed out over-the-counter or on an exchange which
provides a secondary market for options of the same series.
Futures Contracts
The Fund may purchase and sell financial futures contracts to
hedge against the effects of changes in the value of portfolio
securities due to anticipated changes in interest rates and
market conditions without necessarily buying or selling the
securities. The Fund will not engage in futures transactions
for speculative purposes.
A futures contract is a firm commitment by two parties: the
seller who agrees to make delivery of the specific type of
security called for in the contract ("going short") and the
buyer who agrees to take delivery of the security ("going
long") at a certain time in the future.
For example, in the fixed income securities market, prices
move inversely to interest rates. A rise in rates results in a
drop in price. Conversely, a drop in rates results in a rise
in price. In order to hedge its holdings of fixed income
securities against a rise in market interest rates, the Fund
could enter into contracts to deliver securities at a
predetermined price (i.e., "go short") to protect itself
against the possibility that the prices of its fixed income
securities may decline during the Fund's anticipated holding
period. The Fund could agree to purchase securities in the
future at a predetermined price (i.e., "go long") to hedge
against a decline in market interest rates.
"Margin" in Futures Transactions
Unlike the purchase or sale of a security, the Fund does not
pay or receive money upon the purchase or sale of a futures
contract. Rather, the Fund is required to deposit an amount of
"initial margin" in cash or U.S. Treasury bills with its
custodian (or the broker, if legally permitted). The nature of
initial margin in futures transactions is different from that
of margin in securities transactions in that initial margin in
futures transactions does not involve the borrowing of funds
by the Fund to finance the transactions. Initial margin is in
the nature of a performance bond or good faith deposit on the
contract which is returned to the Fund upon termination of the
futures contract, assuming all contractual obligations have
been satisfied.
A futures contract held by the Fund is valued daily at the
official settlement price of the exchange on which it is
traded. Each day the Fund pays or receives cash, called
"variation margin," equal to the daily change in value of the
futures contract. This process is known as "marking to
market." Variation margin does not represent a borrowing or
loan by the Fund, but is instead settlement between the Fund
and the broker of the amount one would owe the other if the
futures contract expired. In computing its daily net asset
value, the Fund will mark to market its open futures
positions.
The Fund is also required to deposit and maintain margin when
it writes call options on futures contracts.
The Fund will comply with the following restrictions when
purchasing and selling futures contracts. First, the Fund will
not participate in futures transactions if the sum of its
initial margin deposits on open contracts will exceed 5% of
the market value of the Fund's total assets, after taking into
account the unrealized profits and losses on those contracts
it has entered into. Second, the Fund will not enter into
these contracts for speculative purposes. Third, since the
Fund does not constitute a commodity pool, it will not market
itself as such, or serve as a vehicle for trading in the
commodities futures or commodity options markets. Connected
with this, the Fund will disclose to all prospective investors
the limitations on its futures and options transactions, and
make clear that these transactions are entered into only for
bona fide hedging purposes, or other permissible purposes
pursuant to regulations promulgated by the Commodity Futures
Trading Commission ("CFTC"). Finally, because the Fund will
submit to the CFTC special calls for information, the Fund
will not register as a commodities pool operator.
Put Options on Financial Futures Contracts
The Fund may purchase listed put options on financial futures
contracts. The Fund would use these options solely to protect
portfolio securities against decreases in value resulting from
market factors such as an anticipated increase in interest
rates.
Unlike entering directly into a futures contract, which
requires the purchaser to buy a financial instrument on a set
date at a specified price, the purchase of a put option on a
futures contract entitles (but does not obligate) its
purchaser to decide on or before a future date whether to
assume a short position at the specified price.
Generally, if the hedged portfolio securities decrease in
value during the term of an option, the related futures
contracts will also decrease in value and the option will
increase in value. In such an event, the Fund will normally
close out its option by selling an identical option. If the
hedge is successful, the proceeds received by the Fund upon
the sale of the second option will be large enough to offset
both the premium paid by the Fund for the original option plus
the decrease in value of the hedged securities.
Alternatively, the Fund may exercise its put option to close
out the position. To do so, it would simultaneously enter into
a futures contract of the type underlying the option (for a
price less than the strike price of the option) and exercise
the option. The Fund would then deliver the futures contract
in return for payment of the strike price. If the Fund neither
closes out nor exercises an option, the option will expire on
the date provided in the option contract, and only the premium
paid for the contract will be lost.
Call Options on Financial Futures Contracts
In addition to purchasing put options on futures, the Fund may
write listed call options on financial futures contracts or
over-the-counter call options on future contracts to hedge its
portfolio against an increase in market interest rates. When
the Fund writes a call option on a futures contract, it is
undertaking the obligation of assuming a short futures
position (selling a futures contract) at the fixed strike
price at any time during the life of the option if the option
is exercised. As market interest rates rise, causing the
prices of futures to decrease, the Fund's obligation under a
call option on a future (to sell a futures contract) costs
less to fulfill, causing the value of the Fund's call option
position to increase.
In other words, as the underlying futures price falls below
the strike price, the buyer of the option has no reason to
exercise the call, so that the Fund keeps the premium received
for the option. This premium can substantially offset the drop
in value of the Fund's portfolio securities.
Prior to the expiration of a call written by the Fund, or
exercise of it by the buyer, the Fund may close out the option
by buying an identical option. If the hedge is successful, the
cost of the second option will be less than the premium
received by the Fund for the initial option. The net premium
income of the Fund will then substantially offset the realized
decrease in value of the hedged securities.
The Fund will not maintain open positions in futures contracts
it has sold or call options it has written on futures
contracts if, in the aggregate, the value of the open
positions (marked to market) exceeds the current market value
of its securities portfolio, plus or minus the unrealized gain
or loss on those open positions, adjusted for the correlation
of volatility between the hedged securities and the futures
contracts. If this limitation is exceeded at any time, the
Fund will take prompt action to close out a sufficient number
of open contracts to bring its open futures and options
positions within this limitation.
Risks
When the Fund uses futures and options on futures as
hedging devices, there is a risk that the prices of the
securities subject to the futures contracts may not
correlate perfectly with the prices of the securities in
the Fund's portfolio. This may cause the futures contract
and any related options to react differently than the
portfolio securities to market changes. In addition, the
Fund's adviser could be incorrect in its expectations
about the direction or extent of market factors such as
stock price movements. In these events, the Fund may lose
money on the futures contract or option.
It is not certain that a secondary market for positions
in futures contracts or for options will exist at all
times. Although the Fund's adviser will consider
liquidity before entering into these transactions, there
is no assurance that a liquid secondary market on an
exchange or otherwise will exist for any particular
futures contract or option at any particular time. The
Fund's ability to establish and close out futures and
options positions depends on this secondary market. The
inability to close out these positions could have an
adverse effect on the Fund's ability to effectively hedge
its portfolio.
To minimize risks, the Fund may not purchase or sell futures
contracts or related options if immediately thereafter the sum
of the amount of margin deposits on the Fund's existing
futures positions and premiums paid for related options would
exceed 5% of the market value of the Fund's total assets. When
the Fund purchases futures contracts, an amount of cash and
cash equivalents, equal to the underlying commodity value of
the futures contracts (less any related margin deposits), will
be deposited in a segregated account with the Fund's custodian
(or the broker, if legally permitted) to collateralize the
position and thereby insure that the use of such futures
contract is unleveraged. When the Fund sells futures
contracts, it will either own or have the right to receive the
underlying future or security, or will make deposits to
collateralize the position as discussed above.
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.
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
Trustees.
From time to time, such as when suitable New Jersey Municipal
Securities are not available, the Fund may invest a portion of
its assets in cash. Any portion of the Fund's assets
maintained in cash will reduce the amount of assets in New
Jersey Municipal Securities 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 may trade or dispose of portfolio securities as
considered necessary to meet its investment objective. It is
not anticipated that the portfolio trading engaged in by the
Fund will result in its annual rate of portfolio turnover
exceeding 100%. For the fiscal year ended August 31, 1994,
and for the period from June 1, 1993 (date of initial public
investment) to August 31, 1993, the portfolio turnover rate
was 47% and 0%, respectively.
Investment Limitations
Selling Short and Buying on Margin
The Fund will not sell any securities short or purchase
any securities on margin but may obtain such short-term
credits as may be necessary for clearance of purchases
and sales of securities. 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 to
facilitate management of the portfolio by enabling the
Fund to, for example, meet redemption requests when the
liquidation of portfolio securities is deemed to be
inconvenient or disadvantageous. The Fund will not
purchase any securities while borrowings in excess of 5%
of its total assets are outstanding.
Pledging Assets
The Fund will not mortgage, pledge, or hypothecate its
assets except to secure permitted borrowings. In those
cases, it may mortgage, pledge, or hypothecate assets
having a market value not exceeding 10% of the value of
its total assets at the time of the pledge. Margin
deposits for the purchase and sale of financial futures
contracts and related options are not deemed to be a
pledge.
Underwriting
The Fund will not underwrite any issue of securities
except as it may be deemed to be an underwriter under the
Securities Act of 1933 in connection with the sale of
securities in accordance with its investment objective,
policies, and limitations.
Investing in Real Estate
The Fund will not purchase or sell real estate, including
limited partnership interests, although it may invest in
municipal bonds secured by real estate or interests in
real estate.
Investing in Commodities
The Fund will not purchase or sell commodities, commodity
contracts, or commodity futures contracts except that the
Fund may purchase and sell futures contracts and related
options.
Lending Cash or Securities
The Fund will not lend any of its assets except that it
may acquire publicly or non-publicly issued municipal
bonds or temporary investments or enter into repurchase
agreements in accordance with its investment objective,
policies, and limitations, or its Declaration of Trust.
Concentration of Investments
The Fund will not purchase securities if, as a result of
such purchase, 25% or more of the value of its total
assets would be invested in any one industry or in
industrial development bonds or other securities, the
interest upon which is paid from revenues of similar
types of projects. However, the Fund may invest as
temporary investments more than 25% of the value of its
assets in cash or cash items (for purposes of this
limitation, the Fund considers instruments issued by a
U.S. branch of a domestic bank or savings and loan having
capital, surplus, and undivided profits in excess of
$100,000,000 at the time of investment to be "cash
items"), securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities, or
instruments secured by these money market instruments,
i.e., repurchase agreements.
The above investment limitations cannot be changed
without shareholder approval. The following limitations,
however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified
before any material change in these limitations becomes
effective.
Investing in Issuers Whose Securities are Owned by
Officers and Trustees of the Fund
The Fund will not purchase or retain the securities of
any issuer if the officers and Trustees 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.
Investing in Securities of Other Investment Companies
The Fund will not purchase securities of other investment
companies except as part of a merger, consolidation, or
other acquisition.
Investing in Restricted Securities
The Fund will not invest more than 10% of its net assets
in securities subject to restrictions on resale under the
Securities Act of 1933, except for commercial paper
issued under Section 4(2) of the Securities Act of 1933
and certain other restricted securities which meet the
criteria for liquidity as established by the Trustees.
Investing in Illiquid Securities
The Fund will not invest more than 15% of its net assets
in illiquid obligations, including repurchase agreements
providing for settlement in more than seven days after
notice, and certain restricted securities not determined
by the Trustees to be liquid.
Investing in Put Options
The Fund will not purchase put options on securities,
unless the securities are held in the Fund's portfolio
and not more than 5% of the value of the Fund's total
assets would be invested in premiums on open put options.
Writing Covered Call Options
The Fund will not write call options on securities unless
the securities are held in the Fund's portfolio or unless
the Fund is entitled to them in deliverable form without
further payment or after segregating cash in the amount
of any further payment.
Investing in New Issuers
The Fund will not invest more than 5% of the value of its
total assets in industrial development bonds where the
principal and interest are the responsibility of
companies (or guarantors, where applicable) with less
than three years of continuous operations, including the
operation of any predecessor.
Investing in Minerals
The Fund will not purchase interests in oil, gas, or
other mineral exploration or development programs or
leases, although it may invest in securities of issuers
which invest in or sponsor such programs.
Except with respect to borrowing money, if a percentage
limitation is adhered to at the time of investment, a
later increase or decrease in percentage resulting from
any change in value or net assets will not result in a
violation of such restriction.
The Fund does not expect to borrow money or pledge
securities in excess of 5% of the value of its net assets
during the coming fiscal year.
New Jersey Investment Risks
The Fund invests in obligations of New Jersey issuers which
results in the Fund's performance being subject to risks
associated with the overall conditions present within the
state. The following information is a brief summary of the
recent prevailing economic conditions and a general summary of
the state's financial status. This information is based on
official statements relating to securities that have been
offered by New Jersey issuers and from other sources believed
to be reliable but should not be relied upon as a complete
description of all relevant information.
The state of New Jersey has experienced fiscal problems for
several years as a result of the recent recession. Although
the state enjoyed extensive growth throughout the 1980's,
unemployment has risen drastically and over 100,000 jobs have
been lost in the past three years. The state's economy is
highly developed with a large emphasis in service, trade,
financial services, and real estate. These areas have more
than compensated for the decrease in the manufacturing sector
that occurred during the late 1970's and 1980's. The growth of
649,000 jobs in the state during the 1980's and large levels
of personal wealth place New Jersey with one of the highest
per capita income averages in the nation.
Increases in taxes and deteriorating financial conditions for
the state have generated considerable taxpayer opposition.
During the November 1991 elections, the state legislature
turned from a Democratic majority to a Republican majority in
response to large tax increases. Compromise and fiscal
realities have forced the legislature to maintain much of the
tax increase in light of the difficult financial position.
The overall financial condition of the state can also be
illustrated by the changes of its debt ratings. During the
period in which the state experienced its financial
difficulties, its general obligation long-term debt ratings as
determined by Moody's was downgraded from Aaa to Aa1, while
S&P has downgraded the state's debt from AAA to AA+. The short-
term debt ratings have not declined and remain at Moody's and
S&P's highest levels. The credit characteristics of the state
remain strong compared to other states, although future
changes in the financial results could adversely affect its
ratings.
The Fund's concentration in securities issued by the state and
its political subdivisions provides a greater level of risk
than a fund which is diversified across numerous states and
municipal entities. The ability of the state or its
municipalities to meet their obligations will depend on the
availability of tax and other revenues; economic, political,
and demographic conditions within the state; and the
underlying fiscal condition of the state and its
municipalities.
Municipal Securities Income Trust Management
Officers and Trustees are listed with their addresses, present
positions with Municipal Securities Income Trust, and
principal occupations.
John F. Donahue*@
Federated Investors Tower
Pittsburgh, PA
Chairman and Trustee of the Trust
Chairman and Trustee, Federated Investors, Federated Advisers,
Federated Management, and Federated Research; Chairman and
Director, Federated Research Corp.; Chairman, Passport
Research, Ltd.; Director, AEtna Life and Casualty Company;
Chief Executive Officer and Director, Trustee, or Managing
General Partner of the Funds. Mr. Donahue is the father of J.
Christopher Donahue, Vice President of the Trust.
Thomas G. Bigley
28th Floor, One Oxford Center
Pittsburgh, PA
Trustee
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
Trustee of the Trust
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
Trustee of the Trust
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
Trustee of the Trust
Attorney-at-law; Director, The Emerging Germany Fund, Inc.;
Director, Trustee, or Managing General Partner of the Funds;
formerly, Director, Blue Cross of Massachusetts, Inc.
Lawrence D. Ellis, M.D.
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Trustee of the Trust
Hematologist, Oncologist, and Internist, Presbyterian and
Montefiore Hospitals; Professor of Medicine and Trustee,
University of Pittsburgh; Director of Corporate Health,
University of Pittsburgh Medical Center; Director, Trustee, or
Managing General Partner of the Funds.
Edward L. Flaherty, Jr.@
5916 Penn Mall
Pittsburgh, PA
Trustee of the Trust
Attorney-at-law; Partner, 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
225 Franklin Street
Boston, MA
Trustee of the Trust
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 and Trustee, Lahey
Clinic Foundation, Inc.
Gregor F. Meyer
5916 Penn Mall
Pittsburgh, PA
Trustee of the Trust
Attorney-at-law; Partner, Meyer and Flaherty; Chairman,
Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.;
Director, Trustee, or Managing General Partner of the Funds;
formerly, Vice Chairman, Horizon Financial, F.A.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Trustee of the Trust
Professor, Foreign Policy and Management Consultant; Trustee,
Carnegie Endowment for International Peace, RAND Corporation,
Online Computer Library Center, Inc., and U.S. Space
Foundation; Chairman, Czecho Slovak Management Center;
Director, Trustee, or Managing General Partner of the Funds;
President Emeritus, University of Pittsburgh; formerly,
Chairman, National Advisory Council for Environmental Policy
and Technology.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Trustee of the Trust
Public relations/marketing consultant; Director, Trustee, or
Managing General Partner of the Funds.
J. Christopher Donahue *
Federated Investors Tower
Pittsburgh, PA
Vice President and Trustee of the Trust
President and Trustee, Federated Investors, Federated
Advisers, Federated Management, and Federated Research;
President and Director, Federated 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 Trustee of the Trust.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
President of the Trust
Executive Vice President and Trustee, Federated Investors;
Director, Federated Research Corp.; Chairman and Director,
Federated Securities Corp.; President or Vice President of
some of the Funds; Director or Trustee of some of the Funds.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Vice President and Treasurer of the Trust
Vice President, Treasurer, and Trustee, Federated Investors;
Vice President and Treasurer, Federated Advisers, Federated
Management, Federated Research, Federated Research Corp., and
Passport Research, Ltd.; Executive Vice President, Treasurer,
and Director, Federated Securities Corp.; Trustee, Federated
Services Company and Federated Shareholder Services; Chairman,
Treasurer, and Trustee, Federated Administrative Services;
Trustee or Director of some of the Funds; Vice President and
Treasurer of the Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Vice President and Secretary of the Trust
Vice President, Secretary, General Counsel, and Trustee,
Federated Investors; Vice President, Secretary, and Trustee,
Federated Advisers, Federated Management, and Federated
Research; Vice President and Secretary, Federated Research
Corp. and Passport Research, Ltd.; Trustee, Federated Services
Company; Executive Vice President, Secretary, and Trustee,
Federated Administrative Services; Secretary and Trustee,
Federated Shareholder Services; Executive Vice President and
Director, Federated Securities Corp.; Vice President and
Secretary of the Funds.
* This Trustee is deemed to be an "interested person" of the
Trust as defined in the Investment Company Act of 1940, as
amended.
@ Member of the Trust's Executive Committee. The Executive
Committee of the Board of Trustees handles the
responsibilities of the Board of Trustees between meetings
of the Board.
Fund Ownership
Officers and Trustees own less than 1% of the Fund's
outstanding shares.
As of December 23, 1994, the following shareholders of record
owned 5% or more of the outstanding shares of the Fund:
Merrill Lynch, Pierce, Fenner & Smith, Jacksonville, Florida,
record owner holding Fund shares for its clients, owned
approximately 63,278.000 shares (50.65%), Lawrence B. Zazzo,
Cherry Hill, New Jersey, owned approximately 7,891.247 shares
(6.32%) and LEWCO Securities Corp, New York, New York, record
owner holding Fund shares for its clients owned approximately
6,397.000 shares (5.12%).
The Funds
"The Funds" and "Funds" mean the following investment
companies: American Leaders Fund, Inc.; Annuity Management
Series; Arrow Funds; Automated Government Money Trust; Cash
Trust Series II; Cash Trust Series, Inc.; DG Investor Series;
Edward D. Jones & Co. Daily Passport Cash Trust; Federated
ARMs Fund; Federated Exchange Fund, Ltd.; Federated GNMA
Trust; Federated Government Trust; Federated Growth Trust;
Federated High Yield Trust; Federated Income Securities Trust;
Federated Income Trust; Federated Index Trust; Federated
Institutional Trust; Federated Intermediate Government Trust;
Federated Master Trust; Federated Municipal Trust; Federated
Short-Intermediate Government Trust; Federated Short-Term
U.S. Government Trust; Federated Stock Trust; Federated Tax-
Free Trust; Federated U.S. Government Bond Fund; 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; Insight Institutional Series,
Inc.; 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; The Medalist
Funds: Money Market Management, Inc.; Money Market Obligations
Trust; Money Market Trust; Municipal Securities Income Trust;
111 Corcoran Funds; Peachtree Funds; The Planters Funds;
Portage Funds; RIMCO Monument Funds; The Shawmut Funds; Short-
Term Municipal Trust; 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; and World
Investment Series, Inc.
Investment Advisory Services
Adviser to the Fund
The Trust's investment adviser is Federated Advisers (the
"Adviser"). It is a subsidiary of Federated Investors. All
the voting securities of Federated Investors are owned by a
trust, the trustees of which are John F. Donahue, his wife and
his son, J. Christopher Donahue.
The Adviser shall not be liable to the Trust, the Fund or any
shareholder of the Fund for any losses that may be sustained
in the purchase, holding, or sale of any security, or for
anything done or omitted by it, except acts or omissions
involving willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties imposed upon it by its
contract with the Fund.
Advisory Fees
For its advisory services, Federated Advisers receives an
annual investment advisory fee as described in the prospectus.
For the period from June 1, 1993 (date of initial public
investment) to August 31, 1993, the Adviser earned advisory
fees of $1,646, all of which was voluntarily waived. During
the fiscal year ended August 31, 1994, the Adviser earned
advisory fees of $33,210, all of which was voluntarily waived.
State Expense Limitations
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 2.5% per year of the first $30 million
of average net assets, 2% per year of the next $70
million of average net assets, and 1.5% per year of the
remaining average net assets, the Adviser will reimburse
the Trust 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 Services Company, 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 period from
June 1, 1993 (date of initial public investment) to August 31,
1993, the Fund did not incur any administrative costs. For
the fiscal year ended August 31, 1994, the Administrators
collectively earned $101,062, all of which was waived. 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 a director of
Commercial Data Services, Inc., a company which provides
computer processing services to Federated Administrative
Services.
Transfer Agent and Dividend Disbursing Agent
Federated Administrative Services, 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 Fund's
accounting records. The fee 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 which 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 Trustees. The Adviser may select brokers and dealers
who offer brokerage and research services. These services may
be furnished directly to the Fund or to the Adviser and may
include:
oadvice as to the advisability of investing in securities;
osecurity analysis and reports;
oeconomic studies;
oindustry studies;
oreceipt of quotations for portfolio evaluations; and
osimilar 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 relation 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 year ended August 31, 1994 , the Fund did not
pay any total brokerage commissions.
Purchasing Shares
Shares of the Fund are sold at their net asset value on days
the New York Stock Exchange is open for business. Effective
October 17, 1994, the Fund has ceased offering its shares for
sale, except for dividend reinvestment by existing
shareholders. The procedure for purchasing shares is
explained in the prospectus under "Investing in the Fund."
Distribution and Shareholder Services Plans
These arrangements permit the payment of fees to financial
institutions, the distributor, and Federated Shareholder
Services, to stimulate distribution activities and to cause
services to be provided to shareholders by a representative
who has knowledge of the shareholder's particular
circumstances and goals. These activities and services may
include, but are not limited to, marketing efforts; providing
office space, equipment, telephone facilities, and various
clerical, supervisory, computer, and other personnel as
necessary or beneficial to establish and maintain shareholder
accounts and records; processing purchase and redemption
transactions and automatic investments of client account cash
balances; answering routine client inquiries; and assisting
clients in changing dividend options, account designations,
and addresses.
By adopting the Distribution Plan, the Trustees expect that
the 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 period ended August 31, 1994, payments in the amount
of $62,268 were made pursuant to the Distribution Plan. In
addition, for this period, payments in the amount of $19,615
were made pursuant to the Shareholder Services Plan.
Determining Net Asset Value
Net asset value generally changes each day. The days on which
net asset value is calculated for shares are described in the
prospectus.
Valuing Municipal Bonds
The Trustees 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 issue, 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 Trustees 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
Trustees.
Redeeming Shares
The Fund redeems shares at the next computed net asset value
after the Fund receives the redemption request, less any
applicable contingent deferred sales charge. Redemption
procedures and contingent deferred sales charges are explained
in the prospectus under "Redeeming Shares." Although the
transfer agent does not charge for telephone redemptions, it
reserves the right to charge a fee for the cost of wire-
transferred redemptions of less than $5,000.
Redemption in Kind
Although the Fund intends to redeem shares in cash, it
reserves the right under certain circumstances to pay the
redemption price in whole or in part by a distribution of
securities from the Fund's portfolio. To the extent available,
such securities will be readily marketable.
The Trust is obligated to redeem shares solely in cash up to
$250,000 or 1% of the Fund's net asset value, whichever is
less, for any one shareholder within a 90-day period.
Any redemption beyond this amount will also be in cash unless
the Trustees determine that further cash payments will have a
material adverse effect on remaining shareholders. In such a
case, the Trust will pay all or a portion of the remainder of
the redemption in portfolio instruments, valued in the same
way that net asset value is determined. The portfolio
instruments will be selected in a manner that the Trustees
deem fair and equitable.
Redemption in kind is not as liquid as a cash redemption. If
redemption is made in kind, shareholders receiving their
securities and selling them before their maturity could
receive less than the redemption value of their securities and
could incur certain transactions 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:
oderive at least 90% of its gross income from dividends,
interest, and gains from the sale of securities;
oderive less than 30% of its gross income from the sale of
securities held less than three months;
oinvest in securities within certain statutory limits; and
odistribute to its shareholders at least 90% of its net
income earned during the year.
Capital Gains
Capital gains or losses may be realized by the Fund 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.
Distributions of long-term capital gains are taxed as such,
whether they are taken in cash or reinvested, and regardless
of the length of time that the shareholder has owned shares.
Any loss by a shareholder on 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 return for the one-year period
ended August 31, 1994, was (5.48%).
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 offering price per share at the end of the
period. The number of shares owned at the end of the period is
based on the number of shares purchased at the beginning of
the period with $1,000, adjusted over the period by any
additional shares, assuming the monthly reinvestment of all
dividends and distributions. The total return calculation
assumes a complete redemption of the investment and the
deduction of any contingent deferred sales charge at the end
of the period. Any applicable contingent deferred sales charge
will be deducted from the ending value of the investment based
on the lesser of the offering price of redeemed shares at the
time of purchase or the offering price of redeemed shares at
the time of redemption.
Yield
The Fund's yield for the thirty-day period ended August 31,
1994, was 5.66%.
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 then annualized
using semiannual compounding. This means that the amount of
income generated during the thirty-day period is assumed to be
generated each month over a twelve-month period and is
reinvested every six months. The yield does not necessarily
reflect income actually earned by the 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, 1994 was 8.60%.
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 tax rate of 28% 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
obligations in the Fund's portfolio generally remains free
from federal regular income tax, and often is free from state
and local taxes as well.* As the table below indicates, a "tax-
free" investment is an attractive choice for investors,
particularly in times of narrow spreads between tax-free and
taxable yields.
TAXABLE YIELD EQUIVALENT FOR 1994
STATE OF NEW JERSEY
Tax Bracket:
Federal 15.00% 28.00% 31.00% 36.00% 39.60%
Combined Federal
and State 17.38% 34.18% 37.18% 42.65%
46.25%
Joint Return:$1-38,000$38,001-91,850$91,851-140,000 $140,001-250,000Over
$250,000
Tax-Exempt Yield Taxable Yield Equivalent
1.50% 1.82% 2.28% 2.39% 2.62% 2.79%
2.00% 2.42% 3.04% 3.18% 3.49% 3.72%
2.50% 3.03% 3.80% 3.98% 4.36% 4.65%
3.00% 3.63% 4.56% 4.78% 5.23% 5.58%
3.50% 4.24% 5.32% 5.57% 6.10% 6.51%
4.00% 4.84% 6.08% 6.37% 6.97% 7.44%
4.50% 5.45% 6.84% 7.16% 7.85% 8.37%
5.00% 6.05% 7.60% 7.96% 8.72% 9.30%
5.50% 6.66% 8.36% 8.75% 9.59% 10.23%
6.00% 7.26% 9.12% 9.55% 10.46% 11.16%
Tax Bracket:
Federal 15.00% 28.00% 31.00% 36.00% 39.60%
Combined Federal
and State 17.38% 34.18% 37.65% 42.65%
46.25%
Single Return:$1-22,750$22,751-55,100 $55,101-115,000$115,001-250,000 Over
$250,00
Tax-Exempt Yield Taxable Yield Equivalent
1.50% 1.82% 2.28% 2.41% 2.62% 2.79%
2.00% 2.42% 3.04% 3.21% 3.49% 3.72%
2.50% 3.03% 3.80% 4.01% 4.36% 4.65%
3.00% 3.63% 4.56% 4.81% 5.23% 5.58%
3.50% 4.24% 5.32% 5.61% 6.10% 6.51%
4.00% 4.84% 6.08% 6.42% 6.97% 7.44%
4.50% 5.45% 6.84% 7.22% 7.85% 8.37%
5.00% 6.05% 7.60% 8.02% 8.72% 9.30%
5.50% 6.66% 8.36% 8.82% 9.59% 10.23%
6.00% 7.26% 9.12% 9.62% 10.46% 11.16%
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 above chart is for illustrative purposes only and uses tax
brackets that went into effect beginning January 1, 1994. It
is not an indicator of past or future performance of any Fund
shares.
*Some portion of the Fund's income may be subject to the
federal alternative minimum tax and state and local regular
or alternative minimum taxes.
Performance Comparisons
The performance of shares depends upon such variables as:
oportfolio quality;
oaverage portfolio maturity;
otype of instruments in which the portfolio is invested;
ochanges in interest rates and market value of portfolio
securities;
ochanges in the Fund's expenses; and
ovarious other factors.
Investors may use financial publications and/or indices to
obtain a more complete view of the Fund's performance. When
comparing performance, investors should consider all relevant
factors such as the composition of any index used, prevailing
market conditions, portfolio compositions of other funds, and
methods used to value portfolio securities and compute
offering price. The financial publications and/or indices
which the Fund uses in advertising may include:
oLipper Analytical Services, Inc. ranks funds in various fund
categories 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 offering price over a specific period
of time. From time to time, the Fund will quote its Lipper
ranking in the "New Jersey Municipal Debt Funds" category in
advertising and sales literature.
oMorningstar, 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. The 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. In
addition, advertisements and sales literature for the Fund may
include charts and other illustrations that depict the
hypothetical growth of a tax-free investment as compared to a
taxable investment.
Advertising and sales literature for the Fund may include
quotations from the Tax Foundation that illustrate the effect
of taxes on income.
Financial Statements
The Financial Statements for the fiscal year ended August 31,
1994, are incorporated herein by reference to the annual
report of the Fund dated August 31, 1994 (File No. 811-6165).
A copy of the report may be obtained without charge by
contacting the Fund.
Appendix
Standard and Poor's Ratings Group Municipal Bond Ratings
("S&P")
AAA--Debt rated AAA has the highest rating assigned by S & P.
Capacity to pay interest and repay principal is extremely
strong.
AA--Debt rated AA has a very strong capacity to pay interest
and repay principal and differs from the 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 effects 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.
NR--Indicates that no public rating has been requested, that
there is insufficient information on which to base a rating,
or that S&P does not rate a particular type of obligation as a
matter of policy.
Plus (+) or minus (-): The ratings from AA to CCC may be
modified by the addition of a plus or minus sign to show
relative standing within the major rating categories.
Moody's Investors Service, Inc., Municipal Bond Ratings
("Moody's")
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.
NR--Not rated by Moody's.
Moody's applies numerical modifiers, 1, 2 and 3 in each
generic rating classification from Aa through B in its generic
rating category; the modifier 1 indicates that the security
ranks in the higher end of its generic ranking category; the
modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of its generic
rating category.
Fitch Investors Service, Inc. Long-Term Debt Ratings ("Fitch")
AAA--Bonds considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally
strong ability to pay interest and repay principal, which is
unlikely to be affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high
quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as
bonds rated AAA. Because bonds rated in the AAA and AA
categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is
generally rated F-1+.
A--Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay
interest and repay principal is considered to be adequate.
Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these
bonds, and therefore, impair timely payment. The likelihood
that the ratings of these bonds will fall below investment
grade is higher than for bonds with higher ratings.
NR--Indicates that Fitch does not rate the specific issue.
Plus (+) or Minus (-):
Plus and minus signs are used with a rating symbol to indicate
the relative position of a credit within the rating category.
Plus and minus signs, however, are not used in the AAA
category.
Standard and Poor's Ratings Group Municipal Note Ratings
SP-1--Very strong or strong capacity to pay principal and
interest. Those issues determined to possess overwhelming
safety characteristics will be given a plus sign (+)
designation.
SP-2--Satisfactory capacity to pay principal and interest.
Moody's Investors Service, Inc., Short-Term Loan Ratings
MIG1/VMIG1--This designation denotes best quality. There is a
present strong protection by established cash flows, superior
liquidity support or demonstrated broad based access to the
market for refinancing.
MIG2/VMIG2--This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding
group.
Fitch Investors Service, Inc. Short-Term Debt Ratings
F-1+--Exceptionally Strong Credit Quality. Issues assigned
this rating are regarded as having the strongest degree of
assurance for timely payment.
F-1--Very Strong Credit Quality. Issues assigned this rating
reflect an assurance of timely payment only slightly less in
degree than issues rated F-1+.
F-2--Good Credit Quality. Issues carrying this rating have a
satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as for issues assigned F-1+
and F-1 ratings.
Standard and Poor's Ratings Group Commercial Paper Ratings
A-1--This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to
possess extremely strong safety characteristics are denoted
with a plus sign (+) designation.
A-2--Capacity for timely payment on issues with this
designation is satisfactory. However, the relative degree of
safety is not as high as for issues designated A-1.
Moody's Investors Service, Inc., Commercial Paper Ratings
Prime-1--Issuers rated Prime-1 (or related supporting
institutions) have a superior capacity for repayment of short-
term promissory obligations. Prime-1 repayment capacity will
normally be evidenced by the following characteristics:
- Leading market positions in well established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate
reliance on debt and ample asset protection.
- Broad margins in earning coverage of fixed financial
charges and high internal cash generation.
- Well established access to a range of financial markets
and assured sources of alternate liquidity.
Prime-2--Issuers rated Prime-2 (or related supporting
institutions) have a strong capacity for repayment of short-
term promissory obligations. This will normally be evidenced
by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will
be more subject to variation. Capitalization characteristics,
while still appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained.
TEXAS MUNICIPAL INCOME FUND
(A PORTFOLIO OF MUNICIPAL SECURITIES INCOME TRUST)
PROSPECTUS
The shares of Texas Municipal Income Fund (the "Fund") represent
interests in a non-diversified portfolio of securities which is
one of a series of investment portfolios in Municipal Securities
Income Trust (the "Trust"), an open-end management investment
company (a mutual fund). The investment objective of the Fund is
to provide current income which is exempt from federal regular
income tax. The Fund invests primarily in a portfolio of municipal
securities, including debt obligations issued by the State of
Texas and its political subdivisions ("Texas Municipal
Securities"). Effective October 17, 1994, the Fund has ceased
offering its shares for sale, except for dividend reinvestments by
existing shareholders.
THE SHARES OF THE FUND 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 information you should read and know
about investing in the Fund. Keep this prospectus for future
reference.
The Fund has also filed a Statement of Additional Information
dated December 31, 1994 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 free of charge by calling 1-800-235-4669. To obtain
other information, or 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 December 31, 1994
TABLE OF CONTENTS ------------------------------------------------
- ------------------------------
SUMMARY OF FUND EXPENSES 1
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS 2
- ------------------------------------------------------
GENERAL INFORMATION 3
- ------------------------------------------------------
INVESTMENT INFORMATION 3
- ------------------------------------------------------
Investment Objective 3
Investment Policies 4
Acceptable Investments 4
Characteristics 4
Participation Interests 4
Variable Rate Municipal Securities 4
Municipal Leases 4
Inverse Floaters 5
Restricted Securities 6
When-Issued and Delayed
Delivery Transactions 6
Futures Contracts and Options to Buy
or Sell Such Contracts 6
Temporary Investments 7
Texas Municipal Securities 7
Investment Risks 8
Non-Diversification 9
Investment Limitations 9
NET ASSET VALUE 9
- ------------------------------------------------------
INVESTING IN THE FUND 9
- ------------------------------------------------------
Share Purchases 9
Through a Financial Institution 9
Directly by Mail 10
Directly by Wire 10
Minimum Investment Required 10
Conversion to Federal Funds 10
What Shares Cost 10
Systematic Investment Program 10
Certificates and Confirmations 11
Dividends and Distributions 11
REDEEMING SHARES 11
- ------------------------------------------------------
Through a Financial Institution 11
Directly by Mail 12
Signatures 12
Receiving Payment 12
Contingent Deferred Sales Charge 12
Elimination of Contingent Deferred
Sales Charge 13
Systematic Withdrawal Program 14
Accounts with Low Balances 14
Exchanges for Shares of Other Funds 14
MUNICIPAL SECURITIES INCOME
TRUST INFORMATION 14
- ------------------------------------------------------
Management of Municipal Securities
Income Trust 14
Board of Trustees 14
Investment Adviser 15
Advisory Fees 15
Adviser's Background 15
Distribution of Fund Shares 15
Distribution Plan 16
Shareholder Services Plan 17
Administration of the Fund 17
Administrative Services 17
Custodian
Transfer Agent and
Dividend Disbursing Agent 17
Legal Counsel 17
Independent Auditors 17
Expenses of the Fund 18
SHAREHOLDER INFORMATION 18
- ------------------------------------------------------
Voting Rights 18
Massachusetts Partnership Law 18
TAX INFORMATION 18
- ------------------------------------------------------
Federal Income Tax 18
Texas State and Municipal Taxation 20
Other State and Local Taxes 20
PERFORMANCE INFORMATION 20
- ------------------------------------------------------
ADDRESSES
Inside Back Cover
- ------------------------------------------------------
Summary of Fund Expenses
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases (as a percentage
of offering price) None
Maximum Sales Load 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) 0.00%
Redemption Fee (as a percentage of amount redeemed,
if applicable) None
Exchange Fee None
Annual Fund Operating Expenses
(As a percentage of average net assets)
Management Fee (after waiver)(2) 0.00%
12b-1 Fee 0.75%
Total Other Expenses (after expense reimbursement)
1.75%
Shareholder Services Fee 0.25%
Total Fund Operating Expenses (3)
2.50%
(1) Effective December 1, 1994, the contingent deferred sales
charge is waived. The contingent deferred sales charge had
been 3.00% in the first year, declining to 2.00% in the
second year and 0.00% after three years. (See "Contingent
Deferred Sales Charge").
(2) The management fee has been reduced to reflect the
voluntary waiver of the management fee. The adviser can
terminate this voluntary waiver at any time at its sole
discretion. The maximum management fee is 0.40%.
(3) The Total Fund Operating Expenses in the table above are
based on expenses expected during the fiscal year ending
August 31, 1995. The Total Fund Operating Expenses were
0.75% for the fiscal year ended August 31, 1994, and would
have been 3.73% absent the voluntary waiver of the
management fee and the voluntary reimbursement of certain
other operating expenses.
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 "Investing in the Fund" and "Municipal
Securities Income Trust Information". Wire--transferred
redemptions of less than $5,000 may be subject to additional
fees.
Long-term shareholders may pay more than the economic
equivalent of the maximum front-end sales charge permitted
under the rules of the National Association of Securities
Dealers, Inc.
EXAMPLE 1 year 3 years 5 years 10 years
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..... $56 $99 $133 $284
You would pay the following
expenses on the same $25 $78 $133 $284
investment, assuming no redemption...................
The above example should not be considered a representation
of past or future expenses. Actual expenses may be greater or
less than those shown.
TEXAS MUNICIPAL INCOME FUND
FINANCIAL HIGHLIGHTS
(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 7, 1994,
on the Fund's Financial Statements for the year ended August 31,
1994, is included in the Annual Report dated August 31, 1994, 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 free of charge.
YEAR ENDED
AUGUST 31,
1994 1993*
Net asset value, beginning of period $10.43 $10.00
Income from investment operations
Net investment income 0.52 0.12
Net realized and unrealized gain on investments
(0.92) 0.44
Total from investment operations (0.40) 0.56
Less distributions
Dividends to shareholders from net investment income (0.52)
(0.12)
Distributions in excess of net investment income (a) (0.06)
(0.01)
Total distributions (0.58) (0.13)
Net asset value, end of period $9.45 $10.43
Total return** (3.97%) 5.67%
Ratios to Average Net Assets
Expenses 0.75% 0.75%(b)
Net investment income 5.14% 5.10%(b)
Expense waiver/reimbursement (c) 2.98% 3.70%(b)
Supplemental Data
Net assets, end of period (000 omitted) $11,130
$5,023
Portfolio turnover rate 60% 0%
*Reflects operations for the period from June 1, 1993 (date of
initial public investment) to August 31, 1993.
**Based on net asset value, which does not reflect the sales load
or contingient deferred sales charge, if applicable.
(a)Distributions are
determined in accordance with income tax regulations which may differ
from generally accepted
accounting principles. These distributions do not represent a return
of capital for federal income
tax purposes.
(b)Computed on an annualized basis.
(c) The voluntary expense
decrease is reflected in both the expense and net investment
income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
FURTHER INFORMATION ABOUT THE FUND'S PERFORMANCE IS CONTAINED IN
THE FUND'S ANNUAL REPORT DATED AUGUST 31, 1994, WHICH CAN BE
OBTAINED FREE OF CHARGE.
GENERAL INFORMATION ----------------------------------------------
- -
Federated Municipal Income Trust was established as a
Massachusetts business trust under a Declaration of Trust dated
August 6, 1990. On September 16, 1992 (effective date October 31,
1992), the Board of Trustees (the "Trustees") approved changing
the name of the Trust from Federated Municipal Income Trust to
Municipal Securities Income Trust. The Declaration of Trust
permits the Trust to offer separate series of shares of beneficial
interest representing interests in separate portfolios of
securities. The shares in any one portfolio may be offered in
separate classes. With respect to this Fund, as of the date of
this prospectus the Trustees have not established any classes of
shares.
Shares of the Fund are designed for customers of financial
institutions such as broker/dealers, banks, fiduciaries, and
investment advisers as a convenient means of accumulating an
interest in a professionally managed, non-diversified portfolio
investing primarily in Texas Municipal Securities. A minimum
initial investment of $1,500 is required. Under normal
circumstances, subsequent investments must be in amounts of at
least $100. Effective October 17, 1994, however, the Fund has
ceased offering its shares for sale, except for dividend
reinvestment by existing shareholders. The Fund is not likely to
be a suitable investment for non-Texas taxpayers or retirement
plans since Texas Municipal Securities are not likely to produce
competitive after-tax yields for such persons and entities when
compared to other investments.
Except as otherwise noted in this prospectus, shares of the Fund
are sold at net asset value and are redeemed at net asset value.
Under ordinary circumstances, a contingent deferred sales charge
is imposed on certain shares of the Fund which are redeemed within
three full years of the date of purchase. The contingent deferred
sales charge has been waived for all redemptions effective
December 1, 1994. Fund assets may be used in connection with the
distribution of shares of the Fund.
In November 1994, the Fund's distributor notified shareholders
that it would recommend the liquidation of the Fund to the
Trustees of the Trust and advised shareholders that it may be
advisable to consider voluntary redemption of Fund shares because,
among other things, effective October 17, 1994, the Fund had
ceased offering shares for sale and because, effective December 1,
1994, the Fund's adviser would cease the voluntary reimbursement
of operating expenses, thus causing the Fund's expense ratio to
increase significantly. The Fund's distributor also indicated
that it would recommend to the Trustees a transaction involving
the tax-free reorganization of the Fund into another investment
company. The Trustees are expected to consider such proposal in
early 1995 and, if approved by them, it is anticipated that such
matter will be submitted to shareholders for their approval
promptly thereafter.
INVESTMENT INFORMATION -------------------------------------------
- -------
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide current income
which is exempt from 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.
Interest income of the Fund that is exempt from the federal income
tax described above retains its exempt status when distributed to
the Fund's shareholders. However, income distributed by the Fund
may not necessarily be exempt from state or municipal taxes in
states other than Texas.
INVESTMENT POLICIES
The Fund pursues its investment objective by investing primarily
in securities which are exempt from federal regular income tax.
Under normal market conditions, the Fund will invest at least 65%
of the value of its total assets in Texas Municipal Securities.
This investment policy may not be changed without shareholder
approval. Unless indicated otherwise, the other investment
policies of the Fund described below may be changed by the
Trustees without approval of shareholders. Shareholders will be
notified before any material changes in these policies become
effective.
ACCEPTABLE INVESTMENTS. The Fund invests primarily in Texas
Municipal Securities, which are obligations issued by or on behalf
of the State of Texas or its political subdivisions and
participation interests, as described below, in any of the above
obligations, the interest from which is, in the opinion of bond
counsel for the issuers or in the opinion of officers of the Fund
and/or the investment adviser to the Fund, exempt from federal
regular income tax. The Fund currently invests primarilyin
variable rate municipal securities, as described below.
The Fund invests primarily in variable rate municipal securities,
as described below.
The Fund may also engage in put and call options, futures
contracts, and options on futures contracts for hedging purposes.
As a matter of investment policy which cannot be changed without
the approval of shareholders, the Fund invests its assets so that
at least 80% of its annual interest income is exempt from federal
regular income tax.
The prices of fixed income securities fluctuate inversely to the
direction of interest rates.
CHARACTERISTICS. The Texas Municipal Securities which the
Fund buys are investment grade bonds rated, at the time of
purchase, Aaa, Aa, A, or Baa by Moody's Investors Service,
Inc. ("Moody's"), or AAA, AA, A, or BBB by Standard and
Poor's Ratings Group ("S&P") or by Fitch Investors Service,
Inc. ("Fitch"). In certain cases the Fund's adviser may
choose bonds which are unrated if it determines that such
bonds are of comparable quality or have similar
characteristics to investment grade bonds. Bonds rated "BBB"
by S&P or Fitch 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.
If the Fund purchases an investment grade bond, and the
rating of such bond is subsequently downgraded so that the
bond is no longer classified as investment grade, the Fund is
not required to drop the bond from the portfolio, but will
consider whether such action is appropriate. A description of
the rating categories is contained in the Appendix to the
Statement of Additional Information.
