PENNSYLVANIA MUNICIPAL INCOME FUND
(A PORTFOLIO OF MUNICIPAL SECURITIES INCOME TRUST)
CLASS A SHARES
PROSPECTUS
The Class A Shares of Pennsylvania Municipal Income Fund (the "Fund") offered by
this prospectus 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 Pennsylvania. The Fund invests primarily in a portfolio of
municipal securities which are exempt from federal regular income tax and
Pennsylvania state and local income tax ("Pennsylvania Municipal Securities").
These securities include those issued by or on behalf of the Commonwealth of
Pennsylvania and Pennsylvania 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
Pennsylvania and Pennsylvania municipalities.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF ANY
BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in Class A Shares. Keep this prospectus for future reference.
The Fund has also filed a Statement of Additional Information for Class A
Shares, dated October 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 to make inquiries about the Fund, contact your financial
institution.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated October 31, 1994
TABLE OF CONTENTS
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SUMMARY OF FUND EXPENSES 1
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FINANCIAL HIGHLIGHTS-CLASS A SHARES 2
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GENERAL INFORMATION 3
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LIBERTY FAMILY OF FUNDS 3
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INVESTMENT INFORMATION 4
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Investment Objective 4
Investment Policies 4
Pennsylvania Municipal Securities 7
Investment Risks 7
Non-Diversification 7
Investment Limitations 8
NET ASSET VALUE 8
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INVESTING IN CLASS A SHARES 9
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Share Purchases 9
Minimum Investment Required 9
What Shares Cost 10
Eliminating/Reducing the Sales Load 10
Systematic Investment Program 12
Certificates and Confirmations 12
Dividends and Distributions 12
EXCHANGE PRIVILEGE 12
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Requirements for Exchange 12
Tax Consequences 13
Making an Exchange 13
REDEEMING CLASS A SHARES 13
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Through a Financial Institution 14
Directly from the Fund 14
Receiving Payment 15
Contingent Deferred Sales Charge 15
Systematic Withdrawal Program 15
Accounts with Low Balances 16
MUNICIPAL SECURITIES INCOME TRUST
INFORMATION 16
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Management of Municipal Securities
Income Trust 16
Distribution of Class A Shares 17
Administration of the Fund 18
SHAREHOLDER INFORMATION 19
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Voting Rights 19
Massachusetts Partnership Law 19
TAX INFORMATION 19
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Federal Income Tax 19
Pennsylvania Taxes 20
Other State and Local Taxes 21
PERFORMANCE INFORMATION 21
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FINANCIAL HIGHLIGHTS-INCOME SHARES 22
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FINANCIAL STATEMENTS 23
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INDEPENDENT AUDITORS' REPORT 39
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ADDRESSES Inside Back Cover
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SUMMARY OF FUND EXPENSES
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<TABLE>
<S> <C> <C>
CLASS A SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)....... 3.00%
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 CLASS A SHARES OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver)(2).................................................. 0.00%
12b-1 Fee(3)...................................................................... 0.00%
Total Other Expenses (after expense reimbursement)................................ 0.75%
Shareholder Services Fee...................................................... 0.25%
Total Class A Shares Operating Expenses(4)............................... 0.75%
</TABLE>
(1) Shareholders who purchased Shares with the proceeds of a redemption of
shares of a mutual fund sold with a sales charge and not distributed by
Federated Securities Corp., prior to June 1, 1994, will be charged a contingent
deferred sales charge by the Fund's distributor of .50 of 1% for redemptions
made within one year of purchase. 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 .40%.
(3) The class has no present intention of paying or accruing the 12b-1 fee
during the fiscal year ending August 31, 1995. If the class were paying or
accruing the 12b-1 fee, the class would be able to pay up to .40% of its average
daily net assets for the 12b-1 fee. See "Municipal Securities Income Trust
Information."
(4) The total Class A Shares operating expenses would have been 1.20% 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 CLASS A SHARES OF THE FUND WILL
BEAR, EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE
VARIOUS COSTS AND EXPENSES, SEE "MUNICIPAL SECURITIES INCOME TRUST INFORMATION"
AND "INVESTING IN CLASS A SHARES." Wire-transferred redemptions of less than
$5,000 may be subject to additional fees.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
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<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment
assuming (1) 5% annual return and (2) redemption at the end
of each time period........................................ $ 42 $53 $70 $120
You would pay the following expenses on the same investment,
assuming no redemption..................................... $ 37 $53 $70 $120
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
PENNSYLVANIA MUNICIPAL INCOME FUND
FINANCIAL HIGHLIGHTS--CLASS A SHARES
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(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 39.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
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1994 1993 1992 1991*
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<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.68 $10.93 $ 10.44 $ 10.00
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INCOME FROM INVESTMENT OPERATIONS
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Net investment income 0.60 0.60 0.627 0.588
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Net realized and unrealized gain (loss) on investments (0.75) 0.75 0.493 0.456
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Total from investment operations (0.15) 1.35 1.120 1.044
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LESS DISTRIBUTIONS
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Dividends to shareholders from net investment income (0.59) (0.60) (0.627) (0.588)
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Distributions in excess of net investment income -- -- (0.003)(a) (0.016)(a)
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Total distributions (0.59) (0.60) (0.630) (0.604)
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NET ASSET VALUE, END OF PERIOD $10.94 $11.68 $ 10.93 $ 10.44
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TOTAL RETURN** (1.34%) 12.71% 11.06% 10.60%
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RATIOS TO AVERAGE NET ASSETS
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Expenses 0.75% 0.83% 0.73% 0.26%(c)
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Net investment income 5.27% 5.33% 5.88% 6.45%(c)
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Expense waiver/reimbursement (b) 0.45% 0.70% 0.97% 1.24%
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SUPPLEMENTAL DATA
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Net assets, end of period (000 omitted) $85,860 $69,947 $48,261 $31,067
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Portfolio turnover rate 17% 0% 0% 10%
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</TABLE>
* Reflects operations for the period from October 11, 1990 (date of initial
public investment) to August 31, 1991.
** 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) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(c) Computed on an annualized basis.
(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 for the fiscal year ended August 31, 1994, which can be obtained
free of charge.
GENERAL INFORMATION
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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 the Fund, as of the date of this
prospectus, the Board of Trustees (the "Trustees") has established one class of
shares, known as Class A Shares ("Shares"). During the fiscal year ended August
31, 1994, the Fund also offered Income Shares and Trust Shares. Neither Income
Shares nor Trust Shares are offered any longer.
The Fund is designed for customers of financial institutions such as banks,
fiduciaries, investment advisers, and broker/dealers as a convenient means of
accumulating an interest in a professionally managed, non-diversified portfolio
investing primarily in Pennsylvania Municipal Securities. A minimum initial
investment of $1,000 is required. The Fund is not likely to be a suitable
investment for non-Pennsylvania taxpayers or retirement plans since Pennsylvania
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 are sold at net asset value
plus an applicable sales load and redeemed at net asset value.
LIBERTY FAMILY OF FUNDS
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This Fund is a member of a family of mutual funds, collectively known as the
Liberty Family of Funds. The other funds in the Liberty Family of Funds are:
- American Leaders Fund, Inc., providing growth of capital and income
through high-quality stocks;
- Capital Growth Fund, providing appreciation of capital primarily through
equity securities;
- Fund for U.S. Government Securities, Inc., providing current income
through long-term
U.S. government securities;
- International Equity Fund, providing long-term capital growth and income
through international securities;
- International Income Fund, providing a high level of current income
consistent with prudent investment risk through high-quality debt
securities denominated primarily in foreign currencies;
- Liberty Equity Income Fund, Inc., providing above-average income and
capital appreciation through income producing equity securities;
- Liberty High Income Bond Fund, Inc., providing high current income
through high-yielding, lower-rated, corporate bonds;
- Liberty Municipal Securities Fund, Inc., providing a high level of
current income exempt from federal regular income tax through municipal
bonds;
- Liberty U.S. Government Money Market Trust, providing current income
consistent with stability of principal through high-quality U.S.
government securities;
- Liberty Utility Fund, Inc., providing current income and long-term growth
of income, primarily through electric, gas, and communications utilities;
- Limited Term Fund, providing a high level of current income consistent
with minimum fluctuation in principal through investment grade
securities;
- Limited Term Municipal Fund, providing a high level of current income
exempt from federal regular income tax consistent with the preservation
of principal, primarily limited to municipal securities;
- Michigan Intermediate Municipal Trust, providing current income exempt
from federal regular income tax and personal income taxes imposed by the
state of Michigan and Michigan municipalities, primarily through Michigan
municipal securities;
- Strategic Income Fund, providing a high level of current income,
primarily through domestic and foreign corporate debt obligations;
- Tax-Free Instruments Trust, providing current income consistent with the
stability of principal and exempt from federal income tax, through
high-quality, short-term municipal securities; and
- World Utility Fund, providing total return primarily through securities
issued by domestic and foreign companies in the utilities industries.
Prospectuses for these funds are available by writing to Federated Securities
Corp. Each of the funds may also invest in certain other types of securities as
described in each find's prospectus.
The Liberty Family of Funds provides flexibility and diversification for an
investor's long-term investment planning. It enables an investor to meet the
challenges of changing market conditions by offering convenient exchange
privileges which give access to various investment vehicles and by providing the
investment services of a proven, professional investment adviser.
INVESTMENT INFORMATION
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INVESTMENT OBJECTIVE
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 Pennsylvania. 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 shareholders. However,
income distributed by the Fund may not necessarily be exempt from state or
municipal taxes in states other than Pennsylvania.
INVESTMENT POLICIES
The Fund pursues its investment objective by investing in a portfolio of
Pennsylvania municipal securities. 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 securities in which the Fund invests include:
- obligations issued by or on behalf of the Commonwealth of Pennsylvania,
its political subdivisions, or agencies;
- debt obligations of any state, territory, or possession of the United
States, 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 taxes
imposed by the Commonwealth of Pennsylvania. At least 80% of the value of the
Fund's total assets will be invested in Pennsylvania Municipal Securities.
The prices of fixed income securities fluctuate inversely to the direction of
interest rates.
CHARACTERISTICS. The 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 &
Poor's Ratings Group ("S&P") or Fitch Investors Service, Inc. ("Fitch"). In
certain cases the Fund's investment adviser may choose bonds which are
unrated if it determines that such bonds are of comparable quality or have
similar characteristics to the investment grade bonds described above. 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. Bonds
rated "BBB" by S&P or Fitch or "Baa" by Moody's. have speculative
characteristics. Changes in economic or other circumstances are more likely
to lead to weakened capacity to make principal and interest payments than
higher rated bonds. 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 Pennsylvania 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 Trustees will determine that participation interests meet the
prescribed quality standards for the Fund.
VARIABLE RATE MUNICIPAL SECURITIES. Some of the Pennsylvania 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. 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. In the event of failure of appropriation, unless the
participation interests are credit enhanced, it is unlikely that the
participants would be able to obtain an acceptable substitute source of
payment.
RESTRICTED SECURITIES. As a matter of fundamental policy, the Fund may
invest up to 10% of its net 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 upon resale under federal securities laws. The Fund will limit
investments in illiquid securities, including certain restricted securities
not determined by the Trustees to be liquid, 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 investment
adviser deems it appropriate to do so. In addition, the Fund may enter in
transactions to sell its purchase commitments to third parties at current market
values and simultaneously acquire other commitments to purchase similar
securities at later dates. The Fund may realize short-term profits or losses
upon the sale of such commitments.
TEMPORARY INVESTMENTS. The Fund invests its assets so that at least 80% of its
annual interest income is exempt from federal regular income tax and the
Commonwealth of Pennsylvania personal income taxes. However, from time to time
when the investment adviser determines that market conditions call for a
temporary defensive posture, the Fund may invest in short-term non-Pennsylvania
municipal
tax-exempt obligations 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 Commonwealth
of Pennsylvania personal income taxes.
PENNSYLVANIA MUNICIPAL SECURITIES
Pennsylvania 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.
Pennsylvania Municipal Securities include industrial development bonds 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.
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.
INVESTMENT RISKS
Yields on Pennsylvania 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 Commonwealth of Pennsylvania 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
Pennsylvania 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 Pennsylvania Municipal Securities which meet the Fund's
quality standards may not be possible if the Commonwealth of Pennsylvania or its
municipalities do not maintain their current credit ratings. In addition, any
Pennsylvania constitutional amendments, legislative measures, executive orders,
administrative regulations, and voter initiatives could result in adverse
consequences affecting Pennsylvania Municipal Securities.
A further discussion of the risks of a portfolio which invests largely in
Pennsylvania 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 would exist 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 of
1986, as amended (the "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
total assets to secure such borrowings.
In order to pass-through to investors the tax-free income from the Fund for
purposes of the Commonwealth of Pennsylvania personal income taxes, the Fund
will invest in securities for income earnings rather than trading for profit.
The Fund will not vary its investments, except to: (i) eliminate unsafe
investments and investments not consistent with the preservation of the capital
or the tax status of the investments of the Fund; (ii) honor redemption orders,
meet anticipated redemption requirements, and negate gains from discount
purchases; (iii) reinvest the earnings from securities in like securities; or
(iv) defray normal administrative expenses (the "Pennsylvania Investment
Restrictions"). Legislation enacted in December, 1993, eliminates the necessity
of the Pennsylvania Investment Restrictions. Consequently, the Trustees may vote
to eliminate the Pennsylvania Investment Restrictions.
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
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The Fund's net asset value per Share fluctuates. It is determined by dividing
the sum of market value of all securities and all other assets, less
liabilities, by the number of Shares outstanding.
INVESTING IN CLASS A SHARES
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SHARE PURCHASES
Shares are sold on days on which the New York Stock Exchange is open. Shares may
be purchased through a financial institution which has a sales agreement with
the distributor, or directly from the distributor, Federated Securities Corp.,
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 broker/dealer) to place an order to purchase Shares. Orders
through a financial institution are considered received when the Fund is
notified of the purchase order. Purchase orders through a financial institution
must be received by the financial institution before 4:00 P.M. (Eastern time)
and must be transmitted by the financial institution to the Fund before 5:00
P.M. (Eastern 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 FROM THE DISTRIBUTOR. An investor may place an order to purchase
Shares directly from the distributor once an account has been established. To do
so: complete and sign the new account form available from the Fund; enclose a
check made payable to Pennsylvania Municipal Income Fund--Class A Shares; and
mail both to Pennsylvania Municipal Income Fund, P.O. Box 8604, Boston, MA
02266-8604.
The order is considered received after the check is converted by the transfer
agent's bank, State Street Bank and Trust Company ("State Street Bank"), into
federal funds. This is generally the next business day after State Street Bank
receives the check.
To purchase Shares by wire from the distributor, 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. Federal funds should be wired
as follows: State Street Bank and Trust Company, Boston, Massachusetts 02105;
Attention: Mutual Fund Servicing Division; For Credit to: Pennsylvania
Municipal Income Fund--Class A Shares, Title or Name of Account; Wire Order
Number. Shares cannot be purchased by wire on Columbus Day, Veterans' Day, or
Martin Luther King Day.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in Shares is $1,000. Subsequent investments must
be in amounts of at least $100.
WHAT SHARES COST
Shares are sold at their net asset value, less any applicable sales load, next
determined after an order is received:
<TABLE>
<CAPTION>
SALES LOAD AS SALES LOAD AS
A PERCENTAGE OF A PERCENTAGE OF
AMOUNT OF TRANSACTION PUBLIC OFFERING PRICE NET AMOUNT INVESTED
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<S> <C> <C>
Less than $50,000.............................. 3.00% 3.09%
$50,000 but less than $100,000................. 2.50% 2.56%
$100,000 but less than $250,000................ 2.00% 2.04%
$250,000 but less than $500,000................ 1.50% 1.52%
$500,000 but less than $1 million.............. 1.00% 1.01%
$1 million or more............................. 0.00% 0.00%
</TABLE>
The net asset value is determined at 4:00 P.M. (Eastern 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, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
Under certain circumstances described under "Redeeming Shares," shareholders may
be charged a contingent deferred sales charge by the distributor at the time
shares are redeemed.
DEALER CONCESSION. For sales of Shares, the distributor will normally offer to
pay dealers up to 100% of the sales load retained by it. On purchases of $1
million or more, the investor pays no sales load; however, the distributor will
make twelve monthly payments to the dealer totaling 0.25% of the public offering
price over the first year following the purchase. Such payments are based on the
original purchase price of Shares outstanding at each month end. No sales load
is imposed for Shares purchased through bank trust departments or investment
advisers registered under the Investment Advisers Act of 1940, as amended.
However, investors who purchase Shares through a trust department or investment
adviser may be charged an additional service fee by that institution.
ELIMINATING/REDUCING THE SALES LOAD
The sales load can be reduced or eliminated on the purchase of Shares through:
- quantity discounts and accumulated purchases;
- signing a 13-month letter of intent;
- using the reinvestment privilege;
- concurrent purchases; or
- purchases with proceeds from redemptions of unaffiliated mutual fund
shares.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES. As shown in the table above,
larger purchases reduce the sales load paid. The Fund will combine purchases
made on the same day by the investor, his spouse, and his children under age 21
when it calculates the sales load.
If an additional purchase of Shares is made, the Fund will consider the previous
purchases still invested in the Fund. For example, if a shareholder already owns
Shares having a current value at the public offering price of $40,000 and he
purchases $10,000 more at the current public offering price, the sales load on
the additional purchase according to the schedule now in effect would be 2.50%,
not 3.00%.
To receive the sales load reduction, Federated Securities Corp. must be notified
by the shareholder in writing or by his financial institution at the time the
purchase is made that Shares are already owned or that purchases are being
combined. The Fund will reduce the sales load effective as of the date on which
the Fund confirms the previous purchases (which under normal circumstances,
would be the date on which the Fund received the notice from the shareholder
that Shares are already owned.)
LETTER OF INTENT. If a shareholder intends to purchase a specific dollar amount
of Shares over the next 13 months, the sales load may be reduced if the
shareholder signs a letter of intent to that effect. For example, if a
shareholder intends to purchase at least $50,000 in Shares, the letter of intent
shall include a provision for a sales load adjustment depending on the amount
actually purchased within the
13-month period and a provision for the custodian to hold 3.00% of the total
amount intended to be purchased in escrow (in Shares) until such purchase is
completed.
The applicable portion of the 3.00% held in escrow will be applied to the
shareholder's account at the end of the 13-month period unless the amount
specified in the letter of intent is not purchased. In this event, an
appropriate number of escrowed Shares may be redeemed in order to realize the
difference in the sales load.
This letter of intent will not obligate the shareholder to purchase Shares, but
if he does, each purchase during the period will be at the sales load applicable
to the total amount intended to be purchased. This letter may be dated as of a
prior date to include any purchases made within the past
90 days towards the dollar fulfillment of the letter of intent. Prior trade
prices will not be adjusted.
REINVESTMENT PRIVILEGE. If Shares have been redeemed, the shareholder has a
one-time right, within 120 days, to reinvest the redemption proceeds at the
next-determined net asset value without any sales load. Federated Securities
Corp. must be notified by the shareholder in writing or by his financial
institution of the reinvestment in order to eliminate a sales load. If the
shareholder redeems his Shares, there may be tax consequences.
CONCURRENT PURCHASES. For purposes of qualifying for a sales load elimination,
a shareholder has the privilege of combining concurrent purchases of two or more
funds in the Liberty Funds, the purchase prices of which include a sales load.
For example, if a shareholder concurrently invested $400,000 in one of the other
Liberty Funds and $600,000 in Shares, the sales load would be eliminated.
To receive this sales load elimination, Federated Securities Corp. must be
notified by the shareholder in writing or by his financial institution at the
time the concurrent purchases are made. The Fund will eliminate the sales load
after it confirms the purchases.
PURCHASES WITH PROCEEDS FROM REDEMPTIONS OF UNAFFILIATED INVESTMENT COMPANIES.
Investors may purchase Shares at net asset value, without a sales load, with
the proceeds from the redemption of shares of an investment company which was
sold with a sales load or commission and was not distributed by Federated
Securities Corp. The purchase must be made within 60 days of the
redemption, and Federated Securities Corp. must be notified by the investor in
writing, or by his financial institution, at the time the purchase is made.
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 Federated Services Company, plus the applicable sales load. A
shareholder may apply for participation in this program through 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
in writing to Federated Services Company.
Detailed confirmations of each purchase and redemption are sent to each
shareholder. Monthly confirmations are sent to report dividends paid during that
month.
DIVIDENDS AND DISTRIBUTIONS
Dividends are declared and paid monthly to all shareholders invested in the Fund
on the record date. Distributions of any net realized long-term capital gains
will be made at least once every twelve months. Dividends and distributions are
automatically reinvested in additional Shares on payment dates at the
ex-dividend date net asset value without a sales load, unless shareholders
request cash payments on the new account form or by writing to Federated
Services Company. All shareholders on the record date are entitled to the
dividend.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
Class A shareholders may exchange all or some of their Shares for Class A Shares
in other funds in the Liberty Family of Funds. Neither the Fund nor any of the
funds in the Liberty Family of Funds imposes any additional fees on exchanges.
Shareholders in certain other Federated Funds may exchange their shares in the
Federated Funds for Class A Shares.
REQUIREMENTS FOR EXCHANGE
Shareholders using this privilege must exchange shares having a net asset value
equal to the minimum investment requirements of the fund into which the exchange
is being made. Before the exchange, the shareholder must receive the prospectus
of the fund into which the exchange is being made. This privilege is available
to shareholders resident in any state in which the fund shares being acquired
may be sold. Upon receipt of proper instructions and required supporting
documents, Shares submitted for exchange are redeemed and the proceeds invested
in shares of the other fund. The exchange privilege may be modified or
terminated at any time. Shareholders will be notified of the modification or
termination of the exchange privilege.
Shares in certain Federated Funds which are advised by subsidiaries or
affiliates of Federated Investors may also be exchanged for Shares at net asset
value. With the exception of exchanges into Pennsylvania Municipal Income Fund
and other Liberty Funds, such exchanges will be subject to a CDSC and possibly a
sales load.
Further information on the exchange privilege and prospectuses for the Liberty
Family of Funds are available by contacting the Fund.
TAX CONSEQUENCES
An exercise of the exchange privilege is treated as a sale for federal income
tax purposes. Depending upon circumstances, a capital gain or loss may be
realized.
MAKING AN EXCHANGE
Instructions for exchanges for the Liberty Family of Funds may be given in
writing or by telephone. Written instructions may require a signature guarantee.
Shareholders of the Fund may have difficulty in making exchanges by telephone
through brokers and other financial institutions during times of drastic
economic or market changes. If a shareholder cannot contact his broker or
financial institution by telephone, it is recommended that an exchange request
be made in writing and sent by overnight mail to Federated Services Company, c/o
State Street Bank and Trust Company, Two Heritage Drive, North Quincy,
Massachusetts 02171.
Shareholders who desire to automatically exchange Shares of a predetermined
amount on a monthly, quarterly, annual, or other periodic basis may take
advantage of a systematic exchange privilege. Further information on these
exchange privileges is available by calling Federated Securities Corp. or the
shareholder's financial institution.
TELEPHONE INSTRUCTIONS. Telephone instructions made by the investor may be
carried out only if a telephone authorization form completed by the investor is
on file with the Fund. If the instructions are given by a broker, a telephone
authorization form completed by the broker must be on file with the Fund. Shares
may be exchanged between two funds by telephone only if the two funds have
identical shareholder registrations. Telephone exchange instructions may be
recorded. If reasonable procedures are not followed by the Fund, it may be
liable for losses due to unauthorized or fraudulent telephone instructions. Any
Fund shares held in certificate form cannot be exchanged by telephone, but must
be forwarded to Federated Services Company, P.O. Box 8604, Boston, Massachusetts
02266-8604, and deposited to the shareholder's account before being exchanged.
Telephone instructions will be processed as of 4:00 P.M. (Eastern time) and must
be received by the Fund before that time for shares to be exchanged the same
day. Shareholders exchanging into a fund will not receive any dividend that is
payable to shareholders of record on that date. This privilege may be modified
or terminated at any time.
REDEEMING CLASS A SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at their net asset value next determined after Federated
Services Company receives the redemption request. Redemptions will be made on
days on which the Fund computes its
net asset value. Redemptions can be made through a financial institution or
directly from the Fund. Redemption requests must be received in proper form.
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 "By Mail" should be considered.
THROUGH A FINANCIAL INSTITUTION
A shareholder may redeem Shares by calling his financial institution (such as a
bank or a broker/ dealer) to request the redemption. Shares will be redeemed at
the net asset value next determined after Federated Services Company receives
the redemption request from the financial institution. The financial institution
is responsible for promptly submitting redemption requests and providing proper
written redemption instructions to Federated Services Company. The financial
institution may charge customary fees and commissions for this service.
DIRECTLY FROM THE FUND
BY TELEPHONE. Shareholders who have not purchased through a financial
institution may redeem their Shares of the Fund by telephoning Federated
Services Company. The proceeds will be mailed to the shareholder's address
of record or wire transferred to the shareholder's account at a domestic
commercial bank that is a member of the Federal Reserve System, normally
within one business day, but in no event longer than seven days after the
request. The minimum amount for a wire transfer is $1,000. If at any time
the Fund shall determine it necessary to terminate or modify this method of
redemption, shareholders would be promptly notified.
An authorization form permitting Federated Services Company to accept
telephone requests must first be completed. Authorization forms and
information on this service are available from Federated Securities Corp.
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.
BY MAIL. Any shareholder may redeem Shares by sending a written request to
Federated Services Company. The written request should include the
shareholder's name, the Fund name and class of shares, the account number,
and the share or dollar amount requested. 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 should 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, which is administered by the Federal Deposit Insurance
Corporation ("FDIC");
- a member 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, 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. Normally, a check for the proceeds is mailed within one business day,
but in no event more than seven days, after receipt of a proper written
redemption request.
BY WIRE. Redemption proceeds will be wired on the business day following
receipt of a proper redemption request.
CONTINGENT DEFERRED SALES CHARGE
Shareholders who purchased Shares with the proceeds of a redemption of shares of
a mutual fund sold with a sales load or commission and not distributed by
Federated Securities Corp. prior to June 1, 1994, will be charged a contingent
deferred sales charge ("CDSC") by the Fund's distributor of .50 of 1% for
redemptions made within one year of purchase. Purchases under the program made
after that date will not be subject to any type of CDSC. The CDSC will be
calculated based upon the lesser of the original purchase price of the Shares or
the net asset value of the Shares when redeemed.
The CDSC will not be imposed on Shares acquired through reinvestment of
dividends or distributions of long-term capital gains. Redemptions are deemed to
have occurred in the following order: (1) Shares acquired through the
reinvestment of dividends and long-term capital gains; (2) purchases of Shares
occurring more than one year before the date of redemption; (3) purchases of
Shares within the previous year without the use of redemption proceeds as
described above; and (4) purchases of Shares within the previous year through
the use of redemption proceeds as described above.
The CDSC will not be imposed when a redemption results from a tax-free return
from the death or disability of the beneficial owner, as defined in Section 72
(m)(7) of the Internal Revenue Code of 1986, as amended.
A CDSC will not be charged in connection with redemptions by the Fund of
accounts with low balances.
SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders who desire to receive 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. Shareholders may redeem by periodic
withdrawal payments in a minimum amount of $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 an account value of at least $10,000. A
shareholder may apply for participation in this program through his financial
institution. Due to the fact that Shares are sold with a sales load, it is not
advisable for shareholders to be purchasing Shares while participating in this
program.
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 $1,000. This
requirement does not apply, however, if the balance falls below $1,000 because
of changes in the Fund's net asset value. Before Shares are redeemed to close an
account, the shareholder is notified in writing and allowed 30 days to purchase
additional Shares to meet the minimum requirement.
MUNICIPAL SECURITIES INCOME TRUST INFORMATION
- --------------------------------------------------------------------------------
MANAGEMENT OF MUNICIPAL SECURITIES INCOME TRUST
BOARD OF TRUSTEES. The Trust is managed by a Board of Trustees. The Trustees are
responsible for managing the business affairs of the Trust and for exercising
all of the powers of the Trust except those reserved for the shareholders. The
Executive Committee of the Board of Trustees handles the Trustee's
responsibilities between meetings of the Board.
INVESTMENT ADVISER. Pursuant to an investment advisory contract with the Trust,
investment decisions for the Fund are made by Federated Advisers, the Fund's
investment adviser (the "Adviser"), subject to direction by the Trustees. The
Adviser continually conducts investment research and supervision for the Fund
and is responsible for the purchase or sale of portfolio instruments, for which
it receives an annual fee from the Fund.
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 of expenses at any time in 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, as amended. 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 are 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 has been the Fund's portfolio manager since June, 1993.
Mr. Roberge joined Federated Investors in 1990 and has been an Assistant
Vice President of the Fund's 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.
DISTRIBUTION OF CLASS A SHARES
Federated Securities Corp. is the principal 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 AND SHAREHOLDER SERVICES PLANS. Under a distribution plan adopted
in accordance with Investment Company Act Rule 12b-1 (the "Distribution Plan"),
the Fund may pay to the distributor an amount, computed at an annual rate of .40
of 1% of the average daily net asset value of Shares to finance any activity
which is principally intended to result in the sale of Shares subject to the
Distribution Plan.
The distributor may select financial institutions such as banks, fiduciaries,
custodians for public funds, investment advisers, and broker/dealers to provide
sales support services as agents for their clients or customers.
The Distribution 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 amount or may earn a profit from future payments made by the Fund
under the Distribution Plan.
In addition, the Trust has adopted a Shareholder Services Plan (the "Services
Plan") under which it may make payments up to 0.25 of 1% of the average daily
net asset value of Shares to obtain certain personal services for shareholders
and the maintenance of shareholder accounts ("shareholder services"). The Trust
has entered into a Shareholder Services Agreement with Federated Shareholder
Services, a subsidiary of Federated Investors, under which Federated Shareholder
Services will either perform shareholder services directly or will select
financial institutions to perform shareholder services. Financial institutions
will receive fees based upon Shares owned by their clients or customers.
The schedules of such fees and the basis upon which such fees will be paid will
be determined from time to time by the Trust and Federated Shareholder Services.
OTHER PAYMENTS TO FINANCIAL INSTITUTIONS. Furthermore, the distributor may offer
to pay a fee from its own assets to financial institutions as financial
assistance for providing substantial marketing and sales support. The support
may include participating in sales, educational and training seminars at
recreational-type facilities, providing sales literature, and engineering
computer software programs that emphasize the attributes of the Fund. Such
assistance will be predicated upon the amount of Shares the financial
institution sells or may sell, and/or upon the type and nature of sales or
marketing support furnished by the financial institution. Any payments made by
the distributor may be reimbursed by the Fund's investment adviser or its
affiliates.
The Glass-Steagall Act prohibits a depository institution (such as a commercial
bank or a savings and loan association) from being an underwriter or distributor
of most securities. 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 Trustees will consider appropriate change 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.
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 Trust.
Federated Administrative Services provides these at an annual rate which relates
to the average aggregate daily net assets of all funds advised by subsidiaries
of Federated Investors ("Federated Funds") as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY NET
ADMINISTRATIVE FEE ASSETS OF THE FEDERATED FUNDS
- --------------------- ------------------------------------
<S> <C>
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
</TABLE>
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of shares.
Federated Administrative Services may choose voluntarily to waive a portion of
its fee.
CUSTODIAN. State Street Bank and Trust Company, Boston, Massachusetts, is
custodian for the securities and cash of the Fund.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company, P.O.
Box 8604, Boston, MA 02266-8604, is transfer agent for the shares of the Fund,
and dividend disbursing agent for the Fund.
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.
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 each portfolio
in the Trust have equal voting rights except that in matters affecting only a
particular fund, only shares of that fund are entitled to vote.
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 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 of 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 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 its
property 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 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 Code, as amended, 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, 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.
The alternative minimum tax, up to 28% of alternative minimum taxable income for
individuals and 20% for corporations, applies when it exceeds the regular tax
for the taxable year. Alternative minimum taxable income is equal to the regular
taxable income of the taxpayer increased by certain "tax preference" items not
included in regular taxable income and reduced by only a portion of the
deductions allowed in the calculation of the regular tax.
The Tax Reform Act of 1986 treats interest on certain "private activity" bonds
issued after August 7, 1986, as a tax preference item for both individuals and
corporations. Unlike traditional governmental purpose municipal bonds, which
finance roads, schools, libraries, prisons, and other public facilities, private
activity bonds provide benefits to private parties. The Fund may purchase all
types of municipal bonds, including private activity bonds. Thus, should it
purchase any such bonds, a portion of the Fund's dividends may be treated as a
tax preference item.
In addition, in the case of a corporate shareholder, dividends of the Fund which
represent interest on municipal bonds 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" is based upon the concept of a corporation's
"earnings and profits." Since "earnings and profits" generally includes the full
amount of any Fund dividend, and alternative minimum taxable income does not
include the portion of the Fund's dividend attributable to municipal bonds which
are not private activity bonds, the difference will be included in the
calculation of the corporation's alternative minimum tax.
Dividends of the Fund representing net interest income earned on some temporary
investments and any realized net short-term gains are taxed as ordinary income.
These tax consequences apply whether dividends are received in cash or as
additional shares. Information on the tax status of dividends and distributions
is provided annually.
PENNSYLVANIA TAXES
The Fund has received a ruling from the Commonwealth of Pennsylvania Department
of Revenue that interest or gain derived by the Fund from obligations free from
state taxation in Pennsylvania is not taxable on pass-through to Fund
shareholders for purposes of Pennsylvania personal income taxes. This is based
on the existence of the Pennsylvania Investment Restrictions (see "Investment
Limitations"). However, legislation enacted in December, 1993, eliminates the
necessity of Pennsylvania Investment Restrictions. This legislation also
generally repeals the Pennsylvania personal income tax
exemptions for gains from the sale of tax-exempt obligations, including the
exemption for distributions from the Fund to the extent that they are derived
from gains from tax-exempt obligations.
Fund shares are exempt from personal property taxes imposed by counties in
Pennsylvania to the extent that the Fund invests in obligations that are exempt
from such taxes.
In the opinion of Houston, Houston & Donnelly, counsel to the Fund, the Fund is
not subject to Pennsylvania corporate or personal property taxes.
OTHER STATE AND LOCAL TAXES
Income from the Fund is not necessarily free from state income taxes in states
other than Pennsylvania 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 maximum sales load and
other similar non-recurring charges, such as the CDSC, which, if excluded, would
increase the total return, yield, and tax-equivalent yield.
From time to time, the Fund may advertise the performance of Shares using
certain financial publications and/or compare the performance of Shares to
certain indices.
PENNSYLVANIA MUNICIPAL INCOME FUND
FINANCIAL HIGHLIGHTS--INCOME SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 39.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------
1994 1993*
------ ------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.68 $11.43
- ---------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------------------------------------------------
Net investment income 0.51 0.09
- ---------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.75) 0.21
- --------------------------------------------------------------------------- ------ ------
Total from investment operations (0.24) 0.30
- --------------------------------------------------------------------------- ------ ------
LESS DISTRIBUTIONS
- ---------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.51) (0.05)
- ---------------------------------------------------------------------------
Distributions in excess of net investment income (0.08)(c) --
- --------------------------------------------------------------------------- ------ ------
Total Distributions (0.59) (0.05)
- --------------------------------------------------------------------------- ------ ------
NET ASSET VALUE, END OF PERIOD $10.85 $11.68
- --------------------------------------------------------------------------- ------ ------
TOTAL RETURN** (2.13%) 1.20%
- ---------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ---------------------------------------------------------------------------
Expenses 1.50% 1.48%(a)
- ---------------------------------------------------------------------------
Net investment income 4.62% 6.13%(a)
- ---------------------------------------------------------------------------
Expense waiver/reimbursement (b) 0.45% 0.60%(a)
- ---------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ---------------------------------------------------------------------------
Net assets, end of period (000 omitted) $8,982 $2,419
- ---------------------------------------------------------------------------
Portfolio turnover rate 17% 0%
- ---------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from July 29, 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) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(c) 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.
(See Notes which are an integral part of the Financial Statements)
PENNSYLVANIA MUNICIPAL INCOME FUND
PORTFOLIO OF INVESTMENTS
AUGUST 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- ---------- --------------------------------------------------------- --------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--100.4%
- -----------------------------------------------------------------------
PENNSYLVANIA--97.2%
---------------------------------------------------------
$1,000,000 Allegheny County, PA, 6.00% GO Bonds (Series C39)/ (AMBAC
Insured)/(Original Issue Yield: 6.099%), 5/1/2012 Aaa $ 1,002,080
---------------------------------------------------------
400,000 Allegheny County, PA, 6.75% GO Bonds
(Series C36)/(Original Issue Yield: 6.80%), 12/1/2007 A 434,332
---------------------------------------------------------
500,000 Allegheny County, PA, 6.75% GO Bonds
(Series C36)/(Original Issue Yield: 6.85%), 12/1/2009 A 542,915
---------------------------------------------------------
4,700,000 Allegheny County, PA, HDA, 6.00%, Revenue Bonds (Series
1992)/(South Hills Health System)/(Original Issue Yield:
6.40%), 5/1/2020 A 4,402,396
---------------------------------------------------------
500,000 Allegheny County, PA, Residential Finance Authority,
7.75% SFH Mortgage Revenue Bonds (Series K)/(GNMA
Collateralized)/(Subject to AMT), 12/1/2022 Aaa 516,295
---------------------------------------------------------
850,000 Allegheny County, PA, Higher Education Building
Authority, 5.80% College Revenue Bonds (Series
1993A)/(Community College of Allegheny County), 6/1/2013 A 810,705
---------------------------------------------------------
1,000,000 Allegheny County, PA, Hospital Development Authority,
5.625% Hospital Revenue Bonds (Series 1993)/
(Magee Women's Hospital)/(FGIC Insured)/
(Original Issue Yield: 5.72%), 10/1/2023 AAA 910,430
---------------------------------------------------------
2,200,000 Allegheny County, PA, Hospital Development Authority,
6.00% Refunding Revenue Bonds (Series 1992)/
(Presbyterian University Health Centre)/(MBIA Insured)/
(Original Issue Yield: 6.40%), 11/1/2023 Aaa 2,137,872
---------------------------------------------------------
2,300,000 Allegheny County, PA, Hospital Development Authority,
6.25% Refunding Revenue Bonds (Series 1992)/
(Presbyterian University Health Centre)/(MBIA Insured)/
(Original Issue Yield: 6.60%), 11/1/2023 Aaa 2,301,196
---------------------------------------------------------
</TABLE>
PENNSYLVANIA MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- ---------- --------------------------------------------------------- --------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- -----------------------------------------------------------------------
PENNSYLVANIA--CONTINUED
---------------------------------------------------------
$1,000,000 Allegheny County, PA, Hospital Development Authority,
6.30% Refunding Revenue Bonds (Series 1992)/
Health Care Development, Inc.)/(MBIA Insured)/
(Original Issue Yield: 6.40%), 9/1/2013 Aaa $ 1,014,800
---------------------------------------------------------
2,525,000 Allegheny County, PA, Hospital Development Authority,
6.875% Revenue Bonds (Children's Hospital of Pittsburgh)/
(MBIA Insured)/(Original Issue Yield: 7.06%), 7/1/2014 Aaa 2,615,799
---------------------------------------------------------
775,000 Allegheny County, PA, Residential Finance Authority,
7.40% SFH Mortgage Revenue Bonds (Series Q)/
(GNMA Collateralized)/(Subject to AMT), 12/1/2022 Aaa 803,613
---------------------------------------------------------
400,000 Allegheny County, PA, Sanitary Authority, 6.00% Sewer
System Revenue Bonds (Series 1992)/(FGIC Insured)/
(Original Issue Yield: 6.20%), 12/1/2012 Aaa 400,256
---------------------------------------------------------
300,000 Armstrong County, PA, Hospital Authority, 6.75% Health
Facilities Revenue Bonds (St. Francis Health Care
Services)/
(AMBAC Insured)/(Original Issue Yield: 7.10%), 8/15/2012 Aaa 313,080
---------------------------------------------------------
200,000 Berks County, PA, Municipal Authority, 7.40% Revenue
Bonds (Albright College)/(CGIC Insured), 12/1/2018 Aaa 225,928
---------------------------------------------------------
750,000 Butler County, PA, Hospital Authority, 7.00% Revenue
Bonds (Series 1991A)/(North Hills Passavant
Hospital)/(CGIC Insured), 6/1/2022 AAA 796,193
---------------------------------------------------------
1,000,000 Central Bucks School District, PA, 6.90% GO Bonds (Series
1991), 2/1/2008 A1 1,063,670
---------------------------------------------------------
1,000,000 Chester County, PA, 7.00% GO Bonds (Series 1991A),
12/15/2011 Aa 1,112,590
---------------------------------------------------------
2,635,000 Delaware County, PA, 6.00% UT GO Bonds (Series 1992)/
Original Issue Yield: 6.20%), 11/15/2022 Aa 2,588,993
---------------------------------------------------------
</TABLE>
PENNSYLVANIA MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- ---------- --------------------------------------------------------- --------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- -----------------------------------------------------------------------
PENNSYLVANIA--CONTINUED
---------------------------------------------------------
$ 750,000 Derry Township School District, PA, 7.00% GO Bonds
(Series 1991), 9/15/2009 A1 $ 789,405
---------------------------------------------------------
1,000,000 Geisinger, PA, Health System, 7.625% Revenue Bonds
(Original Issue Yield: 7.695%), 7/1/2009 AA 1,134,050
---------------------------------------------------------
455,000 Hanover Area School District (Luzerne County), PA, 7.00%
GO Bonds (Series 1991)/(FGIC Insured), 6/1/2008 Aaa 487,000
---------------------------------------------------------
250,000 Harrisburg, PA, Water Authority 7.00% Revenue Bonds
(FGIC Insured), 7/15/2015 Aaa 277,990
---------------------------------------------------------
375,000 Harrisburg, PA, Water Authority, 7.00% Revenue Bonds
(FGIC Insured), 7/15/2010 Aaa 416,985
---------------------------------------------------------
1,000,000 Lackawanna Trail School District, (Wyoming and Lackawanna
Counties), PA 6.90% GO Bonds (Series 1991)/(AMBAC
Insured), 3/15/2010 Aaa 1,061,020
---------------------------------------------------------
1,000,000 Lancaster, PA, Hospital Authority 6.50% Revenue Bonds
(Masonic Homes)/(AMBAC Insured)/(Original Issue Yield:
7.15%), 10/1/2020 Aaa 1,073,030
---------------------------------------------------------
1,875,000 Lebanon County, PA 6.00% Hospital Authority Revenue Bonds
(Good Samaritan Hospital)/(Original Issue Yield: 6.10%),
11/15/2018 BBB+ 1,688,456
---------------------------------------------------------
1,000,000 Lehigh-Northhampton, PA, Airport Authority, 5.60% Airport
Revenue Bonds (Series A)/(Allentown-Bethelem-Easton
International)/(Original Issue Yield: 5.75%)/(MBIA
Insured)/(Subject to AMT), 1/1/2023 AAA 898,870
---------------------------------------------------------
1,000,000 Montgomery County, PA, Higher Education & Health
Facilities Authority, 7.375% Hospital Revenue Bonds (Bryn
Mawr Hospital), 12/1/2019 A 1,129,990
---------------------------------------------------------
1,000,000 Norristown, PA, Area School District, 6.90% GO Bonds
(Series 1991), 9/1/2011 Aa 1,106,350
---------------------------------------------------------
995,000 Pennsylvania HFA, 5.45% SFM Revenue Bonds (Series 37A)/
(Original Issue Yield: 5.46%), 10/1/2017 AA 883,928
---------------------------------------------------------
</TABLE>
PENNSYLVANIA MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- ---------- --------------------------------------------------------- --------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- -----------------------------------------------------------------------
PENNSYLVANIA--CONTINUED
---------------------------------------------------------
$4,000,000 Pennsylvania HFA, 5.60% SFM Revenue Bonds
(Series 1993-37B)/(Subject to AMT), 10/1/2025 AA $ 3,450,800
---------------------------------------------------------
500,000 Pennsylvania HFA, 6.15% SFM Revenue Bonds (Series 38)
10/1/2024 AA 475,330
---------------------------------------------------------
2,290,000 Pennsylvania HFA, 6.875% SFM Revenue Bonds (Series 1994-
39B)/(Subject to AMT), 10/1/2024 AA 2,319,907
---------------------------------------------------------
750,000 Pennsylvania HFA, 6.90% SFM Revenue Bonds (Series 1991)/
(Subject to AMT), 4/1/2017 Aa 772,170
---------------------------------------------------------
1,000,000 Pennsylvania HFA, 7.00% SFM Revenue Bonds (Series
1992B34),(Subject to AMT), 4/1/2024 Aa 1,031,570
---------------------------------------------------------
4,540,000 Pennsylvania HFA, 7.65% SFM Revenue Bonds (Series 28)/
(Subject to AMT), 10/1/2023 Aa 4,699,581
---------------------------------------------------------
2,250,000 Pennsylvania Higher Educational Assistance Agency, 6.00%
Revenue Bonds (Thomas Jefferson University), 7/1/2019 Aa 2,204,280
---------------------------------------------------------
1,000,000 Pennsylvania Higher Educational Facilities Agency, 5.50%
Revenue Bonds (Series 1993A)/(Duquesne University)/(MBIA
Insured)/(Original Issue Yield: 5.73%), 9/1/2020 AAA 911,370
---------------------------------------------------------
1,600,000 Pennsylvania Higher Educational Facilities Agency, 6.625%
Revenue Bonds (Trustees of the University of
Pennsylvania)/ (Original Issue Yield: 6.75%), 1/1/2017 Aa 1,618,528
---------------------------------------------------------
1,000,000 Pennsylvania Higher Educational Facilities Agency, 7.25%
Revenue Bonds (Series 1991A)/(Allegheny General
Hospital)/(Original Issue Yield: 7.40%), 9/1/2017 Aa 1,060,980
---------------------------------------------------------
500,000 Pennsylvania Higher Educational Facilities Agency, 7.30%
Revenue Bonds (Thomas Jefferson University and Jefferson
Park College), 7/1/2015 Aa 559,705
---------------------------------------------------------
1,025,000 Pennsylvania State Higher Education Assistance Agency,
6.05% Student Loan Revenue Bonds (Series 1988D)/(AMBAC
Insured)/(Subject to AMT), 1/1/2019 Aaa 979,716
---------------------------------------------------------
</TABLE>
PENNSYLVANIA MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- ---------- --------------------------------------------------------- --------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- -----------------------------------------------------------------------
PENNSYLVANIA--CONTINUED
---------------------------------------------------------
$ 250,000 Pennsylvania State Higher Educational Facilities
Authority, 6.625% Revenue Bonds (Thomas Jefferson
University and Jefferson Park Hospital)/(Series
1992)/(Original Issue Yield: 6.77%), 8/15/2009 Aa $ 263,683
---------------------------------------------------------
250,000 Pennsylvania State Higher Educational Facilities
Authority, 6.625% Revenue Bonds (Trustees of the
University of Pennsylvania), 1/1/2007 Aa 255,068
---------------------------------------------------------
1,600,000 Pennsylvania State Higher Educational Facilities
Authority, 7.15% Revenue Bonds (Thomas Jefferson
University and Jefferson Park Hospital)/(MBIA Insured),
6/15/2015 Aaa 1,775,136
---------------------------------------------------------
500,000 Pennsylvania State Higher Educational Facilities