PARTICIPATION INTERESTS. The Fund may purchase participation
interests from financial institutions such as commercial
banks, savings and loan associations, and insurance
companies. These participation interests give the Fund an
undivided interest in Texas Municipal Securities. The
financial institutions from which the Fund purchases
participation interests frequently provide or secure
irrevocable letters of credit or guarantees to assure that
the participation interests are of high quality. The Board of
Trustees of the Trust will determine that participation
interests meet the prescribed quality standards for the Fund.
VARIABLE RATE MUNICIPAL SECURITIES. Some of the Texas
Municipal Securities which the Fund purchases may have
variable interest rates. Variable interest rates are
ordinarily based on a published interest rate, interest rate
index or a similar standard, such as the 91-day U.S. Treasury
bill rate. Many variable rate municipal securities are
subject to payment of principal on demand by the Fund in not
more than seven days. All variable rate municipal securities
will meet the quality standards for the Fund. The Fund's
investment adviser has been instructed by the Trustees to
monitor the pricing, quality, and liquidity of the variable
rate municipal securities, including participation interests
held by the Fund, on the basis of published financial
information and reports of the rating agencies and other
analytical services.
MUNICIPAL LEASES. Municipal leases are obligations issued by
state and local governments or authorities to finance the
acquisition of equipment and facilities and may be considered
to be illiquid.
They may take the form of a lease, an installment purchase
contract, a conditional sales contract or a participation
certificate on any of the above.
Also included within the general category of municipal securities
are certain lease obligations or installment purchase contract
obligations and participations therein (hereinafter collectively
called "lease obligations") of municipal authorities or entities.
Although lease obligations do not constitute general obligations
of the municipality for which the municipality's taxing power is
pledged, a lease obligation is ordinarily backed by the
municipality's covenant to budget for, appropriate and make the
payments due under the lease obligation. Interest on lease
obligations is tax-exempt to the same extent as if the
municipality had issued debt obligations to finance the underlying
project or purchase. However, certain lease obligations contain
"non-appropriation" clauses which provide that the municipality
has no obligation to make lease or installment purchase payments
in future years unless money is appropriated for such purpose on a
yearly basis. In addition to the "non-appropriation" risk, these
securities represent a relatively new type of financing that has
not yet developed the depth of marketability associated with more
conventional bonds and some lease obligations may be illiquid.
Although "non-appropriation" lease obligations are generally
secured by the leased property, disposition of the property in the
event of foreclosure might prove difficult. In addition, the tax
treatment of such obligations in the event of non-appropriation is
unclear. The Fund does not intend to invest more than 10% of its
total assets in lease obligations that contain "non-appropriation"
clauses.
In determining the liquidity of municipal lease securities, the
Fund's investment adviser, under the authority delegated by the
Board of Trustees, will base its determination on the following
factors:
- whether the lease can be terminated by the lessee;
- the potential recovery, if any, from a sale of the leased
property upon termination of the lease;
- the lessee's general credit strength (e.g., its debt,
administrative, economic and financial characteristics and
prospects);
- the likelihood that the lessee will discontinue
appropriating funding for the leased property because the
property is no longer deemed essential to its operations
(e.g., the potential for an "event of non-appropriation");
and
- any credit enhancement or legal recourse provided upon an
event of non-appropriation or other termination of the
lease.
INVERSE FLOATERS. The Fund may invest in various types of
derivative municipal securities whose interest rates bear an
inverse relationship to the interest rate on another security or
the value of an index ("inverse floaters"). Because changes in the
interest rate on the other security or index inversely effect the
residual interest paid on the inverse floater, the value of an
inverse floater is generally more volatile than that of a fixed
rate bond. Inverse floaters have interest rate adjustment formulas
which generally reduce or, in the extreme, eliminate the interest
paid to the Fund when short-term interest rates rise, and increase
the interest paid to the Fund when short-term interest rates fall.
Inverse floaters have varying degrees of liquidity, and the market
for these securities is new and relatively volatile. These
securities tend to underperform the market for fixed rate bonds in
a rising interest rate environment, but tend to outperform the
market for fixed rate bonds when interest rates decline. Shifts in
the relationship between short-term and long-term interest rates
may alter this tendency, however. In return for this volatility,
inverse floaters typically offer the potential for yields
exceeding the yields
available on fixed rate bonds with comparable credit quality and
maturity. These securities usually permit the investor to convert
the floating rate to a fixed rate (normally adjusted downward),
and this optional conversion feature may provide a partial hedge
against rising interest rates if exercised at an opportune time.
RESTRICTED SECURITIES. The Fund may invest up to 10% of its total
assets in restricted securities. Restricted securities are any
securities in which the Fund may otherwise invest pursuant to its
investment objective and policies but which are subject to
restriction on resale under federal securities laws. To the extent
these securities are deemed to be illiquid, the Fund will limit
its purchases, together with other securities considered to be
illiquid, to 15% of its net assets.
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 the transaction
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 into transactions to sell its purchase
commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar
securities at later dates. The Fund may realize short-term
profits or losses upon the sale of such commitments.
FUTURES CONTRACTS AND OPTIONS TO BUY OR SELL SUCH CONTRACTS.
The Fund may utilize bond futures contracts and options to a
limited extent. Specifically, the Fund may enter into futures
contracts provided that not more than 5% of its assets are
required as a futures contract deposit; in addition, the Fund may
enter into futures contracts and options transactions only to the
extent that obligations under such contracts or transactions
represent not more than 20% of the Fund's assets.
Futures contracts and options may be used for several reasons: to
maintain cash reserves while remaining fully invested, to
facilitate trading, to reduce transactions costs, or to seek
higher investment returns when a futures contract is priced more
attractively than the underlying municipal security or index. The
Fund may not use futures contracts or options transactions to
leverage its assets.
For example, in order to remain fully invested in bonds, while
maintaining liquidity to meet potential shareholder redemptions,
the Fund may invest a portion of its assets in a bond futures
contract. Because futures contracts only require a small initial
margin deposit, the Fund would then be able to maintain a cash
reserve to meet potential redemptions, while at the same time
remaining fully invested although any gains from such investments
would be fully taxable. Also, because the transactions costs of
futures contracts and options may be lower than the costs of
investing in bonds directly, it is expected that the use of
futures contracts and options may reduce the Fund's total
transactions costs.
The primary risks associated with the use of futures contracts and
options are: (i) imperfect correlation between the change in
market value of the bonds held by the Fund and the prices of
futures contracts and options; and (ii) possible lack of a liquid
secondary market for a futures contract and the resulting
inability to close a futures position prior to its maturity date.
The risk of imperfect correlation will be minimized by investing
only in those contracts whose price fluctuations are expected to
resemble those of the Fund's underlying securities. The risk that
the Fund will be unable to close out a futures position will be
minimized by entering into such transactions on a national
exchange with an active and liquid secondary market. In general,
the futures market is more liquid than the municipal bond market,
and so by investing in futures, liquidity may be improved.
TEMPORARY INVESTMENTS. From time to time, during periods of other
than normal market conditions, the Fund may invest in short-term
non-Texas Municipal Securities or taxable temporary investments.
These temporary investments include: 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 rated within the investment grade categories
described under "Acceptable Investments--Characteristics" (if
rated) or those which the investment adviser judges to have the
same characteristics as such investment grade securities (if
unrated).
Although the Fund is permitted to make taxable, temporary
investments, there is no current intention of generating income
subject to federal regular income tax.
TEXAS MUNICIPAL SECURITIES
Texas Municipal Securities are generally issued to finance public
works, such as airports, bridges, highways, housing, hospitals,
mass transportation projects, schools, streets, and water and
sewer works. They are also issued to repay outstanding
obligations, to raise funds for general operating expenses, and to
make loans to other public institutions and facilities.
The two principal classifications of municipal securities are
"general obligation" and "revenue" bonds. General obligation bonds
are secured by the issuer's pledge of its full faith and credit
and taxing power for the payment of principal and interest.
However, interest on and principal of revenue bonds are payable
only from the revenue generated by the facility financed by the
bond or other specified sources of revenue. Revenue bonds do not
represent a pledge of credit or create any debt of or charge
against the general revenues of a municipality or public
authority. Industrial development bonds are typically classified
as revenue bonds.
Industrial development bonds are issued by or on behalf of public
authorities to provide financing aid to acquire sites or construct
and equip facilities for privately or publicly owned corporations.
The availability of this financing encourages these corporations
to locate within the sponsoring communities and thereby increases
local employment.
Municipal securities may carry fixed, floating or inverse floating
rates of interest. Fixed rate securities bear interest at the same
rate from issuance until maturity. The interest rate on floating
rate securities is subject to adjustment based upon changes in
market interest rates or indices, such as a bank's prime rate or a
published market index. The interest rate may be adjusted at
specified intervals or immediately upon any change in the
applicable index rate. The interest rate for most floating rate
securities varies directly with changes in the index rate, so that
the market value of the security will approximate its stated value
at the time of each adjustment. However, inverse floating rate
securities have interest rates that vary inversely with changes in
the applicable index rate, such that the security's interest rate
rises when market interest rates fall and falls when market
interest rates rise. The market value of floating rate securities
is less sensitive than fixed rate securities to changes in market
interest rates. In contrast, the market value of inverse floating
rate securities is more sensitive to market ratechanges than fixed
or floating rate securities. The effect of market rate changes on
securities depends upon a variety of factors, including market
expectations as to future changes in interest rates and, in the
case of floating and inverse floating rate securities, the
frequency with which the interest rate is adjusted and the
multiple of the index rate used in making the adjustment.
Most municipal securities pay interest in arrears on a semiannual
or more frequent basis. However, certain securities, typically
known as capital appreciation bonds or zero coupon bonds, do not
provide for any interest payments prior to maturity. Such
securities are normally sold at a discount from their stated
value, or provide for periodic increases in their stated value to
reflect a compounded interest rate. The market value of these
securities is also more sensitive to changes in market interest
rates than securities that provide for current interest payments.
The Fund will not generally invest more than 25% of its total
assets in any one industry. Governmental issuers of municipal
securities are not considered part of any "industry." However,
municipal securities backed only by the assets and revenues of
nongovernmental users may, for this purpose, be deemed to be
related to the industry in which such nongovernmental users
engage, and the 25% limitation would apply to such obligations. It
is nonetheless possible that the Fund may invest more than 25% of
its assets in a broader segment of the municipal securities
market, such as revenue obligations of hospitals and other health
care facilities, housing agency revenue obligations, or airport
revenue obligations. This would be the case only if the Fund
determines that the yields available from obligations in a
particular segment of the market justified the additional risks
associated with a large investment in such segment. Although such
obligations could be supported by the credit of governmental users
or by the credit of nongovernmental users engaged in a number of
industries, economic, business, political and other developments
generally affecting the revenues of such users (for example,
proposed legislation or pending court decisions affecting the
financing of such projects and market factors affecting the demand
for their services or products) may have a general adverse effect
on all municipal securities in such a market segment.
INVESTMENT RISKS
Yields on Texas Municipal Securities depend on a variety of
factors, including: the general conditions of the short-term
municipal market and the municipal bond market; the size and
maturity of the particular offering; and the rating of the issue.
Further, any adverse economic conditions or developments affecting
the State of Texas or its municipalities could impact the Fund's
portfolio. The ability of the Fund to achieve its investment
objective also depends on the continuing ability of the issuer of
Texas Municipal Securities and demand features for such
securities, or the credit enhancers of either, to meet their
obligations for the payment of interest and principal when due.
Investing in Texas Municipal Securities which meet the Fund's
quality standards may not be possible if the State of Texas or its
municipalities do not maintain their current credit ratings. In
addition, certain Texas constitutional amendments, legislative
measures, executive orders, administrative regulations, and voter
initiatives could result in adverse consequences affecting Texas
Municipal Securities. An expanded discussion of the current
economic risks associated with the purchase of Texas Municipal
Securities is contained in the Statement of Additional
Information.
NON-DIVERSIFICATION
The Fund is a non-diversified investment portfolio. As such, there
is no limit on the percentage of assets which can be invested in
any single issuer. An investment in the Fund, therefore, will
entail greater risk than investment in a diversified portfolio of
securities because the higher percentage of investments among
fewer issuers may result in greater fluctuation in the total
market value of the Fund's portfolio. Any economic, political, or
regulatory developments affecting the value of the securities in
the Fund's portfolio will have a greater impact on the total value
of the portfolio than would be the case if the portfolio were
diversified among more issuers.
The Fund intends to comply with Subchapter M of the Internal
Revenue Code. This undertaking requires that at the end of each
quarter of the taxable year: (a) with regard to at least 50% of
the Fund's total assets, no more than 5% of its total assets are
invested in the securities of a single issuer; and (b) no more
than 25% of its total assets are invested in the securities of a
single issuer.
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
agreement to buy it back on a set date) or pledge securities
except, under certain circumstances, the Fund may borrow up to one-
third of the value of its total assets and pledge up to 10% of the
value of those assets to secure such borrowings.
The above investment limitation cannot be changed without
shareholder approval. The following limitation, however, can be
changed by the Trustees without shareholder approval. Shareholders
will be notified before any material change in this limitation
becomes effective.
The Fund will not invest more than 5% of its total assets in
industrial development bonds when the payment of principal and
interest is the responsibility of companies (or guarantors, where
applicable) with less than three years of continuous operations,
including the operation of any predecessor.
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.
INVESTING IN THE FUND ----------------------------------------
SHARE PURCHASES
SHARES OF THE FUND ARE NO LONGER BEING OFFERED FOR SALE. When
shares had been offered for sale, the following requirements and
procedures were applicable to purchases.
Shares are sold on days on which the New York Stock Exchange is
open. Shares may be purchased through an investment dealer which
has a sales agreement with the distributor, or directly from the
distributor, Federated Securities Corp., either by mail or by wire
once an account has been established. 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 of the Fund. Orders through a
financial institution are considered received when the Fund is
notified of the purchase order. Purchase orders through a
registered broker/dealer must be received by the broker before
4:00 P.M. (Boston time) and must be transmitted by the broker to
the Fund before 5:00 P.M. (Boston 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. (Boston
time) in order for shares to be purchased at that day's price. It
is the financial institution's responsibility to transmit orders
promptly.
DIRECTLY BY MAIL. To purchase shares by mail directly from
Federated Securities Corp:
- complete and sign the new account form available from
the Fund;
- enclose a check made payable to Florida Municipal
Income Fund; and
- send both to the transfer agent's bank, State Street
Bank and Trust Company, P.O. Box 8604, Boston, MA 02266-
8604.
Purchases by mail are considered received after payment by check
is converted by State Street Bank and Trust Company 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 State Street Bank receives payment by
wire.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in shares is $1,500. Subsequent
investments must be in amounts of at least $100.
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. State
Street Bank acts as the shareholder's agent in depositing checks
and converting them to federal funds.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an
order is received. The net asset value is determined at 4:00 P.M.
(Boston time), 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, Columbus Day,
Veteran's 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.
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their
investment on a regular basis in a minimum amount of $100. Under
this program, funds may be automatically withdrawn periodically
from the shareholder's checking account and invested in shares at
the net asset value next determined after an order is received by
State Street Bank. A shareholder may apply for participation in
this program through Federated Securities Corp. or his financial
institution.
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 Fund.
Detailed confirmations of each purchase and redemption are sent to
each shareholder. Monthly statements are sent to report dividends
paid during the month.
DIVIDENDS AND DISTRIBUTIONS
Dividends are declared daily and paid monthly. Dividends include
substantially all of the investment income earned by the Fund,
less its expenses, other than distribution fees made pursuant to
Rule 12b-1 for the sale of Fund shares, which fees currently are
charged to the Fund's paid-in capital for tax purposes. Effective
January 1, 1995, Rule 12b-1 fees will be paid out of Fund income,
rather than paid-in capital. Until January 1, 1995, a certain
portion of dividend distributions may represent a return of paid-
in capital. Distributions of any net realized long-term capital
gains will be made at least once every twelve months. Dividends
and distributions are automatically reinvested on payment dates in
additional shares of the Fund at net asset value unless
shareholders request cash payments on the application or by
writing to Federated Services Company.
Shares purchased through a financial institution, for which
payment by wire is received by State Street Bank on the business
day following the order, begin to earn dividends on the day that
the wire payment is received. Otherwise, shares purchased by wire
begin to earn dividends on the business day after wire payment is
received by State Street Bank. Shares purchased by mail, or
through a financial institution, if the financial institution's
payment is by check, begin to earn dividends on the second
business day after the check is received by Federated Services
Company.
Shares earn dividends through the business day on which proper
written redemption instructions are received by Federated Services
Company.
See the section entitled "Tax Information" in this prospectus for
a further discussion of the effect of the payment of distribution
fees made pursuant to Rule 12b-1.
REDEEMING SHARES ------------------------------------------------
The Fund redeems shares at their net asset value next determined
after Federated Services Companyreceives 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 by 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. (Boston time) and must be transmitted by the broker to
the Fund before 5:00 P.M. (Boston 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.
(Boston 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 be completed.
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. 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.
DIRECTLY BY MAIL
Shareholders may also redeem shares by sending a written request
to State Street Bank, P.O. Box 8604, Boston, MA 02266-8604. This
written request must include the shareholder's name, the Fund name
and class of shares, the account number, and the share or dollar
amount to be redeemed. Shares will be redeemed at their net asset
value next determined after State Street Bank receives the
redemption request.
If share certificates have been issued, they must be properly
endorsed and should be sent by registered or certified mail with
the written request. Shareholders may call the Fund for assistance
in redeeming by mail.
SIGNATURES. Shareholders requesting a redemption of $50,000 or
more, 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 firm of the New York, American, Boston, Midwest,
or Pacific Stock Exchange;
- 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
Under ordinary circumstances, shareholders redeeming shares from
their Fund accounts within three full years of the purchase date
of those shares will be charged a contingent deferred sales charge
by the Fund's distributor. Any applicable contingent deferred
sales charge will be imposed on the lesser of the net asset value
of the redeemed shares at the time of purchase or the net asset
value of the redeemed shares at the time of redemption in
accordance with the following schedule:
CONTINGENT DEFERRED
SHARES HELD SALES CHARGE
Less than one
year...........................................................
3%
More than one year but less than three
years.................... 2%
More than three
years.....................................................
None
Effective December 1, 1994, the Fund's distributor has waived the
imposition of the contingent deferred sales charge on all
redmeptions of Fund shares.
The contingent deferred sales charge will be deducted from the
redemption proceeds otherwise payable to the shareholder and will
be retained by the distributor. The contingent deferred sales
charge will not be imposed with respect to: (1) shares acquired
through the reinvestment of dividends or distributions of long-
term capital gains; or (2) shares held for more than three full
years from the date of purchase. Redemptions will be processed in
a manner intended to maximize the amount of redemption which will
not be subject to a contingent deferred sales charge. In computing
the amount of the applicable contingent deferred sales charge,
redemptions are deemed to have occurred in the following order:
(1) shares acquired through the reinvestment of dividends and long-
term capital gains; (2) shares held for more than three full years
from the date of purchase; (3) shares held for fewer than three
years from the date of purchase on a first-in-first-out basis. A
contingent deferred sales charges is not assessed in connection
with an exchange of Fund shares for shares in New Jersey Municipal
Income Fund or Florida Municipal Income Fund, portfolios of the
Trust, or for shares in Multi-State Municipal Income Fund, a
portfolio of Fixed Income Securities, Inc. (see "Exchanges for
Shares of Other Funds" below). Shares of New Jersey Municipal
Income Fund, Florida Municipal Income Fund, and Multi-State
Municipal Income Fund are no longer being offered for sales. Any
contingent deferred sales charge imposed at the time exchanged-for
shares are redeemed is calculated as if the shareholder had held
the shares from the date on which he became a shareholder of the
exchanged-from shares. Moreover, the contingent deferred sales
charge will be eliminated with respect to certain redemptions (see
"Elimination of Contingent Deferred Sales Charge" below).
ELIMINATION OF CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge will be eliminated with
respect to the following redemptions: (1) redemptions following
the death or disability, as defined in Section 72(m)(7) of the
Internal Revenue Code of 1986, of a shareholder; (2) redemptions
in connection with certain distributions from Individual
Retirement Accounts, qualified retirement plans or tax-sheltered
annuities; and (3) involuntary redemptions by the Fund of shares
in shareholder accounts that do not comply with the minimum
balance requirement. In addition, to the extent the distributor
does not advance commissions to certain financial institutions for
purchases made by certain individuals or entities, no contingent
deferred sales charge will be imposed on redemptions of shares
held by Trustees, employees and sales representatives of the Fund,
the distributor, or affiliates of the Fund or distributor;
employees of any financial institution that sells shares of the
Fund pursuant to a sales agreement with the distributor; and
spouses and children under the age of 21 of the aforementioned
persons. Finally, no contingent deferred sales charge will be
imposed on the redemption of shares originally purchased through a
bank trust department or investment adviser registered under the
Investment Advisers Act of 1940, to the extent that no commission
was advanced for purchases made by such entities. The Trustees
reserve the right to discontinue the elimination of the contingent
deferred sales charge. Shareholders would be notified of such
elimination. Any shares purchased prior to the termination of such
a waiver would have the contingent deferred sales charge
eliminated as provided in the Fund's prospectus at the time of
purchase of such shares. If a shareholder making a redemption
qualifies for an elimination of the contingent deferred sales
charge, the shareholder must notify Federated Securities Corp. or
State Street Bank in writing that he is entitled to such
elimination.
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; the minimum withdrawal amount is $100. 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. A contingent deferred sales charge is
imposed on shares redeemed through this program within three full
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 and pay the proceeds to
the shareholder if the account balance falls below the required
minimum value of $1,500 due to shareholder redemptions. This
requirement does not apply, however, if the balance falls below
$1,500 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.
EXCHANGES FOR SHARES OF OTHER FUNDS
In order to provide greater flexibility to Fund shareholders whose
investment objective has changed, the Fund allows shareholders to
exchange some or all of their Fund shares for shares of New Jersey
Municipal Income Fund and Florida Municipal Income Fund,
portfolios of the Trust, as well as shares of Multi-State
Municipal Income Fund, a portfolio of Fixed Income Securities,
Inc., which is also advised by Federated Advisers. Exchanges are
made at net asset value without being assessed a contingent
deferred sales charge on the exchanged shares. Shares of New
Jersey Municipal Income Fund, Florida Municipal Income Fund, and
Multi-State Municipal Income Fund are no longer being offered for
sales.
Shareholders using this privilege must exchange shares having a
net asset value of at least $1,500. Shareholders who desire to
automatically exchange shares of a predetermined amount on a
monthly, quarterly, or annual basis may take advantage of a
systematic exchange privilege. A shareholder may obtain further
information on these exchange privileges by calling Federated
Securities Corp. or his financial institution. Before making an
exchange, a shareholder must receive a prospectus of the fund for
which the exchange is being made.
The ability to exchange shares is available to shareholders
residing in any state in which the shares being acquired may be
legally sold. 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.
MUNICIPAL SECURITIES INCOME TRUST INFORMATION --------------------
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MANAGEMENT OF MUNICIPAL SECURITIES INCOME TRUST
BOARD OF TRUSTEES. Municipal Securities Income Trust is managed
by a Board of Trustees. The Board of Trustees is responsible for
managing the business affairs of Municipal Securities Income Trust
and for exercising all of the powers of Municipal Securities
Income Trust except those reserved for the shareholders. An
Executive Committee of the Board of Trustees handles the Trustees'
responsibilities between meetings of the Trustees.
INVESTMENT ADVISER. Pursuant to an investment advisory contract
with Municipal Securities Income Trust, investment decisions for
the Fund are made by Federated Advisers, the Fund's investment
adviser, subject to direction by the Trustees. The adviser
continually conducts investment research and supervision for the
Fund and is responsible for the purchase and sale of portfolio
instruments, for which it receives an annual fee from the Fund.
ADVISORY FEES. The Fund's adviser receives an annual
investment advisory fee equal to 0.40 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 or reimbursement 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. Total assets under management or
administration by these and other subsidiaries of Federated
Investors is approximately $70 billion. Federated Investors,
which was founded in 1956 as Federated Investors, Inc.,
develops and manages mutual funds primarily for the financial
industry. Federated Investors' track record of competitive
performance and its disciplined, risk averse investment
philosophy serve approximately 3,500 client institutions
nationwide. Through these same client institutions,
individual shareholders also have access to this same level
of investment expertise.
James D. Roberge and Jonathan C. Conley are the Fund's co-
portfolio managers. James D. Roberge has been the Fund's co-
portfolio manager since June, 1993. Mr. Roberge joined
Federated Investors in 1990 and has been Vice President of
the Fund's investment adviser since October, 1994. Prior to
this Mr. Roberge served as an Assistant Vice President of the
Fund's investment adviser since 1992. From 1990 until 1992,
Mr. Roberge acted as an investment analyst. Mr. Roberge
received his M.B.A. in Finance from Wharton Business School
in 1990.
Jonathan C. Conley has been the Fund's co-portfolio manager
since June, 1993. Mr. Conley joined Federated Investors in
1979 and has been a Vice President of the Fund's investment
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 (the
"Distributor") for shares of the Fund. Federated Securities
Corp. is located at Federated Investors Tower, Pittsburgh,
Pennsylvania 15222-3779. It is a Pennsylvania corporation
organized on November 14, 1969, and is the principal
distributor for a number of investment companies. Federated
Securities Corp. is a subsidiary of Federated Investors.
DISTRIBUTION PLAN
The Distributor will pay dealers an amount equal to 2% of the
net asset value of Fund shares purchased by their clients or
customers. These payments will be made directly by the
Distributor from its assets, and will not be made from the
assets of the Fund.
Pursuant to the provisions of a distribution plan adopted in
accordance with the Investment Company Act Rule 12b-1 (the
"Plan"), the Fund will pay to the Distributor an amount
computed at an annual rate of 0.75 of 1% of the average daily
net asset value of Fund shares to reimburse the Distributor
for advancements paid to dealers and to finance any activity
which is principally intended to result in the sale of shares
subject to the Plan. The Fund will accrue the distribution
fee as a liability of the Fund, and such method of accrual
will reduce the Fund's net assets and net asset value
accordingly. See the section entitled "Tax Information" in
this prospectus for a further discussion of the effect of the
payment of distribution fees made pursuant to Rule 12b-1 and
the payment of shareholder services fees to financial
institutions for administrative and support services on
distributions (of dividends, etc.) to shareholders.
Because distribution fees to be paid by the Fund to the
Distributor may not exceed an annual rate of 0.75 of 1% of
the Fund's average daily net assets, it will take the
Distributor a number of years to recoup the expenses that it
has incurred for its distribution and distribution related
services pursuant to the Plan.
The Distributor may select financial institutions (such as a
broker/dealer or bank) to provide sales support services as
agents for their clients or customers who beneficially own
shares of the Fund. After a shareholder has been invested in
the Fund for a period of three years, the Distributor will
pay financial institutions a portion of the above-referenced
distribution fee, in an amount up to 0.25 of 1% of the Fund's
average daily net assets based upon the shares owned by the
client for a period exceeding three years. It is anticipated
that the payment to the financial institutions will encourage
such financial institutions to remain knowledgeable about the
Fund, encourage further sales of the Fund, and discourage
redemptions for reinvestment in new products or products
compensating the financial institutions at a higher level.
The Fund's Plan is a compensation type plan. As such, the
Fund makes no payments to the Distributor except as described
above. Therefore, the Fund does not pay for unreimbursed
expenses of the Distributor, including amounts expended by
the Distributor in excess of amounts received by it from the
Fund, interest, carrying or other financing charges in
connection with excess amounts expended, or the Distributor's
overhead expenses. However, the Distributor may be able to
recover such amounts or may earn a profit from future
payments made by the Fund under the Plan.
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. In the event the
Glass-Steagall Act is deemed to prohibit depository institutions
from acting in the administrative capacities described above or
should Congress relax current restrictions on depository
institutions, the Board of Trustees will consider appropriate
changes in the services.
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.
SHAREHOLDER SERVICES PLAN
The Fund has adopted a Shareholder Services Plan (the "Services
Plan"). Under the Services Plan, financial institutions will enter
into shareholder service agreements with the Fund to provide
administrative support services to their customers who from time
to time may be owners of record or beneficial owners of Fund
shares. These administrative services may include, but are not
limited to, the provision of personal service and maintenance of
shareholder accounts. In return for providing these support
services, a financial institution may receive payments from the
Fund at a rate not exceeding 0.25 of 1% of the average daily net
assets of Fund shares beneficially owned by the financial
institution's customers for whom it is holder of record or with
whom it has a servicing relationship.
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 daily net assets of all funds advised by
subsidiaries of Federated Investors ("Federated Funds") as
specified below:
Average Aggregate Daily
Net Assets
Maximum Administrative Fee of the
Federated Funds
0.15 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.10 of 1% on the next $250 million
0.075 of 1% on assets in excess of
$750 million
The administrative fee received during any fiscal year shall be at
least $125,000 per portfolio and $30,000 per each additional class
of shares. Federated Administrative Services may choose
voluntarily to waive a portion of its fee.
CUSTODIAN. State Street Bank and Trust Company, Box 8604, Boston,
Massachusetts, is custodian for the securities and cash of the
Fund
TRANSFER AGENT, AND DIVIDEND DISBURSING AGENT Federated Services
Company, Pittsburgh, Pennsylvania, is transfer agent for the
shares of the Fund, and dividend disbursing agent for the Fund.
The fee paid to the transfer agent is based on the size, type and
number of accounts and transactions made by shareholders.
Federated Services Company also maintains the Trust's accounting
records. The fee paid for this service is based on the level of
the Fund's average net assets for the period, plus out-of-pocket
expenses.
LEGAL COUNSEL
Legal counsel is provided by Houston, Houston & Donnelly, 2510
Centre City Tower, Pittsburgh, Pennsylvania, and Dickstein,
Shapiro & Morin, L.L.P., 2101 L Street, N.W., Washington, D.C.
INDEPENDENT AUDITORS
The independent auditors for the Fund are Deloitte & Touche LLP,
Boston, Massachusetts.
EXPENSES OF THE FUND
The Fund pays all of its own expenses and its allocable share of
Trust expenses. These expenses include, but are not limited to,
the costs of: organizing the Trust and continuing its existence;
Trustees'fees; investment advisory and administrative services;
printing prospectuses and other Fund documents for shareholders;
registering the Trust, the Fund and shares of the Fund; taxes and
commissions; issuing, purchasing, repurchasing, and redeeming
shares; fees for custodian, transfer agent, dividend disbursing
agent, shareholder servicing agents, and registrars; printing,
mailing, auditing, accounting, and legal expenses; reports to
shareholders and government agencies; meetings of Trustees and
shareholders and proxy solicitations therefor; insurance premiums;
association membership dues; and such nonrecurring and
extraordinary items as may arise.
SHAREHOLDER INFORMATION ------------------------------------------
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VOTING RIGHTS
Each share of the Fund gives the shareholder one vote in
Trustee elections and other matters submitted to shareholders
for vote. All shares of all classes of each portfolio in the
Trust have equal voting rights except that in matters
affecting only a particular fund or class, only shares of that
fund or class are entitled to vote. As of December 23, 1994,
Merrill, Lynch, Pierce, Fenner & Smith, Jacksonville, Florida
owned 80.40% 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.
As a Massachusetts business trust, the Trust is not required to
hold annual shareholder meetings. Shareholder approval will be
sought only for certain changes in the Trust's or the Fund's
operation and for the election of Trustees under certain
circumstances. Trustees may be removed by the Trustees or by
shareholders at a special meeting. A special meeting of the
shareholders for this purpose shall be called by the Trustees upon
the written request of shareholders owning at least 10% of the
outstanding shares of all series in the Trust entitled to vote.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally
liable as partners under Massachusetts law for acts or obligations
of the Trust on behalf of the Fund. To protect shareholders of the
Fund, the Trust has filed legal documents with Massachusetts that
expressly disclaim the liability of shareholders of the Fund for
such acts or obligations of the Trust. These documents require
notice of this disclaimer to be given in each agreement,
obligation, or instrument that the Trust or its Trustees enter
into or sign on behalf of the Fund.
In the unlikely event that a shareholder of the Fund is held
personally liable for the Trust's obligations on behalf of the
Fund, the Trust is required to use the property of the Fund to
protect or compensate the shareholder. On request, the Trust will
defend any claim made and pay any judgment against a shareholder
of the Fund for any act or obligation of the Trust on behalf of
the Fund. Therefore, financial loss resulting from liability as a
shareholder of the Fund will occur only if the Trust cannot meet
its obligations to indemnify shareholders and pay judgments
against them from the assets of the Fund.
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. The Fund will be treated as a single,
separate entity for federal income tax purposes so that income
(including capital gains) and losses realized by the Trust's other
portfolios will not be combined for tax purposes with those
realized by the Fund.
In general, shareholders are not required to pay federal regular
income tax on any dividends received from the Fund that represent
net interest on tax-exempt municipal bonds, although tax exempt
interest will increase the taxable income of certain recipients of
social security benefits. However, under the Tax Reform Act of
1986, dividends representing net interest income earned on some
municipal bonds may be included in calculating the federal
individual alternative minimum tax or the federal alternative
minimum tax for corporations.
It is anticipated that each monthly distribution of dividends will
exceed the Fund's net investment income as calculated for
financial statement reporting purposes during the applicable
period by an amount substantially equal to the amount of
distribution payments made pursuant to the Plan, and charged to
the Fund's paid-in capital for tax purposes during such period.
The Securities and Exchange Commission requires the Fund to
indicate that such excess amount is being paid to shareholders
from the Fund's paid-in capital. However, the Fund anticipates
that the entire monthly distribution (including the excess amount)
will constitute tax-exempt income to the shareholders for Federal
income tax purposes, except for the proportionate part of the
distribution that may be considered taxable income if the Fund
earns taxable income during the calendar year. Therefore, the Fund
believes that a shareholder should make no adjustment to the tax
cost basis of his existing shareholdings as a result of the
monthly distribution. The Fund also believes that shareholders
reinvesting the monthly distribution should continue to treat the
amount of the entire distribution as the tax cost basis of the
additional shares acquired by reason of such reinvestment.
The Internal Revenue Service ("IRS") has issued a ruling
(effective April, 1995) which changes the accounting method which
is applied to distribution related expenses incurred under Rule
12b-1 Plans. The ruling requires the Fund to charge such expenses
to the Fund's investment income. Effective January 1, 1995, the
Fund will change its accounting method accordingly.
The alternative minimum tax, equal to 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 municipalbonds, 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 will become
subject to the 20% corporate alternative minimum tax because the
dividends are included in a corporation's "adjusted current
earnings." The corporate alternative 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" are based upon the
concept of a corporation's "earnings and profits." Since "earnings
and profits" generally include 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.
TEXAS STATE AND MUNICIPAL TAXATION
In a majority of states that have an income tax, dividends paid by
a mutual fund attributable to investments in a particular state's
municipal obligations are exempt from both Federal and such
state's income tax. If Texas were to adopt an income tax in the
future, and assuming that its income tax policy with respect to
mutual funds investing in Texas state and local municipal
obligations would be similar to the general tax policy of other
states, dividends paid by the Fund would be exempt from Texas
state income tax.
OTHER STATE AND LOCAL TAXES
Income from the Fund is not necessarily free from regular state
income taxes in states other than Texas or from personal property
taxes. State laws differ on this issue, and shareholders are urged
to consult their own tax advisers regarding the status of their
accounts under state and local tax laws.
PERFORMANCE INFORMATION ------------------------------------------
- -----------------
From time to time the Fund advertises the total return, yield, and
tax-equivalent yield for shares. Total return represents the
change, over a specific period of time, in the value of an
investment in shares after reinvesting all income and capital
gains distributions. It is calculated by dividing that change by
the initial investment and is expressed as a percentage.
The yield of shares is calculated by dividing the net investment
income per share (as defined by the Securities and Exchange
Commission) earned by shares over a thirty-day period by the
maximum offering price per share of shares on the last day of the
period. This number is then annualized using semi-annual
compounding. The tax-equivalent yield of shares is calculated
similarly to the yield, but is adjusted to reflect the taxable
yield that shares would have had to earn to equal its actual
yield, assuming a specific tax rate. The yield and the tax-
equivalent yield do not necessarily reflect income actually earned
by shares and, therefore, may not correlate to the dividends or
other distributions paid to shareholders.
The performance information reflects the effect of the contingent
deferred sales charge, which, if excluded, would increase the
total return, yield, and tax-equivalent yield.
From time to time, the Fund may advertise its performance using
certain financial publications and/or compare its performance to
certain indices.
ADDRESSES
- ------------------------------------------------------------------------------
Texas Municipal Income Fund Federated Investors Tower
Pittsburgh, Pennsylvania
15222-3779
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania
15222-3779
Investment Adviser
Federated Advisers Federated Investors Tower
Pittsburgh, Pennsylvania
15222-3779
Custodian
State Street Bank and P.O. Box 8604
Trust Company Boston, Massachusetts 02266-
8604
Transfer Agent and Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania
15222-3779
Legal Counsel
Houston, Houston & Donnelly 2510 Centre City Tower
Pittsburgh, Pennsylvania
15222
Legal Counsel
Dickstein, Shapiro & Morin, L.L.P. 2101 L Street, N.W.
Washington, D.C. 20037
Independent Auditors
Deloitte & Touche LLP 125 Summer Street
Boston, Massachusetts 02110-
1617
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- ------------------------------
TEXAS MUNICIPAL
INCOME FUND
PROSPECTUS
A Non-Diversified
Portfolio of
Municipal Securities
Income Trust An Open-
End, Management
Investment Company
December
31, 1994
FEDERATED
SECURITIES CORP.
(LOGO)
---------------------
-------------
Distributor
A subsidiary of
FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-
3779
(12/94)
Texas Municipal Income Fund
(A Portfolio of Municipal Securities Income Trust)
Statement of Additional Information
This Statement of Additional Information should be read
with the prospectus of Texas Municipal Income Fund (the
"Fund") dated December 31, 1994. This Statement is not a
prospectus itself. To receive a copy of the prospectus
write or call the Fund.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Statement dated December 31, 1994
FEDERATED SECURITIES
CORP.
Distributor
A subsidiary of FEDERATED
INVESTORS
General Information About
the Fund 1
Investment Objective and
Policies 1
Acceptable Investments 1
Characteristics 1
Types of Acceptable
Investments 1
Participation Interests 1
Variable-Rate Municipal
Securities 1
Municipal Leases 2
Temporary Investments 2
Repurchase Agreements 2
Reverse Repurchase
Agreements 2
Futures and Options
Transactions 3
Futures Contracts 3
"Margin" in Futures
Transactions 3
Put Options on Financial
Futures Contracts 3
Call Options on Financial
Futures Contracts 4
Risks 4
Portfolio Turnover 5
Investment Limitations 5
Selling Short and Buying
on Margin 5
Issuing Senior Securities
and Borrowing Money 5
Pledging Assets 5
Underwriting 5
Investing in Real Estate 5
Investing in Commodities 5
Lending Cash or
Securities 5
Concentration of
Investments 5
Investing in Issuers
Whose Securities are
Owned by Officers and
Trustees of the Fund 6
Investing in Securities
of Other Investment
Companies 6
Investing in Restricted
Securities 6
Investing in Illiquid
Securities 6
Investing in Put Options 6
Writing Covered Call
Options 6
Investing in New Issuers 6
Investing in Minerals 6
Texas Investment Risks 6
Fund Ownership 10
The Funds 10
Investment Advisory Services 11
Adviser to the Fund 11
Advisory Fees 11
State Expense Limitations 11
Administrative Services 11
Brokerage Transactions 12
Purchasing Shares 12
Shares of the Fund are
sold at their net asset
value on days the New
York Stock Exchange is
open for business. The
procedure for purchasing
shares is explained in
the prospectus under
"Investing in the Fund." 12
Distribution and
Shareholder Services
Plans 12
Determining Net Asset Value 13
Valuing Municipal Bonds 13
Use of Amortized Cost 13
Redeeming Shares 13
Redemption in Kind 13
Tax Status 13
The Fund's Tax Status 13
Capital Gains 14
Total Return 14
Yield 14
Tax-Equivalent Yield 15
Tax-Equivalency Table 15
Tax-Equivalency Table 15
Performance Comparisons 15
Appendix 1
General Information About the Fund
The Fund is a portfolio in Municipal Securities Income Trust
(the "Trust"). Federated Municipal Income Trust was
established as a Massachusetts business trust under a
Declaration of Trust dated August 6, 1990. On September 16,
1992 (effective date October 31, 1992), the Trustees approved
changing the name of the Trust from Federated Municipal Income
Trust to Municipal Securities Income Trust.
Investment Objective and Policies
The Fund's investment objective is to provide current income
which is exempt from federal regular income tax. The
investment objective cannot be changed without the approval of
shareholders.
Acceptable Investments
The Fund invests primarily in a portfolio of municipal
securities, including debt obligations issued by the State of
Texas and its political subdivisions ("Texas Municipal
Securities").
Characteristics
The Texas Municipal Securities in which the Fund invests
have the characteristics set forth in the prospectus. If
ratings made by Moody's Investors Service, Inc.
("Moody's"), Standard & Poor's Ratings Group ("S&P") or
Fitch's Investors Service ("Fitch's") 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.
Types of Acceptable Investments
Examples of Texas Municipal Securities include:
ogovernmental lease certificates of participation issued
by state or municipal authorities where payment is
secured by installment payments for equipment,
buildings, or other facilities being leased by the
state or municipality;
omunicipal notes and tax-exempt commercial paper;
oserial bonds;
otax anticipation notes sold to finance working capital
needs of municipalities in anticipation of receiving
taxes;
obond anticipation notes sold in anticipation of the
issuance of long-term bonds;
opre-refunded municipal bonds whose timely payment of
interest and principal is insured by an escrow of U.S.
government obligations; and
ogeneral obligation bonds.
Participation Interests
The financial institutions from which the Fund purchases
participation interests frequently provide or secure from
another financial institution irrevocable letters of
credit or guarantees and give the Fund the right to
demand payment of the principal amounts of the
participation interests plus accrued interest on short
notice (usually within seven days).
Variable-Rate Municipal Securities
Variable interest rates generally reduce changes in the
market value of municipal securities from their original
purchase prices. Accordingly, as interest rates decrease
or increase, the potential for capital appreciation or
depreciation is less for variable-rate municipal
securities than for fixed-income obligations. Many
municipal securities with variable interest rates
purchased by the Fund are subject to repayment of
principal (usually within seven days) on the Fund's
demand. The terms of these variable-rate demand
instruments require payment of principal and accrued
interest from the issuer of the municipal obligations,
the issuer of the participation interests, or a guarantor
of either issuer.
Municipal Leases
The Fund may purchase municipal securities in the form of
participation interests which represent undivided
proportional interests in lease payments by a
governmental or non-profit entity. The lease payments and
other rights under the lease provide for and secure the
payments on the certificates. Lease obligations may be
limited by municipal charter or the nature of the
appropriation for the lease. In particular, lease
obligations may be subject to periodic appropriation. If
the entity does not appropriate funds for future lease
payments, the entity cannot be compelled to make such
payments. Furthermore, a lease may provide that the
certificate trustee cannot accelerate lease obligations
upon default. The trustee would only be able to enforce
lease payments as they became due. In the event of a
default or failure of appropriation, it is unlikely that
the trustee would be able to obtain an acceptable
substitute source of payment.
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. 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. 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 during times
of unusual market conditions for defensive purposes and to
maintain liquidity.
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.
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
Trustees.
From time to time, such as when suitable Texas Municipal
Securities are not available, the Fund may invest a portion of
its assets in cash. Any portion of the Fund's assets
maintained in cash will reduce the amount of assets in Texas
Municipal Securities 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.
Futures and Options Transactions
As a means of reducing fluctuations in the net asset value of
shares of the Fund, the Fund may attempt to hedge all or a
portion of its portfolio by buying and selling financial
futures contracts, buying put options on portfolio securities
and put options on financial futures contracts for portfolio
securities, and writing call options on futures contracts. The
Fund also may write covered call options on portfolio
securities to attempt to increase its current income.
The Fund will maintain its position in securities, options and
segregated cash subject to puts and calls until the options
are exercised, closed, or have expired. An option position may
be closed out over-the-counter or on an exchange which
provides a secondary market for options of the same series.
Futures Contracts
The Fund may purchase and sell financial futures contracts to
hedge against the effects of changes in the value of portfolio
securities due to anticipated changes in interest rates and
market conditions without necessarily buying or selling the
securities. The Fund will not engage in futures transactions
for speculative purposes.
A futures contract is a firm commitment by two parties: the
seller who agrees to make delivery of the specific type of
security called for in the contract ("going short") and the
buyer who agrees to take delivery of the security ("going
long") at a certain time in the future.
For example, in the fixed income securities market, prices
move inversely to interest rates. A rise in rates results in a
drop in price. Conversely, a drop in rates results in a rise
in price. In order to hedge its holdings of fixed income
securities against a rise in market interest rates, the Fund
could enter into contracts to deliver securities at a
predetermined price (i.e., "go short") to protect itself
against the possibility that the prices of its fixed income
securities may decline during the Fund's anticipated holding
period. The Fund could agree to purchase securities in the
future at a predetermined price (i.e., "go long") to hedge
against a decline in market interest rates.
"Margin" in Futures Transactions
Unlike the purchase or sale of a security, the Fund does not
pay or receive money upon the purchase or sale of a futures
contract. Rather, the Fund is required to deposit an amount of
"initial margin" in cash or U.S. Treasury bills with its
custodian (or the broker, if legally permitted). The nature of
initial margin in futures transactions is different from that
of margin in securities transactions in that initial margin in
futures transactions does not involve the borrowing of funds
by the Fund to finance the transactions. Initial margin is in
the nature of a performance bond or good faith deposit on the
contract which is returned to the Fund upon termination of the
futures contract, assuming all contractual obligations have
been satisfied.
A futures contract held by the Fund is valued daily at the
official settlement price of the exchange on which it is
traded. Each day the Fund pays or receives cash, called
"variation margin," equal to the daily change in value of the
futures contract. This process is known as "marking to
market." Variation margin does not represent a borrowing or
loan by the Fund, but is instead settlement between the Fund
and the broker of the amount one would owe the other if the
futures contract expired. In computing its daily net asset
value, the Fund will mark to market its open futures
positions.