Authority, 7.55% Revenue Bonds (Thomas Jefferson
University and Jefferson Park Hospital), 11/1/2010 Aa 575,020
---------------------------------------------------------
290,000 Pennsylvania State Turnpike Commission, 5.50% Revenue
Bonds (Original Issue Yield: 6.68%), 12/1/2017 A 261,197
---------------------------------------------------------
1,250,000 Pennsylvania State University, 5.10% Refunding Bonds
(Series 1993A)/(Original Issue Yield: 5.625%), 3/1/2018 A1 1,079,650
---------------------------------------------------------
400,000 Pennsylvania State University, 5.50% Refunding Revenue
Bonds (Series 1992A)/(Original Issue Yield: 5.90%),
8/15/2016 A1 366,640
---------------------------------------------------------
650,000 Pennsylvania State University, 6.50% Revenue Bonds
(Series 1989)/(Original Issue Yield: 7.02%), 11/15/2010 A1 677,794
---------------------------------------------------------
850,000 Pennsylvania State University, 7.00% Revenue Bonds
(Series 1991)/(Original Issue Yield: 7.172%), 7/1/2016 A1 957,015
---------------------------------------------------------
1,000,000 Pennsylvania State, 6.50% UT GO Bonds (Series 1991A)/
(Original Issue Yield: 6.60%), 11/15/2011 A1 1,039,180
---------------------------------------------------------
1,000,000 Pennsylvania Turnpike Commission, 7.50% Revenue Bonds
(Original Issue Yield: 7.625%), 12/1/2019 A 1,136,970
---------------------------------------------------------
</TABLE>
PENNSYLVANIA MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- ---------- --------------------------------------------------------- --------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- -----------------------------------------------------------------------
PENNSYLVANIA--CONTINUED
---------------------------------------------------------
$1,250,000 Philadelphia, PA, Hospital and Higher Education Facility
Authority, 5.00% Revenue Refunding Bonds (Children's
Hospital of Philadelphia)/(Original Issue Yield: 5.774%),
2/15/2021 AA $ 1,039,212
---------------------------------------------------------
1,500,000 Philadelphia, PA, Hospital and Higher Education Facility
Authority, 5.375% Hospital Revenue Bonds (Children's
Hospital of Philadelphia)/(Original Issue Yield: 5.73%),
2/15/2014 AA 1,336,350
---------------------------------------------------------
2,400,000 Philadelphia, PA, Hospital and Higher Education Facility
Authority, 5.50% Hospital Revenue Bonds (Children's
Hospital of Philadelphia)/(Original Issue Yield: 6.75%),
2/15/2022 AA 2,111,064
---------------------------------------------------------
1,775,000 Philadelphia, PA Water and Waste Water, 5.50% Revenue
Bonds (CGIC Insured)/(Original Issue Yield: 5.78%),
6/15/2015 AAA 1,632,663
---------------------------------------------------------
600,000 Pittsburgh, PA, Water and Sewer Authority, 7.25%
Refunding Bonds (FGIC Insured)/(Original Issue Yield:
7.766%), 9/1/2014 Aaa 688,974
---------------------------------------------------------
220,000 Sayre, PA, Health Care Facilities Authority, 7.10%
Revenue Bonds (Guthrie Healthcare System)/(AMBAC
Insured), 3/1/2017 Aaa 234,874
---------------------------------------------------------
2,500,000 Scranton Lackawanna, PA, Health & Welfare Authority,
7.60% Revenue Bonds (Allied Services Rehab Hospital),
7/15/2020 NR 2,511,150
---------------------------------------------------------
900,000 Seneca Valley School District, PA, 5.50% GO Bonds (Series
1992A)/(FGIC Insured)/(Original Issue Yield: 6.05%),
7/1/2014 Aaa 837,297
---------------------------------------------------------
5,500,000 Sewickley Valley, PA, Hospital Authority, 5.75% Hospital
Revenue Refunding Bonds (Series 1993A)/(Sewickley Valley
Hospital)/(Original Issue Yield: 5.875%), 10/15/2016 A 4,965,455
---------------------------------------------------------
</TABLE>
PENNSYLVANIA MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- ---------- --------------------------------------------------------- --------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- -----------------------------------------------------------------------
PENNSYLVANIA--CONTINUED
---------------------------------------------------------
$1,400,000 Swarthmore Borough Authority, PA, 6.00% Revenue Bonds
(Series 1992)/(Swarthmore College)/(Original Issue Yield:
6.35%), 9/15/2020 AA $ 1,376,732
---------------------------------------------------------
1,000,000 Swarthmore Borough Authority, PA, 7.375% Revenue Bonds
(Swarthmore College), 9/15/2020 AA 1,130,260
---------------------------------------------------------
4,600,000 University of Pittsburgh, PA, 6.125% Capital Project
Refunding Bonds (Series 1992A)/(MBIA Insured)/(Original
Issue Yield: 6.488%), 6/1/2021 Aaa 4,590,432
---------------------------------------------------------
1,000,000 Warren County Hospital Authority, 7.00% Hospital Revenue
Bonds (Series 1994)/(Warren General Hospital)/(Original
Issue Yield: 7.10%), 4/1/2019 BBB+ 999,070
---------------------------------------------------------
1,250,000 Washington County, PA, 6.00% Pooled Capital Program
Revenue Bonds (Series 1992)/(Shadyside Hospital)/(AMBAC
Insured)/(Original Issue Yield: 6.40%), 12/15/2018 Aaa 1,223,287
---------------------------------------------------------
1,450,000 Washington County, PA, 7.45% Municipal Facilities Lease
Revenue Bonds (Shadyside Hospital)/(AMBAC Insured),
12/15/2018 Aaa 1,661,555
---------------------------------------------------------
1,300,000 West Jefferson Hills School District, PA, Allegheny
County, 7.15% GO Bonds (Series 1991)/(FGIC Insured),
2/1/2015 Aaa 1,447,966
---------------------------------------------------------
1,000,000 Westmoreland County, PA IDA, 6.00% Hospital Revenue Bonds
(Series 1992A)/(Westmoreland Health System)/ (AMBAC
Insured)/(Original Issue Yield: 6.42%), 7/1/2022 Aaa 974,820
--------------------------------------------------------- -----------
Total 92,172,668
--------------------------------------------------------- -----------
</TABLE>
PENNSYLVANIA MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- ---------- --------------------------------------------------------- --------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- -----------------------------------------------------------------------
PUERTO RICO--3.2%
---------------------------------------------------------
$3,000,000 Puerto Rico Electric Power Authority, 6.375% Revenue
Bonds
(Series T)/(Original Issue Yield: 6.58%), 7/1/2024 A- $ 3,031,200
--------------------------------------------------------- -----------
TOTAL LONG-TERM MUNICIPAL SECURITIES
(IDENTIFIED COST $94,426,086) $95,203,868+
--------------------------------------------------------- -----------
</TABLE>
* Please refer to the Appendix of the Statement of Additional Information for an
explanation of the credit ratings. Current credit ratings are unaudited.
+ The cost of investments for federal tax purposes amounts to $94,426,086. The
net unrealized appreciation on a federal tax basis amounts to $777,782, which
is comprised of $3,271,774 appreciation and $2,493,992 depreciation at August
31, 1994.
Note: The categories of investments are shown as a percentage of net assets
($94,841,550) at August 31, 1994.
The following abbreviations are used in this portfolio:
<TABLE>
<S> <C>
AMBAC --American Municipal Bond Assurance Corporation
AMT --Alternative Minimum Tax
CGIC --Capital Guaranty Insurance Corporation
FGIC --Financial Guaranty Insurance Company
GNMA --Government National Mortgage Association
GO --General Obligations
HDA --Hospital Development Authority
HFA --Housing Finance Authority/Agency
IDA --Industrial Development Authority
MBIA --Municipal Bond Investors Assurance
SFH --Single Family Housing
SFM --Single Family Mortgage
UT --Unlimited Tax
</TABLE>
(See Notes which are an integral part of the Financial Statements)
PENNSYLVANIA MUNICIPAL INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- ------------------------------------------------------------------------------------------
Investments in securities, at value (identified and tax cost; $94,426,086) $95,203,868
- ------------------------------------------------------------------------------------------
Cash 799,717
- ------------------------------------------------------------------------------------------
Interest receivable 1,738,662
- ------------------------------------------------------------------------------------------
Receivable for Fund shares sold 81,459
- ------------------------------------------------------------------------------------------
Deferred expenses 6,016
- ------------------------------------------------------------------------------------------ -----------
Total assets 97,829,722
- ------------------------------------------------------------------------------------------
LIABILITIES:
- -----------------------------------------------------------------------------
Payable for investments purchased $2,506,333
- -----------------------------------------------------------------------------
Dividends payable 206,062
- -----------------------------------------------------------------------------
Payable for Fund shares redeemed 195,092
- -----------------------------------------------------------------------------
Accrued expenses 80,685
- ----------------------------------------------------------------------------- ----------
Total liabilities 2,988,172
- ------------------------------------------------------------------------------------------ -----------
NET ASSETS for 8,677,665 shares of beneficial interest outstanding $94,841,550
- ------------------------------------------------------------------------------------------ -----------
NET ASSETS CONSIST OF:
- ------------------------------------------------------------------------------------------
Paid-in capital $94,579,062
- ------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments 777,782
- ------------------------------------------------------------------------------------------
Accumulated undistributed net realized gain (loss) on investments (529,378)
- ------------------------------------------------------------------------------------------
Undistributed net investment income 14,084
- ------------------------------------------------------------------------------------------ -----------
Total $94,841,550
- ------------------------------------------------------------------------------------------ -----------
NET ASSET VALUE:
- ------------------------------------------------------------------------------------------
Class A Shares ($85,859,800 / 7,849,970 shares of beneficial interest outstanding) $10.94
- ------------------------------------------------------------------------------------------ -----------
Income Shares ($8,981,750 / 827,695 shares of beneficial interest
outstanding) $10.85
- ------------------------------------------------------------------------------------------ -----------
OFFERING PRICE PER SHARE:
- ------------------------------------------------------------------------------------------
Class A Shares (100/97 of $10.94)* $11.28
- ------------------------------------------------------------------------------------------ -----------
Income Shares $10.85
- ------------------------------------------------------------------------------------------ -----------
REDEMPTION PROCEEDS PER SHARE:
- ------------------------------------------------------------------------------------------
Class A Shares (99.5/100 of $10.94)** $10.89
- ------------------------------------------------------------------------------------------ -----------
Income Shares (97/100 of $10.85)** $10.52
- ------------------------------------------------------------------------------------------ -----------
</TABLE>
* See "What Shares Cost" in the prospectus.
** See "Redeeming Shares" in the prospectus.
(See Notes which are an integral part of the Financial Statements)
PENNSYLVANIA MUNICIPAL INCOME FUND
STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ----------------------------------------------------------------------------------------
Interest income $ 5,944,442
- ----------------------------------------------------------------------------------------
EXPENSES:
- --------------------------------------------------------------------------
Investment advisory fee $ 394,564
- --------------------------------------------------------------------------
Administrative personnel and services 247,255
- --------------------------------------------------------------------------
Trustees' fees 2,556
- --------------------------------------------------------------------------
Custodian and portfolio accounting fees and expenses 91,252
- --------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 64,705
- --------------------------------------------------------------------------
Fund share registration costs 52,972
- --------------------------------------------------------------------------
Printing and postage 37,744
- --------------------------------------------------------------------------
Legal fees 15,808
- --------------------------------------------------------------------------
Auditing fees 16,828
- --------------------------------------------------------------------------
Shareholder service fees--Class A Shares 183,393
- --------------------------------------------------------------------------
Shareholder service fees--Income Shares 16,428
- --------------------------------------------------------------------------
Distribution services fee--Income Shares 49,274
- --------------------------------------------------------------------------
Insurance premiums 6,028
- --------------------------------------------------------------------------
Miscellaneous 5,622
- -------------------------------------------------------------------------- ----------
Total expenses 1,184,429
- --------------------------------------------------------------------------
Deduct--
- ---------------------------------------------------------------
Waiver of investment advisory fee $394,564
- ---------------------------------------------------------------
Reimbursement of other operating fees and expenses by Adviser 48,000 442,564
- --------------------------------------------------------------- -------- ----------
Net expenses 741,865
- ---------------------------------------------------------------------------------------- -----------
Net investment income 5,202,577
- ---------------------------------------------------------------------------------------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ----------------------------------------------------------------------------------------
Net realized gain (loss) on investments (identified cost basis)-- (512,278)
- ----------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) of investments (6,424,038)
- ---------------------------------------------------------------------------------------- -----------
Net realized and unrealized gain (loss) on investments (6,936,316)
- ---------------------------------------------------------------------------------------- -----------
Change in net assets resulting from operations $(1,733,739)
- ---------------------------------------------------------------------------------------- -----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
PENNSYLVANIA MUNICIPAL INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
---------------------------
1994 1993
----------- -----------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ----------------------------------------------------------------------------
OPERATIONS--
- ----------------------------------------------------------------------------
Net investment income $ 5,202,577 $ 3,587,749
- ----------------------------------------------------------------------------
Net realized gain (loss) on investment transactions ($4,200 net gain and $63
net loss, respectively as computed for federal tax purposes) (512,278) (63)
- ----------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments (6,424,038) 4,748,657
- ---------------------------------------------------------------------------- ----------- -----------
Change in net assets resulting from operations (1,733,739) 8,336,343
- ---------------------------------------------------------------------------- ----------- -----------
NET EQUALIZATION CREDITS (DEBITS) (3,542) 37,826
- ---------------------------------------------------------------------------- ----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS
- ----------------------------------------------------------------------------
Dividends to shareholders from net investment income:
Class A Shares (3,799,070) (3,121,962)
- ----------------------------------------------------------------------------
Trust Shares (1,017,184) (490,234)
- ----------------------------------------------------------------------------
Income Shares (322,340) (1,788)
- ----------------------------------------------------------------------------
Distributions in excess of net investment income:
Class A Shares -- --
- ----------------------------------------------------------------------------
Trust Shares -- --
- ----------------------------------------------------------------------------
Income Shares (33,585) --
- ---------------------------------------------------------------------------- ----------- -----------
Change in net assets resulting from distributions to shareholders (5,172,179) (3,613,984)
- ---------------------------------------------------------------------------- ----------- -----------
FUND SHARE (PRINCIPAL) TRANSACTIONS
(EXCLUSIVE OF AMOUNTS ALLOCATED TO NET INVESTMENT INCOME)
- ----------------------------------------------------------------------------
Proceeds from sale of shares 45,919,717 38,303,074
- ----------------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment
of dividends declared 2,723,609 2,177,736
- ----------------------------------------------------------------------------
Cost of shares redeemed (34,783,265) (9,392,767)
- ---------------------------------------------------------------------------- ----------- -----------
Change in net assets resulting from Fund share transactions 13,860,061 31,088,043
- ---------------------------------------------------------------------------- ----------- -----------
Change in net assets 6,950,601 35,848,228
- ----------------------------------------------------------------------------
NET ASSETS:
- ----------------------------------------------------------------------------
Beginning of period 87,890,949 52,042,721
- ---------------------------------------------------------------------------- ----------- -----------
End of period (including undistributed net investment income of $14,084 and
$0, respectively $94,841,550 $87,890,949
- ---------------------------------------------------------------------------- ----------- -----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
PENNSYLVANIA MUNICIPAL INCOME FUND
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1994
- --------------------------------------------------------------------------------
(1) ORGANIZATION
Municipal Securities Income Trust (the "Trust") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as an open-end
management investment company. The Trust consists of ten, non-diversified
portfolios. The financial statements included herein present only those of
Pennsylvania Municipal Income Fund (the "Fund"). The financial statements of the
other portfolios are presented separately. The assets of each portfolio are
segregated and a shareholder's interest is limited to the portfolio in which
shares are held.
Effective October 17, 1994, the Fund will provide one class of shares "Class A
Shares." During the fiscal year ended October 31, 1994, the Fund provided three
classes of shares ("Investment Shares", "Income Shares", and "Trust Shares").
Effective May 31, 1994, the "Investment Shares" class of shares changed its name
to "Class A Shares". As of August 26, 1994, the "Trust Shares" class of shares
were no longer offered. As of October 17, 1994, the "Income Shares" class of
shares were no longer offered.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
<TABLE>
<S> <C>
A. INVESTMENT VALUATIONS--Municipal bonds are valued by an independent pricing service
taking into consideration yield, liquidity, risk, credit, quality, coupon, maturity, type
of issue, and any other factors or market data it deems relevant in determining
valuations for normal institutional size trading units of debt securities. The
independent pricing service does not rely exclusively on quoted prices. Short-term
securities with remaining maturities of sixty days or less may be stated at amortized
cost, which approximates value.
B. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and expenses are accrued
daily. Bond premium and discount, if applicable, are amortized as required by the
Internal Revenue Code, as amended (the "Code"). Distributions to shareholders are
recorded on the ex-dividend date. Distributions are determined in accordance with income
tax regulations which may differ from generally accepted accounting principles. The
excess distributions are the result of the capitalization of the 12b-1 fees for federal
income tax purposes and the recognition of distributions for book and tax purposes. These
excess distributions do not represent a return of capital for federal income tax
purposes.
C. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the Code
applicable to regulated investment companies and to distribute to shareholders each year
all of its tax-exempt income. Accordingly, no provisions for federal tax are necessary.
At August 31, 1994, the Fund, for federal tax purposes, had a capital loss carryforward
of $12,900, which will reduce the Fund's
</TABLE>
PENNSYLVANIA MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
taxable income arising from future net realized gain on investments, if any, to the
extent permitted by the Code, and thus will reduce the amount of the distributions to
shareholders which would otherwise be necessary to relieve the Fund of any liability for
federal tax. Pursuant to the Code, such capital loss carryforward will expire in 2000
($12,837) and 2001 ($63). Additionally, net capital losses of $516,479 attributable to
security transactions incurred after October 31, 1993 are treated as arising on September
1, 1994, the first day of the Fund's next taxable year.
D. EQUALIZATION--The Fund follows the accounting practice known as equalization by which a
portion of the proceeds from sales and costs of redemptions of capital stock equivalent,
on a per share basis, to the amount of undistributed net investment income on the date of
the transaction is credited or charged to undistributed net investment income. As a
result, undistributed net investment income per share is unaffected by sales or
redemptions of capital stock.
E. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in when-issued or
delayed delivery transactions. The Fund records when-issued securities on the trade date
and maintains security positions such that sufficient liquid assets will be available to
make payment for the securities purchased. Securities purchased on a when-issued or
delayed delivery basis are marked to market daily and begin earning interest on the
settlement date.
F. CONCENTRATION OF RISK--Since the Fund invests a substantial portion of its assets in
issuers located in one state, it will be more susceptible to factors adversely affecting
issuers of that state than would be a comparable general tax-exempt mutual fund. In order
to reduce the credit risk associated with such factors, at August 31, 1994, 35.9% of the
securities in the portfolio of investments are backed by letters of credit or bond
insurance of various financial institutions and financial guaranty assurance agencies.
The value of investments insured by or supported (backed) by a letter of credit for any
one institution or agency did not exceed 17.1% of total investments.
G. DEFERRED EXPENSES--The costs incurred by the Fund with respect to registration of its
shares in its first fiscal year, excluding the initial expense of registering its shares,
have been deferred and are being amortized using the straight-line method not to exceed a
period of five years from the Fund's commencement date.
H. OTHER--Investment transactions are accounted for on the trade date.
</TABLE>
PENNSYLVANIA MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
(3) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
--------------------------------------------------------
1994 1993
-------------------------- ------------------------
TRUST SHARES SHARES DOLLARS SHARES DOLLARS
- ---------------------------------------- ---------- ------------ -------- ------------
<S> <C> <C> <C> <C>
Shares sold 967,106 $ 11,190,303 1,442,058 $ 16,212,265
- ----------------------------------------
Shares issued to shareholders in payment
of dividends declared 18,160 205,161 6,460 73,298
- ----------------------------------------
Shares redeemed (2,314,190) (25,466,927) (465,681) (5,204,454)
- ---------------------------------------- ---------- ------------ -------- ------------
Net change resulting from Trust Share
transactions (1,328,924) ($14,071,463) 982,837 $ 11,081,109
- ---------------------------------------- ---------- ------------ -------- ------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
------------------------------------------------------
1994 1993
------------------------ ------------------------
CLASS A SHARES SHARES DOLLARS SHARES DOLLARS
- ------------------------------------------ --------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Shares sold 2,480,778 $27,675,360 1,755,124 $19,686,371
- ------------------------------------------
Shares issued to shareholders in payment
of dividends declared 211,676 2,388,967 187,851 2,102,669
- ------------------------------------------
Shares redeemed (829,711) (9,244,692) (371,875) (4,188,313)
- ------------------------------------------ --------- ----------- --------- -----------
Net change resulting from Class A Share
transactions 1,862,743 $20,819,635 1,571,100 $17,600,727
- ------------------------------------------ --------- ----------- --------- -----------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
------------------------------------------------------
1994 1993*
------------------------ ------------------------
INCOME SHARES SHARES DOLLARS SHARES DOLLARS
- ------------------------------------------ --------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Shares sold 615,174 $ 7,054,054 206,977 $ 2,404,438
- ------------------------------------------
Shares issued to shareholders in payment
of dividends declared 11,755 129,481 152 1,769
- ------------------------------------------
Shares redeemed (6,383) (71,646) -- --
- ------------------------------------------ --------- ----------- --------- -----------
Net change resulting from Income Share
transactions 620,546 7,111,889 207,129 $ 2,406,207
- ------------------------------------------ --------- ----------- --------- -----------
Net change resulting from Fund Share
transactions 1,154,365 $13,860,061 2,761,066 $31,088,043
- ------------------------------------------ --------- ----------- --------- -----------
</TABLE>
* For the period from July 29, 1993 (date of initial public investment) to
August 31, 1993.
PENNSYLVANIA MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
ADVISORY FEE--Federated Advisers, the Fund's investment adviser (the "Adviser"),
receives for its services 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 and reimburse certain operating expenses of the Fund.
The Adviser can modify or terminate this voluntary waiver and reimbursement at
any time at its sole discretion.
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS") provides the Fund
with administrative personnel and services. Prior to March 1, 1994, these
services were provided at approximate cost. Effective March 1, 1994, the FAS fee
is based on the level of average aggregate daily net assets of all funds advised
by subsidiaries of Federated Investors for the period. The administrative fee
received during the period of the Administrative Services Agreement shall be at
least $125,000 per portfolio and $30,000 per each additional class of shares.
DISTRIBUTION AND SHAREHOLDER SERVICES FEE--The Fund has adopted a Distribution
Plan (the "Plan") pursuant to Rule 12b-1 under the Act. The Fund paid Federated
Securities Corp. ("FSC"), the principal distributor, up to .40 of 1% of the
average daily net assets of the Class A Shares (formerly Investment Shares) for
the period from September 1, 1992 to July 28, 1993; thereafter, no fee was
charged. The fee for Income Shares is equal to .75 of 1% of the average daily
net assets.
Under the terms of a Shareholder Services Agreement with Federated Shareholder
Services ("FSS"), the Fund will pay FSS up to .25 of 1% of average net assets of
the Class A Shares and Income Shares of the Fund for the period. This fee is to
obtain certain personal services for shareholders and the maintenance of
shareholder accounts.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES--Federated Services Company
("FServ") serves as transfer agent and dividend disbursing agent for the Fund.
The FServ fee is based on the size, type and number of accounts and transactions
made by shareholders.
ORGANIZATIONAL EXPENSES--Organizational expenses of $28,449 and start-up
administrative services expenses of $100,330 were borne initially by the
Adviser. The Fund has agreed to reimburse the Adviser for the organizational
expenses and start-up administrative expenses during the five year period
following October 1, 1990 (date the Fund first became effective). For the year
ended August 31, 1994, the Fund paid $4,882 and $9,763, respectively, pursuant
to this agreement.
INTERFUND TRANSACTIONS--During the year ended August 31, 1994, the Fund engaged
in purchase and sale transactions with other affiliated Funds at current value
on the date of the transaction pursuant to Rule 17a-7 under the Act amounting to
$25,300,000 and $28,068,969, respectively.
Certain of the Officers and Trustees of the Fund are Officers and Directors or
Trustees of the above companies.
PENNSYLVANIA MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
fiscal year ended August 31, 1994, were as follows:
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------
PURCHASES $34,329,290
- ------------------------------------------------------------------------------- -----------
SALES $16,494,338
- ------------------------------------------------------------------------------- -----------
</TABLE>
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
To the Board of Trustees of MUNICIPAL SECURITIES INCOME TRUST
and Shareholders of PENNSYLVANIA MUNICIPAL INCOME FUND:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Pennsylvania Municipal Income Fund (a portfolio
of Municipal Securities Income Trust) as of August 31, 1994, the related
statement of operations for the year then ended, the statement of changes in net
assets for the years ended August 31, 1994 and 1993, and the financial
highlights (see pages 2 and 22 of the prospectus) for each of the years in the
four-year period ended August 31, 1994. These financial statements and the
financial highlights are the responsibility of the Trust's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
August 31, 1994 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Pennsylvania
Municipal Income Fund as of August 31, 1994, the results of its operations, the
changes in its net assets, and its financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
October 7, 1994
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Fund
Pennsylvania Municipal Income Fund Federated Investors Tower
Class A Shares 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
- ------------------------------------------------------------------------------------------------
</TABLE>
PENNSYLVANIA MUNICIPAL
INCOME FUND
CLASS A SHARES
PROSPECTUS
A Non-Diversified Portfolio of
Municipal Securities Income Trust
an Open-End, Management
Investment Company
October 31, 1994
FEDERATED SECURITIES CORP.
(LOGO)
- ---------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
625922505
0090701A-A (10/94)
PENNSYLVANIA MUNICIPAL INCOME FUND
CLASS A SHARES
(A PORTFOLIO OF MUNICIPAL SECURITIES INCOME TRUST)
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the prospectus for
Class A Shares of Pennsylvania Municipal Income Fund (the "Fund") dated October
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 October 31, 1994
FEDERATED SECURITIES CORP.
(LOGO)
- ---------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND 1
- ----------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES 1
- ----------------------------------------------------------------
Acceptable Investments 1
When-Issued and Delayed
Delivery Transactions 2
Temporary Investments 2
Portfolio Turnover 3
Investment Limitations 3
Pennsylvania Investment Risks 4
MUNICIPAL SECURITIES INCOME TRUST MANAGEMENT 5
- ----------------------------------------------------------------
Officers and Trustees 5
Fund Ownership 7
The Funds 7
Trustee Liability 7
INVESTMENT ADVISORY SERVICES 7
- ----------------------------------------------------------------
Adviser to the Fund 7
Advisory Fees 8
ADMINISTRATIVE SERVICES 8
- ----------------------------------------------------------------
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT 8
- ----------------------------------------------------------------
BROKERAGE TRANSACTIONS 8
- ----------------------------------------------------------------
PURCHASING SHARES 9
- ----------------------------------------------------------------
Distribution and Shareholder Services Plans 9
Purchases by Sales Representatives,
Fund Trustees, and Employees 9
DETERMINING NET ASSET VALUE 9
- ----------------------------------------------------------------
Valuing Municipal Bonds 9
Use of Amortized Cost 9
REDEEMING SHARES 10
- ----------------------------------------------------------------
Redemption in Kind 10
TAX STATUS 10
- ----------------------------------------------------------------
The Fund's Tax Status 10
Shareholders' Tax Status 10
TOTAL RETURN 10
- ----------------------------------------------------------------
YIELD 11
- ----------------------------------------------------------------
TAX-EQUIVALENT YIELD 11
- ----------------------------------------------------------------
Tax-Equivalency Table 11
PERFORMANCE COMPARISONS 12
- ----------------------------------------------------------------
APPENDIX 13
- ----------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND
- --------------------------------------------------------------------------------
The Fund is a portfolio in Municipal Securities Income Trust (the "Trust"). On
September 16, 1992 (effective date October 31, 1992) the Board of Trustees
("Trustees") approved changing the name of the Trust from Federated Municipal
Income Trust to Municipal Securities Income Trust. The Trust was established as
a Massachusetts business trust under a Declaration of Trust dated August 6,
1990.
Shares of the Fund are presently offered in one class known as Class A Shares
("Shares"). As of August 31, 1994, Income Shares and Trust Shares are no longer
offered. This statement of additional information relates only to Class A Shares
of the Fund.
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 Pennsylvania. The investment objective cannot be changed without
approval of shareholders.
ACCEPTABLE INVESTMENTS
The Fund invests primarily in a portfolio of municipal securities which are
exempt from federal regular income tax and Pennsylvania state and local tax
("Pennsylvania Municipal Securities"). These securities include those issued by
or on behalf of the Commonwealth of Pennsylvania and Pennsylvania
municipalities, and 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 Pennsylvania and Pennsylvania
municipalities.
CHARACTERISTICS
The Pennsylvania Municipal Securities in which the Fund invests have the
characteristics set forth in the prospectus.
If a rated bond loses its rating or has its rating reduced after the Fund
has purchased it, the Fund is not required to drop the bond from the
portfolio, but will consider doing so. If ratings made by Moody's
Investors Service, Inc., Standard & Poor's Ratings Group or Fitch's
Investors Service, Inc. 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 Pennsylvania Municipal Securities are:
- municipal notes and municipal commercial paper;
- serial bonds sold with differing maturity dates;
- tax anticipation notes sold to finance working capital needs of
municipalities;
- bond anticipation notes sold prior to the issuance of longer-term
bonds;
- pre-refunded municipal bonds; and
- general obligation bonds secured by a municipality pledge of taxation.
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 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
investment adviser, under the authority delegated by the Trustees, will
base its determination on the following factors:
- whether the lease can be terminated by the lessee:
- the potential recovery, if any, from a sale of the leased property upon
termination of the lease;
- the lessee's general credit strength (e.g., its debt, administrative,
economic and financial characteristics and prospects);
- the likelihood that the lessee will discontinue appropriating funding
for the leased property because the property is no longer deemed
essential to its operations (e.g., the potential for an "event of
non-appropriation");
- 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.
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 will only enter
into repurchase agreements with banks and other recognized financial
institutions, such as broker/dealers, which are deemed by the Fund's
investment adviser to be creditworthy pursuant to guidelines established
by the Trustees.
From time to time, such as when suitable Pennsylvania municipal bonds 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 Pennsylvania municipal bonds and thereby reduce the Fund's
yield.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements. This
transaction is similar to borrowing cash. In a reverse repurchase
agreement the Fund transfers possession of a portfolio instrument to
another person, such as a financial institution, broker, or dealer in
return for a percentage of the instrument's market value in cash and
agrees that on a stipulated date in the future the Fund will repurchase
the portfolio instrument by remitting the original consideration plus
interest at an agreed upon rate. The use of reverse repurchase agreements
may enable the Fund to avoid selling portfolio instruments at a time when
a sale may be deemed to be disadvantageous, but the ability to enter into
reverse repurchase agreements does not ensure that the Fund will be able
to avoid selling portfolio instruments at a disadvantageous time. When
effecting reverse repurchase agreements, liquid assets of the Fund, in a
dollar amount sufficient to make payment for the obligations to be
- --------------------------------------------------------------------------------
purchased, are segregated at the trade date. These securities are marked
to market daily and 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 years ended August 31, 1994 and 1993, the
portfolio turnover rates were 17% 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 or to facilitate management of the portfolio by
enabling the Fund to meet redemption requests when the liquidation of
portfolio securities is deemed to be inconvenient or disadvantageous. The
Fund will not purchase any securities while borrowings in excess of 5% of
its total assets are outstanding. During the period any reverse
repurchase agreements are outstanding, but only to the extent necessary
to assure completion of the reverse repurchase agreements, the Fund will
restrict the purchase of portfolio instruments to money market
instruments maturing on or before the expiration date of the reverse
repurchase agreements.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate 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 buy or sell real estate although it may invest in
municipal bonds secured by real estate or interests in real estate.
INVESTING IN COMMODITIES
The Fund will not buy or sell commodities, commodity contracts, or
commodities futures contracts.
INVESTING IN RESTRICTED SECURITIES
The Fund will not invest more than 10% of the value of its assets in
securities subject to restrictions on resale under the Securities Act of
1933.
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.
DEALING IN PUTS AND CALLS
The Fund will not buy or sell puts, calls, straddles, spreads, or any
combination of these.
CONCENTRATION OF INVESTMENTS
The Fund will not purchase securities if, as a result of such purchase,
25% or more of the value of its total assets would be invested in any one
industry or in industrial development bonds or other securities, the
interest upon which is paid from revenues of similar types of projects.
However, the Fund may invest as temporary investments more than 25% of
the value of its assets in cash or cash items, securities issued or
guaranteed by the
- --------------------------------------------------------------------------------
U.S. government, its agencies, or instrumentalities, or instruments
secured by these money market instruments, 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 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 ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND TRUSTEES OF
THE TRUST
The Fund will not purchase or retain the securities of any issuer if the
Officers and Trustees of the Trust or its investment adviser owning
individually more than 1/2 of 1% of the issuer's securities together own
more than 5% of the issuer's securities.
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.
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
the 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 did not borrow money or pledge securities in excess of 5%
of the value of its net assets during the last fiscal year and has no present
intent to do so in the current fiscal year.
In order to comply with certain state restrictions, the Fund will not invest in
real estate limited partnerships or oil, gas or other mineral leases.
For purposes of its policies and limitations, the Fund considers certificates of
deposit and demand and time deposits issued by a U.S. branch of a domestic bank
or savings and loan having capital, surplus, and undivided profits in excess of
$100,000,000 at the time of investment to be "cash items."
PENNSYLVANIA INVESTMENT RISKS
Yields on Pennsylvania Municipal Securities depend on a variety of factors,
including: 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
Commonwealth of Pennsylvania or its county and local governments could impact
the Fund's portfolio. The Fund's concentration in securities issued by the
Commonwealth of Pennsylvania and its political subdivisions provides a greater
level of risk than a fund which is diversified across numerous states and
municipal entities. Pennsylvania's dependence on manufacturing and mining leaves
it vulnerable to both the business cycle and long-term national economic trends.
The ability of the Commonwealth or its municipalities to meet their obligations
will depend on the availability of tax and other revenues; economic, political
and demographic conditions within Pennsylvania; and their underlying fiscal
condition.
Concerning the constitutional provisions pertaining to debt, the Commonwealth
may issue tax anticipation notes for its General Fund and/or Motor License Fund.
However, the aggregate amount of newly issued and outstanding tax anticipation
notes is limited to a maximum of 20% of the estimated revenues of the
appropriate fund for the fiscal year in which the notes are issued. The notes
must mature within the fiscal year of issuance. The Commonwealth of Pennsylvania
may also issue bond anticipation notes with a term not to exceed three years.
The bond anticipation notes are subject to applicable statutory limitations
pertaining to the issuance of bonds. The ability of the Fund to achieve its
investment objective depends on the continuing ability of the issuers of
Pennsylvania 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 Pennsylvania Municipal Securities which meet the Fund's
quality standards may not be possible if the Commonwealth of Pennsylvania and
its municipalities do not maintain their current credit rating.
MUNICIPAL SECURITIES INCOME TRUST MANAGEMENT
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OFFICERS AND TRUSTEES
Officers and Trustees are listed with their address, 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.
- --------------------------------------------------------------------------------
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
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 Trustees between meetings of the
Board.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the outstanding Shares.
As of September 28, 1994, the following shareholder of record owned 5% or more
of the outstanding Class A Shares of the Fund: Merrill Lynch, Pierce, Fenner &
Smith, Jacksonville, Florida owned approximately 872,760 shares (11.36%); Selma
Wiener Berkman, Pittsburgh, Pennsylvania, owned approximately 504,410 Shares
(6.56%).
THE FUNDS
"The Funds" and "Funds" mean the following investment companies: American
Leaders Fund, Inc.; Annuity Management Series; Arrow Funds; Automated Cash
Management Trust; Automated Government Money Trust; California Municipal Cash
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
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; 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; 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.
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that the Trustees will not be liable
for errors of judgment or mistakes of fact or law. However, they are not
protected against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICES
- --------------------------------------------------------------------------------
ADVISER TO THE FUND
The Fund'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 Trust.
- --------------------------------------------------------------------------------
ADVISORY FEES
For its advisory services, Federated Advisers receives an annual investment
advisory fee as described in the prospectus. For the fiscal years ended August
31, 1994, 1993, and 1992, the Fund's adviser earned $394,564, $267,549, and
$182,192, respectively, 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 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
$247,255, none of which was waived. For the fiscal years ended August 31, 1993
and 1992, Federated Administrative Services, Inc. earned $280,332 and $192,686,
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 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 that 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:
- - advice as to the advisability of investing in securities;
- - security analysis and reports;
- -economic studies;
- - industry studies;
- - receipt of quotations for portfolio evaluations; and
- - similar services.
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 the 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.
PURCHASING SHARES
- --------------------------------------------------------------------------------
Except under certain circumstances described in the respective prospectuses,
Shares are sold at their net asset value plus a sales load on days the New York
Stock Exchange is open for business. The procedure for purchasing Shares is
explained in the prospectus under "Investing in Class A Shares."
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; (3) enhancing shareholder
recordkeeping systems; and (4) responding promptly to shareholders' requests and
inquiries concerning their accounts.
For the fiscal years ended August 31, 1994, 1993, and 1992, payments in the
amount of $49,274, $208,401 and $110,465, respectively, were made pursuant to
the Distribution Plan. In addition, for the fiscal year ended August 31, 1994,
payments in the amount of $199,821 were made pursuant to the Shareholder
Services Plan.
PURCHASES BY SALES REPRESENTATIVES, FUND TRUSTEES, AND EMPLOYEES
Trustees, employees, and sales representatives of the Fund, Federated Advisers,
and Federated Securities Corp. or their affiliates, or any investment dealer who
has a sales agreement with Federated Securities Corp. and their spouses and
children under 21, may buy Shares at net asset value without a sales load.
Shares may also be sold without a sales load to trusts or pension or
profit-sharing plans for these persons. These sales are made with the
purchaser's written assurance that the purchase is for investment purposes and
that the securities will not be resold except through redemption by the Fund.
DETERMINING NET ASSET VALUE
- --------------------------------------------------------------------------------
Net asset value generally changes each day. The days on which net asset value is
calculated by the Fund are described in the prospectus.
VALUING MUNICIPAL BONDS
The Trustees use an independent pricing service to determine the market value of
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. Redemption procedures and contingent deferred
sales charges are explained in the prospectus under "Redeeming Class A Shares."
Although the Fund 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
The Trust is obligated to redeem Shares solely in cash up to $250,000 or 1% of
the net asset value of the respective class, 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 Fund 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 of 1986, as amended,
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:
- - derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;
- - derive less than 30% of its gross income from the sale of securities held less
than three months;
- -invest in securities within certain statutory limits; and
- -distribute to its shareholders at least 90% of its net income earned during the
year.
SHAREHOLDERS' TAX STATUS
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;
- differentials in market values;
- new investment opportunities;
- changes in creditworthiness of an issuer; or
- 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 the
shareholder has owned the shares. Any loss by a shareholder on Fund shares held
for less than six months and sold after a capital gains distribution will be
treated as a long-term capital loss to the extent of the capital gains
distribution.
TOTAL RETURN
- --------------------------------------------------------------------------------
The Fund's average annual total return for Class A Shares for the fiscal year
ended August 31, 1994, and for the period from October 11, 1990 (date of initial
public investment) to August 31, 1994, were (4.29%) and 7.53%, respectively. The
Fund's average annual total return for Income Shares for the fiscal year ended
August 31, 1994 and for the period from July 29, 1993 (date of initial public
investment) to August 31, 1994, were (5.11%) and (2.63%), respectively. The
average annual total return for Class A Shares of 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, less any applicable sales
load, adjusted over the period by any additional
- --------------------------------------------------------------------------------
shares, assuming a monthly reinvestment of all dividends and distributions. 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
offering price of shares redeemed.
YIELD
- --------------------------------------------------------------------------------
The Fund's yield for Class A Shares for the thirty-day period ended August 31,
1994 was 5.16%. The Fund's yield for Income Shares for the thirty-day period
ended August 31, 1994 was 4.57%.
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
respective class 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 any class
of shares of the Fund, performance will be reduced for those shareholders paying
those fees.
TAX-EQUIVALENT YIELD
- --------------------------------------------------------------------------------
The Fund's tax-equivalent yield for Class A Shares for the thirty-day period
ended August 31, 1994 was 7.46%. The Fund's tax equivalent yield for Income
Shares for the thirty-day period ended August 31, 1994 was 6.60%.
The tax-equivalent yield for Shares of the Fund is calculated similarly to the
yield, but is adjusted to reflect the taxable yield that any class would have
had to earn to equal its actual yield, assuming a 28% tax rate 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 is free
from the income taxes imposed by the State of Pennsylvania. 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.
<TABLE>
<S> <C> <C> <C> <C> <C>
TAXABLE YIELD EQUIVALENT FOR 1994**
STATE OF PENNSYLVANIA
- ------------------------------------------------------------------------------------------------------------
COMBINED FEDERAL AND STATE INCOME TAX BRACKET:
17.80% 30.80% 33.80% 38.80% 42.40%
- ------------------------------------------------------------------------------------------------------------
JOINT RETURN: $1-38,000 $38,001-91,850 $91,851-140,000 $140,001-250,000 OVER $250,000
SINGLE RETURN: $1-22,750 $22,751-55,100 $55,101-115,000 $115,001-250,000 OVER $250,000
- ------------------------------------------------------------------------------------------------------------
TAX-EXEMPT YIELD TAXABLE YIELD EQUIVALENT
- ------------------------------------------------------------------------------------------------------------
1.50% 1.82% 2.17% 2.27% 2.45% 2.60%
2.00% 2.43% 2.89% 3.02% 3.27% 3.47%
2.50% 3.04% 3.61% 3.78% 4.08% 4.34%
3.00% 3.65% 4.34% 4.53% 4.90% 5.21%
3.50% 4.26% 5.06% 5.29% 5.72% 6.08%
4.00% 4.87% 5.78% 6.04% 6.54% 6.94%
4.50% 5.47% 6.50% 6.80% 7.35% 7.81%
5.00% 6.08% 7.23% 7.55% 8.17% 8.68%
5.50% 6.69% 7.95% 8.31% 8.99% 9.55%
6.00% 7.30% 8.67% 9.06% 9.80% 10.42%
</TABLE>
The chart above is for illustrative purposes only. It is not an indicator of
past or future performance of the Fund.
* Some portion of the Fund's income may be subject to the federal alternative
minimum tax and state and local taxes.
** The maximum marginal tax rate for each bracket was used in calculating the
taxable yield equivalent. Furthermore, additional state and local taxes paid
on comparable taxable investments were not used to increase federal
deductions.
PERFORMANCE COMPARISONS
- --------------------------------------------------------------------------------
The performance of Shares depends upon such variables as:
- - portfolio quality;
- - average portfolio maturity;
- - type of instruments in which the portfolio is invested;
- - changes in interest rates and market value of portfolio securities;
- - changes in the Fund's class expenses; and
- - various other factors.
The Fund's performance fluctuates on a daily basis largely because net earnings
and offering price per share fluctuate daily. Both net earnings and offering
price per share are factors in the computation of yield and total return as
described below.
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:
- - LEHMAN BROTHERS REVENUE BOND INDEX is a total return performance benchmark for
the long-term, investment grade, revenue bond market. Returns and attributes
for the index are calculated semi-monthly.
- - LIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes the
reinvestment of all capital gains distributions and income dividends and takes
into account any change in offering price over a specific period of time. From
time to time, the Fund will quote its Lipper ranking in the "general municipal
bond funds" category in advertising and sales literature.
- - MORNINGSTAR, INC., an independent rating service, is the publisher of the
bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000
NASDAQ-listed mutual funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and ratings are effective for two
weeks.
Advertisements and other sales literature for the Fund may quote total returns
which are calculated on non-standardized base periods. The total returns
represent the historic change in the value of an investment in the Fund based on
monthly reinvestment of dividends over a specific period of time.
Advertisements may quote performance information which does not reflect the
effect of the sales load.
APPENDIX
- --------------------------------------------------------------------------------
STANDARD AND POOR'S RATINGS GROUP("S&P") MUNICIPAL BOND RATINGS
AAA--Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
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. ("MOODY'S") 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 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 corporate or municipal bond rating
system. The modifier 1 indicates that the security ranks in the higher end of
its generic rating 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. ("FITCH") LONG-TERM DEBT RATINGS
AAA--Bonds considered to be investment grade and of very high 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--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
(+) 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 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 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 structures with moderate reliance on debt
and ample asset protection; broad margins in earning coverage of fixed financial
charges and high internal cash generation; and 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.
625922505
0090701B (10/94)
PENNSYLVANIA MUNICIPAL INCOME FUND
(CLASS A SHARES AND INCOME SHARES)
- --------------------------------------------------------------------------------
ANNUAL REPORT FOR FISCAL YEAR ENDED AUGUST 31, 1994
MANAGEMENT DISCUSSION AND ANALYSIS
---------------------------------------------------------------------------
The fiscal year ended August 31, 1994, was difficult for investors in
long-term, fixed-income securities. Fueled by fears of the potential for
accelerating inflation driven by a steadily expanding economy, yields for
thirty-year U.S. Treasury bonds rose sharply from their cyclical low of
5.79% on October 15, 1993 to 6.38% on November 22, 1993. Yields then
remained in a relatively narrow trading range until February 4, 1994. The
Federal Reserve Board then effected the first of several rate hikes which
reignited inflation fears, sending yields soaring. The yield for
thirty-year U.S. Treasury bonds closed at 7.45% on August 31, 1994.
Pennsylvania Municipal Income Fund (the "Fund") was established in
October, 1990 to provide investors the ability to invest in a
non-diversified portfolio of investment grade, long-term Pennsylvania
municipal issues. The investment objective of the Fund is the provision of
current income which is exempt from federal regular income tax and the
personal income taxes imposed by the Commonwealth of Pennsylvania and
Pennsylvania municipalities.*
When ascertaining the credit quality of issues for potential
investment by the Fund, the investment adviser focuses upon a variety of
economic and financial parameters. For general obligation issues, analysis
is directed towards demographic constitution, income distribution, property
value levels and growth, provision of governmental services, and debt
authorization. For revenue issues, examination is made of issuer cash flow
generation, sensitivity to product or service pricing, competition and
industry/sector make-up, debt structure, debt service coverage, financial
flexibility, and contingent liabilities, if any.