The Fund is also required to deposit and maintain margin when
it writes call options on futures contracts.
The Fund will comply with the following restrictions when
purchasing and selling futures contracts. First, the Fund will
not participate in futures transactions if the sum of its
initial margin deposits on open contracts will exceed 5% of
the market value of the Fund's total assets, after taking into
account the unrealized profits and losses on those contracts
it has entered into. Second, the Fund will not enter into
these contracts for speculative purposes. Third, since the
Fund does not constitute a commodity pool, it will not market
itself as such, or serve as a vehicle for trading in the
commodities futures or commodity options markets. Connected
with this, the Fund will disclose to all prospective investors
the limitations on its futures and options transactions, and
make clear that these transactions are entered into only for
bona fide hedging purposes, or other permissible purposes
pursuant to regulations promulgated by the Commodity Futures
Trading Commission ("CFTC"). Finally, because the Fund will
submit to the CFTC special calls for information, the Fund
will not register as a commodities pool operator.
Put Options on Financial Futures Contracts
The Fund may purchase listed put options on financial futures
contracts. The Fund would use these options solely to protect
portfolio securities against decreases in value resulting from
market factors such as an anticipated increase in interest
rates.
Unlike entering directly into a futures contract, which
requires the purchaser to buy a financial instrument on a set
date at a specified price, the purchase of a put option on a
futures contract entitles (but does not obligate) its
purchaser to decide on or before a future date whether to
assume a short position at the specified price.
Generally, if the hedged portfolio securities decrease in
value during the term of an option, the related futures
contracts will also decrease in value and the option will
increase in value. In such an event, the Fund will normally
close out its option by selling an identical option. If the
hedge is successful, the proceeds received by the Fund upon
the sale of the second option will be large enough to offset
both the premium paid by the Fund for the original option plus
the decrease in value of the hedged securities.
Alternatively, the Fund may exercise its put option to close
out the position. To do so, it would simultaneously enter into
a futures contract of the type underlying the option (for a
price less than the strike price of the option) and exercise
the option. The Fund would then deliver the futures contract
in return for payment of the strike price. If the Fund neither
closes out nor exercises an option, the option will expire on
the date provided in the option contract, and only the premium
paid for the contract will be lost.
Call Options on Financial Futures Contracts
In addition to purchasing put options on futures, the Fund may
write listed call options on financial futures contracts or
over-the-counter call options on future contracts to hedge its
portfolio against an increase in market interest rates. When
the Fund writes a call option on a futures contract, it is
undertaking the obligation of assuming a short futures
position (selling a futures contract) at the fixed strike
price at any time during the life of the option if the option
is exercised. As market interest rates rise, causing the
prices of futures to decrease, the Fund's obligation under a
call option on a future (to sell a futures contract) costs
less to fulfill, causing the value of the Fund's call option
position to increase.
In other words, as the underlying futures price falls below
the strike price, the buyer of the option has no reason to
exercise the call, so that the Fund keeps the premium received
for the option. This premium can substantially offset the drop
in value of the Fund's portfolio securities.
Prior to the expiration of a call written by the Fund, or
exercise of it by the buyer, the Fund may close out the option
by buying an identical option. If the hedge is successful, the
cost of the second option will be less than the premium
received by the Fund for the initial option. The net premium
income of the Fund will then substantially offset the realized
decrease in value of the hedged securities.
The Fund will not maintain open positions in futures contracts
it has sold or call options it has written on futures
contracts if, in the aggregate, the value of the open
positions (marked to market) exceeds the current market value
of its securities portfolio, plus or minus the unrealized gain
or loss
on those open positions, adjusted for the correlation of
volatility between the hedged securities and the futures
contracts. If this limitation is exceeded at any time, the
Fund will take prompt action to close out a sufficient number
of open contracts to bring its open futures and options
positions within this limitation.
Risks
When the Fund uses futures and options on futures as
hedging devices, there is a risk that the prices of the
securities subject to the futures contracts may not
correlate perfectly with the prices of the securities in
the Fund's portfolio. This may cause the futures contract
and any related options to react differently than the
portfolio securities to market changes. In addition, the
Fund's adviser could be incorrect in its expectations
about the direction or extent of market factors such as
stock price movements. In these events, the Fund may lose
money on the futures contract or option.
It is not certain that a secondary market for positions
in futures contracts or for options will exist at all
times. Although the Fund's adviser will consider
liquidity before entering into these transactions, there
is no assurance that a liquid secondary market on an
exchange or otherwise will exist for any particular
futures contract or option at any particular time. The
Fund's ability to establish and close out futures and
options positions depends on this secondary market. The
inability to close out these positions could have an
adverse effect on the Fund's ability to effectively hedge
its portfolio.
To minimize risks, the Fund may not purchase or sell futures
contracts or related options if immediately thereafter the sum
of the amount of margin deposits on the Fund's existing
futures positions and premiums paid for related options would
exceed 5% of the market value of the Fund's total assets. When
the Fund purchases futures contracts, an amount of cash and
cash equivalents, equal to the underlying commodity value of
the futures contracts (less any related margin deposits), will
be deposited in a segregated account with the Fund's custodian
(or the broker, if legally permitted) to collateralize the
position and thereby insure that the use of such futures
contract is unleveraged. When the Fund sells futures
contracts, it will either own or have the right to receive the
underlying future or security, or will make deposits to
collateralize the position as discussed above.
Portfolio Turnover
The Fund may trade or dispose of portfolio securities as
considered necessary to meet its investment objective. It is
not anticipated that the portfolio trading engaged in by the
Fund will result in its annual rate of portfolio turnover
exceeding 100%. For the fiscal year ended August 31, 1994 ,
and for the period from June 1, 1993 (date of initial public
investment) to August 31, 1993, the Fund's portfolio turnover
rate was 60% and 0%, respectively.
Investment Limitations
Selling Short and Buying on Margin
The Fund will not sell any securities short or purchase
any securities on margin but may obtain such short-term
credits as may be necessary for clearance of purchases
and sales of securities.
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 to
facilitate management of the portfolio by enabling the
Fund to, for example, meet redemption requests when the
liquidation of portfolio securities is deemed to be
inconvenient or disadvantageous. The Fund will not
purchase any securities while borrowings in excess of 5%
of its total assets are outstanding.
Pledging Assets
The Fund will not mortgage, pledge, or hypothecate its
assets except to secure permitted borrowings. In those
cases, it may mortgage, pledge, or hypothecate assets
having a market value not exceeding 10% of the value of
its total assets at the time of the pledge.
Underwriting
The Fund will not underwrite any issue of securities
except as it may be deemed to be an underwriter under the
Securities Act of 1933 in connection with the sale of
securities in accordance with its investment objective,
policies, and limitations.
Investing in Real Estate
The Fund will not purchase or sell real estate, including
limited partnership interests, although it may invest in
municipal bonds secured by real estate or interests in
real estate.
Investing in Commodities
The Fund will not purchase or sell commodities, commodity
contracts, or commodity futures contracts except that the
Fund may purchase and sell futures contracts and related
options.
Lending Cash or Securities
The Fund will not lend any of its assets except that it
may acquire publicly or non-publicly issued municipal
bonds or temporary investments or enter into repurchase
agreements in accordance with its investment objective,
policies, and limitations, or its Declaration of Trust.
Concentration of Investments
The Fund will not purchase securities if, as a result of
such purchase, 25% or more of the value of its total
assets would be invested in any one industry or in
industrial development bonds or other securities, the
interest upon which is paid from revenues of similar
types of projects. However, the Fund may invest as
temporary investments more than 25% of the value of its
assets in cash or cash items (for purposes of this
limitation, the Fund considers instruments issued by a
U.S. branch of a domestic bank or savings and loan having
capital, surplus, and undivided profits in excess of
$100,000,000 at the time of investment to be "cash
items"), securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities, or
instruments secured by these money market instruments,
i.e., repurchase agreements.
The above investment limitations cannot be changed without
shareholder approval. The following limitations, however, may
be changed by the Trustees without shareholder approval.
Shareholders will be notified before any material change in
these limitations becomes effective.
Investing in Issuers Whose Securities are Owned by
Officers and Trustees of the Fund
The Fund will not purchase or retain the securities of
any issuer if the officers and Trustees 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.
Investing in Securities of Other Investment Companies
The Fund will not purchase securities of other investment
companies except as part of a merger, consolidation, or
other acquisition.
Investing in Restricted Securities
The Fund will not invest more than 10% of its total
assets in securities subject to restrictions on resale
under the Securities Act of 1933, except for commercial
paper issued under Section 4(2) of the Securities Act of
1933 and certain other restricted securities which meet
the criteria for liquidity as established by the Board of
Trustees.
Investing in Illiquid Securities
The Fund will not invest more than 15% of its net assets
in illiquid obligations, including repurchase agreements
providing for settlement in more than seven days after
notice, and certain restricted securities not determined
by the Trustees to be liquid.
Investing in Put Options
The Fund will not purchase put options on securities,
unless the securities are held in the Fund's portfolio
and not more than 5% of the value of the Fund's total
assets would be invested in premiums on open put options.
Writing Covered Call Options
The Fund will not write call options on securities unless
the securities are held in the Fund's portfolio or unless
the Fund is entitled to them in deliverable form without
further payment or after segregating cash in the amount
of any further payment.
Investing in New Issuers
The Fund will not invest more than 5% of the value of its
total assets in industrial development bonds where the
principal and interest are the responsibility of
companies (or guarantors, where applicable) with less
than three years of continuous operations, including the
operation of any predecessor.
Investing in Minerals
The Fund will not purchase interests in oil, gas, or
other mineral exploration or development programs or
leases, although it may invest in securities of issuers
which invest in or sponsor such programs.
Except with respect to borrowing money, if a percentage
limitation is adhered to at the time of investment, a
later increase or decrease in percentage resulting from
any change in value or net assets will not result in a
violation of such restriction.
The Fund does not expect to borrow money or pledge
securities in excess of 5% of the value of its net assets
during the coming fiscal year.
Texas Investment Risks
The Fund invests in obligations of Texas issuers which results
in the Fund's performance being subject to risks associated
with the overall conditions present within the state. The
following information is a brief summary of the recent
prevailing economic conditions and a general summary of the
state's financial status. This information is based on
official statements relating to securities that have been
offered by Texas issuers and from other sources believed to be
reliable but should not be relied upon as a complete
description of all relevant information.
The Texas economy continues to recover from the recession that
began in the mid-1980s related to the prolonged downturn in
the energy sector. The outlook for the Texas economy is for
gradual but steady growth, with income and employment growing
at levels exceeding national averages. Continued activity in
the energy sector has promoted growth along the Gulf Coast.
Oil remains a volatile and vulnerable component of the state's
economy, but now the sector accounts for only 15% of gross
state product, as opposed to a peak of 27% in 1981. The
state's population ranks third after growing at a rate twice
that of the rest of the nation during the 1980s.
The 1989-91 biennium budget was narrowly balanced, but better
than expected financial performance resulted in an ending cash
balance at August 31, 1991 of $1.005 billion, representing the
third largest closing balance in the state's history. For the
fiscal 1991-93 biennium, the state faced a $4.8 billion
"current services" gap. The state acted to balance the
biennium through a combination of cost reductions, increased
taxes (including sales, franchise, motor fuels, motor vehicle
sales and manufacturing equipment sales), and the approval of
a state lottery.
In 1989, the Texas Supreme Court ruled in the Edgewood v.
Kirby case that the state's school finance system was
unconstitutional. In response, the Texas Legislature has
adopted a number of Senate Bills, culminating with Senate Bill
No. 351 which was signed into law by the governor on April 15,
1991. On January 30, 1992, the Texas Supreme Court released
its judgment holding that the public school financing system
enacted under Senate Bill No. 351 is unconstitutional in that
it levies a state ad valorem tax (through the guise of the
county education districts) and levies a tax without an
election. On May 1, 1993, Texas voters rejected a
constitutional amendment that would have legalized the funding
plan enacted in 1991. The impact of the Edgewood v. Kirby case
cannot be fully assessed at this time, but such litigation
could result in new legislation which makes substantial
changes to the system of funding public education in Texas.
Previous legislative attempts to cure the school funding
problem have required an increased commitment of state
resources.
The Fund's concentration in securities issued by the state and
its political subdivisions provides a greater level of risk
than a fund which is diversified across numerous states and
municipal entities. The ability of the state or its
municipalities to meet their obligations will depend on the
availability of tax and other revenues; economic, political,
and demographic conditions within the state; and the
underlying condition of the state and its municipalities.
Municipal Securities Income Trust Management
Officers and Trustees are listed with their addresses, present
positions with Municipal Securities Income Trust, and
principal occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Chairman and Trustee
Chairman and Trustee, Federated Investors, Federated Advisers,
Federated Management, and Federated Research; Chairman and
Director, Federated Research Corp.; Chairman, Passport
Research, Ltd.; Director, AEtna Life and Casualty Company;
Chief Executive Officer and Director, Trustee, or Managing
General Partner of the Funds. Mr. Donahue is the father of J.
Christopher Donahue , Vice President and Trustee of the Trust.
Thomas G. Bigley
28th Floor, One Oxford Center
Pittsburgh, PA
Trustee
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
Trustee
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
Trustee
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.
J. Christopher Donahue *
Federated Investors Tower
Pittsburgh, PA
Vice President and Trustee
President and Trustee, Federated Investors, Federated
Advisers, Federated Management, and Federated Research;
President and Director, Federated 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 Trustee of the Trust.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Trustee
Attorney-at-law; Director, The Emerging Germany Fund, Inc.;
Director, Trustee, or Managing General Partner of the Funds;
formerly, Director, Blue Cross of Massachusetts, Inc.
Lawrence D. Ellis, M.D.
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Trustee
Hematologist, Oncologist, and Internist, Presbyterian and
Montefiore Hospitals; Professor of Medicine and Trustee,
University of Pittsburgh; Director of Corporate Health,
University of Pittsburgh Medical Center; Director, Trustee, or
Managing General Partner of the Funds.
Edward L. Flaherty, Jr.@
5916 Penn Mall
Pittsburgh, PA
Trustee
Attorney-at-law; Partner, 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
225 Franklin Street
Boston, MA
Trustee
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 and Trustee, Lahey
Clinic Foundation, Inc.
Gregor F. Meyer
5916 Penn Mall
Pittsburgh, PA
Trustee
Attorney-at-law; Partner, Meyer and Flaherty; Chairman,
Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.;
Director, Trustee, or Managing General Partner of the Funds;
formerly, Vice Chairman, Horizon Financial, F.A.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Trustee
Professor, Foreign Policy and Management Consultant; Trustee,
Carnegie Endowment for International Peace, RAND Corporation,
Online Computer Library Center, Inc., and U.S. Space
Foundation; Chairman, Czecho Slovak Management Center;
Director, Trustee, or Managing General Partner of the Funds;
President Emeritus, University of Pittsburgh; formerly,
Chairman, National Advisory Council for Environmental Policy
and Technology.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Trustee
Public relations/marketing consultant; Director, Trustee, or
Managing General Partner of the Funds.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Vice President
Executive Vice President and Trustee, Federated Investors;
Director, Federated Research Corp.; Chairman and Director,
Federated Securities Corp.; President or Vice President of
some of the Funds; Director or Trustee of some of the Funds.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Vice President and Treasurer
Vice President, Treasurer, and Trustee, Federated Investors;
Vice President and Treasurer, Federated Advisers, Federated
Management, Federated Research, Federated Research Corp., and
Passport Research, Ltd.; Executive Vice President, Treasurer,
and Director, Federated Securities Corp.; Trustee, Federated
Services Company and Federated Shareholder Services; Chairman,
Treasurer, and Trustee, Federated Administrative Services;
Trustee or Director of some of the Funds; Vice President and
Treasurer of the Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Vice President and Secretary
Vice President, Secretary, General Counsel, and Trustee,
Federated Investors; Vice President, Secretary, and Trustee,
Federated Advisers, Federated Management, and Federated
Research; Vice President and Secretary, Federated Research
Corp. and Passport Research, Ltd.; Trustee, Federated Services
Company; Executive Vice President, Secretary, and Trustee,
Federated Administrative Services; Secretary and Trustee,
Federated Shareholder Services; Executive Vice President and
Director, Federated Securities Corp.; Vice President and
Secretary of the Funds.
* This Trustee 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 Trustees handles the
responsibilities of the Board of Trustees between
meetings of the Board.
Fund Ownership
Officers and Trustees own less than 1% of the Fund's
outstanding shares.
As of Decmeber 23, 1994 the following shareholder of record
also owned 5% or more of the outstanding shares of the Fund:
Merrill Lynch, Pierce, Fenner & Smith, Jacksonville, Florida,
record owner holding Fund shares for its clients, owned
approximately 155,054.000 shares (80.40%) and Donaldson,
Lufkin & Jenrette Securities Corporation, Inc., Jersey City,
New Jersey, record owner holding Fund shares for its clients,
owned approximately 10,328.427 shares (5.36%).
The Funds
"The Funds" and "Funds" mean the following investment
companies: American Leaders Fund, Inc.; Annuity Management
Series; Arrow Funds; Automated Government Money Trust; Cash
Trust Series II; Cash Trust Series, Inc.; DG Investor Series;
Edward D. Jones & Co. Daily Passport Cash Trust; Federated
ARMs Fund; Federated Exchange Fund, Ltd.; Federated GNMA
Trust; Federated Government Trust; Federated Growth Trust;
Federated High Yield Trust; Federated Income Securities Trust;
Federated Income Trust; Federated Index Trust; Federated
Institutional Trust; Federated Intermediate Government Trust;
Federated Master Trust; Federated Municipal Trust; Federated
Short-Intermediate Government Trust; Federated Short-Term
U.S. Government Trust; Federated Stock Trust; Federated Tax-
Free Trust; Federated U.S. Government Bond Fund; 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; Insight Institutional Series,
Inc.; 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; The Medalist
Funds: Money Market Management, Inc.; Money Market Obligations
Trust; Money Market Trust; Municipal Securities Income Trust;
111 Corcoran Funds; Peachtree Funds; The Planters Funds;
Portage Funds; RIMCO Monument Funds; The Shawmut Funds; Short-
Term Municipal Trust; 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; and World
Investment Series, Inc.
Investment Advisory Services
Adviser to the Fund
The Trust's investment adviser is Federated Advisers (the
"Adviser"). It is a subsidiary of Federated Investors. All
the voting securities of Federated Investors are owned by a
trust, the trustees of which are John F. Donahue, his wife and
his son, J. Christopher Donahue.
The Adviser shall not be liable to the Trust, the Fund or any
shareholder of the Fund for any losses that may be sustained
in the purchase, holding, or sale of any security, or for
anything done or omitted by it, except acts or omissions
involving willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties imposed upon it by its
contract with the Fund.
Advisory Fees
For its advisory services, Federated Advisers receives an
annual investment advisory fee as described in the prospectus.
For the period from June 1, 1993 (date of initial public
investment) to August 31, 1993, the adviser earned advisory
fees of $1,775, all of which were voluntarily waived. During
the fiscal year ended August 31, 1994, the Adviser earned
advisory fees of $37,254, all of which were voluntarily
waived.
State Expense Limitations
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 2.5% per year of the first $30 million
of average net assets, 2% per year of the next $70
million of average net assets, and 1.5% per year of the
remaining average net assets, the adviser will reimburse
the Trust 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 Administative Services, Inc., also, a
subsidiary of Federated Investors, served as the Fund's
administrator, (for purposes of this statement of Additional
Federated Administrative Service's and Federated
Administrative Services, Inc., may hereinafter collectively be
referred to as, the "Administrators.") For the fiscal year
August 31, 1994, the Administrators collectively earned
$101,210, none of which was waived. For the fiscal years
ended August 31, 1993 and 1992, Federated Administrative
Services, Inc. earned $0 and $0, respectively. 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 directors of Commercial Data Services, Inc., a
company which provides computer processing services to
Federated Administrative Services, Inc. For the years ended
August 31, 1993, 1992, and 1991, Federated Administrative
Services, Inc. paid approximately $162,140, $194,737, and
$177,658, respectively, for services provided by Commercial
Data Services, Inc.
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 Trust's
accounting records. The fee 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 which 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 Board of Trustees. The adviser may select brokers and
dealers who offer brokerage and research services. These
services may be furnished directly to the Fund or to the
adviser and may include:
oadvice as to the advisability of investing in securities;
osecurity analysis and reports;
oeconomic studies;
oindustry studies;
oreceipt of quotations for portfolio evaluations; and
osimilar 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 relation 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, 1994 and 1993, the Fund
did not pay any brokerage commissions.
Purchasing Shares
Shares of the Fund are sold at their net asset value on days
the New York Stock Exchange is open for business. Effective
October 17, 1994, the Fund has ceased offering its shares for
sale, except for dividend reinvestments by existing
shareholders. The procedure for purchasing shares is
explained in the prospectus under "Investing in the Fund."
Distribution and Shareholder Services Plans
These arrangements permit the payment of fees to financial
institutions, the distributor, and Federated Shareholder
Services, to stimulate distribution activities and to cause
services to be provided to shareholders by a representative
who has knowledge of the shareholder's particular
circumstances and goals. These activities and services may
include, but are not limited to, marketing efforts; providing
office space, equipment, telephone facilities, and various
clerical, supervisory, computer, and other personnel as
necessary or beneficial to establish and maintain shareholder
accounts and records; processing purchase and redemption
transactions and automatic investments of client account cash
balances; answering routine client inquiries; and assisting
clients in changing dividend options, account designations,
and addresses.
By adopting the Distribution Plan, the Trustees expect that
the 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, 1994, payments in the
amount of $69,852 were made pursuant to the Distribution Plan.
In addition, for this period, payments in the amount of
$22,103 were made pursuant to the Shareholder Services Plan.
Determining Net Asset Value
Net asset value generally changes each day. The days on which
net asset value is calculated for shares are described in the
prospectus.
Valuing Municipal Bonds
The Trustees 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 issue, 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 Trustees 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
Trustees.
Redeeming Shares
The Fund redeems shares at the next computed net asset value
after the Fund receives the redemption request, less any
applicable contingent deferred sales charge. Redemption
procedures and redemption fees are explained in the prospectus
under "Redeeming Shares." Although State Street Bank does not
charge for telephone redemptions, it reserves the right to
charge a fee for the cost of wire-transferred redemptions of
less than $5,000.
Redemption in Kind
Although the Fund intends to redeem shares in cash, it
reserves the right under certain circumstances to pay the
redemption price in whole or in part by a distribution of
securities from the Fund's portfolio. To the extent available,
such securities will be readily marketable.
The Trust is obligated to redeem shares solely in cash up to
$250,000 or 1% of the Fund's net asset value, whichever is
less, for any one shareholder within a 90-day period.
Any redemption beyond this amount will also be in cash unless
the Trustees determine that further cash payments will have a
material adverse effect on remaining shareholders. In such a
case, the Trust will pay all or a portion of the remainder of
the redemption in portfolio instruments, valued in the same
way that net asset value is determined. The portfolio
instruments will be selected in a manner that the Trustees
deem fair and equitable.
Redemption in kind is not as liquid as a cash redemption. If
redemption is made in kind, shareholders receiving their
securities and selling them before their maturity could
receive less than the redemption value of their securities and
could incur certain transactions 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:
oderive at least 90% of its gross income from dividends,
interest, and gains from the sale of securities;
oderive less than 30% of its gross income from the sale of
securities held less than three months;
oinvest in securities within certain statutory limits; and
odistribute to its shareholders at least 90% of its net
income earned during the year.
Capital Gains
Capital gains or losses may be realized by the Fund 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.
Distributions of long-term capital gains are taxed as such,
whether they are taken in cash or reinvested, and regardless
of the length of time that the shareholder has owned shares.
Any loss by a shareholder on 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 return for the one-year period
ended August 31, 1994 was (6.80)%
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 offering price per share at the end of the
period. The number of shares owned at the end of the period is
based on the number of shares purchased at the beginning of
the period with $1,000, adjusted over the period by any
additional shares, assuming the monthly reinvestment of all
dividends and distributions. The total return calculation
assumes a complete redemption of the investment and the
deduction of any contingent deferred sales charge at the end
of the period. Any applicable contingent deferred sales charge
will be deducted from the ending value of the investment based
on the lesser of the offering price of redeemed shares at the
time of purchase or the offering price of redeemed shares at
the time of redemption.
The Fund's cumulative total return from June 1, 1993 (date of
initial public investment) to August 31, 1993 was 2.64%.
Cumulative total return reflects the Fund's total performance
over a specific period of time. This total return assumes
and is reduced by the payment of the maximum sales load. The
Fund's total return is representative of only three months of
fund activity since the Fund's effective date. Any applicable
contingent deferred sales charge 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,
1994 was 5.66%.
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 then annualized
using semi-annual compounding. This means that the amount of
income generated during the thirty-day period is assumed to be
generated each month over a twelve-month period and is
reinvested every six months. The yield does not necessarily
reflect income actually earned by the 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, 1994 was 7.86%.
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 tax rate of 28% 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
obligations in the Fund's portfolio generally remains free
from federal regular income tax, and often is free from state
and local taxes as well.* As the table below indicates, a "tax-
free" investment is an attractive choice for investors,
particularly in times of narrow spreads between tax-free and
taxable yields.
Tax-Equivalency Table
FEDERAL INCOME TAX BRACKET:
15.00% 28.00% 31.00% 36.00%
39.60%
Joint Return$1-38,000 $38,001-91,850$91,851-140,000$1
40,001-$250,000OVER $250,000
Single Return $1-22,750$22,751-55,100$55,101-115,000$1
15,001-250,000OVER $250,000
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.
Performance Comparisons
The performance of shares depends upon such variables as:
oportfolio quality;
oaverage portfolio maturity;
otype of instruments in which the portfolio is invested;
ochanges in interest rates and market value of portfolio
securities;
ochanges in the Fund's expenses; and
ovarious other factors.
The Fund's performance fluctuates on a daily basis largely
because net earnings and net asset value per share fluctuate
daily. Both net earnings and net asset value per share are
factors in the computation of yield and total return as
described above.
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 offering price.
The financial publications and/or indices which the Fund uses
in advertising may include:
oLipper Analytical Services, Inc. ranks funds in various fund
categories 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 "Texas Municipal Debt Funds" category in
advertising and sales literature.
oMorningstar, 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. The 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. In
addition, advertisements and sales literature for the Fund may
include charts and other illustrations that depict the
hypothetical growth of a tax-free investment as compared to a
taxable investment.
Advertising and sales literature for the Fund may include
quotations from the Tax Foundation that illustrate the effect
of taxes on income.
Financial Statements
The financial statements for the fiscal year ended August 31,
1994, are incorporated herein by reference to the annual
report of the Fund dated August 31, 1994 (File No. 811-6165).
A copy of the report may be obtained without charge by
contacting the Fund.
Appendix
Standard and Poor's Ratings Group Municipal Bond Ratings
AAA--Debt rated "AAA" has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely
strong.
AA--Debt rated "AA" has a very strong capacity to pay interest
and repay principal and differs from the 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.
NR--Indicates that no public rating has been requested, that
there is insufficient information on which to base a rating,
or that S&P does not rate a particular type of obligation as a
matter of policy.
Plus (+) or minus (-): The ratings from AA to CCC may be
modified by the addition of a plus or minus sign to show
relative standing within the major rating categories.
Moody's Investors Service, Inc., Municipal Bond Ratings
Aaa--Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and
are generally referred to as "gilt edged." Interest payments
are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of
such issues.
Aa--Bonds which are rated Aa are judged to be of high quality
by all standards. Together with the Aaa group, they comprise
what are generally known as high grade bonds. They are rated
lower than the best bonds because margins of protection may
not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may
be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest
are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
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.
NR--Not rated by Moody's.
Moody's applies numerical modifiers, 1, 2 and 3 in each
generic rating classification from Aa through B in its its
generic rating category; the modifier 1 indicates that the
security ranks in the higher end of its generic ranking
category; the modifier 2 indicates a mid-range ranking; and
the modifier 3 indicates that the issue ranks in the lower end
of its generic rating category.
Fitch Investors Service, Inc. Long-Term Debt Ratings
AAA--Bonds considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally
strong ability to pay interest and repay principal, which is
unlikely to be affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and
repay principal is very strong, although not quite as strong
as bonds rated "AAA". Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these
issuers is generally rated "F-1+."
A--Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay
interest and repay principal is considered to be adequate.
Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these
bonds, and therefore, impair timely payment. The likelihood
that the ratings of these bonds will fall below investment
grade is higher than for bonds with higher ratings.
NR--NR indicates that Fitch does not rate the specific issue.
Plus (+) or Minus (-):
Plus and minus signs are used with a rating symbol to indicate
the relative position of a credit within the rating category.
Plus and minus signs, however, are not used in the AAA
category.
Standard and Poor's Ratings Group Municipal Note Ratings
SP-1--Very strong or strong capacity to pay principal and
interest. Those issues determined to possess overwhelming
safety characteristics will be given a plus sign (+)
designation.
SP-2--Satisfactory capacity to pay principal and interest.
Moody's Investors Service, Inc., Short-Term Loan Ratings
MIG1/VMIG1--This designation denotes best quality. There is a
present strong protection by established cash flows, superior
liquidity support or demonstrated broad based access to the
market for refinancing.
MIG2/VMIG2--This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding
group.
Fitch Investors Service, Inc. Short-Term Debt Ratings
F-1+--Exceptionally Strong Credit Quality. Issues assigned
this rating are regarded as having the strongest degree of
assurance for timely payment.
F-1--Very Strong Credit Quality. Issues assigned this rating
reflect an assurance for timely payment only slightly less in
degree than issues rated F-1+.
F-2--Good Credit Quality. Issues carrying this rating have a
satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as the F-1+ and F-1
categories.
Standard and Poor's Ratings Group Commercial Paper Ratings
A-1--This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined
to possess extremely strong safety characteristics are denoted
with a plus sign (+) designation.
A-2--Capacity for timely payment on issues with this
designation is satisfactory. However, the relative degree of
safety is not as high as for issues designated A-1.
Moody's Investors Service, Inc., Commercial Paper Ratings
P-1--Issuers rated PRIME-1 (or related supporting
institutions) have a superior capacity for repayment of short-
term promissory obligations. PRIME-1 repayment capacity will
normally be evidenced by the following characteristics:
Leading market positions in well established industries; High
rates of return on funds employed; Conservative capitalization
structure with moderate reliance on debt and ample asset
protection; broad margins in earning coverage of fixed
financial charges and high internal cash generation; well
established access to a range of financial markets and assured
sources of alternate liquidity.
P-2--Issuers rated PRIME-2 (or related supporting
institutions) have a strong capacity for repayment of short-
term promissory obligations. This will normally be evidenced
by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will
be more subject to variation. Capitalization characteristics,
while still appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained.
3032503B (9/94)
MARYLAND MUNICIPAL INCOME FUND
(A PORTFOLIO OF MUNICIPAL SECURITIES INCOME TRUST)
PROSPECTUS
The shares of Maryland Municipal Income Fund (the "Fund")
represent interests in a non-diversified portfolio of securities
which is one of a series of investment portfolios in Municipal
Securities Income Trust (the "Trust"), an open-end management
investment company (a mutual fund). The investment objective of
the Fund is to provide current income which is exempt from federal
regular income tax and the personal income taxes imposed by the
State of Maryland and Maryland municipalities. The Fund invests
primarily in a portfolio of municipal securities which are exempt
from federal regular income tax and Maryland state and local
income tax ("Maryland Municipal Securities"). These securities
include those issued by or on behalf of the State of Maryland and
Maryland municipalities as well as those issued by states,
territories, and possessions of the United States, which are not
issued by or on behalf of Maryland or its political subdivisions
and financing authorities, but which are exempt from federal
regular income tax and the personal income taxes imposed by the
State of Maryland and Maryland municipalities. Effective October
17, 1994, the Fund has ceased offering its shares for sale, except
for dividend reinvestment by existing shareholders.
THE SHARES OF THE FUND 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 information you should read and know
about investing in the Fund. Keep this prospectus for future
reference.
The Fund has also filed a Statement of Additional Information
dated December 31, 1994 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 free of charge, obtain other information, or make
inquiries about the Fund by writing or calling the Fund.
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 December 31, 1994
TABLE OF CONTENTS --------------------------------------------
- ----------------------------------
SUMMARY OF FUND EXPENSES 1
- ------------------------------------------------------
GENERAL INFORMATION 2
- ------------------------------------------------------
INVESTMENT INFORMATION 3
- ------------------------------------------------------
Investment Objective 3
Investment Policies 4
Acceptable Investments 4
Characteristics 4
Participation Interests 4
Variable Rate Municipal Securities 5
Municipal Leases 5
Inverse Floaters 5
Restricted and Illiquid Securities 6
When-Issued and Delayed
Delivery Transactions 6
Futures Contracts and Options to
Buy or Sell Such Contracts 6
Temporary Investments 7
Maryland Municipal Securities 7
Investment Risks 7
Non-Diversification 8
Investment Limitations 8
NET ASSET VALUE 8
- ------------------------------------------------------
INVESTING IN THE FUND 8
- ------------------------------------------------------
Share Purchases 8
Through a Financial Institution 9
Directly by Mail 9
Directly by Wire 9
Minimum Investment Required 9
Conversion to Federal Funds 9
What Shares Cost 9
Systematic Investment Program 10
Certificates and Confirmations 10
Dividends and Distributions 10
REDEEMING SHARES 10
- ------------------------------------------------------
Through a Financial Institution 10
Directly by Mail 11
Signatures 11
Receiving Payment 12
Contingent Deferred Sales Charge 12
Elimination of Contingent Deferred
Sales Charge 12
Systematic Withdrawal Program 13
Accounts with Low Balances 13
Exchanges for Shares of Other Funds 13
MUNICIPAL SECURITIES INCOME
TRUST INFORMATION 14
- ------------------------------------------------------
Management of Municipal Securities
Income Trust 14
Board of Trustees 14
Investment Adviser 14
Advisory Fees 14
Adviser's Background 14
Distribution of Fund Shares 15
Distribution Plan 15
Shareholder Services Plan 16
Administration of the Fund 16
Custodian 16
Transfer Agent, and
Dividend Disbursing Agent 16
Legal Counsel 17
Independent Auditors 17
Expenses of the Fund 17
SHAREHOLDER INFORMATION 17
- ------------------------------------------------------
Voting Rights 17
Massachusetts Partnership Law 17
TAX INFORMATION 18
- ------------------------------------------------------
Federal Income Tax 18
Maryland State and Municipal Taxation 19
Other State and Local Taxes 19
PERFORMANCE INFORMATION 20
- ------------------------------------------------------
ADDRESSES
Inside Back Cover
- ------------------------------------------------------
Summary of Fund Expenses
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases (as a percentage
of offering price) None
Maximum Sales Load 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) 0.00%
Redemption Fee (as a percentage of amount redeemed,
if applicable) None
Exchange Fee None
Annual Fund Operating Expenses
(As a percentage of average net assets)
Management Fee (after waiver)(2) 0.00%
12b-1 Fee 0.75%
Total Other Expenses (after expense reimbursement)
1.75%
Shareholder Services Fee 0.25%
Total Fund Operating Expenses (3)
2.50%
(1) Effective December 1, 1994, the contingent deferred sales
charge is waived. The contingent deferred sales charge had
been 3.00% in the first year, declining to 2.00% in the
second year and 0.00% after three years. (See "Contingent
Deferred Sales Charge").
(2) The management fee has been reduced to reflect the
voluntary waiver of the management fee. The adviser can
terminate this voluntary waiver at any time at its sole
discretion. The maximum management fee is 0.40%.
(3) The Total Fund Operating Expenses in the table above are
based on expenses expected during the fiscal year ending
August 31, 1995. The Total Fund Operating Expenses were
0.75% for the fiscal year ended August 31, 1994, and would
have been 5.39% absent the voluntary waiver of the
management fee and the voluntary reimbursement of certain
other operating expenses.
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 "Investing in the Fund" and "Municipal
Securities Income Trust Information". Wire--transferred
redemptions of less than $5,000 may be subject to additional
fees.
Long-term shareholders may pay more than the economic
equivalent of the maximum front-end sales charge permitted
under the rules of the National Association of Securities
Dealers, Inc.
EXAMPLE 1 year 3 years 5 years 10 years
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..... $56 $99 $133 $284
You would pay the following
expenses on the same $25 $78 $133 $284
investment, assuming no redemption...................
The above example should not be considered a representation
of past or future expenses. Actual expenses may be greater or
less than those shown.
MARYLAND MUNICIPAL INCOME FUND
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table has been audited by Deloitte & Touche LLP, the
Fund's independent auditors. Their report dated October 7, 1994,
on the Fund's Financial Statements for the year ended August 31,
1994, is included in the Annual Report dated August 31, 1994, 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 free of charge.
YEAR ENDED
AUGUST 31,
1994*
Net asset value, beginning of period $10.00
Income from investment operations
Net investment income 0.50
Net realized and unrealized gain on
investments (1.16)
Total from investment operations (0.66)
Less distributions
Dividends to shareholders from net
investment income (0.50)
Distributions in excess of net
investment income (0.03)(a)
Total distributions (0.53)
Net asset value, end of period $8.81
Total return** (6.70%)
Ratios to Average Net Assets
Expenses 0.75% (b)
Net investment income 5.35% (b)
Expense waiver/reimbursement (c) 4.64% (b)
Supplemental Data
Net assets, end of period (000 omitted) $5,997
Portfolio turnover rate 56%
*Reflects operations for the period from September 3, 1993 (date
of initial public investment) to August 31, 1994.
**Based on net asset value, which does not reflect the sales load
or contingient deferred sales charge, if applicable.
(a)Distributions are
determined in accordance with income taxregulations which may differ
from generally accepted
accounting principles. These distributions do not represent a return
of capital for federal income tax purposes.
(b)Computed on an annualized basis.
(c) The voluntary expense
decrease is reflected in both the expense and net investment
income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
FURTHER INFORMATION ABOUT THE FUND'S PERFORMANCE IS CONTAINED IN
THE FUND'S ANNUAL REPORT DATED AUGUST 31, 1994, WHICH CAN BE
OBTAINED FREE OF CHARGE.
GENERAL INFORMATION -------------------
Federated Municipal Income Trust was established as a
Massachusetts business trust under a Declaration of Trust dated
August 6, 1990. On September 16, 1992 (effective date October 31,
1992), the Board of Trustees (the "Trustees") approved changing
the name of the Trust from Federated Municipal Income Trust to
Municipal Securities Income Trust. The Declaration of Trust
permits the Trust to offer separate series of shares of beneficial
interest representing interests in separate portfolios of
securities. The shares in any one portfolio may be offered in
separate classes. With respect to this Fund, as of the date of
this prospectus the Trustees have not established any classes of
shares.
Shares of the Fund are designed for customers of financial
institutions such as broker/dealers, banks, fiduciaries, and
investment advisers as a convenient means of accumulating an
interest in a professionally managed, non-diversified portfolio
investing primarily in Maryland Municipal Securities. A minimum
initial investment of $1,500 is required. Under normal
circumstances, subsequent investments must be in amounts of at
least $100. Effective October 17, 1994, however, the Fund ceased
offering its shares for sale, except for dividend reinvestment by
existing shareholders. The Fund is not likely to be a suitable
investment for non-Maryland taxpayers or retirement plans since
Maryland Municipal Securities are not likely to produce
competitive after-tax yields for such persons and entities when
compared to other investments.
Except as otherwise noted in this prospectus, shares of the Fund
are sold at net asset value and are redeemed at net asset value.
However, a contingent deferred sales charge is imposed on certain
shares of the Fund which are redeemed within three full years of
the date of purchase. The contingent deferred sales charge has
been waived for all redemptions effective December 1, 1994. Fund
assets may be used in connection with the distribution of shares
of the Fund.
In November 1994, the Fund's distributor notified shareholders
that it would recommend the liquidation of the Fund to the
Trustees of the Trust and advised shareholders that it may be
advisable to consider voluntary redemption of Fund shares because,
among other things, effective October 17, 1994, the Fund had
ceased offering shares for sale and because, effective December 1,
1994, the Fund's adviser would cease the voluntary reimbursement
of operating expenses, thus causing the Fund's expense ratio to
increase significantly. The Fund's distributor also indicated
that it would recommend to the Trustees a transaction involving
the tax-free reorganization of the Fund into another investment
company. The Trustees are expected to consider such proposal in
early 1995 and, if approved by them, it is anticipated that such
matter will be submitted to shareholders for their approval
promptly thereafter.
INVESTMENT INFORMATION ---------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide current income
which is exempt from federal regular income tax (federal regular
income tax does not include the federal alternative minimum tax)
and the personal income taxes imposed by the state of Maryland and
Maryland municipalities. 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.
Interest income of the Fund that is exempt from the income taxes
described above retains its exempt status when distributed to the
Fund's non-corporate shareholders. However, income distributed by
the Fund may not necessarily be exempt from state or municipal
taxes in states other than Maryland.
INVESTMENT POLICIES
The Fund pursues its investment objective by investing primarily
in securities which are exempt from federal regular income tax and
personal income taxes imposed by the State of Maryland and
Maryland municipalities. As a matter of investment policy, which
may not be changed without shareholder approval, the Fund will
invest its assets so that, under normal circumstances, at least
80% of its annual interest income is exempt from Federal regular
income tax, or that at least 80% of its net assets are invested in
securities the interest from which is exempt from Federal regular
income tax. Unless indicated otherwise, the other investment
policies of the Fund may be changed by the Trustees without
approval of shareholders. Shareholders will be notified before any
material changes in these policies become effective.
ACCEPTABLE INVESTMENTS. Under normal circumstances, the Fund will
invest at least 65% of its total assets in Maryland Municipal
Securities, which are obligations issued by or on behalf of the
State of Maryland, its political subdivisions, or agencies, debt
obligations of any state, territory, or possession of the United
States, including the District of Columbia, or any political
subdivision of any of these, and participation interests, as
described below, in any of the above obligations, the interest
from which is, in the opinion of bond counsel for the issuers or
in the opinion of officers of the Fund and/or the investment
adviser to the Fund, exempt from both federal regular income tax
and the personal income tax imposed by the State of Maryland and
Maryland municipalities. While the Fund intends to invest
primarily in securities issued by or on behalf of the State of
Maryland and its political subdivisions, it will invest in other
securities issued by states, territories, and possessions of the
United States which are exempt from federal regular income tax and
the personal income taxes imposed by the State of Maryland and
Maryland municipalities. The Fund will invest in such securities
in instances where, in the judgment of the Fund's investment
adviser, the supply and yield of such securities would be
beneficial to the Fund's investment performance.
The Fund currently invests primarily in variable rate municipal
securities, as described below.
The prices of Fixed income securities fluctuates inversely to the
direction of interest rates.
The Fund may also engage in put and call options, futures
contracts, and options on futures contracts for hedging purposes.
CHARACTERISTICS. The Maryland Municipal Securities which the
Fund buys are investment grade bonds rated, at the time of
purchase, Aaa, Aa, A, or Baa by Moody's Investors Service,
Inc. ("Moody's"), or AAA, AA, A, or BBB by Standard and
Poor's Ratings Group ("S&P") or by Fitch Investors Service,
Inc. ("Fitch"). In certain cases the Fund's adviser may
choose bonds which are unrated if it determines that such
bonds are of comparable quality or have similar
characteristics to investment grade bonds. Bonds rated "BBB"
by S&P or Fitch 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.
If the Fund purchases an investment grade bond, and the
rating of such bond is subsequently downgraded so that the
bond is no longer classified as investment grade, the Fund is
not required to drop the bond from the portfolio, but will
consider whether such action is appropriate. A description of
the rating categories is contained in the Appendix to the
Statement of Additional Information.
PARTICIPATION INTERESTS. The Fund may purchase participation
interests from financial institutions such as commercial
banks, savings and loan associations, and insurance
companies. These participation interests give the Fund an
undivided interest in Maryland Municipal Securities. The
financial institutions from which the Fund purchases
participation interests frequently provide or secure
irrevocable letters of credit or guarantees to assure that
the participation interests are of high quality. The Board of
Trustees of the Trust will determine that participation
interests meet the prescribed quality standards for the Fund.
VARIABLE RATE MUNICIPAL SECURITIES. Some of the Maryland
Municipal Securities which the Fund purchases may have
variable interest rates. Variable interest rates are
ordinarily based on a published interest rate, interest rate
index or a similar standard, such as the 91-day U.S. Treasury
bill rate. Many variable rate municipal securities are
subject to payment of principal on demand by the Fund in not
more than seven days. All variable rate municipal securities
will meet the quality standards for the Fund. The Fund's
investment adviser has been instructed by the Trustees to
monitor the pricing, quality, and liquidity of the variable
rate municipal securities, including participation interests
held by the Fund, on the basis of published financial
information and reports of the rating agencies and other
analytical services.
MUNICIPAL LEASES. Municipal leases are obligations issued by
state and local governments or authorities to finance the
acquisition of equipment and facilities and may be considered to
be illiquid. They may take the form of a lease, an installment
purchase contract, a conditional sales contract or a participation
certificate on any of the above.
Also included within the general category of municipal securities
are certain lease obligations or installment purchase contract
obligations and participations therein (hereinafter collectively
called "lease obligations") of municipal authorities or entities.
Although lease obligations do not constitute general obligations
of the municipality for which the municipality's taxing power is
pledged, a lease obligation is ordinarily backed by the
municipality's covenant to budget for, appropriate and make the
payments due under the lease obligation. Interest on lease
obligations is tax-exempt to the same extent as if the
municipality had issued debt obligations to finance the underlying
project or purchase. However, certain lease obligations contain
"non-appropriation" clauses which provide that the municipality
has no obligation to make lease or installment purchase payments
in future years unless money is appropriated for such purpose on a
yearly basis. In addition to the "non-appropriation" risk, these
securities represent a relatively new type of financing that has
not yet developed the depth of marketability associated with more
conventional bonds and some lease obligations may be illiquid.
Although "non-appropriation" lease obligations are generally
secured by the leased property, disposition of the property in the
event of foreclosure might prove difficult. In addition, the tax
treatment of such obligations in the event of non-appropriation is
unclear. The Fund does not intend to invest more than 10% of its
total assets in lease obligations that contain "non-appropriation"
clauses.