Issues purchased by the Fund during the last twelve months consisted
largely of single-family mortgage revenue obligations and hospital revenue
obligations.
For the fiscal year ended August 31, 1994, the total return was
(1.34%) for Class A Shares and (2.13%) for Income Shares.** For Class A
Shares this performance was comprised of 5.00% income and reinvestment
return (net of Fund expenses) and a (6.34%) depreciation in the net asset
value per share of the Fund. Past performance is neither indicative nor
predictive of future investment performance.
* Income may be subject to the federal alternative minimum tax.
** Based on net asset value, which does not reflect a sales load or
contingent deferred sales charge, if applicable. Performance quoted
represents past performance. Investment return and principal value will
fluctuate, so that an investor's shares, when redeemed, may be worth
more or less than their original cost.
PENNSYLVANIA MUNICIPAL INCOME FUND (CLASS A SHARES)
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN PENNSYLVANIA MUNICIPAL INCOME FUND (CLASS A
SHARES)
The graph below illustrates the hypothetical investment of $10,000 in
Pennsylvania Municipal Income Fund (Class A Shares) (the "Fund") from October
11, 1990 (start of performance) to August 31, 1994, compared to the Lehman
Brothers Revenue Bond Index (LBRB).+
Graphic Representation Omitted. See Appendix A-1.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN FOR THE
PERIOD ENDED AUGUST 31, 1994
<S> <C>
1 Year............................................................... (4.29%)
Start of Performance (10/11/90)...................................... 7.53%
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
This report must be preceded or accompanied by the Fund's prospectus dated
October 31, 1994, and together with financial statements contained therein,
constitutes the Fund's annual report.
* Represents a hypothetical investment of $10,000 in the Fund after deducting
the maximum sales load of 3% ($10,000 investment minus $300 sales load =
$9,700). The Fund's performance assumes the reinvestment of all dividends and
distributions. The LBRB has been adjusted to reflect reinvestment of dividends
on securities in the index.
+ The LBRB is not adjusted to reflect sales loads, expenses, or other fees that
the Securities and Exchange Commission requires to be reflected in the Fund's
performance.
PENNSYLVANIA MUNICIPAL INCOME FUND (INCOME SHARES)
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN PENNSYLVANIA MUNICIPAL INCOME FUND (INCOME SHARES)
The graph below illustrates the hypothetical investment of $10,000 in
Pennsylvania Municipal Income Fund (Income Shares) (the "Fund") from July 16,
1993 (start of performance) to
August 31, 1994, compared to the Lehman Brothers Revenue Bond Index (LBRB).+
Graphic Representation Omitted. See Appendix A-2.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN FOR THE
PERIOD ENDED AUGUST 31, 1994
<C> <C>
1 Year................................................................. (5.11%)
Start of Performance (7/16/93)......................................... (2.63%)
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
This report must be preceded or accompanied by the Pennsylvania Municipal Income
Fund's prospectus dated October 31, 1994, and, together with financial
statements contained therein, constitutes the Fund's annual report.
* Represents a hypothetical investment of $10,000 in the Fund. The ending value
of the Fund reflects a 2% contingent deferred sales charge on any redemption
less than three years, but greater than one year from the purchase date. The
Fund's performance assumes the reinvestment of all dividends and
distributions. The LBRB has been adjusted to reflect reinvestment of dividends
on securities in the index.
+ The LBRB is not adjusted to reflect sales loads, expenses, or other fees that
the Securities and Exchange Commission requires to be reflected in the Fund's
performance.
FEDERATED SECURITIES CORP.
(LOGO)
- --------------------------------------------------------------------------------
Distributor
625922505
G00577-01 (10/94)
OHIO MUNICIPAL INCOME FUND
(A PORTFOLIO OF MUNICIPAL SECURITIES INCOME TRUST)
FORTRESS SHARES
PROSPECTUS
The Fortress Shares, formerly the Investment Shares, of Ohio Municipal Income
Fund (the "Fund") offered by this prospectus 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 exempt from federal regular income tax and the
personal income taxes imposed by the state of Ohio and Ohio municipalities. The
Fund invests primarily in a portfolio of Ohio municipal securities.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF ANY
BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in Fortress Shares. Keep this prospectus for future reference.
The Fund has also filed a Statement of Additional Information for Fortress
Shares dated October 31, 1994, with the Securities and Exchange Commission. The
information contained in the Statement of Additional Information is incorporated
by reference in 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 to make inquiries about the Fund, contact your financial
institution.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated October 31, 1994
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES 1
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS 2
- ------------------------------------------------------
GENERAL INFORMATION 3
- ------------------------------------------------------
FORTRESS INVESTMENT PROGRAM 3
- ------------------------------------------------------
INVESTMENT INFORMATION 4
- ------------------------------------------------------
Investment Objective 4
Investment Policies 4
Ohio Municipal Securities 6
Investment Risks 7
Non-Diversification 7
Investment Limitations 8
NET ASSET VALUE 8
- ------------------------------------------------------
INVESTING IN FORTRESS SHARES 8
- ------------------------------------------------------
Share Purchases 8
Minimum Investment Required 9
What Shares Cost 9
Eliminating the Sales Load 10
Systematic Investment Program 11
Exchange Privilege 11
Certificates and Confirmations 12
Dividends and Distributions 12
REDEEMING FORTRESS SHARES 12
- ------------------------------------------------------
Through a Financial Institution 13
Directly by Mail 13
Contingent Deferred Sales Charge 14
Systematic Withdrawal Program 15
Accounts with Low Balances 15
MUNICIPAL SECURITIES INCOME TRUST
INFORMATION 15
- ------------------------------------------------------
Management of Municipal Securities
Income Trust 15
Distribution of Fortress Shares 16
Administration of the Fund 17
SHAREHOLDER INFORMATION 18
- ------------------------------------------------------
Voting Rights 18
Massachusetts Partnership Law 19
TAX INFORMATION 19
- ------------------------------------------------------
Federal Income Tax 19
State of Ohio Income Taxes 20
Other State and Local Taxes 20
PERFORMANCE INFORMATION 21
- ------------------------------------------------------
FINANCIAL STATEMENTS 22
- ------------------------------------------------------
INDEPENDENT AUDITORS' REPORT 37
- ------------------------------------------------------
ADDRESSES Inside Back Cover
- ------------------------------------------------------
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
FORTRESS SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)............................................................ 1.00%
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)...................................... 1.00%
Redemption Fee (as a percentage of amount redeemed, if applicable)............................... None
Exchange Fee..................................................................................... None
ANNUAL FORTRESS SHARES OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver)(2)................................................................. 0.11%
12b-1 Fee (after waiver)(3)...................................................................... 0.15%
Total Other Expenses............................................................................. 0.64%
Shareholder Services Fee............................................................ 0.25%
Total Fortress Shares Operating Expenses(4).............................................. 0.90%
</TABLE>
(1) The contingent deferred sales charge is 1.00% of the lesser of the original
purchase price of the net asset value of shares redeemed within four years of
their purchase date. For a more complete description see "Contingent Deferred
Sales Charge."
(2) The management fee has been reduced to reflect the voluntary waiver of a
portion 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 maximum 12b-1 fee is 0.40%
(4) The Total Fortress Shares operating expenses in the table above are based on
expenses expected during the fiscal year ended August 31, 1995. The Total
Fortress Shares operating expenses were 0.90% for the fiscal year ended August
31, 1994, and would have been 1.45% absent the voluntary waiver of the
management fee, waiver of a portion of the 12b-1 fee, and 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 FORTRESS SHARES OF THE FUND
WILL BEAR, EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE
VARIOUS COSTS AND EXPENSES, SEE "INVESTING IN FORTRESS SHARES" 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.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
- ----------------------------------------------------------------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment assuming
(1) 5% annual return and (2) redemption at the end of each time
period............................................................... $ 29 $50 $59 $120
You would pay the following expenses on the same investment, assuming
no redemption........................................................ $ 19 $38 $59 $120
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
OHIO MUNICIPAL INCOME FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 37.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
------------------------------------
1994 1993 1992 1991*
------ ------ ------ ------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.65 $10.89 $10.40 $10.00
- -----------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------------
Net investment income 0.56 0.57 0.61 0.57
- -----------------------------------------------------
Net realized and unrealized gain (loss) on
investments (0.64) 0.77 0.49 0.41
- ----------------------------------------------------- ------ ------ ------ ------
Total from investment operations (0.08) 1.34 1.10 0.98
- ----------------------------------------------------- ------ ------ ------ ------
LESS DISTRIBUTIONS
- -----------------------------------------------------
Dividends to shareholders from net investment
income (0.56) (0.57) (0.61) (0.57)
- -----------------------------------------------------
Distributions in excess of net investment income -- (0.01)(a) -- (0.01)(a)
- ----------------------------------------------------- ------ ------ ------ ------
Total distributions (0.56) (0.58) (0.61) (0.58)
- ----------------------------------------------------- ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $11.01 $11.65 $10.89 $10.40
- ----------------------------------------------------- ------ ------ ------ ------
TOTAL RETURN** (0.72%) 12.69% 10.91% 10.01%
- -----------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------
Expenses 0.90% 0.87% 0.73% 0.28%(b)
- -----------------------------------------------------
Net investment income 5.02% 5.13% 5.79% 6.35%(b)
- -----------------------------------------------------
Expense waiver/reimbursement (c) 0.55% 0.83% 1.35% 1.66%(b)
- -----------------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------------
Net assets, end of period (000 omitted) $81,566 $73,973 $28,924 $19,840
- -----------------------------------------------------
Portfolio turnover rate 20% 0% 0% 11%
- -----------------------------------------------------
</TABLE>
* Reflects operations for the period from October 12, 1990 (date of initial
public investment) to August 31, 1991.
** 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) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
Further information about the Fund's performance is contained in the Fund's
annual report for the fiscal year ended 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 the Fund, as of the date of this
prospectus, the Board of Trustees ("Trustees") has established one class of
shares, known as Fortress Shares ("Shares").
The Fund is 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 Ohio municipal securities. A minimum initial
investment of $1,500 is required. Subsequent investments must be in amounts of
at least $100. The Fund is not likely to be a suitable investment for non-Ohio
taxpayers or retirement plans since Ohio 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 are sold at net asset value
plus an applicable sales load and are redeemed at net asset value. However, a
contingent deferred sales charge ("CDSC") is imposed on certain Shares, other
than Shares purchased through reinvestment of dividends, which are redeemed
within four years of their purchase dates. Fund assets may be used in connection
with the distribution of Shares.
FORTRESS INVESTMENT PROGRAM
- --------------------------------------------------------------------------------
This class of shares is a member of a family of funds, collectively known as the
Fortress Investment Program. The other funds in the Program are:
- American Leaders Fund, Inc. (Fortress Shares only), providing growth of
capital and income through high-quality stocks;
- California Municipal Income Fund (Fortress Shares only), providing
current income exempt from federal regular income tax and California
personal income taxes;
- Fortress Adjustable Rate U.S. Government Fund, Inc., providing current
income consistent with lower volatility of principal through a
diversified portfolio of adjustable and floating rate mortgage securities
which are issued or guaranteed by the U.S. government, its agencies or
instrumentalities;
- Fortress Bond Fund, providing current income primarily through
high-quality corporate debt;
- Fortress Municipal Income Fund, Inc., providing a high level of current
income generally exempt from the federal regular income tax by investing
primarily in a diversified portfolio of municipal bonds;
- Fortress Utility Fund, Inc., providing high current income and moderate
capital appreciation primarily through equity and debt securities of
utility companies;
- Government Income Securities, Inc., providing current income through
long-term U.S. government securities;
- Liberty Equity Income Fund, Inc. (Fortress Shares only), providing above
average income and capital appreciation through income producing equity
securities;
- Limited Term Fund (Fortress Shares only), providing a high level of
current income consistent with minimum fluctuation in principal value;
- Limited Term Municipal Fund (Fortress Shares only), providing a high
level of current income which is exempt from federal regular income tax
consistent with the preservation of capital;
- Money Market Management, Inc., providing current income consistent with
stability of principal through high-quality money market instruments;
- New York Municipal Income Fund (Fortress Shares only), providing current
income exempt from federal regular income tax, New York personal income
taxes, and New York municipalities income taxes; and
- World Utility Fund, providing total return by investing primarily in
securities issued by domestic and foreign companies in the utilities
industry.
Each of the funds may also invest in certain other types of securities as
described in each fund's prospectus.
The Fortress Investment Program provides flexibility and diversification for an
investor's long-term investment planning. It enables an investor to meet the
challenges of changing market conditions by offering convenient exchange
privileges which give access to various investment vehicles, and by providing
the investment services of a proven, professional investment adviser.
INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide current income exempt from
federal regular income tax and the personal income taxes imposed by the state of
Ohio and Ohio 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 shareholders. Income
distributed by the Fund may not necessarily be exempt from state or municipal
taxes in states other than Ohio.
INVESTMENT POLICIES
The Fund pursues its investment objective by investing primarily in Ohio
municipal securities. 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 securities in which the Fund invests include:
- obligations issued by or on behalf of the state of Ohio, 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 Ohio and Ohio
municipalities ("Ohio municipal securities"). At least 80% of the value
of the Fund's total assets will be invested in Ohio municipal securities.
The prices of fixed income securities fluctuate inversely to the direction of
interest rates.
CHARACTERISTICS. The municipal securities which the Fund buys are
investment grade bonds rated 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 Fitch Investors Service, Inc. ("Fitch"). In
certain cases the Fund's investment adviser may choose bonds which are
unrated if it judges the bonds to have the same characteristics as the
investment grade bonds described above. If a bond is rated below investment
grade according to the characteristics set forth here after the Fund has
purchased it, the Fund is not required to drop the bond from the portfolio,
but will consider appropriate action. Bonds rated "BBB" by S&P or Fitch or
"Baa" by Moody's have speculative characteristics. Changes in economic or
other circumstances are more likely to lead to weakened capacity to make
principal and interest payments than higher rated bonds. 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 Ohio 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 Trustees
of the Trust will determine that participation interests meet the
prescribed quality standards for the Fund.
VARIABLE RATE MUNICIPAL SECURITIES. Some of the Ohio 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 Trust's Board of
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. 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. In the event of failure
of appropriation, unless the participation interests are credit enhanced,
it is unlikely that the participants would be able to obtain an acceptable
substitute source of payment.
RESTRICTED SECURITIES. As a matter of fundamental policy, the Fund may invest up
to 10% of its net 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 upon resale under
federal securities laws. The Fund will limit investments in illiquid securities,
including certain restricted securities not determined by the Trustees to be
liquid, 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 these transactions may cause the
Fund to miss a price or yield considered to be advantageous. Settlement dates
may be a month or more after entering into these transactions, and the market
values of the securities purchased may vary from the purchase prices.
Accordingly, the Fund may pay more/less than the market value of the securities
on the settlement date.
The Fund may dispose of a commitment prior to settlement if the investment
adviser deems it appropriate to do so. In addition, the Fund may enter in
transactions to sell its purchase commitments to third parties at current market
values and simultaneously acquire other commitments to purchase similar
securities at later dates. The Fund may realize short-term profits or losses
upon the sale of such commitments.
TEMPORARY INVESTMENTS. The Fund invests its assets so that at least 80% of its
annual interest income is exempt from federal regular income tax and the
personal income taxes imposed by the state of Ohio and Ohio municipalities.
However, from time to time, when the investment adviser determines that market
conditions call for a temporary defensive posture, the Fund may invest in
short-term non-Ohio municipal tax-exempt obligations 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 (if unrated) those which the
investment adviser judges to have the same characteristics as such investment
grade securities.
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 Ohio or Ohio municipalities.
OHIO MUNICIPAL SECURITIES
Ohio 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.
Ohio municipal securities include industrial development bonds 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.
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.
INVESTMENT RISKS
Yields on Ohio municipal securities depend on a variety of factors, including:
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 Ohio or
its municipalities could impact the Fund's portfolio. The state of Ohio and
certain underlying municipalities face potential economic problems over the
longer term. The state economy has grown more slowly than that of the nation as
a whole, resulting in a gradual erosion of its relative economic affluence. The
causes of this relative decline are varied and complex, involving in many cases
national and international demographic and economic trends beyond the influence
of the state. The ability of the Fund to achieve its investment objective also
depends on the continuing ability of the issuers of Ohio 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
Ohio municipal securities which meet the Fund's quality standards may not be
possible if the state of Ohio or its municipalities do not maintain their
current credit ratings. In addition, certain Ohio constitutional amendments,
legislative measures, executive orders, administrative regulations, and voter
initiatives could result in adverse consequences affecting Ohio municipal
securities.
A further discussion of the risks of a portfolio which invests largely in Ohio
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 would exist 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 of
1986, as amended (the "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 FORTRESS SHARES
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SHARE PURCHASES
Shares are sold on days on which the New York Stock Exchange is open. Shares may
be purchased through an investment dealer who has a sales agreement with the
distributor, Federated Securities Corp., 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.
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. (Eastern time) and
must be transmitted by the broker to the Fund before 5:00 P.M. (Eastern time) in
order for Shares to be purchased at that day's price. Purchase orders through
financial institutions other than broker/dealers must be received by the
financial institution and transmitted to the Fund before 4:00 P.M. (Eastern
time) in order for Shares to be purchased at that day's price. It is the
financial institution's responsibility to transmit orders promptly.
The financial institution which maintains investor accounts with the Fund must
do so on a fully disclosed basis unless it accounts for share ownership periods
used in calculating the CDSC (see "Contingent Deferred Sales Charge"). In
addition, advance payments made to financial institutions may be subject to
reclaim by the distributor for accounts transferred to financial institutions
which do not maintain investor accounts on a fully disclosed basis and do not
account for share ownership periods (see "Other Payments to Financial
Institutions").
DIRECTLY BY MAIL. To purchase Shares by mail directly from Federated Securities
Corp. once an account has been established:
- complete and sign the new account form available from the Fund;
- enclose a check made payable to Ohio Municipal Income Fund--Fortress
Shares; and
- send both to the Fund's transfer agent, Federated Services Company, c/o
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
the transfer agent's bank, State Street Bank and Trust Company ("State Street
Bank"), into federal funds. This is generally the next business day after State
Street Bank receives the check.
DIRECTLY BY WIRE. To purchase Shares directly from Federated Securities Corp. by
Federal Reserve Wire, call the Fund. All information needed will be taken over
the telephone, and the order is considered received when 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.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received, plus a sales load of 1% of the offering price (which is 1.01% of the
net amount invested). Further, there is no sales load for purchases of $1
million or more. In addition, no sales load is imposed for Shares purchased
through bank trust departments or investment advisers registered under the
Investment Advisers Act of 1940 purchasing on behalf of their clients, or by
sales representatives, Trustees, and employees of the Fund, Federated Advisers,
and Federated Securities Corp., or their affiliates, or any investment dealer
who has a sales agreement with Federated Securities Corp., their spouses and
children under age 21, or any trusts or pension or profit-sharing plans for
these persons. Unaffiliated institutions through whom Shares are purchased may
charge fees for services provided which may be related to the ownership of Fund
Shares. This prospectus should, therefore, be read together with any agreement
between customer and institution with regard to services provided, the fees
charged for these services, and any restrictions and limitations imposed.
The net asset value is determined at 4:00 P.M. (Eastern 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; and (iii) the
following holidays: New Year's
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
Under certain circumstances, described under "Redeeming Fortress Shares,"
shareholders may be charged a CDSC by the distributor at the time Shares are
redeemed.
DEALER CONCESSION. For sales of Shares, the distributor will normally offer to
pay dealers up to 100% of the sales load retained by it. Any portion of the
sales load which is not paid to a broker/dealer will be retained by the
distributor. However, from time to time, and at the sole discretion of the
distributor, all or part of that portion may be paid to a dealer.
The sales load for Shares sold other than through registered broker/dealers will
be retained by Federated Securities Corp. Federated Securities Corp. may pay
fees to banks out of the sales load in exchange for sales and/or administrative
services performed on behalf of the bank's customers in connection with the
initiation of customer accounts and purchases of Shares.
ELIMINATING THE SALES LOAD
The sales load can be eliminated on the purchase of Shares through:
- quantity discounts and accumulated purchases;
- signing a 13-month letter of intent;
- using the reinvestment privilege; or
- concurrent purchases.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES. There is no sales load for
purchases of $1 million or more. The Fund will combine purchases made on the
same day by the investor, his spouse, and his children under age 21 when it
calculates the sales load.
If an additional purchase of Shares is made, the Fund will consider the previous
purchases still invested in the Fund. For example, if a shareholder already owns
Shares having a current value at the public offering price of $900,000 and he
purchases $100,000 more at the current public offering price, there will be no
sales load on the additional purchase. The Fund will also combine purchases for
the purpose of reducing the CDSC imposed on some Share redemptions. For example,
if a shareholder already owns Shares having a current value at public offering
price of $1 million and purchases an additional $1 million at the current public
offering price, the applicable CDSC would be reduced to .50% of those additional
Shares. For more information on the levels of CDSCs and holding periods, see the
section entitled "Contingent Deferred Sales Charge."
To receive the sales load elimination and/or the CDSC reduction, Federated
Securities Corp. must be notified by the shareholder in writing or by their
financial institution at the time the purchase is made that Shares are already
owned or that purchases are being combined. The Fund will eliminate the sales
load and/or reduce the CDSC after it confirms the purchases.
LETTER OF INTENT. If a shareholder intends to purchase at least $1 million of
Shares over the next 13 months, the sales load may be eliminated by signing a
letter of intent to that effect. This letter of intent includes a provision for
a sales load elimination depending on the amount actually purchased within
the 13-month period and a provision for the Fund's custodian to hold 1.00% of
the total amount intended to be purchased in escrow (in Shares) until such
purchase is completed.
The 1.00% held in escrow will be applied to the shareholder's account at the end
of the 13-month period unless the amount specified in the letter of intent,
which must be $1 million or more of Shares, is not purchased. In this event, an
appropriate number of escrowed Shares may be redeemed in order to realize the
1.00% sales load.
This letter of intent also includes a provision for reductions in the CDSC and
holding period depending on the amount actually purchased within the 13-month
period. For more information on the various levels of CDSCs and holding periods,
see the section entitled "Contingent Deferred Sales Charge."
This letter of intent will not obligate the shareholder to purchase Shares. This
letter may be dated as of a prior date to include any purchases made within the
past 90 days towards the dollar fulfillment of the letter of intent. Prior trade
prices will not be adjusted.
REINVESTMENT PRIVILEGE. If Shares have been redeemed, the shareholder has a
one-time right, within 120 days, to reinvest the redemption proceeds at the
next-determined net asset value without any sales load. Federated Securities
Corp. must be notified by the shareholder in writing or by his financial
institution of the reinvestment in order to receive this elimination of the
sales load. If the shareholder redeems his Shares, there may be tax
consequences.
CONCURRENT PURCHASES. For purposes of qualifying for a sales load elimination, a
shareholder has the privilege of combining concurrent purchases of two or more
funds in the Fortress Investment Program, the purchase prices of which include a
sales load. For example, if a shareholder concurrently invested $400,000 in one
of the other Fortress Funds and $600,000 in Shares, the sales load would be
eliminated. To receive this sales load elimination, Federated Securities Corp.
must be notified by the shareholder in writing or by his financial institution
at the time the concurrent purchases are made. The Fund will eliminate the sales
load after it confirms the purchases.
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their investment on
a regular basis. Under this program, funds may be automatically withdrawn
periodically from the shareholder's checking account and invested in Shares at
the net asset value next determined after an order is received by Federated
Services Company, plus the 1.00% sales load for purchases under $1 million. A
shareholder may apply for participation in this program through Federated
Securities Corp. or his financial institution.
EXCHANGE PRIVILEGE
Shares in Ohio Municipal Cash Trust or in other Fortress Funds may be exchanged
for Shares at net asset value without a sales load (if previously paid) or a
CDSC. The exchange privilege is available to shareholders residing in any state
in which the shares being acquired may be legally sold.
Shares in certain Federated Funds which are advised by subsidiaries or
affiliates of Federated Investors may also be exchanged for Shares at net asset
value. With the exception of exchanges into other Fortress Funds, such exchanges
will be subject to a CDSC and possibly a sales load.
Shareholders using this privilege must exchange shares having a net asset value
which at least meets the minimum investment required for the fund into which the
exchange is being made. 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. Further information on these
exchange privileges is available by calling Federated Securities Corp. or the
shareholder's financial institution.
Before a financial institution may request exchange by telephone on behalf of a
shareholder, an authorization form permitting the Fund to accept exchange by
telephone must first be completed. Telephone exchange instructions may be
recorded. If reasonable procedures are not followed by the Fund, it may be
liable for losses due to unauthorized or fraudulent telephone instructions.
Exercise of the exchange privilege is treated as a sale for federal income tax
purposes. Depending on the circumstances, a short-term or long-term capital gain
or loss may be realized. Before making an exchange, a shareholder must receive a
prospectus of the fund for which the exchange is being made.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Services Company maintains a share
account for each shareholder. Share certificates are not issued unless requested
on the application or by contacting the 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 and paid monthly. Distributions of any net realized
long-term capital gains will be made at least once every twelve months.
Dividends and distributions are automatically reinvested in additional Shares at
net asset value without a sales load, 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 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 that proper written redemption
instructions are received by Federated Services Company.
REDEEMING FORTRESS SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at their net asset value, less any applicable CDSC, next
determined after Federated Services Company receives the redemption request.
Redemptions will be made on days on which the Fund computes its net asset value.
Redemption requests must be received in proper form and can be made through a
financial institution or directly from the Fund by written request.
THROUGH A FINANCIAL INSTITUTION
A shareholder may redeem Shares by calling his financial institution (such as a
bank or a broker/dealer) to request the redemption. Shares will be redeemed at
the net asset value next determined after Federated Services Company receives
the redemption request from the financial institution. Redemption requests
through a registered broker/dealer must be received by the broker before 4:00
P.M. (Eastern time) and must be transmitted by the broker to Federated Services
Company before 5:00 P.M. (Eastern time) in order for Shares to be redeemed at
that day's net asset value. Redemption requests through other financial
institutions must be received by the financial institution and transmitted to
Federated Services Company before 4:00 P.M. (Eastern time) in order for Shares
to be redeemed at that day's net asset value. The financial institution is
responsible for promptly submitting redemption requests and providing proper
written redemption instructions to Federated Services Company. The financial
institution may charge customary fees and commissions for this service. If, at
anytime, the Fund shall determine it necessary to terminate or modify this
method of redemption, shareholders will be promptly notified.
Before a financial institution may request redemption by telephone on behalf of
a shareholder, an authorization form permitting the Fund to accept redemption
requests by telephone must first be completed. 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 Federated
Services Company, c/o State Street Bank, P.O. Box 8604, Boston, MA 02266-8604.
The 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, less any applicable CDSC, next
determined after Federated Services Company 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 of all registered owners on written redemption requests
guaranteed by:
- a trust company or commercial bank whose deposits are insured by the Bank
Insurance Fund, which is administered by the Federal Deposit Insurance
Corporation ("FDIC");
- a member 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, which is administered by the
FDIC; or
- any other "eligible guarantor institution", as defined in the Securities
Exchange Act of 1934.
The Fund does not accept signatures guaranteed by a notary public.
The Fund and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Fund may elect in the future to
limit eligible signature guarantors to institutions that are members of a
signature guarantee program. The Fund and its transfer agent reserve the right
to amend these standards at any time without notice.
RECEIVING PAYMENT. A check for the proceeds is mailed within seven days after
receipt of proper written redemption instructions from a broker or from the
shareholder.
CONTINGENT DEFERRED SALES CHARGE
Shareholders redeeming Shares from their Fund accounts within certain time
periods of the purchase date of those Shares will be charged a CDSC by the
Fund's distributor of the lesser of the original price or the net asset value of
the Shares redeemed as follows:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
AMOUNT OF PURCHASE SHARES HELD SALES CHARGE
- ---------------------------------------------------- ------------------ ---------------------
<S> <C> <C>
Up to $1,999,999.................................... less than 4 years 1%
$2,000,000 to $4,999,999............................ less than 2 years .50%
$5,000,000 or more.................................. less than 1 year .25%
</TABLE>
In instances in which Shares have been acquired in exchange for shares in other
Fortress Funds, (i) the purchase price is the price of the shares when
originally purchased and (ii) the time period during which the shares are held
will run from the date of the original purchase. The CDSC will not be imposed on
Shares acquired through the reinvestment of dividends or distributions of
long-term capital gains. In computing the amount of CDSC for accounts with
Shares subject to a single holding period, if any, redemptions are deemed to
have occurred in the following order: (1) Shares acquired through the
reinvestment of dividends and long-term capital gains, (2) purchases of Shares
occurring prior to the number of years necessary to satisfy the applicable hold
period, and (3) purchases of Shares occurring within the current hold period.
For accounts with Shares subject to multiple share holding periods, the
redemption sequence will be determined first, with reinvested dividends and
long-term capital gains, and second, on a first-in, first-out basis.
The CDSC will not be imposed when a redemption results from a return from the
death or disability of the beneficial owner. The exemption from the CDSCs for
qualified Plans, an IRA, Keogh Plan or a custodial account does not extend to
account transfers, rollovers, and other redemptions made for purposes of
reinvestment. CDSCs are not charged in connection with exchanges of Shares for
shares in Ohio Municipal Cash Trust or shares in other Fortress Funds, or in
connection with redemptions by the Fund of accounts with low balances. Shares of
the Fund originally purchased through a bank trust department or investment
adviser registered under the Investment Advisers Act of 1940, as amended, are
not subject to the CDSC.
SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders who desire to receive monthly or quarterly payments of
predetermined amounts 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 an account value of at
least $10,000 in the Fund (at current offering price).
A shareholder may apply for participation in this program through Federated
Securities Corp. Due to the fact that Shares are sold with a sales load, it is
not advisable for shareholders to be purchasing Shares while participating in
this program. CDSCs are charged for Shares redeemed through this program within
four years of their purchase dates.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account and pay the proceeds to the shareholder if the
account balance falls below the required minimum value of $1,500. 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.
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 Trustees are 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 Board.
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 (the "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 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, as amended. 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 are
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 has been the Fund's portfolio manager since June, 1993.
Mr. Roberge joined Federated Investors in 1990 and has been an Assistant
Vice President of the Fund's 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.
DISTRIBUTION OF FORTRESS SHARES
Federated Securities Corp. is the principal 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 AND SHAREHOLDER SERVICES PLANS. Under a distribution plan adopted
in accordance with Investment Company Act Rule 12b-1 (the "Distribution Plan"),
the Fund may pay to the distributor an amount, computed at an annual rate of
0.40 of 1% of the average daily net asset value of the Shares to finance any
activity which is principally intended to result in the sale of Shares subject
to the Distribution Plan. The distributor may select financial institutions such
as banks, fiduciaries, custodians for public funds, investment advisers, and
broker/dealers to provide sales support services as agents for their clients or
customers.
The Distribution 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 amount or may earn a profit from future
payments made by the Fund under the Distribution Plan.
In addition, the Trust has adopted a Shareholder Services Plan (the "Services
Plan") under which it may make payments up to 0.25 of 1% of the average daily
net asset value of the Shares to obtain certain personal services for
shareholders and the maintenance of shareholder accounts ("shareholder
services"). The Trust has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, under which
Federated Shareholder Services will either perform shareholder services directly
or will select financial institutions to perform shareholder services. Financial
institutions will receive fees based upon Shares owned by their clients or
customers. The schedules of such fees and the basis upon which such fees will be
paid will be determined from time to time by the Trust and Federated Shareholder
Services.
OTHER PAYMENTS TO FINANCIAL INSTITUTIONS. In addition, the distributor will pay
financial institutions, for distribution and/or administrative services, an
amount equal to 1.00% of the offering price of the Shares acquired by their
clients or customers on purchases up to $1,999,999, .50% of the offering price
on purchases of $2,000,000 to $4,999,999, and .25% of the offering price on
purchases of $5,000,000 or more. (This fee is in addition to the 1.00% sales
charge on purchases of less than $1 million.)
Furthermore, the distributor may offer to pay a fee from its own assets to
financial institutions as financial assistance for providing substantial
marketing and sales support. The support may include participating in sales,
educational and training seminars at recreational-type facilities, providing
sales literature, and engineering computer software programs that emphasize the
attributes of the Fund. Such assistance will be predicated upon the amount of
Shares the financial institution sells or may sell and/or upon the type and
nature of sales or marketing support furnished by the financial institution. Any
payments made by the distributor may be reimbursed by the Adviser or its
affiliates.
The Glass-Steagall Act prohibits a depository institution (such as a commercial
bank or a savings and loan association) from being an underwriter or distributor
of most securities. 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.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides administrative personnel and services (including
certain legal and financial reporting services) necessary to operate the Fund.
Federated Administrative Services provides these at an annual
rate which relates to the average aggregate daily net assets of all funds
advised by subsidiaries of Federated Investors ("Federated Funds") as specified
below:
<TABLE>
<CAPTION>
AVERAGE AGGREGATE DAILY
MAXIMUM NET ASSETS OF THE
ADMINISTRATIVE FEE FEDERATED FUNDS
- --------------------- ------------------------------------
<S> <C>
0.150 of 1% of the first $250 million
0.125 of 1% of the next $250 million
0.100 of 1% of the next $250 million
0.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio 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, P.O. Box 8604, Boston,
Massachusetts 02266-8604, is custodian for the securities and cash of the Fund.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company, P.O.
Box 8604, Boston, Massachusetts 02266-8604, is transfer agent for the Shares of
the Fund and dividend disbursing agent for the Fund.
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.
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 each portfolio
in the Trust have equal voting rights except that in matters affecting only a
particular fund, only shares of that fund are entitled to vote. As of September
28, 1994, Merrill Lynch Pierce Fenner, acting in various capacities for numerous
accounts, was the owner of record of approximately 3,337,645 shares (45.90%) 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 of 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 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 does not expect to pay federal income tax because it expects to meet
requirements of the Code, as amended, 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.
The alternative minimum tax, up to 28% of alternative minimum taxable income for
individuals and 20% for corporations, applies when it exceeds the regular tax
for the taxable year. Alternative minimum taxable income is equal to the regular
taxable income of the taxpayer increased by certain "tax preference" items not
included in regular taxable income and reduced by only a portion of the
deductions allowed in the calculation of the regular tax.
The Tax Reform Act of 1986 treats interest on certain "private activity" bonds
issued after August 7, 1986, as a tax preference item for both individuals and
corporations. Unlike traditional governmental purpose municipal bonds, which
finance roads, schools, libraries, prisons, and other public facilities, private
activity bonds provide benefits to private parties. The Fund may purchase all
types of municipal bonds, including private activity bonds. Thus, should it
purchase any such bonds, a portion of the Fund's dividends may be treated as a
tax preference item.
In addition, in the case of a corporate shareholder, dividends of the Fund which
represent interest on municipal bonds 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" is based upon the concept of a corporation's
"earnings and profits." Since "earnings and profits" generally includes the full
amount of any Fund dividend, and alternative minimum taxable income does not
include the portion of the Fund's dividend attributable to municipal bonds which
are not private activity bonds, the difference will be included in the
calculation of the corporation's alternative minimum tax.
Dividends of the Fund representing net interest income earned on some temporary
investments and any realized net short-term gains are taxed as ordinary income.
These tax consequences apply whether dividends are received in cash or as
additional shares. Information on the tax status of dividends and distributions
is provided annually.
STATE OF OHIO INCOME TAXES
Under existing Ohio laws, distributions made by the Fund will not be subject to
Ohio individual income taxes to the extent that such distributions qualify as
"exempt-interest dividends" under the Code and represent (i) interest from
obligations of Ohio or its subdivisions which is exempt from federal income tax;
or (ii) interest of dividends from obligations issued by the United States and
its territories or possessions or by any authority, commission or
instrumentality of the United States which are exempt from state income tax
under federal laws. Conversely, to the extent that distributions made by the
Fund are derived from other types of obligations, such distributions will be
subject to Ohio individual income taxes.
Distributions made by the Fund will not be subject to Ohio corporation franchise
tax to the extent that such distributions qualify as "exempt-interest dividends"
under the Code and represent (i) interest from obligations of Ohio or its
subdivisions which is exempt from federal income tax; or (ii) net interest
income from obligations issued by the United States and its territories or
possessions or by any authority, commission or instrumentality of the United
States, which is included in federal taxable income and which is exempt from
state income tax under federal laws.
Exempt-interest dividends that represent interest from obligations held by the
Fund which are issued by Ohio or its political subdivisions will be exempt from
any Ohio municipal income tax (even if the municipality is permitted under Ohio
law to levy a tax on intangible income).
OTHER STATE AND LOCAL TAXES
Income from the Fund is not necessarily free from state income taxes in states
other than Ohio 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 maximum sales load and
other similar non-recurring charges, such as the CDSC, which, if excluded, would
increase the total return, yield, and tax-equivalent yield.
From time to time, the Fund may advertise the performance of Shares using
certain financial publications and/or compare its performance to certain
indices.
OHIO MUNICIPAL INCOME FUND
PORTFOLIO OF INVESTMENTS
AUGUST 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- ---------- ------------------------------------------------------- -------- -----------
<C> <S> <C> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--97.7%
- --------------------------------------------------------------------------
OHIO--94.7%
-------------------------------------------------------
$ 550,000 Akron, Bath & Copley Joint Townships, OH, 6.50% Health
Care Revenue Bonds (Series 1991)/(Akron General Medical
Centre)/(AMBAC Insured), 1/1/2019 Aaa $ 565,813
-------------------------------------------------------
400,000 Akron, Bath & Copley Joint Townships, OH, 7.45% Health
Care Revenue Bonds (Series 1990)/(Children's Hospital
and Medical Centre of Akron)/(Original Issue Yield:
7.70%), 11/15/2020 A+ 458,404
-------------------------------------------------------
1,750,000 Akron, OH, 6.30% LT Various Purpose GO Bonds, 12/1/2013 A 1,778,840
-------------------------------------------------------
200,000 Akron, OH, Bath & Copley Joint Townships, OH, 7.45%
Health Care Revenue Bonds (Series 1990)/(Children's
Hospital and Medical Centre of Akron)/(AMBAC
Insured)/Original Issue Yield: 7.70%), 11/15/2020 Aaa 229,136
-------------------------------------------------------
750,000 Ashland County, OH, 7.00% LT GO Bonds (Series 1991),
12/1/2011 A 819,945
-------------------------------------------------------
1,000,000 Bay Village, OH, City School District, 7.35% UT GO
School Improvement Bonds (Series 1990), 12/1/2011 Aa 1,117,620
-------------------------------------------------------
300,000 Bellefontaine, OH, 7.05% LT GO Bonds (Storm Water
Utility)/(Series 1991), 6/1/2011 A 324,447
-------------------------------------------------------
1,750,000 Bowling Green State University, OH, 6.35% General
Receipts Bonds (Series 1992), 6/1/2008 A 1,790,845
-------------------------------------------------------
900,000 Brunswick, OH, 7.35% UT GO Municipal Recreation and
Community Center Bonds, 12/1/2010 A 996,741
-------------------------------------------------------
1,000,000 Clermont County, OH, Hospital Facilities Authority,
5.875% Revenue Refunding Bonds (Series 1993B)/(Mercy
Health Care System)/(AMBAC Insured), 9/1/2015 Aaa 978,180
-------------------------------------------------------
</TABLE>
OHIO MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- ---------- ------------------------------------------------------- -------- -----------
<C> <S> <C> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- --------------------------------------------------------------------------
OHIO--CONTINUED
-------------------------------------------------------
$ 800,000 Clermont County, OH, Hospital Facilities Authority,
7.50% Revenue Bonds (Series 1989A)/(Mercy Health Care
System)/(AMBAC Insured), 9/1/2019 Aaa $ 896,616
-------------------------------------------------------
2,500,000 Cleveland, OH, Airport System Revenue Bonds (Series
1994A, 6.00%, 1/1/2024 AAA 2,425,975
-------------------------------------------------------
3,000,000 Columbus, OH, 5.25% UT GO Bonds (Series 1993-1)/
(Original Issue Yield: 5.69%), 9/15/2018 Aa 2,704,890
-------------------------------------------------------
1,600,000 Columbus, OH, Municipal Airport Authority (Columbus
International Airport)/(Series 1994A), 6.25%, 1/1/2024 AAA 1,597,680
-------------------------------------------------------
1,400,000 Columbus, OH, Water System, 6.375% Refunding Revenue
Bonds (Series 1991)/(Original Issue Yield: 6.65%),
11/1/2010 A1 1,429,526
-------------------------------------------------------
800,000 Cuyahoga County, OH, 7.00% UT GO Bonds (Jail
Facilities)/(Series 1991)/(Original Issue Yield:
7.065%), 10/1/2013 Aa 903,288
-------------------------------------------------------
500,000 Cuyahoga County, OH, 8.00% Revenue Bonds (Cleveland
Clinic Foundation)/(Original Issue Yield: 8.045%),
12/1/2015 Aa 548,280
-------------------------------------------------------
800,000 Cuyahoga County, OH, Health System, 6.50% Hospital
Revenue Bonds (Series 1992)/(University Hospital of
Cleveland), 1/15/2019 Aa 813,376
-------------------------------------------------------
780,000 Cuyahoga County, OH, Health System, 6.875% Revenue
Bonds (Series 1989A)/(University Hospital of
Cleveland)/ (BIGI Insured), 1/15/2019 Aaa 818,150
-------------------------------------------------------
1,000,000 Cuyahoga County, OH, Hospital Facilities Authority,
6.25% Revenue Bonds (Series 1993)/(Health Cleveland
Inc.), 8/15/2010 A 1,004,530
-------------------------------------------------------
800,000 Eastlake, OH, 5.60% LT GO Bonds, 12/1/2017 A1 748,208
-------------------------------------------------------
1,000,000 Eaton, OH, IDA, 6.50% Refunding Revenue Bonds
(Baxter International, Inc.)/(Series 1992), 12/1/2012 A3 1,006,550
-------------------------------------------------------
</TABLE>
OHIO MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- ---------- ------------------------------------------------------- -------- -----------
<C> <S> <C> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- --------------------------------------------------------------------------
OHIO--CONTINUED
-------------------------------------------------------
$ 500,000 Franklin County, OH, 5.375% LT GO Refunding Bonds
(Series 1993)/(Original Issue Yield: 5.62%), 12/1/2020 Aaa $ 456,440
-------------------------------------------------------
250,000 Franklin County, OH, 6.375% LT GO Bonds (Public
Improvement)/(Series 1991)/(Original Issue Yield:
6.50%), 12/1/2012 Aaa 273,733
-------------------------------------------------------
400,000 Franklin County, OH, 6.80% UT GO Bonds (Series 1990),
12/1/2008 Aaa 445,128
-------------------------------------------------------
500,000 Franklin County, OH, 7.25% Revenue Refunding and
Improvement Bonds (Riverside United Methodist
Hospital)/(MBIA Insured)/(Original Issue Yield: 7.29%),
5/15/2020 Aaa 546,415
-------------------------------------------------------
260,000 Franklin County, OH, 7.50% Revenue Refunding and
Improvement Bonds (Riverside United Methodist
Hospital)/(Original Issue Yield: 7.60%), 5/15/2008 Aa 297,879
-------------------------------------------------------
1,000,000 Franklin County, OH, 7.65% Hospital Revenue Refunding
Bonds, Holy Cross Health Systems (Mt. Carmel Hospital)/
(Original Issue Yield: 7.85%), 6/1/2010 A1 1,146,360
-------------------------------------------------------
2,000,000 Franklin County, OH, Convention Facilities Authority,
5.80% Lease Revenue Bonds (Series 1992)/(MBIA
Insured)/Original Issue Yield: 6.12%), 12/1/2013 Aaa 1,958,940
-------------------------------------------------------
500,000 Franklin County, OH, Convention Facilities Authority,
7.00% Lease Revenue Bonds (MBIA Insured)/(Original
Issue Yield: 7.195%), 12/1/2019 Aaa 561,840
-------------------------------------------------------
2,500,000 Franklin, OH, 5.75% Hospital Facility Refunding Revenue
Bonds (Series 1993A)/(Riverside United Methodist
Hospital)/(Original Issue Yield: 6.10%), 5/15/2020 Aa 2,331,775
-------------------------------------------------------
1,500,000 Hamilton County, OH, 6.25% Hospital Facility Revenue
Refunding Bonds (Series 1992A)/(Bethesda Hospital),
1/1/2012 A 1,505,490
-------------------------------------------------------
</TABLE>
OHIO MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- ---------- ------------------------------------------------------- -------- -----------
<C> <S> <C> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- --------------------------------------------------------------------------
OHIO--CONTINUED
-------------------------------------------------------
$ 500,000 Hamilton County, OH, 6.50% UT GO Bonds (Museum
Centre)/(Series 1991A), 12/1/2009 Aaa $ 521,455
-------------------------------------------------------
700,000 Hamilton County, OH, 7.00% Hospital Facility Revenue
Refunding and Improvement Bonds (Deaconess Hospital of
Cincinnati)/(Series 1992)/(Original Issue Yield:
7.046%), 1/1/2012 A 744,723
-------------------------------------------------------
450,000 Hamilton County, OH, Hospital Facilities Authority,
6.25% Revenue Refunding Bonds (Bethesda Hospital),
1/1/2008 A 451,989
-------------------------------------------------------
1,000,000 Hamilton County, OH, Sewer System, 5.25% Revenue Bonds
(Series 1993A)/(FGIC Insured)/(Original Issue Yield:
5.656%), 12/1/2016 Aaa 899,390
-------------------------------------------------------
945,000 Hamilton County, OH, Sewer System, 6.70% Improvement
and Refunding Revenue Bonds (Metropolitan Sewer
District of Greater Cincinnati)/(Original Issue Yield:
6.80%), 12/1/2013 A1 1,047,485
-------------------------------------------------------
400,000 Hilliard, OH, City School District, 7.00% UT GO Bonds
(Original Issue Yield: 7.267%), 12/1/2013 A1 449,012
-------------------------------------------------------
500,000 Kenston, OH, Local School District, 6.30% UT GO Bonds
(School Improvement)/(Series 1992)/(Original Issue
Yield: 6.40%), 12/1/2008 A1 509,050
-------------------------------------------------------
700,000 Lakewood, OH, 6.00% Hospital Improvement Revenue Bonds
(Lakewood Hospital)/(BIGI Insured)/(Original Issue
Yield: 6.90%), 2/15/2010 Aaa 702,135
-------------------------------------------------------
1,300,000 Lakewood, OH, 6.50% Various Purpose LT GO Bonds
(Series 1992), 12/1/2012 Aa 1,357,161