INVERSE FLOATERS. The Fund may invest in various types of
derivative municipal securities whose interest rates bear an
inverse relationship to the interest rate on another security or
the value of an index ("inverse floaters"). Because changes in the
interest rate on the other security or index inversely affect the
residual interest paid on the inverse floater, the value of an
inverse floater is generally more volatile than that of a fixed
rate bond. Inverse floaters have interest rate adjustment formulas
which generally reduce or, in the extreme, eliminate the interest
paid to the Fund when short-term interest rates rise, and increase
the interest paid to the Fund when short-term interest rates fall.
Inverse floaters have varying degrees of liquidity, and the market
for these securities is new and relatively volatile. These
securities tend to underperform the market for fixed rate bonds in
a rising interest rate environment and tend to fall in value more
rapidly, but tend to outperform the market for fixed rate bonds
when interest rates decline and tend to rise in value more
rapidly. Shifts in the relationship between short-term and long-
term interest rates may alter this tendency, however. In return
for this volatility, inverse floaters typically offer the
potential for yields exceeding the yields available on fixed rate
bonds with comparable credit quality and maturity. These
securities usually permit the investor to convert the floating
rate to a fixed rate (normally adjusted downward), and this
optional conversion feature may provide a partial hedge against
rising interest rates if exercised at an opportune time.
RESTRICTED AND ILLIQUID SECURITIES. The Fund intends to invest in
restricted securities. Restricted securities are any securities in
which the Fund may otherwise invest pursuant to its investment
objective and policies but which are subject to restriction on
resale under federal securities law. However, the Fund will limit
investments in illiquid securities, including certain restricted
securities determined by the Board of Trustees to be illiquid, non-
negotiable time deposits, and repurchase agreements providing for
settlement in more than seven days after notice, to 15% of its net
assets.
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 the transaction
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 into transactions to sell its purchase
commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar
securities at later dates. The Fund may realize short-term
profits or losses upon the sale of such commitments.
FUTURES CONTRACTS AND OPTIONS TO BUY OR SELL SUCH CONTRACTS. The
Fund may utilize bond futures contracts and options to a limited
extent. Specifically, the Fund may enter into futures contracts
provided that not more than 5% of its assets are required as a
futures contract deposit; in addition, the Fund may enter into
futures contracts and options transactions only to the extent that
obligations under such contracts or transactions represent not
more than 20% of the Fund's assets.
Futures contracts and options may be used for several reasons: to
maintain cash reserves while remaining fully invested, to
facilitate trading, to reduce transactions costs, or to seek
higher investment returns when a futures contract is priced more
attractively than the underlying municipal security or index. The
Fund may not use futures contracts or options transactions to
leverage its assets.
For example, in order to remain fully invested in bonds, while
maintaining liquidity to meet potential shareholder redemptions,
the Fund may invest a portion of its assets in a bond futures
contract. Because futures contracts only require a small initial
margin deposit, the Fund would then be able to maintain a cash
reserve to meet potential redemptions, while at the same time
remaining fully invested. Also, because the transactions costs of
futures contracts and options may be lower than the costs of
investing in bonds directly, it is expected that the use of
futures contracts and options may reduce the Fund's total
transactions costs.
The primary risks associated with the use of futures contracts and
options are: (i) imperfect correlation between the change in
market value of the bonds held by the Fund and the prices of
futures contracts and options; and (ii) possible lack of a liquid
secondary market for a futures contract and the resulting
inability to close a futures position prior to its maturity date.
The risk of imperfect correlation will be minimized by investing
only in those contracts whose price fluctuations are expected to
resemble those of the Fund's underlying securities. The risk that
the Fund will be unable to close out a futures position will be
minimized by entering into such transactions on a national
exchange with an active and liquid secondary market. In general,
the futures market is more liquid than the municipal bond market,
and so by investing in futures, liquidity may be improved.
TEMPORARY INVESTMENTS. From time to time, during periods of other
than normal market conditions, the Fund may invest in short-term
non-Maryland Municipal Securities or taxable temporary
investments. These temporary investments include: 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 rated within the investment grade categories
described under "Acceptable Investments--Characteristics" (if
rated) or those which the investment adviser judges to have the
same characteristics as such investment grade securities (if
unrated).
Although the Fund is permitted to make taxable, temporary
investments, there is no current intention of generating income
subject to federal regular income tax or personal income taxes
imposed by the State of Maryland or Maryland municipalities.
MARYLAND MUNICIPAL SECURITIES
Maryland Municipal Securities are generally issued to finance
public works, such as airports, bridges, highways, housing,
hospitals, mass transportation projects, schools, streets, and
water and sewer works. They are also issued to repay outstanding
obligations, to raise funds for general operating expenses, and to
make loans to other public institutions and facilities.
The two principal classifications of municipal securities are
"general obligation" and "revenue" bonds. General obligation bonds
are secured by the issuer's pledge of its full faith and credit
and taxing power for the payment of principal and interest.
However, interest on and principal of revenue bonds are payable
only from the revenue generated by the facility financed by the
bond or other specified sources of revenue. Revenue bonds do not
represent a pledge of credit or create any debt of or charge
against the general revenues of a municipality or public
authority. Industrial development bonds are typically classified
as revenue bonds.
Industrial development bonds are issued by or on behalf of public
authorities to provide financing aid to acquire sites or construct
and equip facilities for privately or publicly owned corporations.
The availability of this financing encourages these corporations
to locate within the sponsoring communities and thereby increases
local employment.
Most municipal securities pay interest in arrears on a semiannual
or more frequent basis. However, certain securities, typically
known as capital appreciation bonds or zero coupon bonds, do not
provide for any interest payments prior to maturity. Such
securities are normally sold at a discount from their stated
value, or provide for periodic increases in their stated value to
reflect a compounded interest rate. The market value of these
securities is also more sensitive to changes in market interest
rates than securities that provide for current interest payments.
INVESTMENT RISKS
Yields on Maryland Municipal Securities depend on a variety of
factors including, but not limited to: the general conditions of
the municipal bond market; the size of the particular offering;
the maturity of the obligations; and the rating of the issue.
Further, any adverse economic conditions or developments affecting
the State of Maryland or its municipalities could impact the
Fund's portfolio. The ability of the Fund to achieve its
investment objective also depends on the continuing ability of the
issuers of Maryland Municipal Securities and participation
interests, or the guarantors of either, to meet their obligations
for the payment of interest and principal when due. Investing in
Maryland Municipal Securities which meet the Fund's quality
standards may not be possible if the State of Maryland or its
municipalities do not maintain their current credit ratings. In
addition, certain Maryland constitutional amendments, legislative
decisions, executive orders, administrative regulations, and voter
initiatives could result in adverse consequences affecting
Maryland Municipal Securities. An expanded discussion of the
current economic risks associated with the purchase of Maryland
municipal securities is contained in the SAI.
NON-DIVERSIFICATION
The Fund is a non-diversified investment portfolio. As such, there
is no limit on the percentage of assets which can be invested in
any single issuer. An investment in the Fund, therefore, will
entail greater risk than investment in a diversified portfolio of
securities because the higher percentage of investments among
fewer issuers may result in greater fluctuation in the total
market value of the Fund's portfolio. Any economic, political, or
regulatory developments affecting the value of the securities in
the Fund's portfolio will have a greater impact on the total value
of the portfolio than would be the case if the portfolio were
diversified among more issuers.
The Fund intends to comply with Subchapter M of the Internal
Revenue Code. This undertaking requires that at the end of each
quarter of the taxable year: (a) with regard to at least 50% of
the Fund's total assets, no more than 5% of its total assets are
invested in the securities of a single issuer; and (b) no more
than 25% of its total assets are invested in the securities of a
single issuer.
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
agreement to buy it back on a set date) or pledge securities
except, under certain circumstances, the Fund may borrow up to one-
third of the value of its total assets and pledge up to 10% of the
value of those assets to secure such borrowings.
The above investment limitation cannot be changed without
shareholder approval. The following limitation, however, can be
changed by the Trustees without shareholder approval. Shareholders
will be notified before any material change in this limitation
becomes effective.
The Fund will not invest more than 5% of its total assets in
industrial development bonds when the payment of principal and
interest is the responsibility of companies (or guarantors, where
applicable) with less than three years of continuous operations,
including the operation of any predecessor.
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.
INVESTING IN THE FUND -------------------------------------
SHARE PURCHASES
SHARES OF THE FUND ARE NO LONGER BEING OFFERED FOR SALE. When
shares had been offered for sale, the following requirements and
procedures were applicable to purchases.
Shares are sold on days on which the New York Stock Exchange is
open. Shares may be purchased through an investment dealer which
has a sales agreement with the distributor, or directly from the
distributor, Federated Securities Corp., either by mail or by
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 of the Fund. Orders through a
financial institution are considered received when the Fund is
notified of the purchase order. Purchase orders through a
registered broker/dealer must be received by the broker before
4:00 P.M. (Boston time) and must be transmitted by the broker to
the Fund before 5:00 P.M. (Boston 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. (Boston
time) in order for shares to be purchased at that day's price. It
is the financial institution's responsibility to transmit orders
promptly.
DIRECTLY BY MAIL. To purchase shares by mail directly from
Federated Securities Corp:
- complete and sign the new
account form available from the Fund;
- enclose a check made
payable to Maryland Municipal Income Fund; and
- send both to the transfer agent's bank, State Street Bank
and Trust Company, P.O. Box 8604, Boston, MA 02266-8604.
Purchases by mail are considered received after payment by check
is converted by State Street Bank and Trust Company 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 State Street Bank receives payment by
wire.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in shares is $1,500. Subsequent
investments must be in amounts of at least $100.
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. State
Street Bank acts as the shareholder's agent in depositing checks
and converting them to federal funds.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an
order is received. The net asset value is determined at 4:00 P.M.
(Boston time), 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, Columbus Day,
Veteran's 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.
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their
investment on a regular basis in a minimum amount of $100. Under
this program, funds may be automatically withdrawn periodically
from the shareholder's checking account and invested in shares at
the net asset value next determined after an order is received by
State Street Bank. A shareholder may apply for participation in
this program through Federated Securities Corp. or his financial
institution.
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 Fund.
Detailed confirmations of each purchase and redemption are sent to
each shareholder. Monthly statements are sent to report dividends
paid during the month.
DIVIDENDS AND DISTRIBUTIONS
Dividends are declared daily and paid monthly. Dividends include
substantially all of the investment income earned by the Fund,
less its expenses, other than distribution fees made pursuant to
Rule 12b-1 for the sale of Fund shares, which fees currently are
charged to the Fund's paid-in capital for tax purposes. Effective
January 1, 1995, Rule 12b-1 fees will be paid out of Fund income,
rather than paid-in capital. Until January 1, 1995, a certain
portion of dividend distributions may represent a return of paid-
in capital. Distributions of any net realized long-term capital
gains will be made at least once every twelve months. Dividends
and distributions are automatically reinvested on payment dates in
additional shares of the Fund at net asset value unless
shareholders request cash payments on the application or by
writing to Federated Services Company.
Shares purchased through a financial institution, for which
payment by wire is received by State Street Bank on the business
day following the order, begin to earn dividends on the day that
the wire payment is received. Otherwise, shares purchased by wire
begin to earn dividends on the business day after wire payment is
received by State Street Bank. Shares purchased by mail, or
through a financial institution, if the financial institution's
payment is by check, begin to earn dividends on the second
business day after the check is received by Federated Services
Company.
Shares earn dividends through the business day on which proper
written redemption instructions are received by Federated Services
Company.
See the section entitled "Tax Information" in this prospectus for
a further discussion of the effect of the payment of distribution
fees made pursuant to Rule 12b-1.
REDEEMING SHARES -----------------------------------------------
The Fund redeems shares at their net asset value determined after
State Street Bank 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 by 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, less any applicable contingent
deferred sales charge. Redemption requests through a registered
broker/dealer must be received by the broker before 4:00 P.M.
(Boston time) and must be transmitted by the broker to the Fund
before 5:00 P.M. (Boston 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. (Boston
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 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 State Street Bank, P.O. Box 8604, Boston, MA 02266-8604. This
written request must include the shareholder's name, the Fund name
and class of shares, the account number, and the share or dollar
amount to be redeemed. Shares will be redeemed at their net asset
value next determined after State Street Bank receives the
redemption request.
If share certificates have been issued, they must be properly
endorsed and should be sent by registered or certified mail with
the written request. Shareholders may call the Fund for assistance
in redeeming by mail.
SIGNATURES. Shareholders requesting a redemption of $50,000 or
more, 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 firm of the New York, American,
Boston, Midwest, or Pacific Stock Exchange;
- 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
BY CHECK. A check for the proceeds is mailed within seven days
after receipt of proper written redemption instructions from a
broker or from the shareholder.
BY WIRE. Redemption requests will be wired the following business
day.
CONTINGENT DEFERRED SALES CHARGE
Under ordinary circumstances, shareholders redeeming shares from
their Fund accounts within three full years of the purchase date
of those shares will be charged a contingent deferred sales charge
by the Fund's distributor. Any applicable contingent deferred
sales charge will be imposed on the lesser of the net asset value
of the redeemed shares at the time of purchase or the net asset
value of the redeemed shares at the time of redemption in
accordance with the following schedule:
CONTINGENT DEFERRED
SHARES HELD SALES CHARGE
Less than one
year...........................................................
3%
More than one year but less than three
years.................... 2%
More than three
years.....................................................
None
Effective December 1, 1994, the Fund's distributor has waived the
imposition of the contingent deferred sales charge on all
redemptions of Fund shares.
The contingent deferred sales charge will be deducted from the
redemption proceeds otherwise payable to the shareholder and will
be retained by the distributor. The contingent deferred sales
charge will not be imposed with respect to: (1) shares acquired
through the reinvestment of dividends or distributions of longterm
capital gains; or (2) shares held for more than three full years
from the date of purchase. Redemptions will be processed in a
manner intended to maximize the amount of redemption which will
not be subject to a contingent deferred sales charge. In computing
the amount of the applicable contingent deferred sales charge,
redemptions are deemed to have occurred in the following order:
(1) shares acquired through the reinvestment of dividends and long-
term capital gains; (2) shares held for more than three full years
from the date of purchase; (3) shares held for fewer than three
years from the date of purchase on a first-in-first-out basis. A
contingent deferred sales charge is not assessed in connection
with an exchange of Fund shares for shares in Texas Municipal
Income Fund, New Jersey Municipal Income Fund, Virginia Municipal
Income Fund, or Florida Municipal Income Fund, portfolios of the
Trust, or for shares in Multi-State Municipal Income Fund, a
portfolio of Fixed Income Securities, Inc. (see "Exchanges for
Shares of Other Funds" below). Shares of Texas Municipal Income
Fund, New Jersey Municipal Income Fund, Florida Municipal Income
Fund and Multi-State Income Fund are no longer being offered for
sale. Any contingent deferred sales charge imposed at the time
exchanged-for shares are redeemed is calculated as if the
shareholder had held the shares from the date on which he became a
shareholder of the exchanged-from shares. Moreover, the contingent
deferred sales charge will be eliminated with respect to certain
redemptions (see "Elimination of Contingent Deferred Sales Charge"
below).
ELIMINATION OF CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge will be eliminated with
respect to the following redemptions: (1) redemptions following
the death or disability, as defined in Section 72(m)(7) of the
Internal Revenue Code of 1986, of a shareholder; (2) redemptions
in connection with certain distributions from Individual
Retirement Accounts, qualified retirement plans or tax-sheltered
annuities; and (3) involuntary redemptions by the Fund of shares
in shareholder accounts that do not comply with the minimum
balance requirement. In addition, to the extent that the
distributor does not advance commissions to certain financial
institutions for purchases made by certain individuals, no
contingent deferred sales charge will be imposed on redemptions of
shares held by Trustees, employees and sales representatives of
the Fund, the distributor, or affiliates of the Fund or
distributor; employees of any financial institution that sells
shares of the Fund pursuant to a sales agreement with the
distributor; and spouses and children under the age of 21 of the
aforementioned persons. Finally, no contingent deferred sales
charge will be imposed on the redemption of shares originally
purchased through a bank trust department or investment adviser
registered under the Investment Advisers Act of 1940, to the
extent that no commission was advanced for purchases made by such
entities. The Trustees reserve the right to discontinue the
elimination of the contingent deferred sales charge. Shareholders
would be notified of such elimination. Any shares purchased prior
to the termination of such a waiver would have the contingent
deferred sales charge eliminated as provided in the Fund's
prospectus at the time of purchase of such shares. If a
shareholder making a redemption qualifies for an elimination of
the contingent deferred sales charge, the shareholder must notify
Federated Securities Corp. or State Street Bank in writing that he
is entitled to such elimination.
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; the minimum withdrawal amount is $100. 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. A contingent deferred sales charge is
imposed on shares redeemed through this program within three full
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 and pay the proceeds to
the shareholder if the account balance falls below the required
minimum value of $1,500 due to shareholder redemptions. This
requirement does not apply, however, if the balance falls below
$1,500 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. A contingent deferred
sales charge will not be imposed on such redemptions.
EXCHANGES FOR SHARES OF OTHER FUNDS
In order to provide greater flexibility to Fund shareholders whose
investment objective has changed, the Fund allows shareholders to
exchange some or all of their Fund shares for shares of Texas
Municipal Income Fund, New Jersey Municipal Income Fund, Virginia
Municipal Income Fund, and Florida Municipal Income Fund,
portfolios of the Trust, as well as shares of Multi-State
Municipal Income Fund, a portfolio of Fixed Income Securities,
Inc., which is also advised by Federated Advisers. Exchanges are
made at net asset value without being assessed a contingent
deferred sales charge on the exchanged shares. Shares of Texas
Municipal Income Fund, New Jersey Municipal Income Fund, Flordia
Municipal Income Fund and Multi-State Municipal Income Fund are no
longer being offered for sale.
Shareholders using this privilege must exchange shares having a
net asset value of at least $1,500. Shareholders who desire to
automatically exchange shares of a predetermined amount on a
monthly, quarterly, or annual basis may take advantage of a
systematic exchange privilege. A shareholder may obtain further
information on these exchange privileges by calling Federated
Securities Corp. or his financial institution. See the section
entitled "Contingent Deferred Sales Charge" in this prospectus for
more information. Before making an exchange, a shareholder must
receive a prospectus of the fund for which the exchange is being
made.
The ability to exchange shares is available to shareholders
residing in any state in which the shares being acquired may be
legally sold. 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.
MUNICIPAL SECURITIES INCOME TRUST INFORMATION -----------
MANAGEMENT OF MUNICIPAL SECURITIES INCOME TRUST
BOARD OF TRUSTEES. Municipal Securities Income Trust is managed
by a Board of Trustees. The Board of Trustees is responsible for
managing the business affairs of Municipal Securities Income Trust
and for exercising all of the powers of Municipal Securities
Income Trust except those reserved for the shareholders. An
Executive Committee of the Board of Trustees handles the Trustees'
responsibilities between meetings of the Trustees.
INVESTMENT ADVISER. Pursuant to an investment advisory contract
with Municipal Securities Income Trust, investment decisions for
the Fund are made by Federated Advisers, the Fund's investment
adviser, subject to direction by the Trustees. The adviser
continually conducts investment research and supervision for the
Fund and is responsible for the purchase and sale of portfolio
instruments, for which it receives an annual fee from the Fund.
ADVISORY FEES. The Fund's adviser receives an annual
investment advisory fee equal to 0.40 of 1% of the Fund's
average daily net assets. Under the advisory contract, which
provides for the voluntary waiver of the advisory fee by the
adviser, the adviser may voluntarily waive some or all of its
fee. The adviser can terminate this voluntary waiver of
expenses 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. Total assets under management or
administration by these and other subsidiaries of Federated
Investors is approximately $70 billion. Federated Investors,
which was founded in 1956 as Federated Investors, Inc.,
develops and manages mutual funds primarily for the financial
industry. Federated Investors' track record of competitive
performance and its disciplined, risk averse investment
philosophy serve approximately 3,500 client institutions
nationwide. Through these same client institutions,
individual shareholders also have access to this same level
of investment expertise.
James D. Roberge and Jonathan C. Conley are the Fund's co-
portfolio managers. James D. Roberge has been the Fund's co-
portfolio manager since June, 1993. Mr. Roberge joined
Federated Investors in 1990 and has been Vice President of
the Fund's investment adviser since October, 1994. Prior to
this Mr. Roberge served as an Assistant Vice President of the
Fund's investment adviser since 1992. From 1990 until 1992,
Mr. Roberge acted as an investment analyst. Mr. Roberge
received his M.B.A. in Finance from Wharton Business School
in 1990.
Jonathan C. Conley has been the Fund's co-portfolio manager
since June, 1993. Mr. Conley joined Federated Investors in
1979 and has been a Vice President of the Fund's investment
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 (the
"Distributor") for shares of the Fund. Federated Securities Corp.
is located at Federated Investors Tower, Pittsburgh, Pennsylvania
15222-3779. It is a Pennsylvania corporation organized on November
14, 1969, and is the principal distributor for a number of
investment companies. Federated Securities Corp. is a subsidiary
of Federated Investors.
DISTRIBUTION PLAN
The Distributor will pay dealers an amount equal to 2% of the net
asset value of Fund shares purchased by their clients or
customers. These payments will be made directly by the Distributor
from its assets, and will not be made from the assets of the Fund.
Pursuant to the provisions of a distribution plan adopted in
accordance with the Investment Company Act Rule 12b-1 (the
"Plan"), the Fund will pay to the Distributor an amount computed
at an annual rate of 0.75 of 1% of the average daily net asset
value of Fund shares to reimburse the Distributor for advancements
paid to dealers and to finance any activity which is principally
intended to result in the sale of shares subject to the Plan. The
Fund will accrue the distribution fee as a liability of the Fund,
and such method of accrual will reduce the Fund's net assets and
net asset value accordingly. See the section entitled "Tax
Information" in this prospectus for a further discussion of the
effect of the payment of distribution fees made pursuant to Rule
12b-1 and the payment of shareholder services fees to financial
institutions for administrative and support services on
distributions (of dividends, etc.) to shareholders.
Because distribution fees to be paid by the Fund to the
Distributor may not exceed an annual rate of 0.75 of 1% of the
Fund's average daily net assets, it will take the Distributor a
number of years to recoup the expenses that it has incurred for
its distribution and distribution related services pursuant to the
Plan.
The Distributor may select financial institutions (such as a
broker/dealer or bank) to provide sales support services as agents
for their clients or customers who beneficially own shares of the
Fund. After a shareholder has been invested in the Fund for a
period of three years, the Distributor will pay financial
institutions a portion of the above-referenced distribution fee,
in an amount up to 0.25 of 1% of the Fund's average daily net
assets based upon the shares owned by the client for a period
exceeding three years. It is anticipated that the payment to the
financial institutions will encourage such financial institutions
to remain knowledgeable about the Fund, encourage further sales of
the Fund, and discourage redemptions for reinvestment in new
products or products compensating the financial institutions at a
higher level.
The Fund's Plan is a compensation type plan. As such, the Fund
makes no payments to the Distributor except as described above.
Therefore, the Fund does not pay for unreimbursed expenses of the
Distributor, including amounts expended by the Distributor in
excess of amounts received by it from the Fund, interest, carrying
or other financing charges in connection with excess amounts
expended, or the Distributor's overhead expenses. However, the
Distributor may be able to recover such amounts or may earn a
profit from future payments made by the Fund under the Plan.
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. In the event the
Glass-Steagall Act is deemed to prohibit depository institutions
from acting in the administrative capacities described above or
should Congress relax current restrictions on depository
institutions, the Board of Trustees will consider appropriate
changes in the services.
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.
SHAREHOLDER SERVICES PLAN
The Fund has adopted a Shareholder Services Plan (the "Services
Plan"). Under the Services Plan, financial institutions will enter
into shareholder service agreements with the Fund to provide
administrative support services to their customers who from time
to time may be owners of record or beneficial owners of Fund
shares. These administrative services may include, but are not
limited to, the provision of personal service and maintenance of
shareholder accounts. In return for providing these support
services, a financial institution may receive payments from the
Fund at a rate not exceeding 0.25 of 1% of the average daily net
assets of Fund shares beneficially owned by the financial
institution's customers for whom it is holder of record or with
whom it has a servicing relationship.
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 daily net assets of all funds advised by
subsidiaries of Federated Investors ("Federated Funds") as
specified below:
Average Aggregate Daily
Net Assets
Maximum Administrative Fee of the
Federated Funds
0.15 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.10 of 1% on the next $250 million
0.075 of 1% on assets in excess of
$750 million
The administrative fee received during any fiscal year shall be at
least $125,000 per portfolio and $30,000 per each additional class
of shares. Federated Administrative Services may choose
voluntarily to waive a portion of its fee.
CUSTODIAN. State Street Bank and Trust Company, Box 8604, Boston,
Massachusetts, is custodian for the securities and cash of the
Fund
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services
Company, Pittsburgh, Pennsylvania, is transfer agent for the
shares of the Fund, and dividend disbursing agent for the Fund.
The fee paid to the transfer agent is based on the size, type and
number of accounts and transactions made by shareholders.
Federated Services Company also maintains the Trust's accounting
records. The fee paid for this service is based on the level of
the Fund's average net assets for the period, plus out-of-pocket
expenses.
LEGAL COUNSEL
Legal counsel is provided by Houston, Houston & Donnelly, 2510
Centre City Tower, Pittsburgh, Pennsylvania, and Dickstein,
Shapiro & Morin, L.L.P., 2101 L Street, N.W., Washington, D.C.
INDEPENDENT AUDITORS
The independent auditors for the Fund are Deloitte & Touche LLP,
Boston, Massachusetts.
EXPENSES OF THE FUND
The Fund pays all of its own expenses and its allocable share of
Trust expenses. These expenses include, but are not limited to,
the costs of: organizing the Trust and continuing its existence;
Trustees' fees; investment advisory and administrative services;
printing prospectuses and other Fund documents for shareholders;
registering the Trust, the Fund and shares of the Fund; taxes and
commissions; issuing, purchasing, repurchasing, and redeeming
shares; fees for custodian, transfer agent, dividend disbursing
agent, shareholder servicing agents, and registrars; printing,
mailing, auditing, accounting, and legal expenses; reports to
shareholders and government agencies; meetings of Trustees and
shareholders and proxy solicitations therefor; insurance premiums;
association membership dues; and such nonrecurring and
extraordinary items as may arise.
SHAREHOLDER INFORMATION ---------------------------
VOTING RIGHTS
Each share of the Fund gives the shareholder one vote in Trustee
elections and other matters submitted to shareholders for vote.
All shares of all classes of each portfolio in the Trust have
equal voting rights except that in matters affecting only a
particular fund or class, only shares of that fund or class are
entitled to vote. As of December 23, 1994, Alex Brown & Sons,
Inc., Baltimore, Maryland, owned 28.46% 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.
As a Massachusetts business trust, the Trust is not required to
hold annual shareholder meetings. Shareholder approval will be
sought only for certain changes in the Trust's or the Fund's
operation and for the election of Trustees under certain
circumstances. Trustees may be removed by the Trustees or by
shareholders at a special meeting. A special meeting of the
shareholders for this purpose shall be called by the Trustees upon
the written request of shareholders owning at least 10% of the
outstanding shares of all series in the Trust entitled to vote.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally
liable as partners under Massachusetts law for acts or obligations
of the Trust on behalf of the Fund. To protect shareholders of the
Fund, the Trust has filed legal documents with Massachusetts that
expressly disclaim the liability of shareholders of the Fund for
such acts or obligations of the Trust. These documents require
notice of this disclaimer to be given in each agreement,
obligation, or instrument that the Trust or its Trustees enter
into or sign on behalf of the Fund.
In the unlikely event that a shareholder of the Fund is held
personally liable for the Trust's obligations on behalf of the
Fund, the Trust is required to use the property of the Fund to
protect or compensate the shareholder. On request, the Trust will
defend any claim made and pay any judgment against a shareholder
of the Fund for any act or obligation of the Trust on behalf of
the Fund. Therefore, financial loss resulting from liability as a
shareholder of the Fund will occur only if the Trust cannot meet
its obligations to indemnify shareholders and pay judgments
against them from the assets of the Fund.
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. The Fund will be treated as a single,
separate entity for federal income tax purposes so that income
(including capital gains) and losses realized by the Trust's other
portfolios will not be combined for tax purposes with those
realized by the Fund.
Shareholders are not required to pay 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 income earned on some
municipal bonds may be included in calculating the federal
individual alternative minimum tax or the federal alternative
minimum tax for corporations.
It is anticipated that each monthly distribution of dividends will
exceed the Fund's net investment income as calculated for
financial statement reporting purposes during the applicable
period by an amount substantially equal to the amount of
distribution payments made pursuant to the Plan, and charged to
the Fund's paid-in capital for tax purposes during such period.
The Securities and Exchange Commission requires the Fund to
indicate that such excess amount is being paid to shareholders
from the Fund's paid-in capital. However, the Fund anticipates
that the entire monthly distribution (including the excess amount)
will constitute tax-exempt income to the shareholders for Federal
income tax purposes, except for the proportionate part of the
distribution that may be considered taxable income if the Fund
earns taxable income during the calendar year. Therefore, the Fund
believes that a shareholder should make no adjustment to the tax
cost basis of his existing shareholdings as a result of the
monthly distribution. The Fund also believes that shareholders
reinvesting the monthly distribution should continue to treat the
amount of the entire distribution as the tax cost basis of the
additional shares acquired by reason of such reinvestment.
The Internal Revenue Service ("IRS") has issued a ruling
(effective April 1995) which changes the accounting method which
is applied to distribution related expenses incurred under Rule
12b-1 Plans. The ruling requires the Fund to charge such expenses
to the Fund's investment income. Effective January 1, 1995, the
Fund will change its accounting for these expenses accordingly.
The alternative minimum tax, equal to 24% 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 will become
subject to the 20% corporate alternative minimum tax because the
dividends are included in a corporation's "adjusted current
earnings." The corporate alternative 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" are 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.
MARYLAND STATE AND MUNICIPAL TAXATION
Holders of the Fund who are individuals, corporations, estates or
trusts and who are subject to Maryland state and local income tax
will not be subject to tax in Maryland on Fund dividends to the
extent that such dividends qualify as exempt-interest dividends of
a regulated investment company under Section 852(b)(5) of the
Internal Revenue Code of 1986, as amended, (the "Code") and which
are attributable to (i) interest on tax-exempt obligations of the
State of Maryland or its political subdivisions or authorities,
(ii) interest on obligations of the United States of an authority,
commission, instrumentality, possession or territory of the United
States, or (iii) gain realized by the Fund from the sale or
exchange of bonds issued by Maryland, a political subdivision of
Maryland, or the United States Government (excluding obligations
issued by the District of Columbia, a territory or possession of
the United States, or a department, agency, instrumentality, or
political subdivision of the District, territory or possession).
To the extent that distributions of the Fund are attributable to
sources other than those described above, such as (i) interest on
obligations issued by states other than Maryland or (ii) income
from repurchase contracts, such distributions will not be exempt
from Maryland state and local income taxes. In addition, gain
realized by a shareholder upon a redemption or exchange of Fund
shares will be subject to Maryland taxation.
Maryland presently includes in taxable net income items of tax
preferences as defined in the Code. Interest paid on certain
private activity bonds constitutes a tax preference. Accordingly,
subject to a threshold amount, 50% of any distributions on the
Fund attributable to such private activity bonds will not be
exempt from Maryland state and local income taxes.
Interest on indebtedness incurred (directly or indirectly) by a
shareholder of the Fund to purchase or carry shares of the Fund
will not be deductible for Maryland state and local income tax
purposes to the extent such interest is allocable to exempt-
interest dividends.
OTHER STATE AND LOCAL TAXES
Income from the Fund is not necessarily free from regular state
income taxes in states other than Maryland or from personal
property taxes. State laws differ on this issue, and shareholders
are urged to consult their own tax advisers regarding the status
of their accounts under state and local tax laws.
PERFORMANCE INFORMATION -----------------------------------
From time to time the Fund advertises the total return, yield, and
tax-equivalent yield for shares. Total return represents the
change, over a specific period of time, in the value of an
investment in shares after reinvesting all income and capital
gains distributions. It is calculated by dividing that change by
the initial investment and is expressed as a percentage.
The yield of shares is calculated by dividing the net investment
income per share (as defined by the Securities and Exchange
Commission) earned by shares over a thirty-day period by the
maximum offering price per share of shares on the last day of the
period. This number is then annualized using semi-annual
compounding. The tax-equivalent yield of shares is calculated
similarly to the yield, but is adjusted to reflect the taxable
yield that shares would have had to earn to equal its actual
yield, assuming a specific tax rate. The yield and the tax-
equivalent yield do not necessarily reflect income actually earned
by shares and, therefore, may not correlate to the dividends or
other distributions paid to shareholders.
The performance information reflects the effect of the contingent
deferred sales charge, which, if excluded, would increase the
total return, yield, and tax-equivalent yield.
From time to time, the Fund may advertise its performance using
certain financial publications and/or compare its performance to
certain indices.
ADDRESSES
- ------------------------------------------------------------------------------
Maryland Municipal Income Fund Federated Investors Tower
Pittsburgh, Pennsylvania
15222-3779
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania
15222-3779
Investment Adviser
Federated Advisers Federated Investors Tower
Pittsburgh, Pennsylvania
15222-3779
Custodian
State Street Bank and P.O. Box 8604
Trust Company Boston, Massachusetts 02266-
8604
Transfer Agent and Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania
15222-3779
Legal Counsel
Houston, Houston & Donnelly 2510 Centre City Tower
Pittsburgh, Pennsylvania
15222
Legal Counsel
Dickstein, Shapiro & Morin, L.L.P. 2101 L Street, N.W.
Washington, D.C. 20037
Independent Auditors
Deloitte & Touche LLP 125 Summer Street
Boston, Massachusetts 02110-
1617
------------------------------------------------------------------
- ------------------------------
MARYLAND MUNICIPAL
INCOME FUND
PROSPECTUS
A Non-Diversified
Portfolio of Municipal
Securities Income
Trust, An Open-End,
Management Investment
Company
December 31,
1994
FEDERATED
SECURITIES CORP.
(LOGO)
----------------------
----------------------
-
Distributor
A subsidiary of
FEDERATED INVESTORS
FEDERATED
INVESTORS TOWER
PITTSBURGH, PA
15222-3779
(12/94)
Maryland Municipal Income Fund
(A Portfolio of Municipal Securities Income Trust)
Statement of Additional Information
This Statement of Additional Information should be read
with the prospectus of Maryland Municipal Income Fund
(the "Fund") dated December 31, 1994. This Statement is
not a prospectus itself. To receive a copy of the
prospectus write or call the Fund.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Statement dated December 31, 1994
FEDERATED SECURITIES
CORP.
Distributor
A Subsidiary of FEDERATED
INVESTORS
General Information About
the Fund 1
Investment Objective and
Policies 1
Acceptable Investments 1
Characteristics 1
Types of Acceptable
Investments 1
Participation Interests 1
Variable-Rate Municipal
Securities 1
Municipal Leases 2
Temporary Investments 2
Futures and Options
Transactions 2
Futures Contracts 2
"Margin" in Futures
Transactions 3
Put Options on Financial
Futures Contracts 3
Call Options on Financial
Futures Contracts 3
Risks 4
Repurchase Agreements 4
Reverse Repurchase
Agreements 5
Portfolio Turnover 5
Investment Limitations 5
Selling Short and Buying
on Margin 5
Issuing Senior Securities
and Borrowing Money 5
Pledging Assets 5
Underwriting 5
Investing in Real Estate 5
Investing in Commodities 5
Lending Cash or
Securities 6
Concentration of
Investments 6
Investing in Issuers
Whose Securities are
Owned by Officers and
Trustees of the Fund 6
Investing in Securities
of Other Investment
Companies 6
Investing in Restricted
Securities 6
Investing in Illiquid
Securities 6
Investing in Put Options 6
Writing Covered Call
Options 6
Investing in New Issuers 6
Investing in Minerals 6
Maryland Investment Risks 7
Fund Ownership 10
The Funds 10
Investment Advisory Services 11
Adviser to the Fund 11
Advisory Fees 11
State Expense Limitations 11
Administrative Services 11
Brokerage Transactions 12
Purchasing Shares 12
Distribution and
Shareholder Services
Plans 12
Determining Net Asset Value 13
Valuing Municipal Bonds 13
Use of Amortized Cost 13
Redeeming Shares 13
Redemption in Kind 13
Tax Status 14
The Fund's Tax Status 14
Capital Gains 14
Total Return 14
Yield 14
Tax-Equivalent Yield 15
Tax-Equivalency Table 15
Performance Comparisons 16
Financial Statements 16
Appendix 17
General Information About the Fund
The Fund is a portfolio in Municipal Securities Income Trust
(the "Trust"). Federated Municipal Income Trust was
established as a Massachusetts business trust under a
Declaration of Trust dated August 6, 1990. On September 16,
1992 (effective date October 31, 1992), the Board of Trustees
(the "Trustees") approved changing the name of the Trust from
Federated Municipal Income Trust to Municipal Securities
Income Trust.
Investment Objective and Policies
The Fund's investment objective is to provide current income
which is exempt from federal regular income tax and the
personal income taxes imposed by the state of Maryland and
Maryland municipalities. The investment objective cannot be
changed without the approval of shareholders.
Acceptable Investments
The Fund invests primarily in a portfolio of municipal
securities which are exempt from federal income tax and the
personal income taxes imposed by the state of Maryland and
Maryland municipalities ("Maryland Municipal Securities"). The
municipal securities in which the Fund invests include those
issued by or on behalf of the State of Maryland and Maryland
municipalities as well as those issued by states, territories,
and possessions of the United States which are exempt from
federal regular income tax and the personal income taxes
imposed by the State of Maryland and Maryland municipalities.
Characteristics
The Maryland Municipal Securities in which the Fund
invests have the characteristics set forth in the
prospectus. If ratings made by Moody's Investors Service,
Inc. ("Moody's"), Standard & Poor's Ratings Group ("S&P")
or Fitch Investors Service ("Fitch's") 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.
Types of Acceptable Investments
Examples of Maryland Municipal Securities include:
ogovernmental lease certificates of participation issued
by state or municipal authorities where payment is
secured by installment payments for equipment,
buildings, or other facilities being leased by the
state or municipality;
omunicipal notes and tax-exempt commercial paper;
oserial bonds;
otax anticipation notes sold to finance working capital
needs of municipalities in anticipation of receiving
taxes;
obond anticipation notes sold in anticipation of the
issuance of long-term bonds;
opre-refunded municipal bonds whose timely payment of
interest and principal is ensured by an escrow of U.S.
government obligations; and
ogeneral obligation bonds.
Participation Interests
The financial institutions from which the Fund purchases
participation interests frequently provide or secure from
another financial institution irrevocable letters of
credit or guarantees and give the Fund the right to
demand payment of the principal amounts of the
participation interests plus accrued interest on short
notice (usually within seven days).
Variable-Rate Municipal Securities
Variable interest rates generally reduce changes in the
market value of municipal securities from their original
purchase prices. Accordingly, as interest rates decrease
or increase, the potential for capital appreciation or
depreciation is less for variable-rate municipal
securities than for fixed-income obligations. Many
municipal securities with variable interest rates
purchased by the Fund are subject to repayment of
principal (usually within seven days) on the Fund's
demand. The terms of these variable-rate demand
instruments require payment of principal and accrued
interest from the issuer of the municipal obligations,
the issuer of the participation interests, or a guarantor
of either issuer.
Municipal Leases
The Fund may purchase municipal securities in the form of
participation interests which represent undivided
proportional interests in lease payments by a
governmental or non-profit entity. The lease payments and
other rights under the lease provide for and secure the
payments on the certificates. Lease obligations may be
limited by municipal charter or the nature of the
appropriation for the lease. In particular, lease
obligations may be subject to periodic appropriation. If
the entity does not appropriate funds for future lease
payments, the entity cannot be compelled to make such
payments. Furthermore, a lease may provide that the
certificate trustee cannot accelerate lease obligations
upon default. The trustee would only be able to enforce
lease payments as they became due. In the event of a
default or failure of appropriation, it is unlikely that
the trustee would be able to obtain an acceptable
substitute source of payment.
In determining the liquidity of municipal lease securities,
the Fund's investment adviser, under the authority delegated
by the Trustees, will base its determination on the following
factors:
o whether the lease can be terminated by the lessee;
o the potential recovery, if any, from a sale of the leased
property upon termination of the lease;
o the lessee's general credit strength (e.g., its debt,
administrative, economic and financial characteristics and
prospectus);
o the likelihood that the lessee will discontinue
appropriating funding for the leased property because the
property is no longer deemed essential to its operations (e.g.,
the potential for an "event of non-appropriation"); and
o any credit enhancement or legal recourse provided upon an
event of non-appropriation or other termination of the lease.
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. 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. 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 during times
of unusual market conditions for defensive purposes and to
maintain liquidity.
Futures and Options Transactions
As a means of reducing fluctuations in the net asset value of
shares of the Fund, the Fund may attempt to hedge all or a
portion of its portfolio by buying and selling financial
futures contracts, buying put options on portfolio securities
and put options on financial futures contracts for portfolio
securities, and writing call options on futures contracts. The
Fund also may write covered call options on portfolio
securities to attempt to increase its current income.
The Fund will maintain its position in securities, options and
segregated cash subject to puts and calls until the options
are exercised, closed, or have expired. An option position may
be closed out over-the-counter or on an exchange which
provides a secondary market for options of the same series.
Futures Contracts
The Fund may purchase and sell financial futures contracts to
hedge against the effects of changes in the value of portfolio
securities due to anticipated changes in interest rates and
market conditions without necessarily buying or selling the
securities. The Fund will not engage in futures transactions
for speculative purposes.
A futures contract is a firm commitment by two parties: the
seller who agrees to make delivery of the specific type of
security called for in the contract ("going short") and the
buyer who agrees to take delivery of the security ("going
long") at a certain time in the future.
For example, in the fixed income securities market, prices
move inversely to interest rates. A rise in rates results in a
drop in price. Conversely, a drop in rates results in a rise
in price. In order to hedge its holdings of fixed income
securities against a rise in market interest rates, the Fund
could enter into contracts to deliver securities at a
predetermined price (i.e., "go short") to protect itself
against the possibility that the prices of its fixed income
securities may decline during the Fund's anticipated holding
period. The Fund could agree to purchase securities in the
future at a predetermined price (i.e., "go long") to hedge
against a decline in market interest rates.
"Margin" in Futures Transactions
Unlike the purchase or sale of a security, the Fund does not
pay or receive money upon the purchase or sale of a futures
contract. Rather, the Fund is required to deposit an amount of
"initial margin" in cash or U.S. Treasury bills with its
custodian (or the broker, if legally permitted). The nature of
initial margin in futures transactions is different from that
of margin in securities transactions in that initial margin in
futures transactions does not involve the borrowing of funds
by the Fund to finance the transactions. Initial margin is in
the nature of a performance bond or good faith deposit on the
contract which is returned to the Fund upon termination of the
futures contract, assuming all contractual obligations have
been satisfied.
A futures contract held by the Fund is valued daily at the
official settlement price of the exchange on which it is
traded. Each day the Fund pays or receives cash, called
"variation margin," equal to the daily change in value of the
futures contract. This process is known as "marking to
market." Variation margin does not represent a borrowing or
loan by the Fund, but is instead settlement between the Fund
and the broker of the amount one would owe the other if the
futures contract expired. In computing its daily net asset
value, the Fund will mark to market its open futures
positions.
The Fund is also required to deposit and maintain margin when
it writes call options on futures contracts.
The Fund will comply with the following restrictions when
purchasing and selling futures contracts. First, the Fund will
not participate in futures transactions if the sum of its
initial margin deposits on open contracts will exceed 5% of
the market value of the Fund's total assets, after taking into
account the unrealized profits and losses on those contracts
it has entered into. Second, the Fund will not enter into
these contracts for speculative purposes. Third, since the
Fund does not constitute a commodity pool, it will not market
itself as such, or serve as a vehicle for trading in the
commodities futures or commodity options markets. Connected
with this, the Fund will disclose to all prospective investors
the limitations on its futures and options transactions, and
make clear that these transactions are entered into only for
bona fide hedging purposes, or other permissible purposes
pursuant to regulations promulgated by the Commodity Futures
Trading Commission ("CFTC"). Finally, because the Fund will
submit to the CFTC special calls for information, the Fund
will not register as a commodities pool operator.
Put Options on Financial Futures Contracts
The Fund may purchase listed put options on financial futures
contracts. The Fund would use these options solely to protect
portfolio securities against decreases in value resulting from
market factors such as an anticipated increase in interest
rates.
Unlike entering directly into a futures contract, which
requires the purchaser to buy a financial instrument on a set
date at a specified price, the purchase of a put option on a
futures contract entitles (but does not obligate) its
purchaser to decide on or before a future date whether to
assume a short position at the specified price.
Generally, if the hedged portfolio securities decrease in
value during the term of an option, the related futures
contracts will also decrease in value and the option will
increase in value. In such an event, the Fund will normally
close out its option by selling an identical option. If the
hedge is successful, the proceeds received by the Fund upon
the sale of the second option will be large enough to offset
both the premium paid by the Fund for the original option plus
the decrease in value of the hedged securities.
Alternatively, the Fund may exercise its put option to close
out the position. To do so, it would simultaneously enter into
a futures contract of the type underlying the option (for a
price less than the strike price of the option) and exercise
the option. The Fund would then deliver the futures contract
in return for payment of the strike price. If the Fund neither
closes out nor exercises an option, the option will expire on
the date provided in the option contract, and only the premium
paid for the contract will be lost.
Call Options on Financial Futures Contracts
In addition to purchasing put options on futures, the Fund may
write listed call options on financial futures contracts or
over-the-counter call options on future contracts to hedge its
portfolio against an increase in market interest rates. When
the Fund writes a call option on a futures contract, it is
undertaking the obligation of assuming a short futures
position (selling a futures contract) at the fixed strike
price at any time during the life of the option if the option
is exercised. As market interest rates rise, causing the
prices of futures to decrease, the Fund's obligation under a
call option on a future (to sell a futures contract) costs
less to fulfill, causing the value of the Fund's call option
position to increase.
In other words, as the underlying futures price falls below
the strike price, the buyer of the option has no reason to
exercise the call, so that the Fund keeps the premium received
for the option. This premium can substantially offset the drop
in value of the Fund's portfolio securities.
Prior to the expiration of a call written by the Fund, or
exercise of it by the buyer, the Fund may close out the option
by buying an identical option. If the hedge is successful, the
cost of the second option will be less than the premium
received by the Fund for the initial option. The net premium
income of the Fund will then substantially offset the realized
decrease in value of the hedged securities.
The Fund will not maintain open positions in futures contracts
it has sold or call options it has written on futures
contracts if, in the aggregate, the value of the open
positions (marked to market) exceeds the current market value
of its securities portfolio, plus or minus the unrealized gain
or loss on those open positions, adjusted for the correlation
of volatility between the hedged securities and the futures
contracts. If this limitation is exceeded at any time, the
Fund will take prompt action to close out a sufficient number
of open contracts to bring its open futures and options
positions within this limitation.
Risks
When the Fund uses futures and options on futures as
hedging devices, there is a risk that the prices of the
securities subject to the futures contracts may not
correlate perfectly with the prices of the securities in
the Fund's portfolio. This may cause the futures contract
and any related options to react differently than the
portfolio securities to market changes. In addition, the
Fund's adviser could be incorrect in its expectations
about the direction or extent of market factors such as
stock price movements. In these events, the Fund may lose
money on the futures contract or option.
It is not certain that a secondary market for positions
in futures contracts or for options will exist at all
times. Although the Fund's adviser will consider
liquidity before entering into these transactions, there
is no assurance that a liquid secondary market on an
exchange or otherwise will exist for any particular
futures contract or option at any particular time. The
Fund's ability to establish and close out futures and
options positions depends on this secondary market. The
inability to close out these positions could have an
adverse effect on the Fund's ability to effectively hedge
its portfolio.
To minimize risks, the Fund may not purchase or sell futures
contracts or related options if immediately thereafter the sum
of the amount of margin deposits on the Fund's existing
futures positions and premiums paid for related options would
exceed 5% of the market value of the Fund's total assets. When
the Fund purchases futures contracts, an amount of cash and/or
Treasury bills, equal to the underlying commodity value of the
futures contracts (less any related margin deposits), will be
deposited in a segregated account with the Fund's custodian
(or the broker, if legally permitted) to collateralize the
position and thereby insure that the use of such futures
contract is unleveraged. When the Fund sells futures
contracts, it will either own or have the right to receive the
underlying future or security, or will make deposits to
collateralize the position as discussed above.
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.
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
Trustees.
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 may trade or dispose of portfolio securities as
considered necessary to meet its investment objective. It is
not anticipated that the portfolio trading engaged in by the
Fund will result in its annual rate of portfolio turnover
exceeding 100%. For the period from September 2, 1993 (date
of initial public investment) to August 31, 1994, the
portfolio turnover rate was 56%.
Investment Limitations
Selling Short and Buying on Margin
The Fund will not sell any securities short or purchase
any securities on margin but may obtain such short-term
credits as may be necessary for clearance of purchases
and sales of securities. 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 to
facilitate management of the portfolio by enabling the
Fund to, for example, meet redemption requests when the
liquidation of portfolio securities is deemed to be
inconvenient or disadvantageous. The Fund will not
purchase any securities while borrowings in excess of 5%
of its total assets are outstanding.
Pledging Assets
The Fund will not mortgage, pledge, or hypothecate its
assets except to secure permitted borrowings. In those
cases, it may mortgage, pledge, or hypothecate assets
having a market value not exceeding 10% of the value of
its total assets at the time of the pledge. Margin
deposits for the purchase and sale of financial futures
contracts and related options are not deemed to be a
pledge.
Underwriting
The Fund will not underwrite any issue of securities
except as it may be deemed to be an underwriter under the
Securities Act of 1933 in connection with the sale of
securities in accordance with its investment objective,
policies, and limitations.
Investing in Real Estate
The Fund will not purchase or sell real estate, including
limited partnership interests, although it may invest in
municipal bonds secured by real estate or interests in
real estate.
Investing in Commodities
The Fund will not purchase or sell commodities, commodity
contracts, or commodity futures contracts except that the
Fund may purchase and sell futures contracts and related
options.
Lending Cash or Securities
The Fund will not lend any of its assets except that it
may acquire publicly or non-publicly issued municipal
bonds or temporary investments or enter into repurchase
agreements in accordance with its investment objective,
policies, and limitations or its Declaration of Trust.
Concentration of Investments
The Fund will not purchase securities if, as a result of
such purchase, 25% or more of the value of its total
assets would be invested in any one industry or in
industrial development bonds or other securities, the
interest upon which is paid from revenues of similar
types of projects. However, the Fund may invest as
temporary investments more than 25% of the value of its
assets in cash or cash items (for purposes of this
limitation, the Fund considers instruments issued by a
U.S. branch of a domestic bank or savings and loan having
capital, surplus, and undivided profits in excess of
$100,000,000 at the time of investment to be "cash
items"), securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities, or
instruments secured by these money market instruments,
i.e., repurchase agreements.
The above investment limitations cannot be changed
without shareholder approval. The following limitations,
however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified
before any material change in these limitations becomes
effective.
Investing in Issuers Whose Securities are Owned by
Officers and Trustees of the Fund
The Fund will not purchase or retain the securities of
any issuer if the officers and Trustees 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.
Investing in Securities of Other Investment Companies
The Fund will not purchase securities of other investment
companies except as part of a merger, consolidation, or
other acquisition.
Investing in Restricted Securities
The Fund will not invest more than 10% of its total
assets in securities subject to restrictions on resale
under the Securities Act of 1933, except for commercial
paper issued under Section 4(2) of the Securities Act of
1933 and certain other restricted securities which meet
the criteria for liquidity as established by the
Trustees.
Investing in Illiquid Securities
The Fund will not invest more than 15% of its net assets
in illiquid obligations, including repurchase agreements
providing for settlement in more than seven days after
notice, and certain restricted securities not determined
by the Trustees to be liquid, including certain municipal
leases and inverse floaters.
Investing in Put Options
The Fund will not purchase put options on securities,
unless the securities are held in the Fund's portfolio
and not more than 5% of the value of the Fund's total
assets would be invested in premiums on open put options.
Writing Covered Call Options
The Fund will not write call options on securities unless
the securities are held in the Fund's portfolio or unless
the Fund is entitled to them in deliverable form without
further payment or after segregating cash in the amount
of any further payment.
Investing in New Issuers
The Fund will not invest more than 5% of the value of its
total assets in industrial development bonds where the
principal and interest are the responsibility of
companies (or guarantors, where applicable) with less
than three years of continuous operations, including the
operation of any predecessor.
Investing in Minerals
The Fund will not purchase interests in oil, gas, or
other mineral exploration or development programs or
leases, although it may invest in securities of issuers
which invest in or sponsor such programs.
Except with respect to borrowing money, if a percentage
limitation is adhered to at the time of investment, a later
increase or decrease in percentage resulting from any change
in value or net assets will not result in a violation of such
restriction.
The Fund does not expect to borrow money or pledge securities
in excess of 5% of the value of its net assets during the
coming fiscal year.
Maryland Investment Risks
Maryland has a diverse economy with government, services and
trade each accounting for approximately 19%, 29% and 24% of
employment, respectively. The State depends heavily on
government, services and trade, as opposed to manufacturing.
In recent years financial operations of the State have
concluded in ending surpluses, although during fiscal 1991 and
1992 various cost containment and tax revenue measures have
been required. State revenues are largely dependent on income
and sales and use taxes and, relatedly, on general levels of
employment, personal income growth and consumer spending.
The national slowdown, beginning in 1990, is impacting the
State--total employment has declined slightly in 1990 and in
1991, total employment was approximately 3 to 7% less than in
the prior year. Maryland's total personal income growth from
1980 to 1990 (128.8%) exceeded the national rate (106.2%). In
1990, State personal income totaled $104,543 million, up 6.5%
from 1989. In 1990, per capita personal income was $21,864.
This figure exceeded the national average of $18,685 by 17%.
Generally, Maryland has been among the most heavily indebted
of the states. In recent years, general obligation debt, after
nearly doubling during 1974-84, has been controlled and is a
little lower than the 1983 peak level.
General obligations of Maryland are currently rated AAA, Aaa
and AAA, by S&P, Moody's and Fitch, respectively. There can be
no assurance that the economic conditions on which these
ratings are based will continue or that particular bond issues
may not be adversely affected by changes in economic,
political or other conditions.
The Fund's concentration in securities issued by the state and
its political subdivisions provides a greater level of risk
than a fund which is diversified across numerous states and
municipal entities. The ability of the state or its
municipalities to meet their obligations will depend on the
availability of tax and other revenues; economic, political,
and demographic conditions within the state; and the
underlying fiscal condition of the state and its
municipalities.
Municipal Securities Income Trust Management
Officers and Trustees are listed with their addresses, present
positions with Municipal Securities Income Trust, and
principal occupations.
John F. Donahue*@
Federated Investors Tower
Pittsburgh, PA
Chairman and Trustee of the Trust
Chairman and Trustee, Federated Investors, Federated Advisers,
Federated Management, and Federated Research; Chairman and
Director, Federated Research Corp.; Chairman, Passport
Research, Ltd.; Director, AEtna Life and Casualty Company;
Chief Executive Officer and Director, Trustee, or Managing
General Partner of the Funds. Mr. Donahue is the father of J.
Christopher Donahue, Vice President of the Trust.
Thomas G. Bigley
28th Floor, One Oxford Center
Pittsburgh, PA
Trustee
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
Trustee of the Trust
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
Trustee of the Trust
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
Trustee of the Trust
Attorney-at-law; Director, The Emerging Germany Fund, Inc.;
Director, Trustee, or Managing General Partner of the Funds;
formerly, Director, Blue Cross of Massachusetts, Inc.
Lawrence D. Ellis, M.D.
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Trustee of the Trust
Hematologist, Oncologist, and Internist, Presbyterian and
Montefiore Hospitals; Professor of Medicine and Trustee,
University of Pittsburgh; Director of Corporate Health,
University of Pittsburgh Medical Center; Director, Trustee, or
Managing General Partner of the Funds.
Edward L. Flaherty, Jr.@
5916 Penn Mall
Pittsburgh, PA
Trustee of the Trust
Attorney-at-law; Partner, 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
225 Franklin Street
Boston, MA
Trustee of the Trust
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 and Trustee, Lahey
Clinic Foundation, Inc.
Gregor F. Meyer
5916 Penn Mall
Pittsburgh, PA
Trustee of the Trust
Attorney-at-law; Partner, Meyer and Flaherty; Chairman,
Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.;
Director, Trustee, or Managing General Partner of the Funds;
formerly, Vice Chairman, Horizon Financial, F.A.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Trustee of the Trust
Professor, Foreign Policy and Management Consultant; Trustee,
Carnegie Endowment for International Peace, RAND Corporation,
Online Computer Library Center, Inc., and U.S. Space
Foundation; Chairman, Czecho Slovak Management Center;
Director, Trustee, or Managing General Partner of the Funds;
President Emeritus, University of Pittsburgh; formerly,
Chairman, National Advisory Council for Environmental Policy
and Technology.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Trustee of the Trust
Public relations/marketing consultant; Director, Trustee, or
Managing General Partner of the Funds.
J. Christopher Donahue *
Federated Investors Tower
Pittsburgh, PA
Vice President and Trustee of the Trust
President and Trustee, Federated Investors, Federated
Advisers, Federated Management, and Federated Research;
President and Director, Federated 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 Trustee of the Trust.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
President of the Trust
Executive Vice President and Trustee, Federated Investors;
Director, Federated Research Corp.; Chairman and Director,
Federated Securities Corp.; President or Vice President of
some of the Funds; Director or Trustee of some of the Funds.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Vice President and Treasurer of the Trust
Vice President, Treasurer, and Trustee, Federated Investors;
Vice President and Treasurer, Federated Advisers, Federated
Management, Federated Research, Federated Research Corp., and
Passport Research, Ltd.; Executive Vice President, Treasurer,
and Director, Federated Securities Corp.; Trustee, Federated
Services Company and Federated Shareholder Services; Chairman,
Treasurer, and Trustee, Federated Administrative Services;
Trustee or Director of some of the Funds; Vice President and
Treasurer of the Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Vice President and Secretary of the Trust
Vice President, Secretary, General Counsel, and Trustee,
Federated Investors; Vice President, Secretary, and Trustee,
Federated Advisers, Federated Management, and Federated
Research; Vice President and Secretary, Federated Research
Corp. and Passport Research, Ltd.; Trustee, Federated Services
Company; Executive Vice President, Secretary, and Trustee,
Federated Administrative Services; Secretary and Trustee,
Federated Shareholder Services; Executive Vice President and
Director, Federated Securities Corp.; Vice President and
Secretary of the Funds.
* This Trustee is deemed to be an "interested person" of the
Trust as defined in the Investment Company Act of 1940, as
amended.
@ Member of the Trust's Executive Committee. The Executive
Committee of the Board of Trustees handles the
responsibilities of the Board of Trustees between meetings
of the Board.
Fund Ownership
Officers and Trustees own less than 1% of the Fund's
outstanding shares.
As of December 23, 1994, the following shareholders of record
owned 5% or more of the outstanding shares of the Fund:
Alex Brown & Sons, Incorporated, Baltimore Maryland, as record
owner holding Fund shares for its clients, owned approximately
35,067.308 shares (28.46%), Deyanira Falcon, Silver Spring,
Maryland, owned approximately 8,601.992 shares (6.98%) and
Merrill Lynch, Pierce, Fenner & Smith, Jacksonville, Florida,
as record owner holding Fund shares for its clients, owned
approximately 8,120.000 shares (6.59%).
The Funds
"The Funds" and "Funds" mean the following investment
companies: American Leaders Fund, Inc.; Annuity Management
Series; Arrow Funds; Automated Government Money Trust; Cash
Trust Series II; Cash Trust Series, Inc.; DG Investor Series;
Edward D. Jones & Co. Daily Passport Cash Trust; Federated
ARMs Fund; Federated Exchange Fund, Ltd.; Federated GNMA
Trust; Federated Government Trust; Federated Growth Trust;
Federated High Yield Trust; Federated Income Securities Trust;
Federated Income Trust; Federated Index Trust; Federated
Institutional Trust; Federated Intermediate Government Trust;
Federated Master Trust; Federated Municipal Trust; Federated
Short-Intermediate Government Trust; Federated Short-Term
U.S. Government Trust; Federated Stock Trust; Federated Tax-
Free Trust; Federated U.S. Government Bond Fund; 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; Insight Institutional Series,
Inc.; 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; The Medalist
Funds: Money Market Management, Inc.; Money Market Obligations
Trust; Money Market Trust; Municipal Securities Income Trust;
111 Corcoran Funds; Peachtree Funds; The Planters Funds;
Portage Funds; RIMCO Monument Funds; The Shawmut Funds; Short-
Term Municipal Trust; 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; and World
Investment Series, Inc.
Investment Advisory Services
Adviser to the Fund
The Trust's investment adviser is Federated Advisers (the
"Adviser"). It is a subsidiary of Federated Investors. All
the voting securities of Federated Investors are owned by a
trust, the trustees of which are John F. Donahue, his wife and
his son, J. Christopher Donahue.
The Adviser shall not be liable to the Trust, the Fund or any
shareholder of the Fund for any losses that may be sustained
in the purchase, holding, or sale of any security, or for
anything done or omitted by it, except acts or omissions
involving willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties imposed upon it by its
contract with the Fund.
Advisory Fees
For its advisory services, Federated Advisers receives an
annual investment advisory fee as described in the prospectus.
For the period from September 2, 1993 (date of initial public
investment) to August 31, 1994, the Adviser earned advisory
fees of $13,417, all of which was voluntarily waived. In
addition, the Adviser reimbursed other operating expenses of
$142,315.
State Expense Limitations
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 2.5% per year of the first $30 million
of average net assets, 2% per year of the next $70
million of average net assets, and 1.5% per year of the
remaining average net assets, the Adviser will reimburse
the Trust 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, 1994, the Administrators collectively earned
$56,198, none of which was waived. 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 a 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 Fund's
accounting records. The fee 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 which 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 Trustees. The Adviser may select brokers and dealers
who offer brokerage and research services. These services may
be furnished directly to the Fund or to the Adviser and may
include:
oadvice as to the advisability of investing in securities;
osecurity analysis and reports;
oeconomic studies;
oindustry studies;
oreceipt of quotations for portfolio evaluations; and
osimilar 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 relation 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 period from September 2, 1993 (date of initial public
investment) to August 31, 1994 , the Fund did not pay any
brokerage commissions.
Purchasing Shares
Shares of the Fund are sold at their net asset value on days
the New York Stock Exchange is open for business. Effective
October 17, 1994, the Fund has ceased offering its shares for
sale, except for dividend reinvestment by existing
shareholders. The procedure for purchasing shares is
explained in the prospectus under "Investing in the Fund."
Distribution and Shareholder Services Plans
These arrangements permit the payment of fees to financial
institutions, the distributor, and Federated Shareholder
Services, to stimulate distribution activities and to cause
services to be provided to shareholders by a representative
who has knowledge of the shareholder's particular
circumstances and goals. These activities and services may
include, but are not limited to, marketing efforts; providing
office space, equipment, telephone facilities, and various
clerical, supervisory, computer, and other personnel as
necessary or beneficial to establish and maintain shareholder
accounts and records; processing purchase and redemption
transactions and automatic investments of client account cash
balances; answering routine client inquiries; and assisting
clients in changing dividend options, account designations,
and addresses.
By adopting the Distribution Plan, the Trustees expect that
the 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 period from September 2, 1993 (date of initial public
investment) to August 31, 1994, payments in the amount of
$25,161 were made pursuant to the Distribution Plan. In
addition, for this period, payments in the amount of $6,745
were made pursuant to the Shareholder Services Plan.
Determining Net Asset Value
Net asset value generally changes each day. The days on which
net asset value is calculated for shares are described in the
prospectus.
Valuing Municipal Bonds
The Trustees 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 issue, 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 Trustees 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
Trustees.
Redeeming Shares
The Fund redeems shares at the next computed net asset value
after the Fund receives the redemption request, less any
applicable contingent deferred sales charge. Redemption
procedures and contingent deferred sales charges are explained
in the prospectus under "Redeeming Shares." Although the
transfer agent does not charge for telephone redemptions, it
reserves the right to charge a fee for the cost of wire-
transferred redemptions of less than $5,000.
Redemption in Kind
Although the Fund intends to redeem shares in cash, it
reserves the right under certain circumstances to pay the
redemption price in whole or in part by a distribution of
securities from the Fund's portfolio. To the extent available,
such securities will be readily marketable.
The Trust is obligated to redeem shares solely in cash up to
$250,000 or 1% of the Fund's net asset value, whichever is
less, for any one shareholder within a 90-day period.
Any redemption beyond this amount will also be in cash unless
the Trustees determine that further cash payments will have a
material adverse effect on remaining shareholders. In such a
case, the Trust will pay all or a portion of the remainder of
the redemption in portfolio instruments, valued in the same
way that net asset value is determined. The portfolio
instruments will be selected in a manner that the Trustees
deem fair and equitable.
Redemption in kind is not as liquid as a cash redemption. If
redemption is made in kind, shareholders receiving their
securities and selling them before their maturity could
receive less than the redemption value of their securities and
could incur certain transactions 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.
Capital Gains
Capital gains or losses may be realized by the Fund 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.
Distributions of long-term capital gains are taxed as such,
whether they are taken in cash or reinvested, and regardless
of the length of time that the shareholder has owned shares.
Any loss by a shareholder on 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 cumulative total return for the period from
September 2, 1993 (date of initial public investment) to
August 31, 1994, was (9.44%).
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 offering price per share at the end of the
period. The number of shares owned at the end of the period is
based on the number of shares purchased at the beginning of
the period with $1,000, adjusted over the period by any
additional shares, assuming the monthly reinvestment of all
dividends and distributions. The total return calculation
assumes a complete redemption of the investment and the
deduction of any contingent deferred sales charge at the end
of the period. Any applicable contingent deferred sales charge
will be deducted from the ending value of the investment based
on the lesser of the offering price of redeemed shares at the
time of purchase or the offering price of redeemed shares at
the time of redemption.
Yield
The Fund's yield for the thirty-day period ended August 31,
1994, was 5.65%.
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 then annualized
using semiannual compounding. This means that the amount of
income generated during the thirty-day period is assumed to be
generated each month over a twelve-month period and is
reinvested every six months. The yield does not necessarily
reflect income actually earned by the 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, 1994 was 8.76%.
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 tax rate of 28%, 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
obligations in the Fund's portfolio generally remains free
from federal regular income tax, and often is free from state
and local taxes as well.* As the table below indicates, a "tax-
free" investment is an attractive choice for investors,
particularly in times of narrow spreads between tax-free and
taxable yields.
TAXABLE YIELD EQUIVALENT FOR 1994
STATE OF MARYLAND
INCLUDING LOCAL INCOME TAX
Combined Federal, State and County Income
Tax Bracket:
22.50% 35.50% 38.50% 43.50% 45.00%
48.60%
Joint Return: $1-38,000 $38,001-91,850$91,851-$140,000$1
40,001-150,000 $150,001-250,000Over $250,000
Tax-Exempt Yield Taxable Yield Equivalent
3.50% 4.52% 5.43% 5.69% 6.19% 6.36%
6.81%
4.00 5.16 6.20 6.50 7.08 7.27
7.78
4.50 5.81 6.98 7.32 7.96 8.18
8.75
5.00 6.45 7.75 8.13 8.85 9.09
9.73
5.50 7.10 8.53 8.94 9.73 10.00
10.70
6.00 7.74 9.30 9.76 10.62 10.91
11.67
6.50 8.39 10.08 10.57 11.50 11.82
12.65
7.00 9.03 10.85 11.38 12.39 12.73
13.62
7.50 9.68 11.63 12.20 13.27 13.64
14.59
8.00 10.32 12.40 13.01 14.16 14.55
15.56
Combined Federal, State and County Income
Tax Bracket:
22.50% 35.50% 38.50% 40.00% 45.00%
48.60%
Single Return: $1-22,750 $22,751-55,100$55,101-100,000$100
,001-115,000$115,001-250,000Over $250,000
Tax-Exempt Yield Taxable Yield Equivalent
2.00% 2.58% 3.10% 3.25% 3.33% 3.64%
3.89%
2.50 3.23 3.88 4.07 4.17 4.55
4.86
3.00 3.87 4.65 4.88 5.00 5.45
5.84
3.50 4.52 5.43 5.69 5.83 6.36
6.81
4.00 5.16 6.20 6.50 6.67 7.27
7.78
4.50 5.81 6.98 7.32 7.50 8.18
8.75
5.00 6.45 7.75 8.13 8.33 9.09
9.73
5.50 7.10 8.53 8.94 9.17 10.00
10.70
6.00 7.74 9.30 9.76 10.00 10.91
11.67
6.50 8.39 10.08 10.57 10.83 11.82
12.65
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
local income tax rate is assumed to be 50% of the state rate
for all counties excluding Alleghany, Baltimore, Montgomery,
Prince George's, Talbot, and Worcester.
The above chart is for illustrative purposes only and uses tax
brackets that went into effect beginning January 1, 1994. It
is not an indicator of past or future performance of any Fund
shares.
*Some portion of the Fund's income may be subject to the
federal alternative minimum tax and state and local regular
or alternative minimum taxes.
Performance Comparisons
The performance of shares 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 the Fund's expenses; and
o various other factors.
Investors may use financial publications and/or indices to
obtain a more complete view of the Fund's performance. When
comparing performance, investors should consider all relevant
factors such as the composition of any index used, prevailing
market conditions, portfolio compositions of other funds, and
methods used to value portfolio securities and compute
offering price. The financial publications and/or indices
which the Fund uses in advertising may include:
oLipper Analytical Services, Inc. ranks funds in various fund
categories 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 offering price over a specific period
of time. From time to time, the Fund will quote its Lipper
ranking in the "Maryland Municipal Debt Funds" category in
advertising and sales literature.
oMorningstar, 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. The 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. In
addition, advertisements and sales iterature for the Fund may
include charts and other illustrations that depict the
hypothetical growth of a tax-free investment as compared to a
taxable investment and may quote performance information which
does not reflect the effect of the contingent deferred sales
charge.
Advertising and sales literature for the Fund may include
quotations from the Tax Foundation that illustrate the effect
of taxes on income.
Financial Statements
The Financial Statements for the fiscal year ended August 31,
1994, are incorporated herein by reference to the annual
report of the Fund dated August 31, 1994 (File No. 811-6165).
A copy of the report may be obtained without charge by
contacting the Fund.
Appendix
Standard and Poor's Ratings Group Municipal Bond Ratings
("S&P")
AAA--Debt rated AAA has the highest rating assigned by S & P.
Capacity to pay interest and repay principal is extremely
strong.
AA--Debt rated AA has a very strong capacity to pay interest
and repay principal and differs from the 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 effects 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.
NR--Indicates that no public rating has been requested, that
there is insufficient information on which to base a rating,
or that S&P does not rate a particular type of obligation as a
matter of policy.
Plus (+) or minus (-): The ratings from AA to CCC may be
modified by the addition of a plus or minus sign to show
relative standing within the major rating categories.
Moody's Investors Service, Inc., Municipal Bond Ratings
("Moody's")
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.
NR--Not rated by Moody's.
Moody's applies numerical modifiers, 1, 2 and 3 in each
generic rating classification from Aa through B in its generic
rating category; the modifier 1 indicates that the security
ranks in the higher end of its generic ranking category; the
modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of its generic
rating category.
Fitch Investors Service, Inc. Long-Term Debt Ratings ("Fitch")
AAA--Bonds considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally
strong ability to pay interest and repay principal, which is
unlikely to be affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high
quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as
bonds rated AAA. Because bonds rated in the AAA and AA
categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is
generally rated F-1+.
A--Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay
interest and repay principal is considered to be adequate.
Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these
bonds, and therefore, impair timely payment. The likelihood
that the ratings of these bonds will fall below investment
grade is higher than for bonds with higher ratings.
NR--Indicates that Fitch does not rate the specific issue.
Plus (+) or Minus (-):
Plus and minus signs are used with a rating symbol to indicate
the relative position of a credit within the rating category.
Plus and minus signs, however, are not used in the AAA
category.
Standard and Poor's Ratings Group Municipal Note Ratings
SP-1--Very strong or strong capacity to pay principal and
interest. Those issues determined to possess overwhelming
safety characteristics will be given a plus sign (+)
designation.
SP-2--Satisfactory capacity to pay principal and interest.
Moody's Investors Service, Inc., Short-Term Loan Ratings
MIG1/VMIG1--This designation denotes best quality. There is a
present strong protection by established cash flows, superior
liquidity support or demonstrated broad based access to the
market for refinancing.
MIG2/VMIG2--This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding
group.
Fitch Investors Service, Inc. Short-Term Debt Ratings
F-1+--Exceptionally Strong Credit Quality. Issues assigned
this rating are regarded as having the strongest degree of
assurance for timely payment.
F-1--Very Strong Credit Quality. Issues assigned this rating
reflect an assurance of timely payment only slightly less in
degree than issues rated F-1+.
F-2--Good Credit Quality. Issues carrying this rating have a
satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as for issues assigned F-1+
and F-1 ratings.
Standard and Poor's Ratings Group Commercial Paper Ratings
A-1--This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to
possess extremely strong safety characteristics are denoted
with a plus sign (+) designation.
A-2--Capacity for timely payment on issues with this
designation is satisfactory. However, the relative degree of
safety is not as high as for issues designated A-1.
Moody's Investors Service, Inc., Commercial Paper Ratings
Prime-1--Issuers rated Prime-1 (or related supporting
institutions) have a superior capacity for repayment of short-
term promissory obligations. Prime-1 repayment capacity will
normally be evidenced by the following characteristics:
- Leading market positions in well established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate
reliance on debt and ample asset protection.
- Broad margins in earning coverage of fixed financial
charges and high internal cash generation.
- Well established access to a range of financial markets
and assured sources of alternate liquidity.
Prime-2--Issuers rated Prime-2 (or related supporting
institutions) have a strong capacity for repayment of short-
term promissory obligations. This will normally be evidenced
by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will
be more subject to variation. Capitalization characteristics,
while still appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained.
VIRGINIA MUNICIPAL INCOME FUND
(A PORTFOLIO OF MUNICIPAL SECURITIES INCOME TRUST)
PROSPECTUS
The shares of Virginia Municipal Income Fund (the "Fund")
represent interests in a non-diversified portfolio of securities
which is one of a series of investment portfolios in Municipal
Securities Income Trust (the "Trust"), an open-end management
investment company (a mutual fund). The investment objective of
the Fund is to provide current income which is exempt from federal
regular income tax and the personal income taxes imposed by the
Commonwealth of Virginia and Virginia municipalities. The Fund
invests primarily in a portfolio of municipal securities which are
exempt from federal regular income tax and Virginia state and
local income tax ("Virginia Municipal Securities"). These
securities include those issued by or on behalf of the
Commonwealth of Virginia and Virginia municipalities as well as
those issued by states, territories, and possessions of the United
States, which are not issued by or on behalf of Virginia or its
political subdivisions and financing authorities, but which are
exempt from federal regular income tax and the personal income
taxes imposed by the Commonwealth of Virginia and Virginia
municipalities. Effective October 17, 1994, the Fund has ceased
offering its shares for sale, except for dividend reinvestment by
existing shareholders.
THE SHARES OF THE FUND 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 information you should read and know
about investing in the Fund. Keep this prospectus for future
reference.
The Fund has also filed a Statement of Additional Information
dated December 31, 1994 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 free of charge, obtain other information, or make
inquiries about the Fund by writing or calling the Fund.
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 December 31, 1994
TABLE OF CONTENTS --------------------------------------------
- ----------------------------------
SUMMARY OF FUND EXPENSES 1
- ------------------------------------------------------
GENERAL INFORMATION 3
- ------------------------------------------------------
INVESTMENT INFORMATION 3
- ------------------------------------------------------
Investment Objective 3
Investment Policies 4
Acceptable Investments 4
Characteristics 4
Participation Interests 5
Variable Rate Municipal Securities 5
Municipal Leases 5
Inverse Floaters 5
Restricted and Illiquid Securities 6
When-Issued and Delayed
Delivery Transactions 6
Futures Contracts and Options to
Buy or Sell Such Contracts 6
Temporary Investments 7
Virginia Municipal Securities 7
Investment Risks 7
Non-Diversification 8
Investment Limitations 8
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
Conversion to Federal Funds 9
What Shares Cost 9
Systematic Investment Program 10
Certificates and Confirmations 10
Dividends and Distributions 10
REDEEMING SHARES 10
- ------------------------------------------------------
Through a Financial Institution 11
Directly by Mail 11
Signatures 12
Receiving Payment 12
By Check 12
By Wire 12
Contingent Deferred Sales Charge 12
Elimination of Contingent Deferred
Sales Charge 13
Systematic Withdrawal Program 13
Reinvestment Privilege 13
Redemption Before Purchase
Instruments Clear 13
Accounts with Low Balances 13
Exchanges for Shares of Other Funds 13
MUNICIPAL SECURITIES INCOME
TRUST INFORMATION 14
- ------------------------------------------------------
Management of Municipal Securities
Income Trust 14
Board of Trustees 14
Investment Adviser 14
Advisory Fees 14
Adviser's Background 14
Distribution of Fund Shares 15
Distribution Plan 15
Shareholder Services Plan 16
Administration of the Fund 16
Custodian 17
Transfer Agent and
Dividend Disbursing Agent 17
Legal Counsel 17
Independent Auditors 17
Expenses of the Fund 17
SHAREHOLDER INFORMATION 18
- ------------------------------------------------------
Voting Rights 18
Massachusetts Partnership Law 18
TAX INFORMATION 18
- ------------------------------------------------------
Federal Income Tax 18
Virginia Taxes 19
Other State and Local Taxes 20
PERFORMANCE INFORMATION 20
- ------------------------------------------------------
ADDRESSES
Inside Back Cover
- ------------------------------------------------------
I
Summary of Fund Expenses
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases (as a percentage
of offering price) None
Maximum Sales Load 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) 0.00%
Redemption Fee (as a percentage of amount redeemed,
if applicable) None
Exchange Fee None
Annual Fund Operating Expenses
(As a percentage of average net assets)
Management Fee (after waiver)(2) 0.00%
12b-1 Fee 0.75%
Total Other Expenses (after expense reimbursement)
1.75%
Shareholder Services Fee 0.25%
Total Fund Operating Expenses (3)
2.50%
(1) Effective December 1, 1994, the contingent deferred sales
charge is waived. The contingent deferred sales charge had
been 3.00% in the first year, declining to 2.00% in the
second year and 0.00% after three years. (See "Contingent
Deferred Sales Charge").
(2) The management fee has been reduced to reflect the
voluntary waiver of the management fee. The adviser can
terminate this voluntary waiver at any time at its sole
discretion. The maximum management fee is 0.40%.
(3) The Total Fund Operating Expenses in the table above are
based on expenses expected during the fiscal year ending
August 31, 1995. The Total Fund Operating Expenses were
0.75% for the fiscal year ended August 31, 1994, and would
have been 6.30% absent the voluntary waiver of the
management fee and the voluntary reimbursement of certain
other operating expenses.
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 "Investing in the Fund" and "Municipal
Securities Income Trust Information". Wire--transferred
redemptions of less than $5,000 may be subject to additional
fees.
Long-term shareholders may pay more than the economic
equivalent of the maximum front-end sales charge permitted
under the rules of the National Association of Securities
Dealers, Inc.
EXAMPLE 1 year 3 years 5 years 10 years
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..... $56 $99 $133 $284
You would pay the following
expenses on the same $25 $78 $133 $284
investment, assuming no redemption...................
The above example should not be considered a representation
of past or future expenses. Actual expenses may be greater or
less than those shown.
VIRGINIA MUNICIPAL INCOME FUND
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table has been audited by Deloitte & Touche LLP, the
Fund's independent auditors. Their report dated October 7, 1994,
on the Fund's Financial Statements for the year ended August 31,
1994, is included in the Annual Report dated August 31, 1994, 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 free of charge.
YEAR ENDED
AUGUST 31,
1994*
Net asset value, beginning of period $10.00
Income from investment operations
Net investment income 0.49
Net realized and unrealized gain on investments (1.00)
Total from investment operations (0.51)
Less distributions
Dividends to shareholders from net investment
income (0.49)
Distributions in excess of net investment income (0.04)(a)
Total distributions (0.53)
Net asset value, end of period $8.96
Total return** (5.26%)
Ratios to Average Net Assets
Expenses 0.75% (b)
Net investment income 5.19% (b)
Expense waiver/reimbursement (c) 5.55% (b)
Supplemental Data
Net assets, end of period (000 omitted) $4,375
Portfolio turnover rate 46%
*Reflects operations for the period from September 3, 1993 (date
of initial public investment) to August 31, 1994.
**Based on net asset value, which does not reflect the sales load
or contingient deferred sales charge, if applicable.
(a)Distributions are
determined in accordance with income taxregulations which may differ
from generally accepted
accounting principles. These distributions do not represent a return
of capital for federal income tax purposes.
(b)Computed on an annualized basis.
(c) The voluntary expense
decrease is reflected in both the expense and net investment
income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
FURTHER INFORMATION ABOUT THE FUND'S PERFORMANCE IS CONTAINED IN
THE FUND'S ANNUAL REPORT DATED AUGUST 31, 1994, WHICH CAN BE
OBTAINED FREE OF CHARGE.
GENERAL INFORMATION ----------------------------------------------
- ----------
Federated Municipal Income Trust was established as a
Massachusetts business trust under a Declaration of Trust dated
August 6, 1990. On September 16, 1992 (effective date October 31,
1992), the Board of Trustees (the "Trustees") approved changing
the name of the Trust from Federated Municipal Income Trust to
Municipal Securities Income Trust. The Declaration of Trust
permits the Trust to offer separate series of shares of beneficial
interest representing interests in separate portfolios of
securities. The shares in any one portfolio may be offered in
separate classes. With respect to this Fund, as of the date of
this prospectus the Trustees have not established any classes of
shares.
Shares of the Fund are designed for customers of financial
institutions such as broker/dealers, banks, fiduciaries, and
investment advisers as a convenient means of accumulating an
interest in a professionally managed, non-diversified portfolio
investing primarily in Virginia Municipal Securities. A minimum
initial investment of $1,500 is required. Under normal
circumstances, subsequent investments must be in amounts of at
least $100. Effective October 17, 1994, however, the Fund ceased
offering its shares for sale, except for dividend reinvestment by
existing shareholders. The Fund is not likely to be a suitable
investment for non-Virginia taxpayers or retirement plans since
Virginia Municipal Securities are not likely to produce
competitive after-tax yields for such persons and entities when
compared to other investments.
Except as otherwise noted in this prospectus, shares of the Fund
are sold at net asset value and are redeemed at net asset value.
Under ordinary circumstances, a contingent deferred sales charge
is imposed on certain shares of the Fund which are redeemed within
three full years of the date of purchase. The contingent deferred
sales charge has been waived for all redemptions effective
December 1, 1994. Fund assets may be used in connection with the
distribution of shares of the Fund.
In November 1994, the Fund's distributor notified shareholders
that it would recommend the liquidation of the Fund to the
Trustees of the Trust and advised shareholders that it may be
advisable to consider voluntary redemption of Fund shares because,
among other things, effective October 17, 1994, the Fund had
ceased offering shares for sale and because, effective December 1,
1994, the Fund's adviser would cease the voluntary reimbursement
of operating expenses, thus causing the Fund's expense ratio to
increase significantly. The Fund's distributor also indicated
that it would recommend to the Trustees a transaction involving
the tax-free reorganization of the Fund into another investment
company. The Trustees are expected to consider such proposal in
early 1995 and, if approved by them, it is anticipated that such
matter will be submitted to shareholders for their approval
promptly thereafter.
INVESTMENT INFORMATION ---------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide current income
which is exempt from federal regular income tax (federal regular
income tax does not include the federal alternative minimum tax)
and the personal income taxes imposed by the Commonwealth of
Virginia and Virginia municipalities. 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.
Interest income of the Fund that is exempt from the income taxes
described above retains its exempt status when distributed to the
Fund's non-corporate shareholders. However, income distributed by
the Fund may not necessarily be exempt from state or municipal
taxes in states other than Virginia.
INVESTMENT POLICIES
The Fund pursues its investment objective by investing primarily
in securities which are exempt from federal regular income tax and
personal income taxes imposed by the Commonwealth of Virginia and
Virginia municipalities. As a matter of investment policy, which
may not be changed without shareholder approval, the Fund will
invest its assets so that, under normal circumstances, at least
80% of its annual interest income is exempt from Federal regular
income tax, or that at least 80% of its net assets are invested in
securities the interest from which is exempt from Federal regular
income tax.
Unless indicated otherwise, the other investment policies of the
Fund may be changed by the Trustees without approval of
shareholders. Shareholders will be notified before any material
changes in these policies become effective.
ACCEPTABLE INVESTMENTS. Under normal circumstances, the Fund will
invest at least 65% of its total assets in Virginia Municipal
Securities, which are obligations issued by or on behalf of the
Commonwealth of Virginia, its political subdivisions, or agencies,
debt obligations of any state, territory, or possession of the
United States, including the District of Columbia, or any
political subdivision of any of these, and participation
interests, as described below, in any of the above obligations,
the interest from which is, in the opinion of bond counsel for the
issuers or in the opinion of officers of the Fund and/or the
investment adviser to the Fund, exempt from both federal regular
income tax and the personal income tax imposed by the Commonwealth
of Virginia and Virginia municipalities. While the Fund intends to
invest primarily in securities issued by or on behalf of the
Commonwealth of Virginia and its political subdivisions, it will
invest in other securities issued by states, territories, and
possessions of the United States which are exempt from federal
regular income tax and the personal income taxes imposed by the
Commonwealth of Virginia and Virginia municipalities. The Fund
will invest in such securities in instances where, in the judgment
of the Fund's investment adviser, the supply and yield of such
securities would be beneficial to the Fund's investment
performance.
The Fund currently invests primarily in variable rate municipal
securities, as described below.
The prices of fixed income securities fluctuate inversely to the
direction of interest rates.
The Fund may also engage in put and call options, futures
contracts, and options on futures contracts for hedging purposes.
CHARACTERISTICS. The Virginia Municipal Securities which the
Fund buys are investment grade bonds rated, at the time of
purchase, Aaa, Aa, A, or Baa by Moody's Investors Service,
Inc. ("Moody's"), or AAA, AA, A, or BBB by Standard and
Poor's Ratings Group ("S&P") or by Fitch Investors Service,
Inc. ("Fitch"). In certain cases the Fund's adviser may
choose bonds which are unrated if it determines that such
bonds are of comparable quality or have similar
characteristics to investment grade bonds. Bonds rated "BBB"
by S&P or Fitch 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.
If the Fund purchases an investment grade bond, and the
rating of such bond is subsequently downgraded so that the
bond is no longer classified as investment grade, the Fund is
not required to drop the bond from the portfolio, but will
consider whether such action is appropriate. A description of
the rating categories is contained in the Appendix to the
Statement of Additional Information.
PARTICIPATION INTERESTS. The Fund may purchase participation
interests from financial institutions such as commercial
banks, savings and loan associations, and insurance
companies. These participation interests give the Fund an
undivided interest in Virginia Municipal Securities. The
financial institutions from which the Fund purchases
participation interests frequently provide or secure
irrevocable letters of credit or guarantees to assure that
the participation interests are of high quality. The Board of
Trustees of the Trust will determine that participation
interests meet the prescribed quality standards for the Fund.
VARIABLE RATE MUNICIPAL SECURITIES. Some of the Virginia
Municipal Securities which the Fund purchases may have
variable interest rates. Variable interest rates are
ordinarily based on a published interest rate, interest rate
index or a similar standard, such as the 91-day U.S. Treasury
bill rate. Many variable rate municipal securities are
subject to payment of principal on demand by the Fund in not
more than seven days. All variable rate municipal securities
will meet the quality standards for the Fund. The Fund's
investment adviser has been instructed by the Trustees to
monitor the pricing, quality, and liquidity of the variable
rate municipal securities, including participation interests
held by the Fund, on the basis of published financial
information and reports of the rating agencies and other
analytical services.
MUNICIPAL LEASES. Municipal leases are obligations issued by
state and local governments or authorities to finance the
acquisition of equipment and facilities and may be considered to
be illiquid. They may take the form of a lease, an installment
purchase contract, a conditional sales contract or a participation
certificate on any of the above.
Also included within the general category of municipal securities
are certain lease obligations or installment purchase contract
obligations and participations therein (hereinafter collectively
called "lease obligations") of municipal authorities or entities.
Although lease obligations do not constitute general obligations
of the municipality for which the municipality's taxing power is
pledged, a lease obligation is ordinarily backed by the
municipality's covenant to budget for, appropriate and make the
payments due under the lease obligation. Interest on lease
obligations is tax-exempt to the same extent as if the
municipality had issued debt obligations to finance the underlying
project or purchase. However, certain lease obligations contain
"non-appropriation" clauses which provide that the municipality
has no obligation to make lease or installment purchase payments
in future years unless money is appropriated for such purpose on a
yearly basis. In addition to the "non-appropriation" risk, these
securities represent a relatively new type of financing that has
not yet developed the depth of marketability associated with more
conventional bonds and some lease obligations may be illiquid.
Although "non-appropriation" lease obligations are generally
secured by the leased property, disposition of the property in the
event of foreclosure might prove difficult. In addition, the tax
treatment of such obligations in the event of non-appropriation is
unclear. The Fund does not intend to invest more than 10% of its
total assets in lease obligations that contain "non-appropriation"
clauses.
INVERSE FLOATERS. The Fund may invest in various types of
derivative municipal securities whose interest rates bear an
inverse relationship to the interest rate on another security or
the value of an index ("inverse floaters"). Because changes in the
interest rate on the other security or index inversely affect the
residual interest paid on the inverse floater, the value of an
inverse floater is generally more volatile than that of a fixed
rate bond. Inverse floaters have interest rate adjustment formulas
which generally reduce or, in the extreme, eliminate the interest
paid to the Fund when short-term interest rates rise, and increase
the interest paid to the Fund when short-term interest rates fall.
Inverse floaters have varying degrees of liquidity, and the market
for these securities is new and relatively volatile. These
securities tend to underperform the market for fixed rate bonds in
a rising interest rate environment and tend to fall in value more
rapidly, but tend to outperform the market for fixed rate bonds
when interest rates decline and tend to rise in value more
rapidly. Shifts in the relationship between short-term and long-
term interest rates may alter this tendency, however. In return
for this volatility, inverse floaters typically offer the
potential for yields exceeding the yields available on fixed rate
bonds with comparable credit quality and maturity.
These securities usually permit the investor to convert the
floating rate to a fixed rate (normally adjusted downward), and
this optional conversion feature may provide a partial hedge
against rising interest rates if exercised at an opportune time.
RESTRICTED AND ILLIQUID SECURITIES. The Fund intends to invest in
restricted securities. Restricted securities are any securities in
which the Fund may otherwise invest pursuant to its investment
objective and policies but which are subject to restriction on
resale under federal securities law. However, the Fund will limit
investments in illiquid securities, including certain restricted
securities determined by the Board of Trustees to be illiquid, non-
negotiable time deposits, and repurchase agreements providing for
settlement in more than seven days after notice, to 15% of its net
assets.
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 the transaction
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 into transactions to sell its purchase
commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar
securities at later dates. The Fund may realize short-term
profits or losses upon the sale of such commitments.
FUTURES CONTRACTS AND OPTIONS TO BUY OR SELL SUCH CONTRACTS. The
Fund may utilize bond futures contracts and options to a limited
extent. Specifically, the Fund may enter into futures contracts
provided that not more than 5% of its assets are required as a
futures contract deposit; in addition, the Fund may enter into
futures contracts and options transactions only to the extent that
obligations under such contracts or transactions represent not
more than 20% of the Fund's assets.