-------------------------------------------------------
1,000,000 Lakota, OH, Local School District, 6.00% UT GO School
Improvement Bonds (Series 1993)/(Original Issue Yield:
6.20%), 12/1/2015 A1 996,320
-------------------------------------------------------
500,000 Lakota, OH, Local School District, 6.125% UT GO School
Improvement Bonds (Series 1994), 12/1/2017 AAA 505,000
-------------------------------------------------------
</TABLE>
OHIO MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- ---------- ------------------------------------------------------- -------- -----------
<C> <S> <C> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- --------------------------------------------------------------------------
OHIO--CONTINUED
-------------------------------------------------------
$ 500,000 Lebanon, OH, Waterworks System, 7.10%, Mortgage
Improvement and Refunding Revenue Bonds (Series 1991),
3/1/2008 A $ 541,330
-------------------------------------------------------
1,760,000 Loveland, OH, City School District, 6.65% UT GO School
Improvement Bonds, (Original Issue Yield: 6.70%),
12/1/2015 A 1,835,363
-------------------------------------------------------
1,750,000 Madison, OH, Local School District, 6.00% UT GO School
Improvement Bonds (Original Issue Yield: 6.06%)/
(FGIC Insured), 12/1/2015 Aaa 1,752,450
-------------------------------------------------------
420,000 Marysville, OH, Sewer System, 7.15% Improvement Revenue
Bonds (Series 1991), 12/1/2011 A 451,508
-------------------------------------------------------
1,000,000 Middleburg Heights, OH, 7.20%, LT GO Bonds, 12/1/2011 Aa 1,097,580
-------------------------------------------------------
1,130,000 Montgomery County, OH, 6.25% Revenue Bonds (Series
A)/(Miami Valley Hospital)/(Original Issue Yield:
6.655%)/(AMBAC Insured), 11/15/2016 AAA 1,145,176
-------------------------------------------------------
1,000,000 Montgomery County, OH, 6.625% Health Care Revenue Bonds
(Series 1991A)/(Sisters of Charity Health Care System,
Inc.)/(MBIA Insured)/(Original Issue Yield: 6.80%),
5/15/2021 Aaa 1,037,660
-------------------------------------------------------
500,000 Montgomery County, OH, 6.75% Various Purpose LT GO
Bonds (Series 1991A), 9/1/2011 Aa 546,960
-------------------------------------------------------
3,000,000 Moraine, OH, Solid Waste Disposal, 6.75% Revenue Bonds
(Series 1994)/(General Motors Corp.)/(Original Issue
Yield: 6.80%), 7/1/2014 BBB+ 3,046,200
-------------------------------------------------------
1,750,000 Northeast OH, Regional Sewer District, 6.50% Wastewater
System Improvement Revenue Bonds (Series 1991)/ (AMBAC
Insured)/(Original Issue Yield: 6.85%), 11/15/2016 Aaa 1,814,750
-------------------------------------------------------
2,640,000 Ohio HFA, 7.65% SFM Revenue Bonds (Series 1989A)/ (GNMA
Collateralized)/(Subject to AMT), 3/1/2029 AAA 2,795,839
-------------------------------------------------------
</TABLE>
OHIO MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- ---------- ------------------------------------------------------- -------- -----------
<C> <S> <C> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- --------------------------------------------------------------------------
OHIO--CONTINUED
-------------------------------------------------------
$ 370,000 Ohio Housing Finance Agency, 7.80% Single Family
Housing Mortgage Revenue Bonds (GNMA
Collateralized)/(Subject to AMT), 3/1/2030 AAA $ 387,161
-------------------------------------------------------
1,500,000 Ohio Municipal Electric Generation Agency, 5.375%
Revenue Bonds (AMBAC Insured)/(Original Issue Yield:
5.680%), 2/15/2024 AAA 1,337,085
-------------------------------------------------------
2,500,000 Ohio State Air Quality Development Authority, 5.95% PCR
Bonds (Ohio Edison Company), 5/15/2029 BBB- 2,223,625
-------------------------------------------------------
1,250,000 Ohio State Air Quality Development Authority, 7.45% PCR
Bonds (Ohio Edison Company)/(FGIC Insured), 3/1/2016 Aaa 1,389,813
-------------------------------------------------------
1,500,000 Ohio State Higher Education Facilities Authority, 6.00%
Revenue Bonds (Western Reserve University)/(Original
Issue Yield: 6.222%), 10/1/2022 Aa 1,479,855
-------------------------------------------------------
600,000 Ohio State University, 5.875% General Receipts Bonds
(Series 1992A)/(Original Issue Yield: 6.07%), 12/1/2012 A1 585,834
-------------------------------------------------------
500,000 Ohio State Water Development Authority, 5.50% Revenue
Refunding and Improvement Bonds (AMBAC Insured)/
(Original Issue Yield: 6.30%), 12/1/2018 AAA 464,605
-------------------------------------------------------
1,700,000 Ohio State Water Development Authority, 5.95% PCR Bonds
(Ohio Edison Company), 5/15/2029 NR 1,503,939
-------------------------------------------------------
650,000 Ohio State Water Development Authority, 7.00% Revenue
Bonds (Original Issue Yield: 7.650%), 12/1/2014 A 700,089
-------------------------------------------------------
1,000,000 Revere, OH, Local School District, 6.00% UT GO Bonds
(Series 1993)/(AMBAC Insured), 12/1/2016 Aaa 1,002,320
-------------------------------------------------------
350,000 Rocky River, OH, City School District, 6.90% Special
Tax GO Bonds (Original Issue Yield: 6.970%), 12/1/2011 Aa 371,619
-------------------------------------------------------
1,000,000 Solon, OH, 6.15% Various Purpose Improvement UT GO
Bonds (Series 1992), 12/1/2012 Aa 1,023,950
-------------------------------------------------------
</TABLE>
OHIO MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- ---------- ------------------------------------------------------- -------- -----------
<C> <S> <C> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- --------------------------------------------------------------------------
OHIO--CONTINUED
-------------------------------------------------------
$ 500,000 South Euclid, OH, 7.00% UT GO Bonds (Recreational
Facilities Improvement Series), 12/1/2011 A1 $ 542,885
-------------------------------------------------------
500,000 Stark County, OH, 5.00% Hospital Revenue Bonds (Timken
Mercy Medical Center)/(MBIA Insured)/(Original Issue
Yield: 5.431%), 12/1/2019 AAA 425,015
-------------------------------------------------------
500,000 Tiffin, OH, 7.10% LT GO Bonds (Sanitary Sewer System
Improvement Series), 12/1/2011 A 543,430
-------------------------------------------------------
3,500,000 Toledo-Lucas County, OH, 5.90% Port Authority Revenue
Refunding Bonds (Cargill Inc.)/(Original Issue Yield:
5.981%), 12/1/2015 Aa3 3,356,570
-------------------------------------------------------
500,000 University of Cincinnati, OH, 6.50% General Receipts
Bonds (Series 12)/(Original Issue Yield: 6.613%),
6/1/2011 A1 517,795
-------------------------------------------------------
500,000 University of Cincinnati, OH, 7.00% General Receipts
Bonds (Original Issue Yield: 7.05%), 6/1/2011 A1 541,025
-------------------------------------------------------
1,100,000 Wilmington, OH, 6.05% Municipal Building LT GO Bonds
(Series 1992), 8/1/2017 A 1,098,570
------------------------------------------------------- -----------
Total 77,224,761
------------------------------------------------------- -----------
PUERTO RICO--3.0%
-------------------------------------------------------
2,400,000 Puerto Rico Electric Power Authority, 6.375% Revenue
Bonds (Series T)/(Original Issue Yield: 6.58%),
7/1/2024 A- 2,424,960
------------------------------------------------------- -----------
TOTAL LONG-TERM MUNICIPAL SECURITIES
(IDENTIFIED COST, $78,087,039) $79,649,721+
------------------------------------------------------- -----------
</TABLE>
* Please refer to the Appendix of the Statement of Additional Information for an
explanation of the credit ratings. Current credit ratings are unaudited.
+ The cost of investments for federal tax purposes amounts to $78,087,039. The
net unrealized appreciation on a federal tax cost basis amounts to $1,562,682
and is comprised of $2,566,517 appreciation and $1,003,835 depreciation at
August 31, 1994.
Note: The categories of investments are shown as a percentage of net assets
($81,565,959) at August 31, 1994.
OHIO MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
The following abbreviations are used in this portfolio:
<TABLE>
<S> <C> <C>
AMBAC -- American Municipal Bond Assurance Corporation
AMT -- Alternative Minimum Tax
BIGI -- Bond Investors Guaranty Inc.
FGIC -- Financial Guaranty Insurance Co.
GNMA -- Government National Mortgage Association
GO -- General Obligation
HFA -- Housing Finance Authority
IDA -- Industrial Development Authority
LT -- Limited Tax
MBIA -- Municipal Bond Investors Assurance
PCR -- Pollution Control Revenue
SFM -- Single Family Mortgage
UT -- Unlimited Tax
</TABLE>
(See Notes which are an integral part of the Financial Statements)
OHIO MUNICIPAL INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- --------------------------------------------------------------------------------------
Investments in securities, at value (identified and tax cost $78,087,039) $79,649,721
- --------------------------------------------------------------------------------------
Cash 1,308,155
- --------------------------------------------------------------------------------------
Interest receivable 1,335,903
- --------------------------------------------------------------------------------------
Receivable for investments sold 998,750
- --------------------------------------------------------------------------------------
Receivable for Fund shares sold 179,994
- --------------------------------------------------------------------------------------
Deferred expenses 5,645
- -------------------------------------------------------------------------------------- -----------
Total assets 83,478,168
- --------------------------------------------------------------------------------------
LIABILITIES:
- -------------------------------------------------------------------------
Payable for investments purchased $1,586,989
- -------------------------------------------------------------------------
Dividends payable 224,305
- -------------------------------------------------------------------------
Payable for Fund Shares redeemed 62,309
- -------------------------------------------------------------------------
Payable to Distributor 9,808
- -------------------------------------------------------------------------
Accrued expenses 28,798
- ------------------------------------------------------------------------- ----------
Total liabilities 1,912,209
- -------------------------------------------------------------------------------------- -----------
NET ASSETS FOR 7,410,283 shares of beneficial interest outstanding $81,565,959
- -------------------------------------------------------------------------------------- -----------
NET ASSETS CONSIST OF:
- --------------------------------------------------------------------------------------
Paid-in capital $80,237,403
- --------------------------------------------------------------------------------------
Accumulated net realized gain (loss) on investments (265,110)
- --------------------------------------------------------------------------------------
Undistributed net investment income 30,984
- --------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments 1,562,682
- -------------------------------------------------------------------------------------- -----------
Total Net Assets $81,565,959
- -------------------------------------------------------------------------------------- -----------
NET ASSET VALUE ($81,565,959 / 7,410,283 shares of beneficial interest outstanding) $ 11.01
- -------------------------------------------------------------------------------------- -----------
OFFERING PRICE PER SHARE (100/99 of $11.01)* $ 11.12
- -------------------------------------------------------------------------------------- -----------
REDEMPTION PROCEEDS PER SHARE (99/100 of $11.01)** $ 10.90
- -------------------------------------------------------------------------------------- -----------
</TABLE>
* See "What Shares Cost" in the prospectus.
** See "Redeeming Shares" in the prospectus.
(See Notes which are an integral part of the Financial Statements)
OHIO MUNICIPAL INCOME FUND
STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- -----------------------------------------------------------------------------------------
Interest income $4,919,307
- -----------------------------------------------------------------------------------------
EXPENSES:
- ---------------------------------------------------------------------------
Investment advisory fee $ 332,570
- ---------------------------------------------------------------------------
Administrative personnel and services 224,287
- ---------------------------------------------------------------------------
Trustees' fees 3,154
- ---------------------------------------------------------------------------
Custodian and portfolio accounting fees 63,355
- ---------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 42,834
- ---------------------------------------------------------------------------
Fund share registration costs 27,485
- ---------------------------------------------------------------------------
Shareholder services fee 96,785
- ---------------------------------------------------------------------------
Distribution services fee 307,350
- ---------------------------------------------------------------------------
Printing and postage 28,281
- ---------------------------------------------------------------------------
Legal fees 7,152
- ---------------------------------------------------------------------------
Auditing fees 16,828
- ---------------------------------------------------------------------------
Insurance premiums 7,193
- ---------------------------------------------------------------------------
Miscellaneous 11,851
- --------------------------------------------------------------------------- ----------
Total expenses 1,169,125
- ---------------------------------------------------------------------------
Deduct--
- ----------------------------------------------------------------
Waiver of investment advisory fee $332,570
- ----------------------------------------------------------------
Waiver of distribution services fee 96,785
- ----------------------------------------------------------------
Reimbursement of other operating expenses by Adviser 16,715 446,070
- ---------------------------------------------------------------- -------- ----------
Net expenses 723,055
- ----------------------------------------------------------------------------------------- ----------
Net investment income 4,196,252
- ----------------------------------------------------------------------------------------- ----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- -----------------------------------------------------------------------------------------
Net realized gain (loss) on investments (identified cost basis) (255,186)
- -----------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments (4,648,123)
- ----------------------------------------------------------------------------------------- ----------
Net realized and unrealized gain (loss) on investments (4,903,309)
- ----------------------------------------------------------------------------------------- ----------
Change in net assets resulting from operations $ (707,057)
- ----------------------------------------------------------------------------------------- ----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
OHIO MUNICIPAL INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
---------------------------
1994 1993
----------- -----------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- -----------------------------------------------------------------------
OPERATIONS--
- -----------------------------------------------------------------------
Net investment income $ 4,196,252 $ 2,892,393
- -----------------------------------------------------------------------
Net realized gain (loss) on investments ($595 net loss and $50 net
gains, respectively, as computed for federal tax purposes) (255,186) (210)
- -----------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments (4,648,123) 4,715,102
- ----------------------------------------------------------------------- ----------- -----------
Change in net assets resulting from operations (707,057) 7,607,285
- ----------------------------------------------------------------------- ----------- -----------
NET EQUALIZATION CREDITS (DEBITS) (11,943) 46,834
- ----------------------------------------------------------------------- ----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS--
- -----------------------------------------------------------------------
Dividends to shareholders from net investment income:
Fortress Shares (3,779,954) (2,685,573)
- -----------------------------------------------------------------------
Trust Shares (330,980) (255,290)
- -----------------------------------------------------------------------
Distributions in excess of net investment income:
Fortress Shares -- (45,258)
- -----------------------------------------------------------------------
Trust Shares -- --
- ----------------------------------------------------------------------- ----------- -----------
Change in net assets resulting from distributions to shareholders (4,110,934) (2,986,121)
- ----------------------------------------------------------------------- ----------- -----------
FUND SHARE (PRINCIPAL) TRANSACTIONS (EXCLUSIVE OF AMOUNTS
ALLOCATED TO NET INVESTMENT INCOME)--
- -----------------------------------------------------------------------
Proceeds from sale of shares 28,336,326 50,841,231
- -----------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment
of dividends declared 1,388,664 1,136,955
- -----------------------------------------------------------------------
Cost of shares redeemed (23,607,643) (6,951,397)
- ----------------------------------------------------------------------- ----------- -----------
Change in net assets resulting from Fund share transactions 6,117,347 45,026,789
- ----------------------------------------------------------------------- ----------- -----------
Change in net assets 1,287,413 49,694,787
- -----------------------------------------------------------------------
NET ASSETS:
- -----------------------------------------------------------------------
Beginning of period 80,278,546 30,583,759
- ----------------------------------------------------------------------- ----------- -----------
End of period (including net undistributed net investment income of
$30,984 and $0, respectively $81,565,959 $80,278,546
- ----------------------------------------------------------------------- ----------- -----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
OHIO MUNICIPAL INCOME FUND
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1994
- --------------------------------------------------------------------------------
(1) ORGANIZATION
Municipal Securities Income Trust (the "Trust"), is registered under the
Investment Company Act of 1940, as amended (the "Act"), as an open-end
management investment company. The Trust consists of ten, non-diversified
portfolios. The financial statements included herein present only those of Ohio
Municipal Income Fund (the "Fund"). The financial statements of the other
portfolios are presented separately. The assets of each portfolio are segregated
and a shareholder's interest is limited to the portfolio in which shares are
held.
The Fund provides one class of shares ("Fortress Shares"). Previously, the Fund
provided two classes of shares ("Fortress Shares" and "Trust Shares"). As of
August 23, 1994, the "Trust Shares" class of shares were no longer offered.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
<TABLE>
<S> <C>
A. INVESTMENT VALUATIONS--Municipal bonds are valued by an independent pricing service
taking into consideration yield, liquidity, risk, credit, quality, coupon, maturity, type
of issue, and any other factors or market data it deems relevant in determining
valuations for normal institutional size trading units of debt securities. The
independent pricing service does not rely exclusively on quoted prices. Short-term
securities with remaining maturities of sixty days or less may be stated at amortized
cost, which approximates value.
B. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and expenses are accrued
daily. Bond premium and discount, if applicable, are amortized as required by the
Internal Revenue Code, as amended (the "Code"). Distributions to shareholders are
recorded on the ex-dividend date.
C. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the Code
applicable to regulated investment companies and to distribute to shareholders each year
substantially all of its tax-exempt income. Accordingly, no provision for federal income
tax is necessary. At August 31, 1994, the Fund for federal tax purposes, had a capital
loss carryforward of $10,260, which will reduce the Fund's taxable income arising from
future net realized gain on investments, if any, to the extent permitted by the Code, and
thus will reduce the amount of the distributions to shareholders which would otherwise be
necessary to relieve the Fund of any liability for federal tax. Pursuant to the Code,
such capital loss carryforward will expire in 2000 ($9,665) and 2002 ($595).
Additionally, net capital losses of $254,851 attributable to security transactions
incurred after October 31, 1993 are treated as arising on September 1, 1994, the first
day of the Fund's next taxable year.
</TABLE>
OHIO MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
D. EQUALIZATION--The Fund follows the accounting practice known as equalization by which a
portion of the proceeds from sales and costs of redemptions of capital stock equivalent,
on a per share basis, to the amount of undistributed net investment income on the date of
the transaction is credited or charged to undistributed net investment income. As a
result, undistributed net investment income per share is unaffected by sales or
redemptions of capital stock.
E. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in when-issued or
delayed delivery transactions. The Fund records when-issued securities on the trade date
and maintains security positions such that sufficient liquid assets will be available to
make payment for the securities purchased. Securities purchased on a when-issued or
delayed delivery basis are marked to market daily and begin earning interest on the
settlement date.
F. CONCENTRATION OF RISK--Since the Fund invests a substantial portion of its assets in
issuers located in one state, it will be more susceptible to factors adversely affecting
issuers of that state than would be a comparable general tax-exempt mutual fund. In order
to reduce the credit risk associated with such factors, at August 31, 1994, 23.3% of the
securities in the portfolio of investments are backed by letters of credit or bond
insurance of various financial institutions and financial guaranty assurance agencies.
The value of investments insured by or supported (backed) by a letter of credit for any
one institution or agency did not exceed 10.6% of total investments.
G. DEFERRED EXPENSES--The costs incurred by the Fund with respect to registration of its
shares in its first fiscal year, excluding the initial expense of registering its shares,
have been deferred and are being amortized using the straight-line method not to exceed a
period of five years from the Fund's commencement date.
H. OTHER--Investment transactions are accounted for on the trade date.
</TABLE>
(3) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-------------------------------------------------------------
1994 1993
--------------------------- -------------------------
TRUST SHARES SHARES DOLLARS SHARES DOLLARS
- ------------------------------------ ---------- ------------ --------- -----------
<S> <C> <C> <C> <C>
Shares sold 429,857 $ 4,955,407 522,626 $ 5,775,096
- ------------------------------------
Shares issued to shareholders in
payment of dividends declared 4,891 55,546 10,195 113,377
- ------------------------------------
Shares redeemed (975,921) (10,906,082) (144,075) (1,601,771)
- ------------------------------------ ---------- ------------ --------- -----------
Net change resulting from Fund
share transactions (541,173) $ (5,895,127) 388,746 $ 4,286,702
- ------------------------------------ ---------- ------------ --------- -----------
</TABLE>
OHIO MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-------------------------------------------------------------
1994 1993
--------------------------- -------------------------
FORTRESS SHARES SHARES DOLLARS SHARES DOLLARS
- ----------------------------------- ---------- ------------ --------- -----------
<S> <C> <C> <C> <C>
Shares sold 2,071,672 $ 23,380,919 4,077,428 $45,066,135
- -----------------------------------
Shares issued to shareholders in
payment of dividends declared 117,979 1,333,119 91,777 1,023,578
- -----------------------------------
Shares redeemed (1,127,610) (12,701,562) (476,933) (5,349,626)
- ----------------------------------- ---------- ------------ --------- -----------
Net change resulting from Fund
share transactions 1,062,041 $ 12,012,476 3,692,272 $40,740,087
- ----------------------------------- ---------- ------------ --------- -----------
</TABLE>
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
ADVISORY FEE--Federated Advisers, the Fund's investment adviser (the "Adviser"),
receives for its services 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 and reimburse certain operating expenses of the Fund.
The Adviser can modify or terminate this voluntary waiver and reimbursement at
any time at its sole discretion.
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS") provides the Fund
with administrative personnel and services. Prior to March 1, 1994, these
services were provided at approximately cost. Effective March 1, 1994, the FAS
fee is based on the level of average aggregate daily net assets of all funds
advised by subsidiaries of Federated Investors for the period. The
administrative fee received during the period of the Administrative Services
Agreement shall be at least $125,000 per portfolio and $30,000 per each
additional class of shares.
DISTRIBUTION AND SHAREHOLDER SERVICES FEE--The Fund has adopted a Distribution
Plan (the "Plan") pursuant to Rule 12b-1 under the Act. Under the terms of the
Plan, the Fund will compensate Federated Securities Corp. ("FSC"), the principal
distributor, from the net assets of the Fund to finance activities intended to
result in the sale of the Fund's Fortress Shares. The Plan provides that the
Fund may incur distribution expenses up to .40 of 1% of the average daily net
assets of the Fortress Shares, annually, to compensate FSC. The distributor may
voluntarily choose to waive a portion of its fee. The distributor can modify or
terminate this voluntary waiver at any time at its sole discretion.
Under the terms of a Shareholder Services Agreement with Federated Shareholder
Services ("FSS"), the Fund will pay FSS up to .25 of 1% of average net assets
for the Fund for the period. This fee is to obtain certain personal services for
shareholders and the maintenance of shareholder accounts.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES--Federated Services Company
("FServ") serves as transfer agent and dividend disbursing agent for the Fund.
The FServ fee is based on the size, type and number of accounts and transactions
made by shareholders.
OHIO MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
ORGANIZATIONAL EXPENSES--Organizational expenses of $29,070 and start-up
administrative services expenses of $97,677 were borne initially by the Adviser.
The Fund has agreed to reimburse the Adviser for the organizational expenses and
start-up administrative expenses during the five year period following October
10, 1990 (date the Fund first became effective). For the year ended August 31,
1994, the Fund paid $4,141 and $8,281, respectively, pursuant to this agreement.
INTERFUND TRANSACTIONS--During the year ended August 31, 1994, the Fund engaged
in purchase and sale transactions with other affiliated funds at current value
on the date of the transaction pursuant to Rule 17a-7 under the Act amounting to
$13,050,000 and $15,724,800, respectively.