Futures contracts and options may be used for several reasons: to
maintain cash reserves while remaining fully invested, to
facilitate trading, to reduce transactions costs, or to seek
higher investment returns when a futures contract is priced more
attractively than the underlying municipal security or index. The
Fund may not use futures contracts or options transactions to
leverage its assets.
For example, in order to remain fully invested in bonds, while
maintaining liquidity to meet potential shareholder redemptions,
the Fund may invest a portion of its assets in a bond futures
contract. Because futures contracts only require a small initial
margin deposit, the Fund would then be able to maintain a cash
reserve to meet potential redemptions, while at the same time
remaining fully invested. Also, because the transactions costs of
futures contracts and options may be lower than the costs of
investing in bonds directly, it is expected that the use of
futures contracts and options may reduce the Fund's total
transactions costs.
The primary risks associated with the use of futures contracts and
options are: (i) imperfect correlation between the change in
market value of the bonds held by the Fund and the prices of
futures contracts and options; and (ii) possible lack of a liquid
secondary market for a futures contract and the resulting
inability to close a futures position prior to its maturity date.
The risk of imperfect correlation will be minimized by investing
only in those contracts whose price fluctuations are expected to
resemble those of the Fund's underlying securities. The risk that
the Fund will be unable to close out a futures position will be
minimized by entering into such transactions on a national
exchange with an active and liquid secondary market. In general,
the futures market is more liquid than the municipal bond market,
and so by investing in futures, liquidity may be improved.
TEMPORARY INVESTMENTS. From time to time, during periods of other
than normal market conditions, the Fund may invest in short-term
non-Virginia Municipal Securities or taxable temporary
investments. These temporary investments include: 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 rated within the investment grade categories
described under "Acceptable Investments--Characteristics" (if
rated) or those which the investment adviser judges to have the
same characteristics as such investment grade securities (if
unrated).
Although the Fund is permitted to make taxable, temporary
investments, there is no current intention of generating income
subject to federal regular income tax or personal income taxes
imposed by the Commonwealth of Virginia or Virginia
municipalities.
VIRGINIA MUNICIPAL SECURITIES
Virginia Municipal Securities are generally issued to finance
public works, such as airports, bridges, highways, housing,
hospitals, mass transportation projects, schools, streets, and
water and sewer works. They are also issued to repay outstanding
obligations, to raise funds for general operating expenses, and to
make loans to other public institutions and facilities.
The two principal classifications of municipal securities are
"general obligation" and "revenue" bonds. General obligation bonds
are secured by the issuer's pledge of its full faith and credit
and taxing power for the payment of principal and interest.
However, interest on and principal of revenue bonds are payable
only from the revenue generated by the facility financed by the
bond or other specified sources of revenue. Revenue bonds do not
represent a pledge of credit or create any debt of or charge
against the general revenues of a municipality or public
authority. Industrial development bonds are typically classified
as revenue bonds.
Industrial development bonds are issued by or on behalf of public
authorities to provide financing aid to acquire sites or construct
and equip facilities for privately or publicly owned corporations.
The availability of this financing encourages these corporations
to locate within the sponsoring communities and thereby increases
local employment.
Most municipal securities pay interest in arrears on a semiannual
or more frequent basis. However, certain securities, typically
known as capital appreciation bonds or zero coupon bonds, do not
provide for any interest payments prior to maturity. Such
securities are normally sold at a discount from their stated
value, or provide for periodic increases in their stated value to
reflect a compounded interest rate. The market value of these
securities is also more sensitive to changes in market interest
rates than securities that provide for current interest payments.
INVESTMENT RISKS
Yields on Virginia Municipal Securities depend on a variety of
factors including, but not limited to: the general conditions of
the municipal bond; the size of the particular offering; the
maturity of the obligations; and the rating of the issue. Further,
any adverse economic conditions or developments affecting the
Commonwealth of Virginia or its municipalities could impact the
Fund's portfolio. The ability of the Fund to achieve its
investment objective also depends on the continuing ability of the
issuers of Virginia Municipal Securities and participation
interests, or the guarantors of either, to meet their obligations
for the payment of interest and principal when due. Investing in
Virginia Municipal Securities which meet the Fund's quality
standards may not be possible if the Commonwealth of Virginia and
its municipalities do not maintain their current credit ratings.
In addition, certain Virginia constitutional amendments,
legislative measures, executive orders, administrative
regulations, and voter initiatives could result in adverse
consequences affecting Virginia Municipal Securities. An expanded
discussion of the current economic risks associated with the
purchase of Virginia Municipal Securities is contained in the
Statement of Additional Information.
NON-DIVERSIFICATION
The Fund is a non-diversified investment portfolio. As such, there
is no limit on the percentage of assets which can be invested in
any single issuer. An investment in the Fund, therefore, will
entail greater risk than investment in a diversified portfolio of
securities because the higher percentage of investments among
fewer issuers may result in greater fluctuation in the total
market value of the Fund's portfolio. Any economic, political, or
regulatory developments affecting the value of the securities in
the Fund's portfolio will have a greater impact on the total value
of the portfolio than would be the case if the portfolio were
diversified among more issuers.
The Fund intends to comply with Subchapter M of the Internal
Revenue Code. This undertaking requires that at the end of each
quarter of the taxable year: (a) with regard to at least 50% of
the Fund's total assets, no more than 5% of its total assets are
invested in the securities of a single issuer; and (b) no more
than 25% of its total assets are invested in the securities of a
single issuer.
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
agreement to buy it back on a set date) or pledge securities
except, under certain circumstances, the Fund may borrow up to one-
third of the value of its total assets and pledge up to 10% of the
value of those assets to secure such borrowings.
The above investment limitation cannot be changed without
shareholder approval. The following limitation, however, can be
changed by the Trustees without shareholder approval. Shareholders
will be notified before any material change in this limitation
becomes effective.
The Fund will not invest more than 5% of its total assets in
industrial development bonds when the payment of principal and
interest is the responsibility of companies (or guarantors, where
applicable) with less than three years of continuous operations,
including the operation of any predecessor.
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.
INVESTING IN THE FUND --------------------------------------------
- --
SHARE PURCHASES
SHARES OF THE FUND ARE NO LONGER BEING OFFERED FOR SALE. When
shares had been offered for sale, the following requirements and
procedures were applicable to purchases.
Shares are sold on days on which the New York Stock Exchange is
open. Shares may be purchased through an investment dealer which
has a sales agreement with the distributor, or directly from the
distributor, Federated Securities Corp., either by mail or by
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 of the Fund. Orders through a
financial institution are considered received when the Fund is
notified of the purchase order. Purchase orders through a
registered broker/dealer must be received by the broker before
4:00 P.M. (Boston time) and must be transmitted by the broker to
the Fund before 5:00 P.M. (Boston 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. (Boston
time) in order for shares to be purchased at that day's price. It
is the financial institution's responsibility to transmit orders
promptly.
DIRECTLY BY MAIL. To purchase shares by mail directly from
Federated Securities Corp:
- complete and sign the new
account form available from the Fund;
- enclose a check made
payable to Virginia Municipal Income Fund; and
- send both to the transfer
agent's bank, State Street Bank and Trust Company, P.O. Box
8604, Boston, MA 02266-8604.
Purchases by mail are considered received after payment by check
is converted by State Street Bank and Trust Company 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 State Street Bank receives payment by
wire.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in shares is $1,500. Subsequent
investments must be in amounts of at least $100.
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. State
Street Bank acts as the shareholder's agent in depositing checks
and converting them to federal funds.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an
order is received. The net asset value is determined at 4:00 P.M.
(Boston time), 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, Columbus Day,
Veteran's 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.
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their
investment on a regular basis in a minimum amount of $100. Under
this program, funds may be automatically withdrawn periodically
from the shareholder's checking account and invested in shares at
the net asset value next determined after an order is received by
State Street Bank. A shareholder may apply for participation in
this program through Federated Securities Corp. or his financial
institution.
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 Fund.
Detailed confirmations of each purchase and redemption are sent to
each shareholder. Monthly statements are sent to report dividends
paid during the month.
DIVIDENDS AND DISTRIBUTIONS
Dividends are declared daily and paid monthly. Dividends include
substantially all of the investment income earned by the Fund,
less its expenses, other than distribution fees made pursuant to
Rule 12b-1 for the sale of Fund shares, which fees currently are
charged to the Fund's paid-in capital for tax purposes. Effective
January 1, 1995, Rule 12b-1 fees will be paid out of Fund income,
rather than paid-in capital. Until January 1, 1995, a certain
portion of dividend distributions may represent a return of paid-
in capital. Distributions of any net realized long-term capital
gains will be made at least once every twelve months. Dividends
and distributions are automatically reinvested on payment dates in
additional shares of the Fund at net asset value unless
shareholders request cash payments on the application or by
writing to Federated Services Company.
Shares purchased through a financial institution, for which
payment by wire is received by State Street Bank on the business
day following the order, begin to earn dividends on the day that
the wire payment is received. Otherwise, shares purchased by wire
begin to earn dividends on the business day after wire payment is
received by State Street Bank. Shares purchased by mail, or
through a financial institution, if the financial institution's
payment is by check, begin to earn dividends on the second
business day after the check is received by Federated Services
Company .
Shares earn dividends through the business day on which proper
written redemption instructions are received by Federated Services
Company .
See the section entitled "Tax Information" in this prospectus for
a further discussion of the effect of the payment of distribution
fees made pursuant to Rule 12b-1.
REDEEMING SHARES --------------------------------------------
The Fund redeems shares at their net asset value determined after
State Street Bank 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 by 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. (Boston time) and must be transmitted by the broker to
the Fund before 5:00 P.M. (Boston 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.
(Boston 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 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 State Street Bank, P.O. Box 8604, Boston, MA 02266-8604. This
written request must include the shareholder's name, the Fund name
and class of shares, the account number, and the share or dollar
amount to be redeemed. Shares will be redeemed at their net asset
value next determined after State Street Bank receives the
redemption request.
If share certificates have been issued, they must be properly
endorsed and should be sent by registered or certified mail with
the written request. Shareholders may call the Fund for assistance
in redeeming by mail.
SIGNATURES. Shareholders requesting a redemption of $50,000 or
more, 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 firm of the New York, American, Boston, Midwest,
or Pacific Stock Exchange;
- 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.
BY CHECK. A check for the proceeds is mailed within seven days
after receipt of proper written redemption instructions from a
broker or from the shareholder.
BY WIRE. Redemption requests will be wired the following day.
CONTINGENT DEFERRED SALES CHARGE
Under ordinary circumstances, shareholders redeeming shares from
their Fund accounts within three full years of the purchase date
of those shares will be charged a contingent deferred sales charge
by the Fund's distributor. Any applicable contingent deferred
sales charge will be imposed on the lesser of the net asset value
of the redeemed shares at the time of purchase or the net asset
value of the redeemed shares at the time of redemption in
accordance with the following schedule:
CONTINGENT DEFERRED
SHARES HELD SALES CHARGE
Less than one
year...........................................................
3%
More than one year but less than three
years.................... 2%
More than three
years.....................................................
None
Effective December 1, 1994, the Fund's distributor has waived the
imposition of the contingent deferred sales charge on all
redemptions of Fund shares.
The contingent deferred sales charge will be deducted from the
redemption proceeds otherwise payable to the shareholder and will
be retained by the distributor. The contingent deferred sales
charge will not be imposed with respect to: (1) shares acquired
through the reinvestment of dividends or distributions of longterm
capital gains; or (2) shares held for more than three full years
from the date of purchase. Redemptions will be processed in a
manner intended to maximize the amount of redemption which will
not be subject to a contingent deferred sales charge. In computing
the amount of the applicable contingent deferred sales charge,
redemptions are deemed to have occurred in the following order:
(1) shares acquired through the reinvestment of dividends and long-
term capital gains; (2) shares held for more than three full years
from the date of purchase; (3) shares held for fewer than three
years from the date of purchase on a first-in-first-out basis. A
contingent deferred sales charge is not assessed in connection
with an exchange of Fund shares for shares in Texas Municipal
Income Fund, New Jersey Municipal Income Fund, Maryland Municipal
Income Fund, or Florida Municipal Income Fund, portfolios of the
Trust, or for shares in Multi-State Municipal Income Fund, a
portfolio of Fixed Income Securities, Inc. (see "Exchanges for
Shares of Other Funds" below). Shares of Texas Municipal Income
Fund, New Jersey Municipal Income Fund, Florida Municipal Income
Fund and Multi-State Municipal Income Fund are no longer being
offered for sale. Any contingent deferred sales charge imposed at
the time exchanged-for shares are redeemed is calculated as if the
shareholder had held the shares from the date on which he became a
shareholder of the exchanged-from shares. Moreover, the contingent
deferred sales charge will be eliminated with respect to certain
redemptions (see "Elimination of Contingent Deferred Sales Charge"
below).
ELIMINATION OF CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge will be eliminated with
respect to the following redemptions: (1) redemptions following
the death or disability, as defined in Section 72(m)(7) of the
Internal Revenue Code of 1986, of a shareholder; (2) redemptions
in connection with certain distributions from Individual
Retirement Accounts, qualified retirement plans or tax-sheltered
annuities; and (3) involuntary redemptions by the Fund of shares
in shareholder accounts that do not comply with the minimum
balance requirement. In addition, to the extent that the
distributor does not advance commissions to certain financial
institutions for purchases made by certain individuals, no
contingent deferred sales charge will be imposed on redemptions of
shares held by Trustees, employees and sales representatives of
the Fund, the distributor, or affiliates of the Fund or
distributor; employees of any financial institution that sells
shares of the Fund pursuant to a sales agreement with the
distributor; and spouses and children under the age of 21 of the
aforementioned persons. Finally, no contingent deferred sales
charge will be imposed on the redemption of shares originally
purchased through a bank trust department or investment adviser
registered under the Investment Advisers Act of 1940, to the
extent that no commission was advanced for purchases made by such
entities. The Trustees reserve the right to discontinue the
elimination of the contingent deferred sales charge. Shareholders
would be notified of such elimination. Any shares purchased prior
to the termination of such a waiver would have the contingent
deferred sales charge eliminated as provided in the Fund's
prospectus at the time of purchase of such shares. If a
shareholder making a redemption qualifies for an elimination of
the contingent deferred sales charge, the shareholder must notify
Federated Securities Corp. or State Street Bank in writing that he
is entitled to such elimination.
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; the minimum withdrawal amount is $100. 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. A contingent deferred sales charge is
imposed on shares redeemed through this program within three full
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 and pay the proceeds to
the shareholder if the account balance falls below the required
minimum value of $1,500 due to shareholder redemptions. This
requirement does not apply, however, if the balance falls below
$1,500 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. A contingent deferred
sales charge will not be imposed on such redemptions.
EXCHANGES FOR SHARES OF OTHER FUNDS
In order to provide greater flexibility to Fund shareholders whose
investment objective has changed, the Fund allows shareholders to
exchange some or all of their Fund shares for shares of Texas
Municipal Income Fund, New Jersey Municipal Income Fund, Maryland
Municipal Income Fund, and Florida Municipal Income Fund,
portfolios of the Trust, as well as shares of Multi-State
Municipal Income Fund, a portfolio of Fixed Income Securities,
Inc., which is also advised by Federated Advisers. Exchanges are
made at net asset value without being assessed a contingent
deferred sales charge on the exchanged shares. Shares of Texas
Municipal Income Fund, New Jersey Municipal Income Fund, Florida
Municipal Income Fund and Multi-State Municipal Income Fund are no
longer being offered for sale.
Shareholders using this privilege must exchange shares having a
net asset value of at least $1,500. Shareholders who desire to
automatically exchange shares of a predetermined amount on a
monthly, quarterly, or annual basis may take advantage of a
systematic exchange privilege. A shareholder may obtain further
information on these exchange privileges by calling Federated
Securities Corp. or his financial institution. See the section
entitled "Contingent Deferred Sales Charge" in this prospectus for
more information. Before making an exchange, a shareholder must
receive a prospectus of the fund for which the exchange is being
made.
The ability to exchange shares is available to shareholders
residing in any state in which the shares being acquired may be
legally sold. 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.
MUNICIPAL SECURITIES INCOME TRUST INFORMATION -----------------
MANAGEMENT OF MUNICIPAL SECURITIES INCOME TRUST
BOARD OF TRUSTEES. Municipal Securities Income Trust is managed
by a Board of Trustees. The Board of Trustees is responsible for
managing the business affairs of Municipal Securities Income Trust
and for exercising all of the powers of Municipal Securities
Income Trust except those reserved for the shareholders. An
Executive Committee of the Board of Trustees handles the Trustees'
responsibilities between meetings of the Trustees.
INVESTMENT ADVISER. Pursuant to an investment advisory contract
with Municipal Securities Income Trust, investment decisions for
the Fund are made by Federated Advisers, the Fund's investment
adviser, subject to direction by the Trustees. The adviser
continually conducts investment research and supervision for the
Fund and is responsible for the purchase and sale of portfolio
instruments, for which it receives an annual fee from the Fund.
ADVISORY FEES. The Fund's adviser receives an annual
investment advisory fee equal to 0.40 of 1% of the Fund's
average daily net assets. Under the advisory contract, which
provides for the voluntary waiver of the advisory fee by the
adviser, the adviser may voluntarily waive some or all of its
fee. The adviser can terminate this voluntary waiver of
expenses 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. Total assets under management or
administration by these and other subsidiaries of Federated
Investors is approximately $70 billion. Federated Investors,
which was founded in 1956 as Federated Investors, Inc.,
develops and manages mutual funds primarily for the financial
industry. Federated Investors' track record of competitive
performance and its disciplined, risk averse investment
philosophy serve approximately 3,500 client institutions
nationwide. Through these same client institutions,
individual shareholders also have access to this same level
of investment expertise.
James D. Roberge and Jonathan C. Conley are the Fund's co-
portfolio managers. James D. Roberge has been the Fund's co-
portfolio manager since June, 1993. Mr. Roberge joined
Federated Investors in 1990 and has been Vice President of
the Fund's investment adviser since October, 1994. Prior to
this Mr. Roberge served as an Assistant Vice President of the
Fund's investment adviser since 1992. From 1990 until 1992,
Mr. Roberge acted as an investment analyst. Mr. Roberge
received his M.B.A. in Finance from Wharton Business School
in 1990.
Jonathan C. Conley has been the Fund's co-portfolio manager
since June, 1993. Mr. Conley joined Federated Investors in
1979 and has been a Vice President of the Fund's investment
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 (the
"Distributor") for shares of the Fund. Federated Securities
Corp. is located at Federated Investors Tower, Pittsburgh,
Pennsylvania 15222-3779. It is a Pennsylvania corporation
organized on November 14, 1969, and is the principal
distributor for a number of investment companies. Federated
Securities Corp. is a subsidiary of Federated Investors.
DISTRIBUTION PLAN
The Distributor will pay dealers an amount equal to 2% of the
net asset value of Fund shares purchased by their clients or
customers. These payments will be made directly by the
Distributor from its assets, and will not be made from the
assets of the Fund.
Pursuant to the provisions of a distribution plan adopted in
accordance with the Investment Company Act Rule 12b-1 (the
"Plan"), the Fund will pay to the Distributor an amount
computed at an annual rate of 0.75 of 1% of the average daily
net asset value of Fund shares to reimburse the Distributor
for advancements paid to dealers and to finance any activity
which is principally intended to result in the sale of shares
subject to the Plan. The Fund will accrue the distribution
fee as a liability of the Fund, and such method of accrual
will reduce the Fund's net assets and net asset value
accordingly. See the section entitled "Tax Information" in
this prospectus for a further discussion of the effect of the
payment of distribution fees made pursuant to Rule 12b-1 and
the payment of shareholder services fees to financial
institutions for administrative and support services on
distributions (of dividends, etc.) to shareholders.
Because distribution fees to be paid by the Fund to the
Distributor may not exceed an annual rate of 0.75 of 1% of
the Fund's average daily net assets, it will take the
Distributor a number of years to recoup the expenses that it
has incurred for its distribution and distribution related
services pursuant to the Plan.
The Distributor may select financial institutions (such as a
broker/dealer or bank) to provide sales support services as
agents for their clients or customers who beneficially own
shares of the Fund. After a shareholder has been invested in
the Fund for a period of three years, the Distributor will
pay financial institutions a portion of the above-referenced
distribution fee, in an amount up to 0.25 of 1% of the Fund's
average daily net assets based upon the shares owned by the
client for a period exceeding three years. It is anticipated
that the payment to the financial institutions will encourage
such financial institutions to remain knowledgeable about the
Fund, encourage further sales of the Fund, and discourage
redemptions for reinvestment in new products or products
compensating the financial institutions at a higher level.
The Fund's Plan is a compensation type plan. As such, the Fund
makes no payments to the Distributor except as described above.
Therefore, the Fund does not pay for unreimbursed expenses of the
Distributor, including amounts expended by the Distributor in
excess of amounts received by it from the Fund, interest, carrying
or other financing charges in connection with excess amounts
expended, or the Distributor's overhead expenses. However, the
Distributor may be able to recover such amounts or may earn a
profit from future payments made by the Fund under the Plan.
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. In the event the
Glass-Steagall Act is deemed to prohibit depository institutions
from acting in the administrative capacities described above or
should Congress relax current restrictions on depository
institutions, the Board of Trustees will consider appropriate
changes in the services.
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.
SHAREHOLDER SERVICES PLAN
The Fund has adopted a Shareholder Services Plan (the "Services
Plan"). Under the Services Plan, financial institutions will enter
into shareholder service agreements with the Fund to provide
administrative support services to their customers who from time
to time may be owners of record or beneficial owners of Fund
shares. These administrative services may include, but are not
limited to, the provision of personal service and maintenance of
shareholder accounts. In return for providing these support
services, a financial institution may receive payments from the
Fund at a rate not exceeding 0.25 of 1% of the average daily net
assets of Fund shares beneficially owned by the financial
institution's customers for whom it is holder of record or with
whom it has a servicing relationship.
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 daily net assets of all funds advised by
subsidiaries of Federated Investors ("Federated Funds") as
specified below:
Average Aggregate Daily
Net Assets
Maximum Administrative Fee of the
Federated Funds
0.15 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.10 of 1% on the next $250 million
0.075 of 1% on assets in excess of
$750 million
The administrative fee received during any fiscal year shall be at
least $125,000 per portfolio and $30,000 per each additional class
of shares. Federated Administrative Services may choose
voluntarily to waive a portion of its fee.
CUSTODIAN. State Street Bank and Trust Company, Box 8604, Boston,
Massachusetts, is custodian for the securities and cash of the
Fund
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services
Company, Pittsburgh, Pennsylvania, is transfer agent for the
shares of the Fund, and dividend disbursing agent for the Fund.
The fee paid to the transfer agent is based on the size, type and
number of accounts and transactions made by shareholders.
Federated Services Company also maintains the Trust's accounting
records. The fee paid for this service is based on the level of
the Fund's average net assets for the period, plus out-of-pocket
expenses.
LEGAL COUNSEL
Legal counsel is provided by Houston, Houston & Donnelly, 2510
Centre City Tower, Pittsburgh, Pennsylvania, and Dickstein,
Shapiro & Morin, L.L.P., 2101 L Street, N.W., Washington, D.C.
INDEPENDENT AUDITORS
The independent auditors for the Fund are Deloitte & Touche LLP,
Boston, Massachusetts.
EXPENSES OF THE FUND
The Fund pays all of its own expenses and its allocable share of
Trust expenses. These expenses include, but are not limited to,
the costs of: organizing the Trust and continuing its existence;
Trustees' fees; investment advisory and administrative services;
printing prospectuses and other Fund documents for shareholders;
registering the Trust, the Fund and shares of the Fund; taxes and
commissions; issuing, purchasing, repurchasing, and redeeming
shares; fees for custodian, transfer agent, dividend disbursing
agent, shareholder servicing agents, and registrars; printing,
mailing, auditing, accounting, and legal expenses; reports to
shareholders and government agencies; meetings of Trustees and
shareholders and proxy solicitations therefor; insurance premiums;
association membership dues; and such nonrecurring and
extraordinary items as may arise.
SHAREHOLDER INFORMATION ----------------------------------
VOTING RIGHTS
Each share of the Fund gives the shareholder one vote in Trustee
elections and other matters submitted to shareholders for vote.
All shares of all classes of each portfolio in the Trust have
equal voting rights except that in matters affecting only a
particular fund or class, only shares of that fund or class are
entitled to vote. As of December 23, 1994, FUBS & Co.,
Chesapeake, Virginia owned 27.47% 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.
As a Massachusetts business trust, the Trust is not required to
hold annual shareholder meetings. Shareholder approval will be
sought only for certain changes in the Trust's or the Fund's
operation and for the election of Trustees under certain
circumstances. Trustees may be removed by the Trustees or by
shareholders at a special meeting. A special meeting of the
shareholders for this purpose shall be called by the Trustees upon
the written request of shareholders owning at least 10% of the
outstanding shares of all series in the Trust entitled to vote.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally
liable as partners under Massachusetts law for acts or obligations
of the Trust on behalf of the Fund. To protect shareholders of the
Fund, the Trust has filed legal documents with Massachusetts that
expressly disclaim the liability of shareholders of the Fund for
such acts or obligations of the Trust. These documents require
notice of this disclaimer to be given in each agreement,
obligation, or instrument that the Trust or its Trustees enter
into or sign on behalf of the Fund.
In the unlikely event that a shareholder of the Fund is held
personally liable for the Trust's obligations on behalf of the
Fund, the Trust is required to use the property of the Fund to
protect or compensate the shareholder. On request, the Trust will
defend any claim made and pay any judgment against a shareholder
of the Fund for any act or obligation of the Trust on behalf of
the Fund. Therefore, financial loss resulting from liability as a
shareholder of the Fund will occur only if the Trust cannot meet
its obligations to indemnify shareholders and pay judgments
against them from the assets of the Fund.
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. The Fund will be treated as a single,
separate entity for federal income tax purposes so that income
(including capital gains) and losses realized by the Trust's other
portfolios will not be combined for tax purposes with those
realized by the Fund.
Shareholders are not required to pay 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 income earned on some
municipal bonds may be included in calculating the federal
individual alternative minimum tax or the federal alternative
minimum tax for corporations.
It is anticipated that each monthly distribution of dividends will
exceed the Fund's net investment income as calculated for
financial statement reporting purposes during the applicable
period by an amount substantially equal to the amount of
distribution payments made pursuant to the Plan, and charged to
the Fund's paid-in capital for tax purposes during such period.
The Securities and Exchange Commission requires the Fund to
indicate that such excess amount is being paid to shareholders
from the Fund's paid-in capital. However, the Fund anticipates
that the entire monthly distribution (including the excess amount)
will constitute tax-exempt income to the shareholders for Federal
income tax purposes, except for the proportionate part of the
distribution that may be considered taxable income if the Fund
earns taxable income during the calendar year. Therefore, the Fund
believes that a shareholder should make no adjustment to the tax
cost basis of his existing shareholdings as a result of the
monthly distribution. The Fund also believes that shareholders
reinvesting the monthly distribution should continue to treat the
amount of the entire distribution as the tax cost basis of the
additional shares acquired by reason of such reinvestment.
The Internal Revenue Service ("IRS") has issued a ruling
(effective April 1995) which changes the accounting method which
is applied to distribution related expenses incurred under Rule
12b-1 Plans. The ruling requires the Fund to charge such expenses
to the Fund's investment income. Effective January 1, 1995, the
Fund will change its accounting method accordingly.
The alternative minimum tax, equal to 24% 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 will become
subject to the 20% corporate alternative minimum tax because the
dividends are included in a corporation's "adjusted current
earnings." The corporate alternative 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" are 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.
VIRGINIA TAXES
Income to the Fund is exempt from Virginia state income taxes and
income taxes imposed by Virginia municipalities will retain it
exempt status when distributed to Virginia shareholders.
Shares of the Fund will not be subject to Virginia state or local
personal property taxes.
Shares of the Fund will not be subject to any Virginia property
taxes.
OTHER STATE AND LOCAL TAXES
Income from the Fund is not necessarily free from regular state
income taxes in states other than Virginia or from personal
property taxes. State laws differ on this issue, and shareholders
are urged to consult their own tax advisers regarding the status
of their accounts under state and local tax laws.
PERFORMANCE INFORMATION ------------------------------------------
- -----------------
From time to time the Fund advertises the total return, yield, and
tax-equivalent yield for shares. Total return represents the
change, over a specific period of time, in the value of an
investment in shares after reinvesting all income and capital
gains distributions. It is calculated by dividing that change by
the initial investment and is expressed as a percentage.
The yield of shares is calculated by dividing the net investment
income per share (as defined by the Securities and Exchange
Commission) earned by shares over a thirty-day period by the
maximum offering price per share of shares on the last day of the
period. This number is then annualized using semi-annual
compounding. The tax-equivalent yield of shares is calculated
similarly to the yield, but is adjusted to reflect the taxable
yield that shares would have had to earn to equal its actual
yield, assuming a specific tax rate. The yield and the tax-
equivalent yield do not necessarily reflect income actually earned
by shares and, therefore, may not correlate to the dividends or
other distributions paid to shareholders.
The performance information reflects the effect of the contingent
deferred sales charge, which, if excluded, would increase the
total return, yield, and tax-equivalent yield.
From time to time, the Fund may advertise its performance using
certain financial publications and/or compare its performance to
certain indices.
ADDRESSES
- ------------------------------------------------------------------------------
Virginia Municipal Income Fund Federated Investors Tower
Pittsburgh, Pennsylvania
15222-3779
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania
15222-3779
Investment Adviser
Federated Advisers Federated Investors Tower
Pittsburgh, Pennsylvania
15222-3779
Custodian
State Street Bank and P.O. Box 8604
Trust Company Boston, Massachusetts 02266-
8604
Transfer Agent and Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania
15222-3779
Legal Counsel
Houston, Houston & Donnelly 2510 Centre City Tower
Pittsburgh, Pennsylvania
15222
Legal Counsel
Dickstein, Shapiro & Morin, L.L.P. 2101 L Street, N.W.
Washington, D.C. 20037
Independent Auditors
Deloitte & Touche LLP 125 Summer Street
Boston, Massachusetts 02110-
1617
------------------------------------------------------------------
- ------------------------------
VIRGINIA MUNICIPAL
INCOME FUND
PROSPECTUS
A Non-Diversified
Portfolio of Municipal
Securities Income Trust,
An Open-End, Management
Investment Company
December 31, 1994
FEDERATED SECURITIES
CORP.
(LOGO)
-------------------------
----------
Distributor
A subsidiary of FEDERATED
INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
(12/94)
Virginia Municipal Income Fund
(A Portfolio of Municipal Securities Income Trust)
Statement of Additional Information
This Statement of Additional Information should be read
with the prospectus of shares of Virginia Municipal
Income Fund (the "Fund") dated December 31, 1994. This
Statement is not a prospectus itself. To receive a copy
of the prospectus write or call the Fund.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Statement dated December 31, 1994
FEDERATED SECURITIES
CORP.
Distributor
A subsidiary of FEDERATED
INVESTORS
General Information About
the Fund 1
Investment Objective and
Policies 1
Acceptable Investments 1
Characteristics 1
Types of Acceptable
Investments 1
Participation Interests 1
Variable-Rate Municipal
Securities 1
Municipal Leases 2
When-Issued and Delayed
Delivery Transactions 2
Temporary Investments 2
Futures and Options
Transactions 2
Futures Contracts 2
"Margin" in Futures
Transactions 3
Put Options on Financial
Futures Contracts 3
Call Options on Financial
Futures Contracts 4
Risks 4
Repurchase Agreements 4
Reverse Repurchase
Agreements 5
Portfolio Turnover 5
Investment Limitations 5
Selling Short and Buying
on Margin 5
Issuing Senior Securities
and Borrowing Money 5
Pledging Assets 5
Underwriting 5
Investing in Real Estate 5
Investing in Commodities 5
Lending Cash or
Securities 6
Concentration of
Investments 6
Investing in Issuers
Whose Securities are
Owned by Officers and
Trustees of the Fund 6
Investing in Securities
of Other Investment
Companies 6
Investing in Restricted
Securities 6
Investing in Illiquid
Securities 6
Investing in Put Options 6
Writing Covered Call
Options 6
Investing in New Issuers 6
Investing in Minerals 6
Virginia Investment Risks 7
Fund Ownership 10
The Funds 11
Investment Advisory Services 11
Adviser to the Fund 11
Advisory Fees 11
State Expense Limitations 11
Administrative Services 12
Brokerage Transactions 12
Purchasing Shares 12
Distribution and
Shareholder Services
Plans 12
Determining Net Asset Value 13
Valuing Municipal Bonds 13
Use of Amortized Cost 13
Redeeming Shares 13
Redemption in Kind 13
Tax Status 14
The Fund's Tax Status 14
Capital Gains 14
Total Return 14
Yield 14
Tax-Equivalent Yield 15
Tax-Equivalency Table 15
Performance Comparisons 15
Financial Statements 16
Appendix 17
General Information About the Fund
The Fund is a portfolio in Municipal Securities Income Trust
(the "Trust"). Federated Municipal Income Trust was
established as a Massachusetts business trust under a
Declaration of Trust dated August 6, 1990. On September 16,
1992 (effective date October 31, 1992), the Board of Trustees
(the "Trustees") approved changing the name of the Trust from
Federated Municipal Income Trust to Municipal Securities
Income Trust.
Investment Objective and Policies
The Fund's investment objective is to provide current income
which is exempt from federal regular income tax and the
personal income taxes imposed by the Commonwealth of Virginia
and Virginia municipalities. The investment objective cannot
be changed without the approval of shareholders.
Acceptable Investments
The Fund invests primarily in a portfolio of municipal securities
which are exempt from federal income tax and the personal income
taxes imposed by the Commonwealth of Virginia and Virginia
municipalities ("Virginia Municipal Securities"). The municipal
securities in which the Fund invests include those issued by or on
behalf of the Commonwealth of Virginia and Virginia municipalities
as well as those issued by states, territories, and possessions of
the United States which are exempt from federal regular income tax
and the personal income taxes imposed by the Commonwealth of
Virginia and Virginia municipalities.
Characteristics
The Virginia Municipal Securities in which the Fund
invests have the characteristics set forth in the
prospectus. If ratings made by Moody's Investors Service,
Inc. ("Moody's"), Standard & Poor's Ratings Group ("S&P")
or Fitch Investors Service ("Fitch's") 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.
Types of Acceptable Investments
Examples of Virginia Municipal Securities include:
ogovernmental lease certificates of participation issued
by state or municipal authorities where payment is
secured by installment payments for equipment,
buildings, or other facilities being leased by the
state or municipality;
omunicipal notes and tax-exempt commercial paper;
oserial bonds;
otax anticipation notes sold to finance working capital
needs of municipalities in anticipation of receiving
taxes;
obond anticipation notes sold in anticipation of the
issuance of long-term bonds;
opre-refunded municipal bonds whose timely payment of
interest and principal is ensured by an escrow of U.S.
government obligations; and
ogeneral obligation bonds.
Participation Interests
The financial institutions from which the Fund purchases
participation interests frequently provide or secure from
another financial institution irrevocable letters of
credit or guarantees and give the Fund the right to
demand payment of the principal amounts of the
participation interests plus accrued interest on short
notice (usually within seven days).
Variable-Rate Municipal Securities
Variable interest rates generally reduce changes in the
market value of municipal securities from their original
purchase prices. Accordingly, as interest rates decrease
or increase, the potential for capital appreciation or
depreciation is less for variable-rate municipal
securities than for fixed-income obligations. Many
municipal securities with variable interest rates
purchased by the Fund are subject to repayment of
principal (usually within seven days) on the Fund's
demand. The terms of these variable-rate demand
instruments require payment of principal and accrued
interest from the issuer of the municipal obligations,
the issuer of the participation interests, or a guarantor
of either issuer.
Municipal Leases
The Fund may purchase municipal securities in the form of
participation
interests which represent undivided proportional
interests in lease payments by a governmental or non-
profit entity. The lease payments and other rights under
the lease provide for and secure the payments on the
certificates. Lease obligations may be limited by
municipal charter or the nature of the appropriation for
the lease. In particular, lease obligations may be
subject to periodic appropriation. If the entity does not
appropriate funds for future lease payments, the entity
cannot be compelled to make such payments. Furthermore, a
lease may provide that the certificate trustee cannot
accelerate lease obligations upon default. The trustee
would only be able to enforce lease payments as they
became due. In the event of a default or failure of
appropriation, it is unlikely that the trustee would be
able to obtain an acceptable substitute source of
payment.
In determining the liquidity of municipal lease securities,
the Fund's investment adviser, under the authority delegated
by the Trustees, will base its determination on the following
factors:
owhether the lease can be terminated by the lessee;
othe potential recovery, if any, from a sale of the leased
property upon termination of the lease;
othe lessee's general credit strength (e.g., its debt,
administrative, economic and financial characteristics and
prospects);
othe likelihood that the lessee will discontinue
appropriating funding for the leased property because the
property is no longer deemed essential to its operations
(e.g., the potential for an "event of non-appropriation");
and
oany credit enhancement or legal recourse provided upon an
event of non-appropriation or other termination of the
lease.
When-Issued and Delayed Delivery Transactions
These transactions are made to secure what is considered to be
an advantageous price or yield for the Trust. 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. No fees or other
expenses, other than normal transaction costs, are incurred.
However, liquid assets of the Trust sufficient to make payment
for the securities to be purchased are segregated on the
Trust's records at the trade date. These assets are marked to
market daily and are maintained until the transaction has been
settled. The Trust does not intend to engage in when-issued
and delayed delivery transactions to an extent that would
cause the segregation of more than 20% of the total value of
its assets.
Temporary Investments
The Fund may also invest in temporary investments during times
of unusual market conditions for defensive purposes and to
maintain liquidity.
Futures and Options Transactions
As a means of reducing fluctuations in the net asset value of
shares of the Fund, the Fund may attempt to hedge all or a
portion of its portfolio by buying and selling financial
futures contracts, buying put options on portfolio securities
and put options on financial futures contracts for portfolio
securities, and writing call options on futures contracts. The
Fund also may write covered call options on portfolio
securities to attempt to increase its current income.
The Fund will maintain its position in securities, options and
segregated cash subject to puts and calls until the options
are exercised, closed, or have expired. An option position may
be closed out over-the-counter or on an exchange which
provides a secondary market for options of the same series.
Futures Contracts
The Fund may purchase and sell financial futures contracts to
hedge against the effects of changes in the value of portfolio
securities due to anticipated changes in interest rates and
market conditions without necessarily buying or selling the
securities. The Fund will not engage in futures transactions
for speculative purposes.
A futures contract is a firm commitment by two parties: the
seller who agrees to make delivery of the specific type of
security called for in the contract ("going short") and the
buyer who agrees to take delivery of the security ("going
long") at a certain time in the future.
For example, in the fixed income securities market, prices
move inversely to interest rates. A rise in rates results in a
drop in price. Conversely, a drop in rates results in a rise
in price. In order to hedge its holdings of fixed income
securities against a rise in market interest rates, the Fund
could enter into contracts to deliver securities at a
predetermined price (i.e., "go short") to protect itself
against the possibility that the prices of its fixed income
securities may decline during the Fund's anticipated holding
period. The Fund could agree to purchase securities in the
future at a predetermined price (i.e., "go long") to hedge
against a decline in market interest rates.
"Margin" in Futures Transactions
Unlike the purchase or sale of a security, the Fund does not
pay or receive money upon the purchase or sale of a futures
contract. Rather, the Fund is required to deposit an amount of
"initial margin" in cash or U.S. Treasury bills with its
custodian (or the broker, if legally permitted). The nature of
initial margin in futures transactions is different from that
of margin in securities transactions in that initial margin in
futures transactions does not involve the borrowing of funds
by the Fund to finance the transactions. Initial margin is in
the nature of a performance bond or good faith deposit on the
contract which is returned to the Fund upon termination of the
futures contract, assuming all contractual obligations have
been satisfied.
A futures contract held by the Fund is valued daily at the
official settlement price of the exchange on which it is
traded. Each day the Fund pays or receives cash, called
"variation margin," equal to the daily change in value of the
futures contract. This process is known as "marking to
market." Variation margin does not represent a borrowing or
loan by the Fund, but is instead settlement between the Fund
and the broker of the amount one would owe the other if the
futures contract expired. In computing its daily net asset
value, the Fund will mark to market its open futures
positions.
The Fund is also required to deposit and maintain margin when
it writes call options on futures contracts.
The Fund will comply with the following restrictions when
purchasing and selling futures contracts. First, the Fund will
not participate in futures transactions if the sum of its
initial margin deposits on open contracts will exceed 5% of
the market value of the Fund's total assets, after taking into
account the unrealized profits and losses on those contracts
it has entered into. Second, the Fund will not enter into
these contracts for speculative purposes. Third, since the
Fund does not constitute a commodity pool, it will not market
itself as such, or serve as a vehicle for trading in the
commodities futures or commodity options markets. Connected
with this, the Fund will disclose to all prospective investors
the limitations on its futures and options transactions, and
make clear that these transactions are entered into only for
bona fide hedging purposes, or other permissible purposes
pursuant to regulations promulgated by the Commodity Futures
Trading Commission ("CFTC"). Finally, because the Fund will
submit to the CFTC special calls for information, the Fund
will not register as a commodities pool operator.
Put Options on Financial Futures Contracts
The Fund may purchase listed put options on financial futures
contracts. The Fund would use these options solely to protect
portfolio securities against decreases in value resulting from
market factors such as an anticipated increase in interest
rates.
Unlike entering directly into a futures contract, which
requires the purchaser to buy a financial instrument on a set
date at a specified price, the purchase of a put option on a
futures contract entitles (but does not obligate) its
purchaser to decide on or before a future date whether to
assume a short position at the specified price.
Generally, if the hedged portfolio securities decrease in
value during the term of an option, the related futures
contracts will also decrease in value and the option will
increase in value. In such an event, the Fund will normally
close out its option by selling an identical option. If the
hedge is successful, the proceeds received by the Fund upon
the sale of the second option will be large enough to offset
both the premium paid by the Fund for the original option plus
the decrease in value of the hedged securities.
Alternatively, the Fund may exercise its put option to close
out the position. To do so, it would simultaneously enter into
a futures contract of the type underlying the option (for a
price less than the strike price of the option) and exercise
the option. The Fund would then deliver the futures contract
in return for payment of the strike price. If the Fund neither
closes out nor exercises an option, the option will expire on
the date provided in the option contract, and only the premium
paid for the contract will be lost.
Call Options on Financial Futures Contracts
In addition to purchasing put options on futures, the Fund may
write listed call options on financial futures contracts or
over-the-counter call options on future contracts to hedge its
portfolio against an increase in market interest rates. When
the Fund writes a call option on a futures contract, it is
undertaking the obligation of assuming a short futures
position (selling a futures contract) at the fixed strike
price at any time during the life of the option if the option
is exercised. As market interest rates rise, causing the
prices of futures to decrease, the Fund's obligation under a
call option on a future (to sell a futures contract) costs
less to fulfill, causing the value of the Fund's call option
position to increase.
In other words, as the underlying futures price falls below
the strike price, the buyer of the option has no reason to
exercise the call, so that the Fund keeps the premium received
for the option. This premium can substantially offset the drop
in value of the Fund's portfolio securities.
Prior to the expiration of a call written by the Fund, or
exercise of it by the buyer, the Fund may close out the option
by buying an identical option. If the hedge is successful, the
cost of the second option will be less than the premium
received by the Fund for the initial option. The net premium
income of the Fund will then substantially offset the realized
decrease in value of the hedged securities.
The Fund will not maintain open positions in futures contracts
it has sold or call options it has written on futures
contracts if, in the aggregate, the value of the open
positions (marked to market) exceeds the current market value
of its securities portfolio, plus or minus the unrealized gain
or loss on those open positions, adjusted for the correlation
of volatility between the hedged securities and the futures
contracts. If this limitation is exceeded at any time, the
Fund will take prompt action to close out a sufficient number
of open contracts to bring its open futures and options
positions within this limitation.
Risks
When the Fund uses futures and options on futures as
hedging devices, there is a risk that the prices of the
securities subject to the futures contracts may not
correlate perfectly with the prices of the securities in
the Fund's portfolio. This may cause the futures contract
and any related options to react differently than the
portfolio securities to market changes. In addition, the
Fund's adviser could be incorrect in its expectations
about the direction or extent of market factors such as
stock price movements. In these events, the Fund may lose
money on the futures contract or option.
It is not certain that a secondary market for positions
in futures contracts or for options will exist at all
times. Although the Fund's adviser will consider
liquidity before entering into these transactions, there
is no assurance that a liquid secondary market on an
exchange or otherwise will exist for any particular
futures contract or option at any particular time. The
Fund's ability to establish and close out futures and
options positions depends on this secondary market. The
inability to close out these positions could have an
adverse effect on the Fund's ability to effectively hedge
its portfolio.
To minimize risks, the Fund may not purchase or sell futures
contracts or related options if immediately thereafter the sum
of the amount of margin deposits on the Fund's existing
futures positions and premiums paid for related options would
exceed 5% of the market value of the Fund's total assets. When
the Fund purchases futures contracts, an amount of cash and/or
Treasury bills, equal to the underlying commodity value of the
futures contracts (less any related margin deposits), will be
deposited in a segregated account with the Fund's custodian
(or the broker, if legally permitted) to collateralize the
position and thereby insure that the use of such futures
contract is unleveraged. When the Fund sells futures
contracts, it will either own or have the right to receive the
underlying future or security, or will make deposits to
collateralize the position as discussed above.
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.
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
Trustees.
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 may trade or dispose of portfolio securities as
considered necessary to meet its investment objective. It is
not anticipated that the portfolio trading engaged in by the
Fund will result in its annual rate of portfolio turnover
exceeding 100%. For the period from September 2, 1993 (date
of initial public investment) to August 31, 1994, the
portfolio turnover rate was 46%.
Investment Limitations
Selling Short and Buying on Margin
The Fund will not sell any securities short or purchase
any securities on margin but may obtain such short-term
credits as may be necessary for clearance of purchases
and sales of securities.
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 to
facilitate management of the portfolio by enabling the
Fund to, for example, meet redemption requests when the
liquidation of portfolio securities is deemed to be
inconvenient or disadvantageous. The Fund will not
purchase any securities while borrowings in excess of 5%
of its total assets are outstanding.
Pledging Assets
The Fund will not mortgage, pledge, or hypothecate its
assets except to secure permitted borrowings. In those
cases, it may mortgage, pledge, or hypothecate assets
having a market value not exceeding 10% of the value of
its total assets at the time of the pledge.
Underwriting
The Fund will not underwrite any issue of securities
except as it may be deemed to be an underwriter under the
Securities Act of 1933 in connection with the sale of
securities in accordance with its investment objective,
policies, and limitations.
Investing in Real Estate
The Fund will not purchase or sell real estate, including
limited partnership interests, although it may invest in
municipal bonds secured by real estate or interests in
real estate.
Investing in Commodities
The Fund will not purchase or sell commodities, commodity
contracts, or commodity futures contracts except that the
Fund may purchase and sell futures contracts and related
options.
Lending Cash or Securities
The Fund will not lend any of its assets except that it
may acquire publicly or non-publicly issued municipal
bonds or temporary investments or enter into repurchase
agreements in accordance with its investment objective,
policies, and limitations.
Concentration of Investments
The Fund will not purchase securities if, as a result of
such purchase, 25% or more of the value of its total
assets would be invested in any one industry or in
industrial development bonds or other securities, the
interest upon which is paid from revenues of similar
types of projects. However, the Fund may invest as
temporary investments more than 25% of the value of its
assets in cash or cash items (for purposes of this
limitation, the Fund considers instruments issued by a
U.S. branch of a domestic bank or savings and loan having
capital, surplus, and undivided profits in excess of
$100,000,000 at the time of investment to be "cash
items"), securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities, or
instruments secured by these money market instruments,
i.e., repurchase agreements.
The above investment limitations cannot be changed
without shareholder approval. The following limitations,
however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified
before any material change in these limitations becomes
effective.
Investing in Issuers Whose Securities are Owned by
Officers and Trustees of the Fund
The Fund will not purchase or retain the securities of
any issuer if the officers and Trustees 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.
Investing in Securities of Other Investment Companies
The Fund will not purchase securities of other investment
companies except as part of a merger, consolidation, or
other acquisition.
Investing in Restricted Securities
The Fund will not invest more than 10% of its total
assets in securities subject to restrictions on resale
under the Securities Act of 1933, except for certain
other restricted securities which meet the criteria for
liquidity as established by the Trustees.
Investing in Illiquid Securities
The Fund will not invest more than 15% of its net assets
in illiquid obligations, including repurchase agreements
providing for settlement in more than seven days after
notice, and certain restricted securities not determined
by the Trustees to be liquid, including certain municipal
leases and inverse floaters.
Investing in Put Options
The Fund will not purchase put options on securities,
unless the securities are held in the Fund's portfolio
and not more than 5% of the value of the Fund's total
assets would be invested in premiums on open put options.
Writing Covered Call Options
The Fund will not write call options on securities unless
the securities are held in the Fund's portfolio or unless
the Fund is entitled to them in deliverable form without
further payment or after segregating cash in the amount
of any further payment.
Investing in New Issuers
The Fund will not invest more than 5% of the value of its
total assets in industrial development bonds where the
principal and interest are the responsibility of
companies (or guarantors, where applicable) with less
than three years of continuous operations, including the
operation of any predecessor.
Investing in Minerals
The Fund will not purchase interests in oil, gas, or
other mineral exploration or development programs or
leases, although it may invest in securities of issuers
which invest in or sponsor such programs.
Except with respect to borrowing money, if a percentage
limitation is adhered to at the time of investment, a later
increase or decrease in percentage resulting from any change
in value or net assets will not result in a violation of such
restriction.
The Fund does not expect to borrow money or pledge securities
in excess of 5% of the value of its net assets during the
coming fiscal year.
Virginia Investment Risks
The Fund invests in obligations of Virginia issuers which
results in the Fund's performance being subject to risks
associated with the overall conditions present within the
state. The following information is a brief summary of the
recent prevailing economic conditions and a general summary of
the state's financial status. This information is based on
official statements relating to securities that have been
offered by Virginia issuers and from other sources believed to
be reliable but should not be relied upon as a complete
description of all relevant information.
The Commonwealth of Virginia's credit strength is derived from
a diversified economy, relatively low unemployment rates,
strong financial management, and a low debt burden. The
State's economy benefits significantly from its proximity to
Washington, D.C. Government is the State's third-largest
employment sector, comprising 21% of total employment. Other
important sectors of the economy include shipbuilding,
tourism, construction, and agriculture. Virginia faces some
economic uncertainties with respect to defense-related
cutbacks. Although Virginia's unemployment rate is well below
the national rate, Virginia has experienced a significant loss
of jobs in the construction industry due to commercial and
residential overbuilding.
Virginia is a very conservative debt issuer and has maintained
debt levels that are low in relation to its substantial
resources. Conservative policies also dominate the State's
financial operations; and the State administration continually
demonstrates its ability and willingness to adjust financial
planning and budgeting to preserve financial balance. For
example, economic weakness in the State and the region caused
personal income and sale and corporate tax collections to fall
below projected forecasts and placed the State under budgetary
strain. The State reacted by reducing its revenue expectations
for the 1990-92 biennium and preserved financial balance
through a series of transfers, appropriation reductions, and
other budgetary revisions. Management's actions resulted in a
modest budget surplus for fiscal 1992. For the first nine
months of 1993, general fund revenues have been above
expectations and the State has adopted a balanced budget for
the biennium ending June 30, 1994.
The Fund's concentration in securities issued by the State and
its political subdivisions provides a greater level of risk
than a fund which is diversified across numerous states and
municipal entities. The ability of the State or its
municipalities to meet their obligations will depend on the
availability of tax and other revenues; economic, political,
and demographic conditions within the State; and the
underlying fiscal condition of the State, its counties, and
its municipalities.
The Fund's concentration in securities issued by the state and
its political subdivisions provides a greater level of risk
than a fund which is diversified across numerous states and
municipal entities. The ability of the state or its
municipalities to meet their obligations will depend on the
availability of tax and other revenues; economic, political,
and demographic conditions within the state; and the
underlying fiscal condition of the state and its
municipalities.
Municipal Securities Income Trust Management
Officers and Trustees are listed with their addresses, present
positions with Municipal Securities Income Trust, and
principal occupations.
John F. Donahue*@
Federated Investors Tower
Pittsburgh, PA
Chairman and Trustee of the Trust
Chairman and Trustee, Federated Investors, Federated Advisers,
Federated Management, and Federated Research; Chairman and
Director, Federated Research Corp.; Chairman, Passport
Research, Ltd.; Director, AEtna Life and Casualty Company;
Chief Executive Officer and Director, Trustee, or Managing
General Partner of the Funds. Mr. Donahue is the father of J.
Christopher Donahue, Vice President of the Trust.
Thomas G. Bigley
28th Floor, One Oxford Center
Pittsburgh, PA
Trustee
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
Trustee of the Trust
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
Trustee of the Trust
Fun
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
Trustee of the Trust
Attorney-at-law; Director, The Emerging Germany Fund, Inc.;
Director, Trustee, or Managing General Partner of the Funds;
formerly, Director, Blue Cross of Massachusetts, Inc.
Lawrence D. Ellis, M.D.
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Trustee of the Trust
Hematologist, Oncologist, and Internist, Presbyterian and
Montefiore Hospitals; Professor of Medicine and Trustee,
University of Pittsburgh; Director of Corporate Health,
University of Pittsburgh Medical Center; Director, Trustee, or
Managing General Partner of the Funds.
Edward L. Flaherty, Jr.@
5916 Penn Mall
Pittsburgh, PA
Trustee of the Trust
Attorney-at-law; Partner, 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
225 Franklin Street
Boston, MA
Trustee of the Trust
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 and Trustee, Lahey
Clinic Foundation, Inc.
Gregor F. Meyer
5916 Penn Mall
Pittsburgh, PA
Trustee of the Trust
Attorney-at-law; Partner, Meyer and Flaherty; Chairman,
Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.;
Director, Trustee, or Managing General Partner of the Funds;
formerly, Vice Chairman, Horizon Financial, F.A.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Trustee of the Trust
Professor, Foreign Policy and Management Consultant; Trustee,
Carnegie Endowment for International Peace, RAND Corporation,
Online Computer Library Center, Inc., and U.S. Space
Foundation; Chairman, Czecho Slovak Management Center;
Director, Trustee, or Managing General Partner of the Funds;
President Emeritus, University of Pittsburgh; formerly,
Chairman, National Advisory Council for Environmental Policy
and Technology.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Trustee of the Trust
Public relations/marketing consultant; Director, Trustee, or
Managing General Partner of the Funds.
J. Christopher Donahue *
Federated Investors Tower
Pittsburgh, PA
Vice President and Trustee of the Trust
President and Trustee, Federated Investors, Federated
Advisers, Federated Management, and Federated Research;
President and Director, Federated 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 Trustee of the Trust.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
President of the Trust
Executive Vice President and Trustee, Federated Investors;
Director, Federated Research Corp.; Chairman and Director,
Federated Securities Corp.; President or Vice President of
some of the Funds; Director or Trustee of some of the Funds.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Vice President and Treasurer of the Trust
Vice President, Treasurer, and Trustee, Federated Investors;
Vice President and Treasurer, Federated Advisers, Federated
Management, Federated Research, Federated Research Corp., and
Passport Research, Ltd.; Executive Vice President, Treasurer,
and Director, Federated Securities Corp.; Trustee, Federated
Services Company and Federated Shareholder Services; Chairman,
Treasurer, and Trustee, Federated Administrative Services;
Trustee or Director of some of the Funds; Vice President and
Treasurer of the Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Vice President and Secretary of the Trust
Vice President, Secretary, General Counsel, and Trustee,
Federated Investors; Vice President, Secretary, and Trustee,
Federated Advisers, Federated Management, and Federated
Research; Vice President and Secretary, Federated Research
Corp. and Passport Research, Ltd.; Trustee, Federated Services
Company; Executive Vice President, Secretary, and Trustee,
Federated Administrative Services; Secretary and Trustee,
Federated Shareholder Services; Executive Vice President and
Director, Federated Securities Corp.; Vice President and
Secretary of the Funds.
* This Trustee is deemed to be an "interested person" of the
Trust as defined in the Investment Company Act of 1940, as
amended.
@ Member of the Trust's Executive Committee. The Executive
Committee of the Board of Trustees handles the
responsibilities of the Board of Trustees between meetings
of the Board.
Fund Ownership
Officers and Trustees own less than 1% of the Fund's
outstanding shares.
As of December 23, 1994, the following shareholders of record
owned 5% or more of the outstanding shares of the Fund:
Merrill Lynch, Pierce, Fenner & Smith, Jacksonville, Florida,
record owner holding Fund shares for its clients, owned
approximately 4,946.000 shares (24.46%), FUBS & Co.,
Chesapeake, Virginia, record owner holding Fund shares for its
clients, owned approximately 5,555.852 shares (27.47%), George
E. Briers and Janet Durfee Briers, Jt. Ten., Lebanan,
Virginia, owned approximately 2,468.000 shares (12.20%), NFSC,
Sterling, Virginia, record owner holding Fund shares for its
clients, owned approximately 2,318.847 shares (11.47%),
Stewart L. Kneessi, Springfield, Virginia, owned approximately
1,411.038 shares (6.98%), and Thomas William Kibler, Sr. and
Jane Gray Kibler, JTWROS, Glen Allen, Virginia, owned
approximately 1,114.827 shares (5.51%) and Frank E. Mann,
Alexandria, Virginia, owned approximately 1,029.482 shares
(5.09%).
The Funds
"The Funds" and "Funds" mean the following investment
companies: American Leaders Fund, Inc.; Annuity Management
Series; Arrow Funds; Automated Government Money Trust; Cash
Trust Series II; Cash Trust Series, Inc.; DG Investor Series;
Edward D. Jones & Co. Daily Passport Cash Trust; Federated
ARMs Fund; Federated Exchange Fund, Ltd.; Federated GNMA
Trust; Federated Government Trust; Federated Growth Trust;
Federated High Yield Trust; Federated Income Securities Trust;
Federated Income Trust; Federated Index Trust; Federated
Institutional Trust; Federated Intermediate Government Trust;
Federated Master Trust; Federated Municipal Trust; Federated
Short-Intermediate Government Trust; Federated Short-Term
U.S. Government Trust; Federated Stock Trust; Federated Tax-
Free Trust; Federated U.S. Government Bond Fund; 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; Insight Institutional Series,
Inc.; 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; The Medalist
Funds: Money Market Management, Inc.; Money Market Obligations
Trust; Money Market Trust; Municipal Securities Income Trust;
111 Corcoran Funds; Peachtree Funds; The Planters Funds;
Portage Funds; RIMCO Monument Funds; The Shawmut Funds; Short-
Term Municipal Trust; 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; and World
Investment Series, Inc.
Investment Advisory Services
Adviser to the Fund
The Trust's investment adviser is Federated Advisers (the
"Adviser"). It is a subsidiary of Federated Investors. All
the voting securities of Federated Investors are owned by a
trust, the trustees of which are John F. Donahue, his wife and
his son, J. Christopher Donahue.
The Adviser shall not be liable to the Trust, the Fund or any
shareholder of the Fund for any losses that may be sustained
in the purchase, holding, or sale of any security, or for
anything done or omitted by it, except acts or omissions
involving willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties imposed upon it by its
contract with the Fund.
Advisory Fees
For its advisory services, Federated Advisers receives an
annual investment advisory fee as described in the prospectus.
For the period from September 2, 1993 (date of initial public
investment) to August 31, 1994, the Adviser earned advisory
fees of $10,471, all of which was waived. In addition, the
adviser reimbursed other operating expenses of $134,825.
State Expense Limitations
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 2.5% per year of the first $30 million
of average net assets, 2% per year of the next $70
million of average net assets, and 1.5% per year of the
remaining average net assets, the Adviser will reimburse
the Trust 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 period from
September 2, 1993 (date of initial public investment) to
August 31, 1994, the Administrators collectively earned
$56,198, none of which was waived. Dr. Henry J. Gailliot, an
officer of Federated Advisers, the adviser to the Fund, holds
approximately 20%, of the outstanding common stock and serve
as directors of Commercial Data Services, Inc., a company
which provides computer processing services to Federated
Administrative Services.
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 which 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 Trustees. The Adviser may select brokers and dealers
who offer brokerage and research services. These services may
be furnished directly to the Fund or to the Adviser and may
include:
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 relation 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 period from September 2, 1993 (date of initial public
investment) to August 31, 1994, the Fund did not pay any
brokerage commissions.
Purchasing Shares
Shares of the Fund are sold at their net asset value on days
the New York Stock Exchange is open for business. Effective
October 17, 1994, the Fund has ceased offering its shares for
sale, except for dividend reinvestment by existing
shareholders. The procedure for purchasing shares is
explained in the prospectus under "Investing in the Fund."
Distribution and Shareholder Services Plans
These arrangements permit the payment of fees to financial
institutions, the distributor, and Federated Shareholder
Services, to stimulate distribution activities and to cause
services to be provided to shareholders by a representative
who has knowledge of the shareholder's particular
circumstances and goals. These activities and services may
include, but are not limited to, marketing efforts; providing
office space, equipment, telephone facilities, and various
clerical, supervisory, computer, and other personnel as
necessary or beneficial to establish and maintain shareholder
accounts and records; processing purchase and redemption
transactions and automatic investments of client account cash
balances; answering routine client inquiries; and assisting
clients in changing dividend options, account designations,
and addresses.
By adopting the Distribution Plan, the Trustees expect that
the 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 period from September 2, 1993 (date of initial public
investment) to August 31, 1994, payments in the amount of
$19,633 were made pursuant to the Distribution Plan. In
addition, for this period, payments in the amount of $3,631
were made pursuant to the Shareholder Services Plan.
Determining Net Asset Value
Net asset value generally changes each day. The days on which
net asset value is calculated for shares are described in the
prospectus.
Valuing Municipal Bonds
The Trustees 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 issue, 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 Trustees 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
Trustees.
Redeeming Shares
The Fund redeems shares at the next computed net asset value
after the Fund receives the redemption request, less any
applicable contingent deferred sales charge. Redemption
procedures and contingent deferred sales charges are explained
in the prospectus under "Redeeming Shares." Although the
transfer agent does not charge for telephone redemptions, it
reserves the right to charge a fee for the cost of wire-
transferred redemptions of less than $5,000.
Redemption in Kind
Although the Fund intends to redeem shares in cash, it
reserves the right under certain circumstances to pay the
redemption price in whole or in part by a distribution of
securities from the Fund's portfolio. To the extent available,
such securities will be readily marketable.
The Trust is obligated to redeem shares solely in cash up to
$250,000 or 1% of the Fund's net asset value, whichever is
less, for any one shareholder within a 90-day period.
Any redemption beyond this amount will also be in cash unless
the Trustees determine that further cash payments will have a
material adverse effect on remaining shareholders. In such a
case, the Trust will pay all or a portion of the remainder of
the redemption in portfolio instruments, valued in the same
way that net asset value is determined. The portfolio
instruments will be selected in a manner that the Trustees
deem fair and equitable.
Redemption in kind is not as liquid as a cash redemption. If
redemption is made in kind, shareholders receiving their
securities and selling them before their maturity could
receive less than the redemption value of their securities and
could incur certain transactions 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.
Capital Gains
Capital gains or losses may be realized by the Fund 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: - the
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.
Distributions of long-term capital gains are taxed as such,
whether they are taken in cash or reinvested, and regardless
of the length of time that the shareholder has owned shares.
Any loss by a shareholder on 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 cumulative total return for the period from
September 2, 1993 (date of initial public investment) to
August 31, 1994, was (8.10)%.
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 offering price per share at the end of the
period. The number of shares owned at the end of the period is
based on the number of shares purchased at the beginning of
the period with $1,000, adjusted over the period by any
additional shares, assuming the monthly reinvestment of all
dividends and distributions. The total return calculation
assumes a complete redemption of the investment and the
deduction of any contingent deferred sales charge at the end
of the period. Any applicable contingent deferred sales charge
will be deducted from the ending value of the investment based
on the lesser of the offering price of redeemed shares at the
time of purchase or the offering price of redeemed shares at
the time of redemption.
Yield
The Fund's yield for the thirty-day period ended August 31,
1994, was 5.71%.
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 then annualized
using semiannual compounding. This means that the amount of
income generated during the thirty-day period is assumed to be
generated each month over a twelve-month period and is
reinvested every six months. The yield does not necessarily
reflect income actually earned by the 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, 1994 was 8.62%.
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 tax rate of 28%, 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
obligations in the Fund's portfolio generally remains free
from federal regular income tax, and often is free from state
and local taxes as well.* As the table below indicates, a "tax-
free" investment is an attractive choice for investors,
particularly in times of narrow spreads between tax-free and
taxable yields.
TAXABLE YIELD EQUIVALENT FOR 1994
STATE OF VIRGINIA
Combined Federal and State Income Tax
Bracket:
20.75% 33.75% 36.75% 41.75% 45.35%
Joint Return: $1-38,000 $38,001-91,850$91,851-140,000$140
,001-250,000Over $250,000
Single Return: $1-22,750 $22,751-55,100$55,101-115,000$115
,001-250,000Over $250,000
Tax-Exempt Yield Taxable Yield Equivalent
3.50% 4.42% 5.28% 5.53% 6.01% 6.40%
4.00 5.05 6.04 6.32 6.87 7.32
4.50 5.68 6.79 7.11 7.73 8.23
5.00 6.31 7.55 7.91 8.58 9.15
5.50 6.94 8.30 8.70 9.44 10.06
6.00 7.57 9.06 9.49 10.30 10.98
6.50 8.20 9.81 10.28 11.16 11.89
7.00 8.83 10.57 11.07 12.02 12.81
7.50 9.46 11.32 11.86 12.88 13.72
8.00 10.09 12.08 12.65 13.73 14.64
Note: The maximum marginal tax rate for each bracket was used
in calculating the Taxable Yield Equivalent. Furthermore,
additional state and local taxes paid on comparable taxable
investments were not used to increase federal deductions.
The above chart is for illustrative purposes only and uses tax
brackets that went into effect beginning January 1, 1994. It
is not an indicator of past or future performance of any Fund
shares.
* Some portion of the Fund's income may be subject to the
federal alternative minimum tax and state and local regular or
alternative minimum taxes.
Performance Comparisons
The performance of shares depends upon such variables as:
oportfolio quality;
oaverage portfolio maturity;
otype of instruments in which the portfolio is invested;
ochanges in interest rates and market value of portfolio
securities;
ochanges in the Fund's expenses; and
ovarious other factors.
Investors may use financial publications and/or indices to
obtain a more complete view of the Fund's performance. When
comparing performance, investors should consider all relevant
factors such as the composition of any index used, prevailing
market conditions, portfolio compositions of other funds, and
methods used to value portfolio securities and compute
offering price. The financial publications and/or indices
which the Fund uses in advertising may include:
oLipper Analytical Services, Inc. ranks funds in various fund
categories 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 offering price over a specific period
of time. From time to time, the Fund will quote its Lipper
ranking in the "Virginia Municipal Debt Funds" category in
advertising and sales literature.
oMorningstar, 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. The 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. In
addition, advertisements and sales literature for the Fund may
include charts and other illustrations that depict the
hypothetical growth of a tax-free investment as compared to a
taxable investment and may quote performance information which
does not reflect the effect of the contingent deferral sales
charge.
Advertising and sales literature for the Fund may include
quotations from the Tax Foundation that illustrate the effect
of taxes on income.
Financial Statements
The Financial Statements for the fiscal year ended August 31,
1994, are incorporated herein by reference to the annual
report of the Fund dated August 31, 1994 (File No. 811-
6165). A copy of the report may be obtained without charge by
contacting the Fund.
Appendix
Standard and Poor's Ratings Group Municipal Bond Ratings
("S&P")
AAA--Debt rated AAA has the highest rating assigned by S & P.
Capacity to pay interest and repay principal is extremely
strong.
AA--Debt rated AA has a very strong capacity to pay interest
and repay principal and differs from the 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 effects 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.
NR--Indicates that no public rating has been requested, that
there is insufficient information on which to base a rating,
or that S&P does not rate a particular type of obligation as a
matter of policy.
Plus (+) or minus (-): The ratings from AA to CCC may be
modified by the addition of a plus or minus sign to show
relative standing within the major rating categories.
Moody's Investors Service, Inc., Municipal Bond Ratings
("Moody's")
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.
NR--Not rated by Moody's.
Moody's applies numerical modifiers, 1, 2 and 3 in each
generic rating classification from Aa through B in its generic
rating category; the modifier 1 indicates that the security
ranks in the higher end of its generic ranking category; the
modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of its generic
rating category.
Fitch Investors Service, Inc. Long-Term Debt Ratings ("Fitch")
AAA--Bonds considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally
strong ability to pay interest and repay principal, which is
unlikely to be affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high
quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as
bonds rated AAA. Because bonds rated in the AAA and AA
categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is
generally rated F-1+.
A--Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay
interest and repay principal is considered to be adequate.
Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these
bonds, and therefore, impair timely payment. The likelihood
that the ratings of these bonds will fall below investment
grade is higher than for bonds with higher ratings.
NR--Indicates that Fitch does not rate the specific issue.
Plus (+) or Minus (-):
Plus and minus signs are used with a rating symbol to indicate
the relative position of a credit within the rating category.
Plus and minus signs, however, are not used in the AAA
category.
Standard and Poor's Ratings Group Municipal Note Ratings
SP-1--Very strong or strong capacity to pay principal and
interest. Those issues determined to possess overwhelming
safety characteristics will be given a plus sign (+)
designation.
SP-2--Satisfactory capacity to pay principal and interest.
Moody's Investors Service, Inc., Short-Term Loan Ratings
MIG1/VMIG1--This designation denotes best quality. There is a
present strong protection by established cash flows, superior
liquidity support or demonstrated broad based access to the
market for refinancing.
MIG2/VMIG2--This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding
group.
Fitch Investors Service, Inc. Short-Term Debt Ratings
F-1+--Exceptionally Strong Credit Quality. Issues assigned
this rating are regarded as having the strongest degree of
assurance for timely payment.
F-1--Very Strong Credit Quality. Issues assigned this rating
reflect an assurance of timely payment only slightly less in
degree than issues rated F-1+.
F-2--Good Credit Quality. Issues carrying this rating have a
satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as for issues assigned F-1+
and F-1 ratings.
Standard and Poor's Ratings Group Commercial Paper Ratings
A-1--This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to
possess extremely strong safety characteristics are denoted
with a plus sign (+) designation.
A-2--Capacity for timely payment on issues with this
designation is satisfactory. However, the relative degree of
safety is not as high as for issues designated A-1.
Moody's Investors Service, Inc., Commercial Paper Ratings
Prime-1--Issuers rated Prime-1 (or related supporting
institutions) have a superior capacity for repayment of short-
term promissory obligations. Prime-1 repayment capacity will
normally be evidenced by the following characteristics:
- Leading market positions in well established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate
reliance on debt and ample asset protection.
- Broad margins in earning coverage of fixed financial
charges and high internal cash generation.
- Well established access to a range of financial markets
and assured sources of alternate liquidity.
Prime-2--Issuers rated Prime-2 (or related supporting
institutions) have a strong capacity for repayment of short-
term promissory obligations. This will normally be evidenced
by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will
be more subject to variation. Capitalization characteristics,
while still appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained.
PART C. OTHER INFORMATION.
Item 24. Financial Statements and Exhibits:
(a) Financial Statements: Filed in Part A.
(b) Exhibits:
(1) (i) Paper Copy of Declaration of
Trust of the Registrant (1);
(ii) Paper Copy of Amendment No. 1 (dated August
26, 1991) to Declaration of Trust (5);
(iii) Conformed Copy of Amendment No. 2 (dated
August 6, 1990) to the Declaration of Trust
(6);
(iv) Conformed Copy of Amendment No. 3 (dated
August 31, 1992) to the Declaration of Trust
(8);
(v) Conformed Copy of Amendment No. 4 (dated
September 17, 1992) to the Declaration of
Trust (8);
(vi) Conformed Copy of Amendment No. 5 (dated
February 4, 1993) to the Declaration of Trust
(10);
(vii) Conformed Copy of Amendment No. 6 (dated May
24, 1993) to the Declaration of Trust; (13)
(2) Copy of By-Laws of the Registrant (1);
(3) Not applicable;
(4) Copy of Specimen Certificate for Shares of
Beneficial Interest for:
(i) Pennsylvania Municipal Income Fund-Class A
Shares (16);
(ii) Ohio Municipal Income Fund-Trust Shares (6);
(iii) California Municipal Income Fund (10);
(iv) New York Municipal Income Fund (10);
(v) Florida Municipal Income Fund (10);
(vi) New Jersey Municipal Income Fund (10);
(vii) Texas Municipal Income Fund (10);
+ All exhibits are filed electronically.
1. Response is incorporated by reference to Registrant's Initial
Registration Statement on Form N-1A filed August 31, 1990.
(File Nos. 33-36729 and 811-6165)
5. Response is incorporated by reference to Registrant's Post-
Effective Amendment No. 4 on Form N-1A filed on October 28,
1991. (File Nos. 33-36729 and 811-6165)
6. Response is incorporated by reference to Registrant's Post-
Effective Amendment No. 5 on Form N-1A filed on January 24,
1992. (File Nos. 33-36729 and 811-6165)
8. Response is incorporated by reference to Registrant's Post-
Effective Amendment No. 7 on Form N-1A filed on September 25,
1992. (File Nos. 33-36729 and 811-6165)
10. Response is incorporated by reference to Registrant's Post-
Effective Amendment No. 10 on Form N-1A filed on March 24,
1993. (File Nos. 33-36729 and 811-6165)
11. Response is incorporated by reference to Registrant's Post-
Effective Amendment No. 11 on Form N-1A filed on April 28,
1993. (File Nos. 33-36729 and 811-6165)
13. Response is incorporated by reference to Registrant's Post-
Effective Amendment No. 13 on Form N-1A filed on July 2,
1993, (File Nos. 33-36729 and 811-6165)
15. Response is incorporated by reference to Registrant's Post-
Effective Amendment No. 15 on Form N-1A filed on February 24,
1994. (File Nos. 33-36729 and 811-6165)
16. Response is incorporated by reference to Registrant's Post-
Effective Amendment No. 15 on Form N-1A filed on October 27,
1994. (File Nos. 33-36729 and 811-6165)
(viii) Michigan Intermediate Municipal Trust
(16);
(ix) Maryland Municipal Income Fund (15);
(x) Virginia Municipal Income Fund (15);
(5) Copy of new Investment Advisory Contract of the
Registrant (8);
(i) Copy of Amendment to Investment Advisory
Contract (12)
(ii) Conformed Copies of Amendments to
Investment Advisory Contract (14);
(iii) Conformed Copies of Amendments to
Investment Advisory Contract (14);
(6) Copy of Distributor's Contract of the Registrant
(8);
(i) Copy of Amendment to Distributor's
Contract (12);
(ii) Conformed copy of Amendment to
Distributor's Contract (14);
(7) Not applicable;
(8) Conformed Copy of Custodian Contract of the
Registrant (16);
(9) (i) Conformed Copy of Agreement for Fund
Accounting, Shareholder Recordkeeping, and
Custody Services Procurement (16);
(ii) Conformed Copy of Shareholder Services
Agreement;+
(iii) Conformed Copy of Shareholder Services Plan
(16);
(iv) Copy of Shareholder Services Sub-Contract
(16);
(v) Conformed Copy of Administrative Services
Agreement (16);
(10) Conformed Copy of Opinion and Consent of
Counsel as to the legality of shares being
registered (1);
(11) Conformed Copy of Consent of Independent
Auditors;+
(12) Not applicable;
(13) Conformed Copy of Initial Capital Understanding
(1);
(14) Not applicable;
+ All exhibits are filed electronically.
1. Response is incorporated by reference to Registrant's Initial
Registration Statement on Form N-1A filed August 31, 1990.
(File Nos. 33-36729 and 811-6165)
3. Response is incorporated by reference to Registrant's Post-
Effective Amendment No.1 on Form N-1A filed on October 9,
1990. (File Nos. 33-36729 and 811-6165)
8. Response is incorporated by reference to Registrant's Post-
Effective Amendment No. 7 on Form N-1A filed on September 25,
1992. (File Nos. 33-36729 and 811-6165)
12. Response is incorporated by reference to Registrant's Post-
Effective Amendment No. 12 on Form N-1A filed on May 17,
1993. (File Nos. 33-36729 and 811-6165)
14. Response is incorporated by reference to Registrant's Post-
Effective Amendment No. 14 on Form N-1A filed on October 28,
1993. (File Nos. 33-36729 and 811-6165)
15. Response is incorporated by reference to Registrant's Post-
Effective Amendment No. 15 on Form N-1A filed on February 24,
1994. (File Nos. 33-36729 and 811-6165)
16. Response is incorporated by reference to Registrant's Post-
Effective Amendment No. 15 on Form N-1A filed on October 27,
1994. (File Nos. 33-36729 and 811-6165)
(15) (i) Copy of Distribution Plan (12);
(ii) Conformed copy of Distribution Plan for
Florida Municipal Income Fund, New Jersey
Municipal Income Fund, Texas Municipal Income
Fund, Pennsylvania Municipal Income Fund
(Income Shares), Maryland Municipal Income
Fund, and Virginia Municipal Income Fund (15);
(iii) Copy of 12b-1 Agreement (8);
(16) Copy of Schedule for Computation of Fund
Performance Data for:
(i) Ohio Municipal Income Fund (3);
(ii) Pennsylvania Municipal Income Fund (3);
(iii) California Municipal Income Fund (11);
(iv) New York Municipal Income Fund (11);
(v) Michigan Municipal Income Fund (11);
(vi) Florida Municipal Income Fund (14);
(vii) Texas Municipal Income Fund (14);
(viii) New Jersey Municipal Income Fund (14);
(ix) Maryland Municipal Income Fund (15);
(x) Virginia Municipal Income Fund (15);
(17) Copy of Financial Data Schedules;+
(18) Conformed Copy of Opinion and Consent of
Counsel as to availability of Rule 485(b);+;
(19) Conformed Copy of Power of Attorney;+
Item 25. Persons Controlled by or Under Common Control with
Registrant
None
+ All exhibits are filed electronically.
1. Response is incorporated by reference to Registrant's Initial
Registration Statement on Form N-1A filed August 31, 1990.
(File Nos. 33-36729 and 811-6165)
3. Response is incorporated by reference to Registrant's Post-
Effective Amendment No.1 on Form N-1A filed on October 9,
1990. (File Nos. 33-36729 and 811-6165)
8. Response is incorporated by reference to Registrant's Post-
Effective Amendment No. 7 on Form N-1A filed on September 25,
1992. (File Nos. 33-36729 and 811-6165)
11. Response is incorporated by reference to Registrant's Post-
Effective Amendment No. 11 on Form N-1A filed on April 28,
1993. (File Nos. 33-36729 and 811-6165)
12. Response is incorporated by reference to Registrant's Post-
Effective Amendment No. 12 on Form N-1A filed on May 17,
1993. (File Nos. 33-36729 and 811-6165)
14. Response is incorporated by reference to Registrant's Post-
Effective Amendment No. 14 on Form N-1A filed on October 28,
1993. (File Nos. 33-36729 and 811-6165)
15. Response is incorporated by reference to Registrant's Post-
Effective Amendment No. 15 on Form N-1A filed on February 24,
1994. (File Nos. 33-36729 and 811-6165)
16. Response is incorporated by reference to Registrant's Post-
Effective Amendment No. 15 on Form N-1A filed on October 27,
1994. (File Nos. 33-36729 and 811-6165)
Item 26. Number of Holders of Securities:
Number of Record Holders
Title of Class as of December 28, 1994
Shares of
beneficial interest
Florida Municipal Income Fund 22
New Jersey Municipal Income Fund 45
Texas Municipal Income Fund 29
Maryland Municipal Income Fund 45
Virginia Municipal Income Fund 36
Item 27. Indemnification: (1)
Item 28. Business and Other Connections of Investment Adviser:
(a) For a description of the other business of
the investment adviser, see the section entitled
"Trust Information - Management of the Trust" in Part
A. The affiliations with the Registrant of four of
the Trustees and one of the Officers of the
investment adviser are included in Part B of this
Registration Statement under "Trust Management -
Officers and Trustees." The remaining Trustee of the
investment adviser, his position with the investment
adviser, and, in parentheses, his principal
occupation is: Mark D. Olson, (Partner, Wilson,
Halbrook & Bayard), 107 W. Market Street, Georgetown,
Delaware, 19947.
The remaining Officers of the investment adviser are:
William P. Dawson, III, J. Thomas Madden, and Mark L.
Mallon, Executive Vice Presidents; Henry J. Gailliot,
Senior Vice President-Economist; Peter R. Anderson,
Gary J. Madich, and J. Alan Minteer, Senior Vice
Presidents; Randall A. Bauer, Jonathan C. Conley,
Deborah A. Cunningham, Mark E. Durbiano, Kathleen
Foody-Malus, Thomas M. Franks, Edward C. Gonzales,
Jeff A. Kozemchak, Marian R. Marinack, John W.
McGonigle, Gregory M. Melvin, Susan M. Nason, Mary Jo
Ochson, Robert J. Ostrowski, Charles A. Ritter, and
Christopher H. Wiles, Vice Presidents; Edward C.
Gonzales, Treasurer; and John W. McGonigle,
Secretary. The business address of each of the
Officers of the investment adviser is Federated
Investors Tower, Pittsburgh, PA 15222-3779. These
individuals are also officers of a majority of the
investment advisers to the Funds listed in Part B of
this Registration Statement under "The Funds."
Item 29. Principal Underwriters:
(a) Federated Securities Corp., the Distributor
for shares of the Registrant, also acts as principal
underwriter for the following open-end investment
companies: Alexander Hamilton Funds; American
Leaders Fund, Inc.; Annuity Management Series; Arrow
Funds; Automated Cash Management Trust; Automated
Government Money Trust; BayFunds; The Biltmore
Funds; The Biltmore Municipal Funds; California
Municipal Cash Trust; Cash Trust Series, Inc.; Cash
Trust Series II; DG Investor Series; Edward D. Jones
& Co. Daily Passport Cash Trust; Federated ARMs Fund;
Federated Exchange Fund, Ltd.; Federated GNMA Trust;
Federated Government Trust; Federated Growth Trust;
Federated High Yield Trust; Federated Income
Securities Trust; Federated Income Trust; Federated
Index Trust; Federated Institutional Trust; Federated
Intermediate Government Trust; Federated Master
Trust; Federated Municipal Trust; Federated Short-
Intermediate Government Trust; Federated Short-Term
U.S. Government Trust; Federated Stock Trust;
Federated Tax-Free Trust; Federated U.S. Government
Bond Fund; First Priority Funds; First Union Funds;
Fixed Income Securities, Inc.; Fortress Adjustable
Rate U.S. Government Fund, Inc.; Fortress Municipal
Income Fund, Inc.; Fortress Utility Fund, Inc.;
Fountain Square Funds; Fund for U.S. Government
Securities, Inc.; Government Income Securities, Inc.;
High Yield Cash Trust; Independence One Mutual Funds;
Insight Institutional Series, Inc.; 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 Utility Fund,
Inc.; Liquid Cash Trust; Managed Series Trust;
Marshall Funds, Inc.; Money Market Management, Inc.;
The Medalist Funds; Money Market Obligations Trust;
Money Market Trust; The Monitor Funds; New York
Municipal Cash Trust; 111 Corcoran Funds; Peachtree
Funds; The Planters Funds; Portage Funds; RIMCO
Monument Funds; The Shawmut Funds; Short-Term
Municipal Trust; SouthTrust Vulcan Funds; Star Funds;
The Starburst Funds; The Starburst Funds II; Stock
and Bond Fund, Inc.; Sunburst Funds; Targeted
Duration Trust; Tax-Free Instruments Trust; Tower
Mutual Funds; 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; Vision Fiduciary
Funds, Inc.; Vision Group of Funds, Inc.; and World
Investment Series, Inc.
Federated Securities Corp. also acts as principal
underwriter for the following closed-end investment
company: Liberty Term Trust, Inc.- 1999.
(b)
(1) (2) (3)
Name and Principal Positions and Offices Positions and
Offices
Business Address With Underwriter With
Registrant
Richard B. Fisher Director, Chairman, Chief
President
Federated Investors Tower Executive Officer, Chief
Pittsburgh, PA 15222-3779 Operating Officer, and
Asst. Treasurer, Federated
Securities Corp.
Edward C. Gonzales Director, Executive Vice Vice
President and
Federated Investors Tower President, and Treasurer, Treasurer
Pittsburgh, PA 15222-3779 Federated Securities
Corp.
John W. McGonigle Director, Executive Vice Vice
President and
Federated Investors Tower President, and Assistant Secretary
Pittsburgh, PA 15222-3779 Secretary, Federated
Securities Corp.
(1) (2) (3)
Name and Principal Positions and Offices Positions and
Offices
Business Address With Underwriter With
Registrant
John B. Fisher President-Institutional Sales, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
James F. Getz President-Broker/Dealer, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mark R. Gensheimer Executive Vice President of --
Federated Investors Tower Bank/Trust
Pittsburgh, PA 15222-3779 Federated Securities Corp.
Mark W. Bloss Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Theodore Fadool, Jr. Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Bryant R. Fisher Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Christopher T. Fives Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
James S. Hamilton Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
James M. Heaton Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
H. Joseph Kennedy Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Keith Nixon Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Timothy C. Pillion Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard W. Boyd Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Jane E. Broeren-Lambesis Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
(1) (2) (3)
Name and Principal Positions and Offices Positions and
Offices
Business Address With Underwriter With
Registrant
Mary J. Combs Vice President, --
Federated Investors Tower Federated
Securities Corp.
Pittsburgh, PA 15222-3779
R. Edmond Connell, Jr. Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Laura M. Deger Vice President, --
Federated Investors Tower Federated
Securities Corp.
Pittsburgh, PA 15222-3779
Jill Ehrenfeld Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mark D. Fisher Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Michael D. Fitzgerald Vice President,
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Joseph D. Gibbons Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
David C. Glabicki Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard C. Gonzales Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Newton Hestion III Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Scott A. Hutton Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
William J. Kerns Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
William E. Kugler Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Dennis M. Laffey Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
(1) (2) (3)
Name and Principal Positions and Offices Positions and
Offices
Business Address With Underwriter With
Registrant
Francis J. Matten, Jr. Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mark J. Miehl Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard C. Mihm Vice President,
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
J. Michael Miller Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
R. Jeffrey Niss Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Michael P. O'Brien Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Robert D. Oehlschlager Vice President,
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Solon A. Person, IV Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Robert F. Phillips Vice President, --
Federated Investors Tower Federated
Securities Corp.
Pittsburgh, PA 15222-3779
Eugene B. Reed Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Paul V. Riordan Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Charles A. Robison Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
David W. Spears Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Jeffrey A. Stewart Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
(1) (2) (3)
Name and Principal Positions and Offices Positions and
Offices
Business Address With Underwriter With
Registrant
Thomas E. Territ Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Jamie M. Teschner Vice President,
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
William C. Tustin Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard B. Watts Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Charles H. Field Assistant Vice President --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Philip C. Hetzel Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Ernest L. Linane Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
S. Elliott Cohan Secretary, Federated Assistant
Federated Investors Tower Securities Corp. Secretary
Pittsburgh, PA 15222-3779
(c) Not applicable.
Item 30. Location of Accounts and Records:
All accounts and records required to be maintained by Section
31(a) of the Investment Company Act of 1940 and Rules 31a-1
through 31a-3 promulgated thereunder are maintained at one of the
following locations:
Registrant Federated Investors Tower
Pittsburgh, PA 15222-3779
Federated Services Company Federated Investors Tower
("Transfer Agent and Dividend Pittsburgh, PA 15222-3779
Disbursing Agent")
Federated Adminstrative Services Federated Investors Tower
("Administrator") Pittsburgh, PA 15222-3779
Federated Advisers Federated Investors Tower
("Adviser") Pittsburgh, PA 15222-3779
State Street Bank and Trust Company P.O. Box 8604
("Custodian") Boston, MA 02266-8604
Item 31. Management Services:
Not applicable.
Item 32. Undertakings:
Registrant hereby undertakes to comply with the
provisions of Section 16(c) of the 1940 Act with respect
to the removal of Trustees and the calling of special
shareholder meetings by shareholders.
Registrant hereby undertakes to furnish each person to
whom a prospectus is delivered with a copy of the
Registrant's latest annual report to shareholders upon
request and without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933
and the Investment Company Act of 1940, the Registrant,
MUNCIPAL SECURITIES INCOME TRUST, and has duly caused this
Amendment to its Registration Statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the
City of Pittsburgh and Commonwealth of Pennsylvania, on the
30th day of Decemeber, 1994.
MUNICPAL SECURITIES INCOME TRUST
BY: /s/ J. Crilley Kelly
J. Crilley Kelly, Assistant Secretary
Attorney in Fact for John F. Donahue
December 30, 1994
Pursuant to the requirements of the Securities Act of 1933,
this Amendment to its Registration Statement has been signed
below by the following person in the capacity and on the date
indicated:
NAME TITLE
DATE
By: /s/ J. Crilley Kelly
J. Crilley Kelly Attorney In Fact December 30,
1994
ASSISTANT SECRETARY For the Persons
Listed Below
NAME TITLE
John F. Donahue* Chairman and Trustee
(Chief Executive Officer)
Glen R. Johnson* President
Edward C. Gonzales* Vice President and Treasurer
(Principal Financial and
Accounting Officer)
Thomas G. Bigley* Trustee
John T. Conroy, Jr.* Trustee
William J. Copeland* Trustee
James E. Dowd* Trustee
Lawrence D. Ellis, M.D.* Trustee
Edward L. Flaherty, Jr.* Trustee
Peter E. Madden* Trustee
Gregor F. Meyer* Trustee
Wesley W. Posvar* Trustee
Marjorie P. Smuts* Trustee
* By Power of Attorney
Exhibit (11) under N-1A
Exhibit 23 under 601/Reg SK
DELOITTE & TOUCHE
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use in the Prospectus constituting part
of Post-Effective Amendment No. 17 of the Registration
Statement on Form N-1A (No. 33-36729) of our report dated
October 31, 1994 accompanying the financial statements of
MUNICIPAL SECURITIES INCOME TRUST contained in such
Registration Statement, and the use of our name, and the
statements with respect to us, as appearing under the heading
"Independent Auditor" in the Prospectus.
By: DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Certified Public Accountants
Boston, Massachusetts
December 28, 1994
HOUSTON, HOUSTON & DONNELLY
ATTORNEYS AT LAW
2510 CENTRE CITY TOWER
WILLIAM McC. HOUSTONPITTSBURGH, PA. 15222
FRED CHALMERS HOUSTON, JR.__________
THOMAS J. DONNELLY
JOHN F. MECK (412) 471-5828 FRED CHALMERS HOUSTON
FAX (412) 471-0736 (1914 - 1971)
MARIO SANTILLI, JR.
THEODORE M. HAMMER
December 30, 1994
Municipal Securities Income Trust
Federated Investors Tower
Pittsburgh, PA 15222-3779
Gentlemen:
As counsel to Municipal Securities Income Trust ("Trust")
we have reviewed Post-effective Amendment No. 17 to the Trust's
Registration Statement to be filed with the Securities and
Exchange Commission under the Securities Act of 1933 (File No. 33-
36729). The subject Post-effective Amendment will be filed
pursuant to Paragraph (b) of Rule 485 and become effective
pursuant to said Rule immediately upon filing.
Our review also included an examination of other relevant
portions of the amended 1933 Act Registration Statement of the
Trust and such other documents and records deemed appropriate.
On the basis of this review we are of the opinion that Post-
effective Amendment No. 17 does not contain disclosures which
would render it ineligible to become effective pursuant to
Paragraph (b) of Rule 485.
We hereby consent to the filing of this representation
letter as a part of the Trust's Registration Statement filed with
the Securities and Exchange Commission under the Securities Act
of 1933 and as part of any application or registration statement
filed under the Securities Laws of the States of the United
States.
Very truly yours,
Houston, Houston & Donnelly
By: /s/ Thomas J. Donnelly
TJD:heh
Exhibit 19 under Form N-1A
Exhibit 24 under Item 601/Reg. S-K
POWER OF ATTORNEY
Each person whose signature appears below hereby
constitutes and appoints the Secretary and Assistant Secretary
of
MUNICIPAL SECURITIES INCOME TRUST
and the Assistant General Counsel of Federated Investors, and
each of them, their true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution for
them and in their names, place and stead, in any and all
capacities, to sign any and all documents to be filed with the
Securities and Exchange Commission pursuant to the Securities
Act of 1933, the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, by means of the Securities and
Exchange Commission's electronic disclosure system known as
EDGAR; and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to sign
and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all
intents and purposes as each of them might or could do in
person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his
substitute or substitutes, may lawfully do or cause to be done
by virtue thereof.
SIGNATURES TITLE DATE
_/s/John F. Donahue________ Chairman and Trustee
John F. Donahue (Chief Executive Officer)
/s/Richard B. Fisher________ President
Richard B. Fisher
/s/Edward C. Gonzales_______ Vice President and Treasurer
Edward C. Gonzales (Principal Financial and
Accounting Officer)
/s/Thomas G. Bigley _______ Trustee
Thomas G. Bigley
/s/John T. Conroy, Jr.______ Trustee
John T. Conroy, Jr.
/s/William J. Copeland______ Trustee
William J. Copeland
SIGNATURES TITLE DATE
/s/James E. Dowd _______ Trustee
James E. Dowd
/s/Lawrence D. Ellis, M.D._ Trustee
Lawrence D. Ellis, M.D.
/s/Edward L. Flaherty, Jr._ Trustee
Edward L. Flaherty, Jr.
/s/Peter E. Madden _______ Trustee
Peter E. Madden
/s/Peter E. Madden _______ Trustee
Gregor F. Meyer
/s/Wesley W. Posvar _______ Trustee
Wesley W. Posvar
/s/Marjorie P. Smuts _____ Trustee
Marjorie P. Smuts
Sworn to and subscribed before me this _28__ day of December
, 1994
/s/Marie M. Hamm
Notary Public
Notorial Seal
Marie M. Hamm, Notary Public
Plum Boro, Allegheny County
My Commission Expires Sept. 16, 1996
FSCO Services Provider New Contract 1
December 1, 1994
Exhibit 9(ii) under Form N-1A
Exhibit 10 under Item 601/Reg. S-K
AGREEMENT
for
FUND ACCOUNTING,
SHAREHOLDER RECORDKEEPING,
and
CUSTODY SERVICES PROCUREMENT
AGREEMENT made as of the 1st day of December, 1994, by and
between those investment companies listed on Exhibit 1 as
may be amended from time to time, having their principal
office and place of business at Federated Investors Tower,
Pittsburgh, PA 15222-3779 (the "Trust"), on behalf of the
portfolios (individually referred to herein as a "Fund" and
collectively as "Funds") of the Trust, and FEDERATED
SERVICES COMPANY, a Delaware business trust, having its
principal office and place of business at Federated
Investors Tower, Pittsburgh, Pennsylvania 15222-3779 (the
"Company").
WHEREAS, the Trust is registered as an open-end management
investment company under the Investment Company Act of 1940,
as amended (the "1940 Act"), with authorized and issued
shares of capital stock or beneficial interest ("Shares");
and
WHEREAS, the Trust may desire to retain the Company to
provide certain pricing, accounting and recordkeeping
services for each of the Funds, including any classes of
shares issued by any Fund ("Classes") if so indicated on
Exhibit 1, and the Company is willing to furnish such
services; and
WHEREAS, the Trust may desire to appoint the Company as
its transfer agent, dividend disbursing agent if so
indicated on Exhibit 1, and agent in connection with certain
other activities, and the Company desires to accept such
appointment; and
WHEREAS, the Trust may desire to appoint the Company as
its agent to select, negotiate and subcontract for custodian
services from an approved list of qualified banks if so
indicated on Exhibit 1, and the Company desires to accept
such appointment; and
WHEREAS, from time to time the Trust may desire and may
instruct the Company to subcontract for the performance of
certain of its duties and responsibilities hereunder to
State Street Bank and Trust Company or another agent (the
"Agent"); and
WHEREAS, the words Trust and Fund may be used
interchangeably for those investment companies consisting of
only one portfolio;
NOW THEREFORE, in consideration of the premises and mutual
covenants herein contained, and intending to be legally
bound hereby, the parties hereto agree as follows:
SECTION ONE: Fund Accounting.
Article 1. Appointment.
The Trust hereby appoints the Company to provide certain
pricing and accounting services to the Funds, and/or the
Classes, for the period and on the terms set forth in this
Agreement. The Company accepts such appointment and agrees
to furnish the services herein set forth in return for the
compensation as provided in Article 3 of this Section.
Article 2. The Company's Duties.
Subject to the supervision and control of the Trust's
Board of Trustees or Directors ("Board"), the Company will
assist the Trust with regard to fund accounting for the
Trust, and/or the Funds, and/or the Classes, and in
connection therewith undertakes to perform the following
specific services;
A. Value the assets of the Funds using: primarily, market
quotations, including the use of matrix pricing,
supplied by the independent pricing services selected
by the Company in consultation with the adviser, or
sources selected by the adviser, and reviewed by the
board; secondarily, if a designated pricing service
does not provide a price for a security which the
Company believes should be available by market
quotation, the Company may obtain a price by calling
brokers designated by the investment adviser of the
fund holding the security, or if the adviser does not
supply the names of such brokers, the Company will
attempt on its own to find brokers to price those
securities; thirdly, for securities for which no
market price is available, the Pricing Committee of
the Board will determine a fair value in good faith.
Consistent with Rule 2a-4 of the 40 Act, estimates may
be used where necessary or appropriate. The Company's
obligations with regard to the prices received from
outside pricing services and designated brokers or
other outside sources, is to exercise reasonable care
in the supervision of the pricing agent. The Company
is not the guarantor of the securities prices received
from such agents and the Company is not liable to the
Fund for potential errors in valuing a Fund's assets
or calculating the net asset value per share of such
Fund or Class when the calculations are based upon
such prices. All of the above sources of prices used
as described are deemed by the Company to be
authorized sources of security prices. The Company
provides daily to the adviser the securities prices
used in calculating the net asset value of the fund,
for its use in preparing exception reports for those
prices on which the adviser has comment. Further,
upon receipt of the exception reports generated by the
adviser, the Company diligently pursues communication
regarding exception reports with the designated
pricing agents.
B. Determine the net asset value per share of each Fund
and/or Class, at the time and in the manner from time
to time determined by the Board and as set forth in
the Prospectus and Statement of Additional Information
("Prospectus") of each Fund;
C. Calculate the net income of each of the Funds, if any;
D. Calculate capital gains or losses of each of the Funds
resulting from sale or disposition of assets, if any;
E. Maintain the general ledger and other accounts, books
and financial records of the Trust, including for each
Fund, and/or Class, as required under Section 31(a) of
the 1940 Act and the Rules thereunder in connection
with the services provided by the Company;
F. Preserve for the periods prescribed by Rule 31a-2
under the 1940 Act the records to be maintained by
Rule 31a-1 under the 1940 Act in connection with the
services provided by the Company. The Company further
agrees that all such records it maintains for the
Trust are the property of the Trust and further agrees
to surrender promptly to the Trust such records upon
the Trust's request;
G. At the request of the Trust, prepare various reports
or other financial documents required by federal,
state and other applicable laws and regulations; and
H. Such other similar services as may be reasonably
requested by the Trust.
Article 3. Compensation and Allocation of Expenses.
A. The Funds will compensate the Company for its services
rendered pursuant to Section One of this Agreement in
accordance with the fees agreed upon from time to time
between the parties hereto. Such fees do not include
out-of-pocket disbursements of the Company for which
the Funds shall reimburse the Company upon receipt of
a separate invoice. Out-of-pocket disbursements shall
include, but shall not be limited to, the items agreed
upon between the parties from time to time.
B. The Fund and/or the Class, and not the Company, shall
bear the cost of: custodial expenses; membership dues
in the Investment Company Institute or any similar
organization; transfer agency expenses; investment
advisory expenses; costs of printing and mailing stock
certificates, Prospectuses, reports and notices;
administrative expenses; interest on borrowed money;
brokerage commissions; taxes and fees payable to
federal, state and other governmental agencies; fees
of Trustees or Directors of the Trust; independent
auditors expenses; Federated Administrative Services
and/or Federated Administrative Services, Inc. legal
and audit department expenses billed to Federated
Services Company for work performed related to the
Trust, the Funds, or the Classes; law firm expenses;
or other expenses not specified in this Article 3
which may be properly payable by the Funds and/or
classes.
C. The compensation and out-of-pocket expenses shall be
accrued by the Fund and shall be paid to the Company
no less frequently than monthly, and shall be paid
daily upon request of the Company. The Company will
maintain detailed information about the compensation
and out-of-pocket expenses by Fund and Class.
D. Any schedule of compensation agreed to hereunder, as
may be adjusted from time to time, shall be dated and
signed by a duly authorized officer of the Trust
and/or the Funds and a duly authorized officer of the
Company.
E. The fee for the period from the effective date of this
Agreement with respect to a Fund or a Class to the end
of the initial month shall be prorated according to
the proportion that such period bears to the full
month period. Upon any termination of this Agreement
before the end of any month, the fee for such period
shall be prorated according to the proportion which
such period bears to the full month period. For
purposes of determining fees payable to the Company,
the value of the Fund's net assets shall be computed
at the time and in the manner specified in the Fund's
Prospectus.
F. The Company, in its sole discretion, may from time to
time subcontract to, employ or associate with itself
such person or persons as the Company may believe to
be particularly suited to assist it in performing
services under this Section One. Such person or
persons may be third-party service providers, or they
may be officers and employees who are employed by both
the Company and the Funds. The compensation of such
person or persons shall be paid by the Company and no
obligation shall be incurred on behalf of the Trust,
the Funds, or the Classes in such respect.
SECTION TWO: Shareholder Recordkeeping.
Article 4. Terms of Appointment.
Subject to the terms and conditions set forth in this
Agreement, the Trust hereby appoints the Company to act as,
and the Company agrees to act as, transfer agent and
dividend disbursing agent for each Fund's Shares, and agent
in connection with any accumulation, open-account or similar
plans provided to the shareholders of any Fund
("Shareholder(s)"), including without limitation any
periodic investment plan or periodic withdrawal program.
As used throughout this Agreement, a "Proper Instruction"
means a writing signed or initialed by one or more person or
persons as the Board shall have from time to time
authorized. Each such writing shall set forth the specific
transaction or type of transaction involved. Oral
instructions will be deemed to be Proper Instructions if (a)
the Company reasonably believes them to have been given by a
person previously authorized in Proper Instructions to give
such instructions with respect to the transaction involved,
and (b) the Trust, or the Fund, and the Company promptly
cause such oral instructions to be confirmed in writing.
Proper Instructions may include communications effected
directly between electro-mechanical or electronic devices
provided that the Trust, or the Fund, and the Company are
satisfied that such procedures afford adequate safeguards
for the Fund's assets. Proper Instructions may only be
amended in writing.
Article 5. Duties of the Company.
The Company shall perform the following services in
accordance with Proper Instructions as may be provided from
time to time by the Trust as to any Fund:
A. Purchases
(1) The Company shall receive orders and payment for
the purchase of shares and promptly deliver
payment and appropriate documentation therefore
to the custodian of the relevant Fund, (the
"Custodian"). The Company shall notify the Fund
and the Custodian on a daily basis of the total
amount of orders and payments so delivered.
(2) Pursuant to purchase orders and in accordance
with the Fund's current Prospectus, the Company
shall compute and issue the appropriate number of
Shares of each Fund and/or Class and hold such
Shares in the appropriate Shareholder accounts.
(3) For certificated Funds and/or Classes, if a
Shareholder or its agent requests a certificate,
the Company, as Transfer Agent, shall countersign
and mail by first class mail, a certificate to
the Shareholder at its address as set forth on
the transfer books of the Funds, and/or Classes,
subject to any Proper Instructions regarding the
delivery of certificates.
(4) In the event that any check or other order for
the purchase of Shares of the Fund and/or Class
is returned unpaid for any reason, the Company
shall debit the Share account of the Shareholder
by the number of Shares that had been credited to
its account upon receipt of the check or other
order, promptly mail a debit advice to the
Shareholder, and notify the Fund and/or Class of
its action. In the event that the amount paid
for such Shares exceeds proceeds of the
redemption of such Shares plus the amount of any
dividends paid with respect to such Shares, the
Fund and/the Class or its distributor will
reimburse the Company on the amount of such
excess.
B. Distribution
(1) Upon notification by the Funds of the declaration
of any distribution to Shareholders, the Company
shall act as Dividend Disbursing Agent for the
Funds in accordance with the provisions of its
governing document and the then-current
Prospectus of the Fund. The Company shall
prepare and mail or credit income, capital gain,
or any other payments to Shareholders. As the
Dividend Disbursing Agent, the Company shall, on
or before the payment date of any such
distribution, notify the Custodian of the
estimated amount required to pay any portion of
said distribution which is payable in cash and
request the Custodian to make available
sufficient funds for the cash amount to be paid
out. The Company shall reconcile the amounts so
requested and the amounts actually received with
the Custodian on a daily basis. If a Shareholder
is entitled to receive additional Shares by
virtue of any such distribution or dividend,
appropriate credits shall be made to the
Shareholder's account, for certificated Funds
and/or Classes, delivered where requested; and
(2) The Company shall maintain records of account for
each Fund and Class and advise the Trust, each
Fund and Class and its Shareholders as to the
foregoing.
C. Redemptions and Transfers
(1) The Company shall receive redemption requests and
redemption directions and, if such redemption
requests comply with the procedures as may be
described in the Fund Prospectus or set forth in
Proper Instructions, deliver the appropriate
instructions therefor to the Custodian. The
Company shall notify the Funds on a daily basis
of the total amount of redemption requests
processed and monies paid to the Company by the
Custodian for redemptions.
(2) At the appropriate time upon receiving redemption
proceeds from the Custodian with respect to any
redemption, the Company shall pay or cause to be
paid the redemption proceeds in the manner
instructed by the redeeming Shareholders,
pursuant to procedures described in the then-
current Prospectus of the Fund.
(3) If any certificate returned for redemption or
other request for redemption does not comply with
the procedures for redemption approved by the
Fund, the Company shall promptly notify the
Shareholder of such fact, together with the
reason therefor, and shall effect such redemption
at the price applicable to the date and time of
receipt of documents complying with said
procedures.
(4) The Company shall effect transfers of Shares by
the registered owners thereof.
(5) The Company shall identify and process abandoned
accounts and uncashed checks for state escheat
requirements on an annual basis and report such
actions to the Fund.
D. Recordkeeping
(1) The Company shall record the issuance of Shares
of each Fund, and/or Class, and maintain pursuant
to applicable rules of the Securities and
Exchange Commission ("SEC") a record of the total
number of Shares of the Fund and/or Class which
are authorized, based upon data provided to it by
the Fund, and issued and outstanding. The
Company shall also provide the Fund on a regular
basis or upon reasonable request with the total
number of Shares which are authorized and issued
and outstanding, but shall have no obligation
when recording the issuance of Shares, except as
otherwise set forth herein, to monitor the
issuance of such Shares or to take cognizance of
any laws relating to the issue or sale of such
Shares, which functions shall be the sole
responsibility of the Funds.
(2) The Company shall establish and maintain records
pursuant to applicable rules of the SEC relating
to the services to be performed hereunder in the
form and manner as agreed to by the Trust or the
Fund to include a record for each Shareholder's
account of the following:
(a) Name, address and tax identification number
(and whether such number has been
certified);
(b) Number of Shares held;
(c) Historical information regarding the
account, including dividends paid and date
and price for all transactions;
(d) Any stop or restraining order placed against
the account;
(e) Information with respect to withholding in
the case of a foreign account or an account
for which withholding is required by the
Internal Revenue Code;
(f) Any dividend reinvestment order, plan
application, dividend address and
correspondence relating to the current
maintenance of the account;
(g) Certificate numbers and denominations for
any Shareholder holding certificates;
(h) Any information required in order for the
Company to perform the calculations
contemplated or required by this Agreement.
(3) The Company shall preserve any such records
required to be maintained pursuant to the rules
of the SEC for the periods prescribed in said
rules as specifically noted below. Such record
retention shall be at the expense of the Company,
and such records may be inspected by the Fund at
reasonable times. The Company may, at its option
at any time, and shall forthwith upon the Fund's
demand, turn over to the Fund and cease to retain
in the Company's files, records and documents
created and maintained by the Company pursuant to
this Agreement, which are no longer needed by the
Company in performance of its services or for its
protection. If not so turned over to the Fund,
such records and documents will be retained by
the Company for six years from the year of
creation, during the first two of which such
documents will be in readily accessible form. At
the end of the six year period, such records and
documents will either be turned over to the Fund
or destroyed in accordance with Proper
Instructions.
E. Confirmations/Reports
(1) The Company shall furnish to the Fund
periodically the following information:
(a) A copy of the transaction register;
(b) Dividend and reinvestment blotters;
(c) The total number of Shares issued and
outstanding in each state for "blue sky"
purposes as determined according to Proper
Instructions delivered from time to time by
the Fund to the Company;
(d) Shareholder lists and statistical
information;
(e) Payments to third parties relating to
distribution agreements, allocations of
sales loads, redemption fees, or other
transaction- or sales-related payments;
(f) Such other information as may be agreed upon
from time to time.
(2) The Company shall prepare in the appropriate
form, file with the Internal Revenue Service and
appropriate state agencies, and, if required,
mail to Shareholders, such notices for reporting
dividends and distributions paid as are required
to be so filed and mailed and shall withhold such
sums as are required to be withheld under
applicable federal and state income tax laws,
rules and regulations.
(3) In addition to and not in lieu of the services
set forth above, the Company shall:
(a) Perform all of the customary services of a
transfer agent, dividend disbursing agent
and, as relevant, agent in connection with
accumulation, open-account or similar plans
(including without limitation any periodic
investment plan or periodic withdrawal
program), including but not limited to:
maintaining all Shareholder accounts,
mailing Shareholder reports and Prospectuses
to current Shareholders, withholding taxes
on accounts subject to back-up or other
withholding (including non-resident alien
accounts), preparing and filing reports on
U.S. Treasury Department Form 1099 and other
appropriate forms required with respect to
dividends and distributions by federal
authorities for all Shareholders, preparing
and mailing confirmation forms and
statements of account to Shareholders for
all purchases and redemptions of Shares and
other conformable transactions in
Shareholder accounts, preparing and mailing
activity statements for Shareholders, and
providing Shareholder account information;
and
(b) provide a system which will enable the Fund
to monitor the total number of Shares of
each Fund and/or Class sold in each state
("blue sky reporting"). The Fund shall by
Proper Instructions (i) identify to the
Company those transactions and assets to be
treated as exempt from the blue sky
reporting for each state and (ii) verify the
classification of transactions for each
state on the system prior to activation and
thereafter monitor the daily activity for
each state. The responsibility of the
Company for each Fund's and/or Class's state
blue sky registration status is limited
solely to the recording of the initial
classification of transactions or accounts
with regard to blue sky compliance and the
reporting of such transactions and accounts
to the Fund as provided above.
F. Other Duties
(1) The Company shall answer correspondence from
Shareholders relating to their Share accounts and
such other correspondence as may from time to
time be addressed to the Company;
(2) The Company shall prepare Shareholder meeting
lists, mail proxy cards and other material
supplied to it by the Fund in connection with
Shareholder Meetings of each Fund; receive,
examine and tabulate returned proxies, and
certify the vote of the Shareholders;
(3) The Company shall establish and maintain
facilities and procedures for safekeeping of
stock certificates, check forms and facsimile
signature imprinting devices, if any; and for the
preparation or use, and for keeping account of,
such certificates, forms and devices.
Article 6. Duties of the Trust.
A. Compliance
The Trust or Fund assume full responsibility for the
preparation, contents and distribution of their own
and/or their classes' Prospectus and for complying
with all applicable requirements of the Securities Act
of 1933, as amended (the "1933 Act"), the 1940 Act and
any laws, rules and regulations of government
authorities having jurisdiction.
B. Share Certificates
The Trust shall supply the Company with a sufficient
supply of blank Share certificates and from time to
time shall renew such supply upon request of the
Company. Such blank Share certificates shall be
properly signed, manually or by facsimile, if
authorized by the Trust and shall bear the seal of the
Trust or facsimile thereof; and notwithstanding the
death, resignation or removal of any officer of the
Trust authorized to sign certificates, the Company may
continue to countersign certificates which bear the
manual or facsimile signature of such officer until
otherwise directed by the Trust.
C. Distributions
The Fund shall promptly inform the Company of the
declaration of any dividend or distribution on account
of any Fund's shares.
Article 7. Compensation and Expenses.
A. Annual Fee
For performance by the Company pursuant to Section Two
of this Agreement, the Trust and/or the Fund agree to
pay the Company an annual maintenance fee for each
Shareholder account as agreed upon between the parties
and as may be added to or amended from time to time.
Such fees may be changed from time to time subject to
written agreement between the Trust and the Company.
Pursuant to information in the Fund Prospectus or
other information or instructions from the Fund, the
Company may sub-divide any Fund into Classes or other
sub-components for recordkeeping purposes. The
Company will charge the Fund the same fees for each
such Class or sub-component the same as if each were a
Fund.
B. Reimbursements
In addition to the fee paid under Article 7A above,
the Trust and/or Fund agree to reimburse the Company
for out-of-pocket expenses or advances incurred by the
Company for the items agreed upon between the parties,
as may be added to or amended from time to time. In
addition, any other expenses incurred by the Company
at the request or with the consent of the Trust and/or
the Fund, will be reimbursed by the appropriate Fund.
C. Payment
The compensation and out-of-pocket expenses shall be
accrued by the Fund and shall be paid to the Company
no less frequently than monthly, and shall be paid
daily upon request of the Company. The Company will
maintain detailed information about the compensation
and out-of-pocket expenses by Fund and Class.
D. Any schedule of compensation agreed to hereunder, as
may be adjusted from time to time, shall be dated and
signed by a duly authorized officer of the Trust
and/or the Funds and a duly authorized officer of the
Company.
Article 8. Assignment of Shareholder Recordkeeping.
Except as provided below, no right or obligation under
this Section Two may be assigned by either party without the
written consent of the other party.
A. This Agreement shall inure to the benefit of and be
binding upon the parties and their respective
permitted successors and assigns.
B. The Company may without further consent on the part of
the Trust subcontract for the performance hereof with
(A) State Street Bank and its subsidiary, Boston
Financial Data Services, Inc., a Massachusetts Trust
("BFDS"), which is duly registered as a transfer agent
pursuant to Section 17A(c)(1) of the Securities
Exchange Act of 1934, as amended, or any succeeding
statute ("Section 17A(c)(1)"), or (B) a BFDS
subsidiary duly registered as a transfer agent
pursuant to Section 17A(c)(1), or (C) a BFDS
affiliate, or (D) such other provider of services duly
registered as a transfer agent under Section 17A(c)(1)
as Company shall select; provided, however, that the
Company shall be as fully responsible to the Trust for
the acts and omissions of any subcontractor as it is
for its own acts and omissions; or
C. The Company shall upon instruction from the Trust
subcontract for the performance hereof with an Agent
selected by the Trust, other than BFDS or a provider
of services selected by Company, as described in (2)
above; provided, however, that the Company shall in no
way be responsible to the Trust for the acts and
omissions of the Agent.
SECTION THREE: Custody Services Procurement
Article 9. Appointment.
The Trust hereby appoints Company as its agent to evaluate
and obtain custody services from a financial institution
that (i) meets the criteria established in Section 17(f) of
the 1940 Act and (ii) has been approved by the Board as
eligible for selection by the Company as a custodian (the
"Eligible Custodian"). The Company accepts such
appointment.
Article 10. The Company and Its Duties.
Subject to the review, supervision and control of the
Board, the Company shall:
A. evaluate the nature and the quality of the custodial
services provided by the Eligible Custodian;
B. employ the Eligible Custodian to serve on behalf of
the Trust as Custodian of the Trust's assets
substantially on the terms set forth as the form of
agreement in Exhibit 2;
C. negotiate and enter into agreements with the
Custodians for the benefit of the Trust, with the
Trust as a party to each such agreement. The Company
shall not be a party to any agreement with any such
Custodian;
D. establish procedures to monitor the nature and the
quality of the services provided by the Custodians;
E. continuously monitor the nature and the quality of
services provided by the Custodians; and
F. periodically provide to the Trust (i) written reports
on the activities and services of the Custodians; (ii)
the nature and amount of disbursement made on account
of the Trust with respect to each custodial agreement;
and (iii) such other information as the Board shall
reasonably request to enable it to fulfill its duties
and obligations under Sections 17(f) and 36(b) of the
1940 Act and other duties and obligations thereof.
Article 11. Fees and Expenses.
A. Annual Fee
For the performance by the Company pursuant to Section
Three of this Agreement, the Trust and/or the Fund
agree to pay the Company an annual fee as agreed upon
between the parties.
B. Reimbursements
In addition to the fee paid under Section 11A above,
the Trust and/or Fund agree to reimburse the Company
for out-of-pocket expenses or advances incurred by the
Company for the items agreed upon between the parties,
as may be added to or amended from time to time. In
addition, any other expenses incurred by the Company
at the request or with the consent of the Trust and/or
the Fund, will be reimbursed by the appropriate Fund.
C. Payment
The compensation and out-of-pocket expenses shall be
accrued by the Fund and shall be paid to the Company
no less frequently than monthly, and shall be paid
daily upon request of the Company. The Company will
maintain detailed information about the compensation
and out-of-pocket expenses by Fund.
D. Any schedule of compensation agreed to hereunder, as
may be adjusted from time to time, shall be dated and
signed by a duly authorized officer of the Trust
and/or the Funds and a duly authorized officer of the
Company.
Article 12. Representations.
The Company represents and warrants that it has obtained
all required approvals from all government or regulatory
authorities necessary to enter into this arrangement and to
provide the services contemplated in Section Three of this
Agreement.
SECTION FOUR: General Provisions.
Article 13. Documents.
A. In connection with the appointment of the Company
under this Agreement, the Trust shall file with the
Company the following documents:
(1) A copy of the Charter and By-Laws of the Trust
and all amendments thereto;
(2) A copy of the resolution of the Board of the
Trust authorizing this Agreement;
(3) Specimens of all forms of outstanding Share
certificates of the Trust or the Funds in the
forms approved by the Board of the Trust with a
certificate of the Secretary of the Trust as to
such approval;
(4) All account application forms and other documents
relating to Shareholders accounts; and
(5) A copy of the current Prospectus for each Fund.
B. The Fund will also furnish from time to time the
following documents:
(1) Each resolution of the Board of the Trust
authorizing the original issuance of each Fund's,
and/or Class's Shares;
(2) Each Registration Statement filed with the SEC
and amendments thereof and orders relating
thereto in effect with respect to the sale of
Shares of any Fund, and/or Class;
(3) A certified copy of each amendment to the
governing document and the By-Laws of the Trust;
(4) Certified copies of each vote of the Board
authorizing officers to give Proper Instructions
to the Custodian and agents for fund accountant,
custody services procurement, and shareholder
recordkeeping or transfer agency services;
(5) Specimens of all new Share certificates
representing Shares of any Fund, accompanied by
Board resolutions approving such forms;
(6) Such other certificates, documents or opinions
which the Company may, in its discretion, deem
necessary or appropriate in the proper
performance of its duties; and
(7) Revisions to the Prospectus of each Fund.
Article 14. Representations and Warranties.
A. Representations and Warranties of the Company
The Company represents and warrants to the Trust that:
(1) It is a business trust duly organized and
existing and in good standing under the laws of
the State of Delaware.
(2) It is duly qualified to carry on its business in
the State of Delaware.
(3) It is empowered under applicable laws and by its
charter and by-laws to enter into and perform
this Agreement.
(4) All requisite corporate proceedings have been
taken to authorize it to enter into and perform
its obligations under this Agreement.
(5) It has and will continue to have access to the
necessary facilities, equipment and personnel to
perform its duties and obligations under this
Agreement.
(6) It is in compliance with federal securities law
requirements and in good standing as a transfer
agent.
B. Representations and Warranties of the Trust
The Trust represents and warrants to the Company that:
(1) It is an investment company duly organized and
existing and in good standing under the laws of
its state of organization;
(2) It is empowered under applicable laws and by its
Charter and By-Laws to enter into and perform its
obligations under this Agreement;
(3) All corporate proceedings required by said
Charter and By-Laws have been taken to authorize
it to enter into and perform its obligations
under this Agreement;
(4) The Trust is an open-end investment company
registered under the 1940 Act; and
(5) A registration statement under the 1933 Act will
be effective, and appropriate state securities
law filings have been made and will continue to
be made, with respect to all Shares of each Fund
being offered for sale.
Article 15. Standard of Care and Indemnification.
A. Standard of Care
The Company shall be held to a standard of reasonable
care in carrying out the provisions of this Contract.
The Company shall be entitled to rely on and may act
upon advice of counsel (who may be counsel for the
Trust) on all matters, and shall be without liability
for any action reasonably taken or omitted pursuant to
such advice, provided that such action is not in
violation of applicable federal or state laws or
regulations, and is in good faith and without
negligence.
B. Indemnification by Trust
The Company shall not be responsible for and the Trust
or Fund shall indemnify and hold the Company,
including its officers, directors, shareholders and
their agents employees and affiliates, harmless
against any and all losses, damages, costs, charges,
counsel fees, payments, expenses and liabilities
arising out of or attributable to:
(1) The acts or omissions of any Custodian, Adviser,
Sub-adviser or other party contracted by or
approved by the Trust or Fund,
(2) The reliance on or use by the Company or its
agents or subcontractors of information, records
and documents in proper form which
(a) are received by the Company or its agents or
subcontractors and furnished to it by or on
behalf of the Fund, its Shareholders or
investors regarding the purchase, redemption
or transfer of Shares and Shareholder
account information;
(b) are received by the Company from independent
pricing services or sources for use in
valuing the assets of the Funds; or
(c) are received by the Company or its agents or
subcontractors from Advisers, Sub-advisers
or other third parties contracted by or
approved by the Trust of Fund for use in the
performance of services under this
Agreement;
(d) have been prepared and/or maintained by the
Fund or its affiliates or any other person
or firm on behalf of the Trust.
(3) The reliance on, or the carrying out by the
Company or its agents or subcontractors of Proper
Instructions of the Trust or the Fund.
(4) The offer or sale of Shares in violation of any
requirement under the federal securities laws or
regulations or the securities laws or regulations
of any state that such Shares be registered in
such state or in violation of any stop order or
other determination or ruling by any federal
agency or any state with respect to the offer or
sale of such Shares in such state.
Provided, however, that the Company shall not be
protected by this Article 15.A. from liability
for any act or omission resulting from the
Company's willful misfeasance, bad faith,
negligence or reckless disregard of its duties of
failure to meet the standard of care set forth in
15.A. above.
C. Reliance
At any time the Company may apply to any officer of
the Trust or Fund for instructions, and may consult
with legal counsel with respect to any matter arising
in connection with the services to be performed by the
Company under this Agreement, and the Company and its
agents or subcontractors shall not be liable and shall
be indemnified by the Trust or the appropriate Fund
for any action reasonably taken or omitted by it in
reliance upon such instructions or upon the opinion of
such counsel provided such action is not in violation
of applicable federal or state laws or regulations.
The Company, its agents and subcontractors shall be
protected and indemnified in recognizing stock
certificates which are reasonably believed to bear the
proper manual or facsimile signatures of the officers
of the Trust or the Fund, and the proper
countersignature of any former transfer agent or
registrar, or of a co-transfer agent or co-registrar.
D. Notification
In order that the indemnification provisions contained
in this Article 15 shall apply, upon the assertion of
a claim for which either party may be required to
indemnify the other, the party seeking indemnification
shall promptly notify the other party of such
assertion, and shall keep the other party advised with
respect to all developments concerning such claim.
The party who may be required to indemnify shall have
the option to participate with the party seeking
indemnification in the defense of such claim. The
party seeking indemnification shall in no case confess
any claim or make any compromise in any case in which
the other party may be required to indemnify it except
with the other party's prior written consent.
Article 16. Termination of Agreement.
This Agreement may be terminated by either party upon one
hundred twenty (120) days written notice to the other.
Should the Trust exercise its rights to terminate, all out-
of-pocket expenses associated with the movement of records
and materials will be borne by the Trust or the appropriate
Fund. Additionally, the Company reserves the right to
charge for any other reasonable expenses associated with
such termination. The provisions of Article 15 shall
survive the termination of this Agreement.
Article 17. Amendment.
This Agreement may be amended or modified by a written
agreement executed by both parties.
Article 18. Interpretive and Additional Provisions.
In connection with the operation of this Agreement, the
Company and the Trust may from time to time agree on such
provisions interpretive of or in addition to the provisions
of this Agreement as may in their joint opinion be
consistent with the general tenor of this Agreement. Any
such interpretive or additional provisions shall be in a
writing signed by both parties and shall be annexed hereto,
provided that no such interpretive or additional provisions
shall contravene any applicable federal or state regulations
or any provision of the Charter. No interpretive or
additional provisions made as provided in the preceding
sentence shall be deemed to be an amendment of this
Agreement.
Article 19. Governing Law.
This Agreement shall be construed and the provisions
hereof interpreted under and in accordance with the laws of
the Commonwealth of Massachusetts
Article 20. Notices.
Except as otherwise specifically provided herein, Notices
and other writings delivered or mailed postage prepaid to
the Trust at Federated Investors Tower, Pittsburgh,
Pennsylvania, 15222-3779, or to the Company at Federated
Investors Tower, Pittsburgh, Pennsylvania, 15222-3779, or to
such other address as the Trust or the Company may hereafter
specify, shall be deemed to have been properly delivered or
given hereunder to the respective address.
Article 21. Counterparts.
This Agreement may be executed simultaneously in two or
more counterparts, each of which shall be deemed an
original.
Article 22. Limitations of Liability of Trustees and
Shareholders of the Trust.
The execution and delivery of this Agreement have been
authorized by the Trustees of the Trust and signed by an
authorized officer of the Trust, acting as such, and neither
such authorization by such Trustees nor such execution and
delivery by such officer shall be deemed to have been made
by any of them individually or to impose any liability on
any of them personally, and the obligations of this
Agreement are not binding upon any of the Trustees or
Shareholders of the Trust, but bind only the appropriate
property of the Fund, or Class, as provided in the
Declaration of Trust.
Article 23. Limitations of Liability of Trustees and
Shareholders of the Company.
The execution and delivery of this Agreement have been
authorized by the Trustees of the Company and signed by an
authorized officer of the Company, acting as such, and
neither such authorization by such Trustees nor such
execution and delivery by such officer shall be deemed to
have been made by any of them individually or to impose any
liability on any of them personally, and the obligations of
this Agreement are not binding upon any of the Trustees or
Shareholders of the Company, but bind only the property of
the Company as provided in the Declaration of Trust.
Article 24. Assignment.
This Agreement and the rights and duties hereunder shall
not be assignable with respect to the Trust or the Funds by
either of the parties hereto except by the specific written
consent of the other party.
Article 25. Merger of Agreement.
This Agreement constitutes the entire agreement between
the parties hereto and supersedes any prior agreement with
respect to the subject hereof whether oral or written.
Article 26. Successor Agent.
If a successor agent for the Trust shall be appointed by
the Trust, the Company shall upon termination of this
Agreement deliver to such successor agent at the office of
the Company all properties of the Trust held by it
hereunder. If no such successor agent shall be appointed,
the Company shall at its office upon receipt of Proper
Instructions deliver such properties in accordance with such
instructions.
In the event that no written order designating a successor
agent or Proper Instructions shall have been delivered to
the Company on or before the date when such termination
shall become effective, then the Company shall have the
right to deliver to a bank or trust company, which is a
"bank" as defined in the 1940 Act, of its own selection,
having an aggregate capital, surplus, and undivided profits,
as shown by its last published report, of not less than
$2,000,000, all properties held by the Company under this
Agreement. Thereafter, such bank or trust company shall be
the successor of the Company under this Agreement.
Article 27. Force Majeure.
The Company shall have no liability for cessation of
services hereunder or any damages resulting therefrom to the
Fund as a result of work stoppage, power or other mechanical
failure, natural disaster, governmental action,
communication disruption or other impossibility of
performance.
Article 28. Assignment; Successors.
This Agreement shall not be assigned by either party
without the prior written consent of the other party, except
that either party may assign to a successor all of or a
substantial portion of its business, or to a party
controlling, controlled by, or under common control with
such party. Nothing in this Article 28 shall prevent the
Company from delegating its responsibilities to another
entity to the extent provided herein.
Article 29. Severability.
In the event any provision of this Agreement is held
illegal, void or unenforceable, the balance shall remain in
effect.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed in their names and on their behalf
under their seals by and through their duly authorized
officers, as of the day and year first above written.
ATTEST: INVESTMENT COMPANIES (listed on Exhibit
1)
/s/S. Elliott Cohan_______ By:__/s/ John F. Donahue___
S. Elliott Cohan John F. Donahue
Assistant Secretary Chairman
ATTEST: FEDERATED SERVICES COMPANY
/s/ Jeannette Fisher-Garber By:_/s/ James J. Dolan_____
Jeannette Fisher-Garber James J. Dolan
Secretary President
EXHIBIT 1
FA=Fund Accounting
SR=Shareholder Recordkeeping
CSP=Custody Services Procurement
CONTRACT SERVICES
DATE INVESTMENT COMPANY PROVIDED
12/1/94 Municipal Securities Income Trust
12/1/94 California Municipal Income Fund
12/1/94 Fortress Shares FA,SR,CSP
12/1/94 Florida Municipal Income Fund FA,SR,CSP
12/1/94 Maryland Municipal Income Fund FA,SR,CSP
12/1/94 Michigan Municipal Income Fund FA,SR,CSP
12/1/94 New Jersey Municipal Income Fund FA,SR,CSP
12/1/94 New York Municipal Income Fund
12/1/94 Fortress Shares FA,SR,CSP
12/1/94 Ohio Municipal Income Fund
12/1/94 Fortress Shares FA,SR,CSP
12/1/94 Trust Shares FA,SR,CSP
12/1/94 Pennsylvania Municipal Income Fund
12/1/94 Investment Shares FA,SR,CSP
12/1/94 Trust Shares FA,SR,CSP
12/1/94 Income shares FA,SR,CSP
12/1/94 Texas Municipal Income Fund FA,SR,CSP
12/1/94 Virginia Municipal Income Fund FA,SR,CSP
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> Florida Municipal Income Funds
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1994
<PERIOD-END> AUG-31-1994
<INVESTMENTS-AT-COST> 11,966,023
<INVESTMENTS-AT-VALUE> 11,400,376
<RECEIVABLES> 278,079
<ASSETS-OTHER> 40,575
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 11,719,030
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 84,378
<TOTAL-LIABILITIES> 84,378
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 12,406,759
<SHARES-COMMON-STOCK> 1,242,600
<SHARES-COMMON-PRIOR> 291,754
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (565,647)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (206,460)
<NET-ASSETS> 11,634,652
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 463,865
<OTHER-INCOME> 0
<EXPENSES-NET> 58,653
<NET-INVESTMENT-INCOME> 405,212
<REALIZED-GAINS-CURRENT> (206,460)
<APPREC-INCREASE-CURRENT> (646,820)
<NET-CHANGE-FROM-OPS> (448,068)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 405,212
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 58,653
<NUMBER-OF-SHARES-SOLD> 1,080,585
<NUMBER-OF-SHARES-REDEEMED> 135,560
<SHARES-REINVESTED> 5,821
<NET-CHANGE-IN-ASSETS> 950,846
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 31,280
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 322,142
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 10.350
<PER-SHARE-NII> .520
<PER-SHARE-GAIN-APPREC> (.940)
<PER-SHARE-DIVIDEND> .520
<PER-SHARE-DISTRIBUTIONS> .050
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.360
<EXPENSE-RATIO> 75
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> Maryland Municipal Income Fund
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1994
<PERIOD-END> AUG-31-1994
<INVESTMENTS-AT-COST> 6,144,386
<INVESTMENTS-AT-VALUE> 5,872,473
<RECEIVABLES> 119,304
<ASSETS-OTHER> 42,296
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 6,034,073
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 37,509
<TOTAL-LIABILITIES> 37,509
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 6,480,973
<SHARES-COMMON-STOCK>
680,820
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (212,496)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (271,913)
<NET-ASSETS> 5,996,564
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 204,728
<OTHER-INCOME> 0
<EXPENSES-NET> 25,161
<NET-INVESTMENT-INCOME> 179,567
<REALIZED-GAINS-CURRENT> (212,496)
<APPREC-INCREASE-CURRENT> (271,913)
<NET-CHANGE-FROM-OPS> (304,842)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 179,567
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 25,161
<NUMBER-OF-SHARES-SOLD> 1,365,537
<NUMBER-OF-SHARES-REDEEMED> 698,012
<SHARES-REINVESTED> 13,295
<NET-CHANGE-IN-ASSETS> 5,996,564
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 13,417
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 180,893
<AVERAGE-NET-ASSETS> 3,518,328
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .500
<PER-SHARE-GAIN-APPREC> (1.16)
<PER-SHARE-DIVIDEND> .500
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .030
<PER-SHARE-NAV-END> 8.81
<EXPENSE-RATIO> 75
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> New Jersey Municipal Income Fund
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1994
<PERIOD-END> AUG-31-1994
<INVESTMENTS-AT-COST> 11,485,726
<INVESTMENTS-AT-VALUE> 11,022,302
<RECEIVABLES> 360,180
<ASSETS-OTHER> 45,978
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 11,428,460
<PAYABLE-FOR-SECURITIES> 200,556
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 61,725
<TOTAL-LIABILITIES> 262,281
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 11,857,962
<SHARES-COMMON-STOCK> 1,179,470
<SHARES-COMMON-PRIOR> 325,174
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (228,359)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (463,424)
<NET-ASSETS> 11,166,179
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 485,429
<OTHER-INCOME> 0
<EXPENSES-NET> 62,268
<NET-INVESTMENT-INCOME> 423,161
<REALIZED-GAINS-CURRENT> (228,359)
<APPREC-INCREASE-CURRENT> (537,756)
<NET-CHANGE-FROM-OPS> (342,954)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 423,161
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 62,268
<NUMBER-OF-SHARES-SOLD> 986,212
<NUMBER-OF-SHARES-REDEEMED> 145,961
<SHARES-REINVESTED> 14,045
<NET-CHANGE-IN-ASSETS> 7,815,683
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 33,210
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 329,663
<AVERAGE-NET-ASSETS> 8,302,374
<PER-SHARE-NAV-BEGIN> 10.30
<PER-SHARE-NII> .510
<PER-SHARE-GAIN-APPREC> (.780)
<PER-SHARE-DIVIDEND> .510
<PER-SHARE-DISTRIBUTIONS> .050
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 9.47
<EXPENSE-RATIO> 75
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> Texas Municipal Income Fund
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1994
<PERIOD-END> AUG-31-1994
<INVESTMENTS-AT-COST> 11,390,299
<INVESTMENTS-AT-VALUE> 10,942,222
<RECEIVABLES> 681,009
<ASSETS-OTHER> 225,658
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 11,848,889
<PAYABLE-FOR-SECURITIES> 628,438
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 89,980
<TOTAL-LIABILITIES> 718,418
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 12,035,524
<SHARES-COMMON-STOCK> 1,177,980
<SHARES-COMMON-PRIOR> 481,753
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (456,976)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (448,077)
<NET-ASSETS> 11,130,471
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 548,244
<OTHER-INCOME> 0
<EXPENSES-NET> 69,852
<NET-INVESTMENT-INCOME> 478,392
<REALIZED-GAINS-CURRENT> (456,976)
<APPREC-INCREASE-CURRENT> (538,720)
<NET-CHANGE-FROM-OPS> (517,304)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 478,392
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 69,852
<NUMBER-OF-SHARES-SOLD> 779,446
<NUMBER-OF-SHARES-REDEEMED> 97,053
<SHARES-REINVESTED> 13,834
<NET-CHANGE-IN-ASSETS> 6,107,591
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 37,254
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 347,229
<AVERAGE-NET-ASSETS> 9,373,917
<PER-SHARE-NAV-BEGIN> 10.430
<PER-SHARE-NII> 0.520
<PER-SHARE-GAIN-APPREC> (0.920)
<PER-SHARE-DIVIDEND> 0.520
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0.060
<PER-SHARE-NAV-END> 9.450
<EXPENSE-RATIO> 75
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 5
<NAME> Virginia Municipal Income Fund
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1994
<PERIOD-END> AUG-31-1994
<INVESTMENTS-AT-COST> 4,464,045
<INVESTMENTS-AT-VALUE> 4,240,676
<RECEIVABLES> 152,167
<ASSETS-OTHER> 12,470
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 4,405,313
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 29,923
<TOTAL-LIABILITIES> 29,923
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4,699,156
<SHARES-COMMON-STOCK>
488,341
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (100,397)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (223,369)
<NET-ASSETS> 4,375,390
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 155,393
<OTHER-INCOME> 0
<EXPENSES-NET> 19,633
<NET-INVESTMENT-INCOME> 135,760
<REALIZED-GAINS-CURRENT> (100,397)
<APPREC-INCREASE-CURRENT> (223,369)
<NET-CHANGE-FROM-OPS> (188,006)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 135,760
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 19,633
<NUMBER-OF-SHARES-SOLD> 968,824
<NUMBER-OF-SHARES-REDEEMED> 489,413
<SHARES-REINVESTED> 8,930
<NET-CHANGE-IN-ASSETS> 4,375,390
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 10,471
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 164,929
<AVERAGE-NET-ASSETS> 2,707,439
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .490
<PER-SHARE-GAIN-APPREC> (1.10)
<PER-SHARE-DIVIDEND> .490
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .040
<PER-SHARE-NAV-END> 8.86
<EXPENSE-RATIO> 75
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