Certain of the Officers and Trustees of the Fund are Officers and Directors or
Trustees of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
fiscal year ended August 31, 1994, were as follows:
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------
PURCHASES $21,560,169
- ------------------------------------------------------------------------------- -----------
SALES $15,942,411
- ------------------------------------------------------------------------------- -----------
</TABLE>
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
To the Board of Trustees of MUNICIPAL SECURITIES INCOME TRUST
and Shareholders of OHIO MUNICIPAL INCOME FUND:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Ohio Municipal Income Fund (a portfolio of
Municipal Securities Income Trust) as of August 31, 1994, the related statement
of operations for the year then ended, the statement of changes in net assets
for the years ended August 31, 1994 and 1993, and the financial highlights (see
page 2 of the prospectus) for each of the years in the four-year period ended
August 31, 1994. These financial statements and financial highlights are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
August 31, 1994 by correspondence with the custodian and brokers; where replies
were not received from brokers we performed other auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Ohio Municipal
Income Fund as of August 31, 1994, the results of its operations, the changes in
its net assets, and the financial highlights for the respected stated periods in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
October 7, 1994
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Ohio Municipal Income Fund Federated Investors Tower
Fortress Shares 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 8602
Trust Company Boston, Massachusetts 02266-8602
- ------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------
</TABLE>
OHIO MUNICIPAL
INCOME FUND
FORTRESS SHARES
PROSPECTUS
A Non-Diversified Portfolio of
Municipal Securities Income Trust
an Open-End, Management
Investment Company
October 31, 1994
FEDERATED SECURITIES CORP.
(LOGO)
- ---------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
625922307
0090702A-FS (10/94)
[THIS PAGE INTENTIONALLY LEFT BLANK]
[THIS PAGE INTENTIONALLY LEFT BLANK]
OHIO MUNICIPAL INCOME FUND
(A PORTFOLIO OF MUNICIPAL SECURITIES INCOME TRUST)
FORTRESS SHARES
STATEMENT OF ADDITIONAL INFORMATION
The Fortress Shares of Ohio Municipal Income Fund (the "Fund") represent
interests in a non-diversified portfolio of securities. This Statement of
Additional Information should be read with the prospectus of the Fund dated
October 31, 1994. This Statement is not a prospectus itself. To receive a copy
of a prospectus write or call the Fund.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated October 31, 1994
FEDERATED SECURITIES CORP.
(LOGO)
- ---------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND 1
- ---------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES 1
- ---------------------------------------------------------------
Acceptable Investments 1
When-Issued and Delayed
Delivery Transactions 2
Temporary Investments 2
Portfolio Turnover 3
Investment Limitations 3
Ohio Investment Risks 4
MUNICIPAL SECURITIES
INCOME TRUST MANAGEMENT 5
- ---------------------------------------------------------------
Officers and Trustees 5
Fund Ownership 7
The Funds 7
INVESTMENT ADVISORY SERVICES 7
- ---------------------------------------------------------------
Adviser to the Fund 7
Advisory Fees 8
ADMINISTRATIVE SERVICES 8
- ---------------------------------------------------------------
TRANSFER AGENT AND DIVIDEND
DISBURSING AGENT 8
- ---------------------------------------------------------------
BROKERAGE TRANSACTIONS 8
- ---------------------------------------------------------------
PURCHASING SHARES 9
- ---------------------------------------------------------------
Distribution and Shareholder Services Plans 9
Conversion to Federal Funds 9
Purchases by Sales Representatives,
Fund Trustees, and Employees 9
DETERMINING NET ASSET VALUE 9
- ---------------------------------------------------------------
Valuing Municipal Bonds 9
Use of Amortized Cost 10
REDEEMING SHARES 10
- ---------------------------------------------------------------
Redemption in Kind 10
EXCHANGE PRIVILEGE 10
- ---------------------------------------------------------------
Reduced Sales Load 10
Requirements for Exchange 10
Tax Consequences 10
Making an Exchange 10
TAX STATUS 11
- ---------------------------------------------------------------
The Fund's Tax Status 11
Shareholder's Tax Status 11
TOTAL RETURN 11
- ---------------------------------------------------------------
YIELD 11
- ---------------------------------------------------------------
TAX-EQUIVALENT YIELD 11
- ---------------------------------------------------------------
Tax-Equivalency Table 12
PERFORMANCE COMPARISONS 13
- ---------------------------------------------------------------
APPENDIX 14
- ---------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND
- --------------------------------------------------------------------------------
The Fund is a portfolio of Municipal Securities Income Trust (the "Trust"). The
Trust was established as a Massachusetts business trust under a Declaration of
Trust dated August 6, 1990. On August 31, 1992, (effective October 31, 1992),
the Board of Trustees ("Trustees") approved the conversion of Investment Shares
to Fortress Shares. On September 16, 1992, (effective October 31, 1992), the
Trustees approved changing the name of the Trust from Federated Municipal Income
Trust to Municipal Securities Income Trust. Shares of the Fund are presently
offered in one class known as Fortress Shares ("Shares"). As of August 31, 1994,
Trust Shares are no longer offered.
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The Fund's investment objective is to provide current income which is exempt
from federal regular income tax and personal income taxes imposed by the state
of Ohio and Ohio municipalities. The investment objective cannot be changed
without approval of shareholders.
ACCEPTABLE INVESTMENTS
The Fund invests primarily in Ohio municipal securities.
CHARACTERISTICS
The Ohio municipal securities in which the Fund invests have the
characteristics set forth in the prospectus. If a rated bond loses its
rating or has its rating reduced after the Fund has purchased it, the
Fund is not required to drop the bond from the portfolio, but will
consider doing so. If ratings made by Moody's Investors Service, Inc.,
Standard & Poor's Ratings Group or Fitch's Investors Service, Inc. 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 Ohio municipal securities are:
- 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. Government lease certificates purchased by the Fund
will not contain non-appropriation clauses;
- municipal notes and tax-exempt commercial paper;
- serial bonds;
- tax anticipation notes sold to finance working capital needs of
municipalities;
- bond anticipation notes sold in anticipation of the issuance of
long-term bonds;
- pre-refunded municipal bonds whose timely payment of interest and
principal is ensured by an escrow of U.S. government obligations; and
- 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
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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
investment adviser, under the authority delegated by the Trustees, will
base its determination on the following factors:
- whether the lease can be terminated by the lessee:
- the potential recovery, if any, from a sale of the leased property upon
termination of the lease;
- the lessee's general credit strength (e.g., its debt, administrative,
economic and financial characteristics and prospects);
- the likelihood that the lessee will discontinue appropriating funding
for the leased property because the property is no longer deemed
essential to its operations (e.g., the potential for an "event of
non-appropriation");
- 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.
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
investment adviser to be creditworthy pursuant to guidelines established
by the Trustees.
From time to time, such as when suitable Ohio municipal bonds 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 Ohio municipal
bonds and thereby reduce the Fund's yield.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements. This
transaction is similar to borrowing cash. In a reverse repurchase
agreement the Fund transfers possession of a portfolio instrument to
another person, such as a financial institution, broker, or dealer, in
return for a percentage of the instrument's market value in cash, and
agrees that on a stipulated date in the future the Fund will repurchase
the portfolio instrument by remitting the original consideration plus
interest at an agreed upon rate. The use of reverse repurchase agreements
may enable the Fund to avoid selling portfolio instruments at a time when
a sale may be deemed to be disadvantageous, but the ability to enter into
reverse repurchase agreements does not ensure that the Fund will be able
to avoid selling portfolio instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund,
in a dollar amount sufficient to make payment for the obligations to be
purchased, are segregated on the Fund's records at the trade date. These
assets are marked to market daily and are maintained until the
transaction is settled.
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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 portfolio turnover rate
exceeding 100%. For the fiscal years ended August 31, 1994 and 1993, the
portfolio turnover rates were 20% 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 or to facilitate management of the
portfolio by enabling the Fund to meet redemption requests when the
liquidation of portfolio securities is deemed to be inconvenient or
disadvantageous. The Fund will not purchase any securities while
borrowings in excess of 5% of its total assets are outstanding. During
the period any reverse repurchase agreements are outstanding, but only to
the extent necessary to assure completion of the reverse repurchase
agreements, the Fund will restrict the purchase of portfolio instruments
to money market instruments maturing on or before the expiration date of
the reverse repurchase agreements.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate 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 buy or sell real estate although it may invest in
municipal bonds secured by real estate or interests in real estate.
INVESTING IN COMMODITIES
The Fund will not buy or sell commodities, commodity contracts, or
commodities futures contracts.
INVESTING IN RESTRICTED SECURITIES
The Fund will not invest more than 10% of the value of its net assets in
securities subject to restrictions on resale under the Securities Act of
1933.
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.
DEALING IN PUTS AND CALLS
The Fund will not buy or sell puts, calls, straddles, spreads, or any
combination of these.
CONCENTRATION OF INVESTMENTS
The Fund will not purchase securities if, as a result of such purchase,
25% or more of the value of its total assets would be invested in any one
industry or in industrial development bonds or other securities, the
interest upon which is paid from revenues of similar types of projects.
However, the Fund may invest as temporary investments more than 25% of
the value of its assets in cash or cash items, securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities, or
instruments secured by these money market instruments, i.e., repurchase
agreements.
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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 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 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 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.
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.
In addition, in order to comply with certain state restrictions, the Fund may
not invest in real estate limited partnerships.
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.
For purposes of its policies and limitations, the Fund considers certificates of
deposit and demand and time deposits issued by a U.S. branch of a domestic bank
or savings and loan having capital, surplus, and undivided profits in excess of
$100,000,000 at the time of investment to be "cash items."
OHIO INVESTMENT RISKS
The economy of the State of Ohio is reliant in part on durable goods
manufacturing, largely concentrated in motor vehicles and equipment, steel,
rubber products and household appliances. During the past decade, competition in
various industries in the State of Ohio has changed from being domestic to
international in nature. In addition, these industries may be characterized as
having excess capacity in particular product segments. The steel industry, in
particular, and the automobile industry, to a lesser extent, share these
characteristics. Because the State of Ohio and certain underlying municipalities
have large exposure to these industries and their respective aftermarkets,
trends in these industries may, over the long term, impact the demographic and
financial position of the State of Ohio and its municipalities. To the degree
that domestic manufacturers in industries to which Ohio municipalities have
exposure fail to make competitive adjustments, employment statistics and
disposable income of residents in Ohio may deteriorate, possibly leading to
population declines and erosion of municipality tax bases.
Both the economic trends above and the political climate in various
municipalities may have contributed to the decisions of various businesses and
individuals to relocate outside the State. A municipality's political climate in
particular may affect its own credit standing. For both the State of Ohio and
underlying Ohio municipalities, adjustment of credit ratings by the rating
agencies may affect the ability to issue securities and thereby affect the
supply of obligations meeting the quality standards for investment by the Fund.
The State acted quickly in response to the national recession. Expenditure
reductions in excess of $700 million coupled with various revenue adjustments
enabled the State to maintain its General Fund balances and restore $21 million
to its budget stabilization reserve during fiscal 1993. The State has relatively
modest debt outstanding as compared to its economic base.
Economic restructuring continues as the State's traditional manufacturing
sectors are gradually replaced by trade and service sectors. This transformation
will reduce the State's sensitivity to economic cycles.
The State has established procedures for municipal fiscal emergencies under
which joint state/local commissions are established to monitor the fiscal
affairs of a financially troubled municipality. When these procedures are
invoked, the municipality must develop a financial plan to eliminate deficits
and cure any defaults. Since their adoption in 1979, these
- --------------------------------------------------------------------------------
procedures have been applied to approximately twenty-one cities and villages,
including the City of Cleveland; in sixteen of these communities, the fiscal
situation has been resolved and the procedures terminated.
The foregoing discussion only highlights some of the significant financial
trends and problems affecting the State of Ohio and underlying municipalities.
MUNICIPAL SECURITIES INCOME TRUST MANAGEMENT
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OFFICERS AND TRUSTEES
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.
- --------------------------------------------------------------------------------
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
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 Trustees between meetings of the
Board.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the outstanding Shares.
As of September 28, 1994, the following shareholder of record owned 5% or more
of the outstanding Shares of the Fund: Merrill Lynch, Pierce, Fenner & Smith,
Jacksonville, Florida own approximately 3,337,645 shares (45.90%).
THE FUNDS
"The Funds" and "Funds" mean the following investment companies: American
Leaders Fund, Inc.; Annuity Management Series; Arrow Funds; Automated Cash
Management Trust; Automated Government Money Trust; California Municipal Cash
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
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; 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; 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 Fund'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 Trust.
ADVISORY FEES
For its advisory services, Federated Advisers receives an annual investment
advisory fee as described in the prospectus. For the fiscal years ended August
31, 1994, 1993, and 1992, the Adviser earned $332,570, $267,549, and $182,192,
respectively, 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 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
$224,287, none of which was waived. For the fiscal years ended August 31, 1993
and 1992, Federated Administrative Services, Inc. earned $283,923 and $184,597.
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 who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. The Adviser makes
decisions on portfolio transactions and selects brokers and dealers subject to
review by the Trustees. The Adviser may select brokers and dealers who offer
brokerage and research services. These services may be furnished directly to the
Fund or to the Adviser and may include:
- - advice as to the advisability of investing in securities;
- - security analysis and reports;
- - economic studies;
- - industry studies;
- - receipt of quotations for portfolio evaluations; and
- - similar services.
- --------------------------------------------------------------------------------
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 the 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.
PURCHASING SHARES
- --------------------------------------------------------------------------------
Except under certain circumstances described in the prospectus, Shares are sold
at their net asset value plus a sales load on days the New York Stock Exchange
is open for business. The procedure for purchasing Shares is explained in the
prospectus under "Investing in Fortress Shares."
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 years ended August 31, 1994, 1993, and 1992, payments in the
amount of $307,350, $209,201, and $61,684, respectively, were made pursuant to
the Distribution Plan. In addition, for the fiscal year ended August 31, 1994,
payments in the amount of $96,785 and $0, respectively, were made pursuant to
the Shareholder Services Plan.
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 and Trust Company acts as the shareholder's
agent in depositing checks and converting them to federal funds.
PURCHASES BY SALES REPRESENTATIVES, FUND TRUSTEES, AND EMPLOYEES
Trustees, employees, and sales representatives of the Fund, Federated Advisers,
and Federated Securities Corp. or their affiliates, or any investment dealer who
has a sales agreement with Federated Securities Corp. and their spouses and
children under 21, may buy shares at net asset value without a sales load.
Shares may also be sold without a sales load to trusts or pension or
profit-sharing plans for these persons. These sales are made with the
purchaser's written assurance that the purchase is for investment purposes and
that the securities will not be resold except through redemption by the Fund.
DETERMINING NET ASSET VALUE
- --------------------------------------------------------------------------------
Net asset value generally changes each day. The days on which net asset value is
calculated by the Fund are described in the prospectus.
VALUING MUNICIPAL BONDS
The Trustees use an independent pricing service to determine the market value of
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. Redemption procedures and contingent deferred
sales charges are explained in the prospectus under "Redeeming Fortress Shares."
Although the Fund 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
The Trust is obligated to redeem Shares solely in cash up to $250,000 or 1% of
the respective class'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 transaction costs.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
Fund shareholders are allowed to exchange all or some of their Fortress Shares
for shares in other Fortress Funds, Ohio Municipal Cash Trust, or certain of the
Funds which are sold with a sales load different from that of the Fund's or with
no sales load and which are advised by subsidiaries or affiliates of Federated
Investors. These exchanges are made at net asset value plus the difference
between the Fund's sales load already paid and any sales load of the fund into
which the Shares are to be exchanged, if higher.
REDUCED SALES LOAD
If a shareholder making such an exchange qualifies for a reduction or an
elimination of the sales load, the shareholder must notify Federated Securities
Corp. or Federated Services Company in writing.
REQUIREMENTS FOR EXCHANGE
Shareholders using this privilege must exchange Fortress Shares having a net
asset value which at least meets the minimum investment required for the fund
into which the exchange is being made. Before the exchange, the shareholder must
receive a prospectus of the fund for which the exchange is being made.
This privilege is available to shareholders residing in any state in which the
fund shares being acquired may be sold. Upon receipt of proper instructions and
required supporting documents, Shares submitted for exchange are redeemed and
the proceeds invested in shares of the other fund.
A shareholder may obtain further information on the exchange privilege and
prospectuses for Fortress Funds, Ohio Municipal Cash Trust, or certain Federated
Funds by calling the Fund or his financial institution.
TAX CONSEQUENCES
Exercise of this exchange privilege is treated as a sale for federal income tax
purposes. Depending upon the circumstances, a short or long-term capital gain or
loss may be realized.
MAKING AN EXCHANGE
Instructions for exchanges for Fortress Funds, Ohio Municipal Cash Trust, or
certain Federated Funds must be given in writing by the shareholder. Written
instructions may require a signature guarantee.
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 of 1986, as amended,
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:
- - derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;
- - derive less than 30% of its gross income from the sale of securities held less
than three months;
- - invest in securities within certain statutory limits; and
- - distribute to its shareholders at least 90% of its net income earned during
the year.
SHAREHOLDERS' TAX STATUS
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;
- differentials in market values;
- new investment opportunities;
- changes in creditworthiness of an issuer; or
- 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 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 Shares for the fiscal year ended
August 31, 1994, and for the period from October 12, 1990 (date of initial
public investment) to August 31, 1994, were (2.72%) and 7.81%, respectively.
The average annual total return for the Shares of 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 less any applicable sales
load, adjusted over the period by any additional shares, assuming a monthly
reinvestment of all dividends and distributions. Any applicable contingent
deferred sales charge will be deducted from the ending value of the investment
based on the lesser of the original purchase price or the offering price of
shares redeemed.
YIELD
- --------------------------------------------------------------------------------
The Fund's yield for Fortress Shares for the 30-day period ended August 31, 1994
was 5.12%.
The yield for the Fund is determined each day by dividing the net investment
income per share (as defined by the Securities and Exchange Commission) earned
by Fund Shares over a thirty-day period by the maximum offering price per share
of the respective class 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 either
class of shares, performance will be reduced for those shareholders paying those
fees.
TAX-EQUIVALENT YIELD
- --------------------------------------------------------------------------------
The tax-equivalent yield for shares of the Fund for the 30-day period ended
August 31, 1994 was 7.66%.
The tax-equivalent yield for shares of the Fund is calculated similarly to the
yield, but is adjusted to reflect the taxable yield that either class would have
had to earn to equal its actual yield, assuming a 28% tax rate and assuming that
income is 100% tax-exempt.
- --------------------------------------------------------------------------------
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 is free
from the income taxes imposed by the State of Ohio. 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.
<TABLE>
<S> <C> <C> <C> <C> <C>
TAXABLE YIELD EQUIVALENT FOR 1994**
STATE OF OHIO
- ----------------------------------------------------------------------------------------------------------
FEDERAL TAX BRACKET:
15.00 % 28.00 % 31.00 % 36.00 % 39.60 %
COMBINED FEDERAL AND STATE TAX BRACKET:
19.457% 33.201% 37.900% 43.500% 47.100%
- ----------------------------------------------------------------------------------------------------------
SINGLE RETURN; $1-22,100 $22,101-53,500 53,501-115,000 $115,001-250,000 OVER $250,000
- ----------------------------------------------------------------------------------------------------------
TAX-EXEMPT YIELD TAXABLE YIELD EQUIVALENT
- ----------------------------------------------------------------------------------------------------------
1.50% 1.86% 2.25% 2.42% 2.65% 2.84%
2.00% 2.48% 2.99% 3.22% 3.54% 3.78%
2.50% 3.10% 3.74% 4.03% 4.42% 4.73%
3.00% 3.72% 4.49% 4.83% 5.31% 5.67%
3.50% 4.35% 5.24% 5.64% 6.19% 6.62%
4.00% 4.97% 5.99% 6.44% 7.08% 7.56%
4.50% 5.59% 6.74% 7.25% 7.96% 8.51%
5.00% 6.21% 7.49% 8.05% 8.85% 9.45%
5.50% 6.83% 8.23% 8.86% 9.73% 10.40%
6.00% 7.45% 8.98% 9.66% 10.62% 11.34%
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
TAXABLE YIELD EQUIVALENT FOR 1994**
STATE OF OHIO
- ----------------------------------------------------------------------------------------------------------
FEDERAL INCOME TAX BRACKET:
15.00 % 28.00 % 31.00 % 36.00 % 39.60 %
- ----------------------------------------------------------------------------------------------------------
COMBINED FEDERAL AND STATE INCOME TAX BRACKET:
20.201% 33.943% 37.900% 43.500% 47.100%
- ----------------------------------------------------------------------------------------------------------
JOINT RETURN: $1-36,900 $36,901-89,150 $89,151-140,000 $140,001-250,000 OVER $250,000
- ----------------------------------------------------------------------------------------------------------
TAX-EXEMPT YIELD TAXABLE YIELD EQUIVALENT
- ----------------------------------------------------------------------------------------------------------
1.50% 1.88% 2.30% 2.42% 2.65% 2.84%
2.00% 2.51% 3.07% 3.22% 3.54% 3.78%
2.50% 3.13% 3.84% 4.03% 4.42% 4.73%
3.00% 3.76% 4.61% 4.83% 5.31% 5.67%
3.50% 4.39% 5.38% 5.64% 6.19% 6.62%
4.00% 5.01% 6.14% 6.44% 7.08% 7.56%
4.50% 5.64% 6.91% 7.25% 7.96% 8.51%
5.00% 6.27% 7.68% 8.05% 8.85% 9.45%
5.50% 6.89% 8.45% 8.86% 9.73% 10.40%
6.00% 7.52% 9.22% 9.66% 10.62% 11.34%
</TABLE>
The chart above is for illustrative purposes only. It is not an indicator of
past or future performance of the Fund.
* Some portion of the Fund's income may be subject to the federal alternative
minimum tax and state and local taxes.
** The maximum marginal tax rate for each bracket was used in calculating the
taxable yield equivalent. Furthermore, additional state and local taxes paid
on comparable taxable investments were not used to increase federal
deductions.
PERFORMANCE COMPARISONS
- --------------------------------------------------------------------------------
The performance of Shares depends upon such variables as:
- - portfolio quality;
- - average portfolio maturity;
- - type of instruments in which the portfolio is invested;
- - changes in interest rates and market value of portfolio securities;
- - changes in the Fund's expenses; and
- - various other factors.
The Fund's performance fluctuates on a daily basis largely because net earnings
and offering price per share fluctuate daily. Both net earnings and offering
price per share are factors in the computation of yield and total return 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 compute offering price. The financial
publications and/or indices which the Fund uses in advertising may include:
- - LEHMAN BROTHERS REVENUE BOND INDEX is a total return performance benchmark for
the long-term, investment grade, revenue bond market. Returns and attributes
for the index are calculated semi-monthly.
- - LIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes the
reinvestment of all capital gains distributions and income dividends and takes
into account any change in offering price over a specific period of time. From
time to time, the Fund will quote its Lipper ranking in the "general municipal
bond funds" category in advertising and sales literature.
- - MORNINGSTAR, INC., an independent rating service, is the publisher of the
bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000
NASDAQ-listed mutual funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and ratings are effective for two
weeks.
Advertisements and other sales literature for the Fund may quote total returns
which are calculated on non-standardized base periods. The total returns
represent the historic change in the value of an investment in either class of
shares based on monthly reinvestment of dividends over a specified period of
time.
Advertisements may quote performance information which does not reflect the
effect of the sales load.
APPENDIX
- --------------------------------------------------------------------------------
STANDARD AND POOR'S RATINGS GROUP("S&P") 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 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. ("MOODY'S") 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 corporate or municipal bond rating
system. The modifier 1 indicates that the security ranks in the higher end of
its generic rating 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. ("FITCH") 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 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
(+) 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 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 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 structures with moderate reliance on debt
and ample asset protection; broad margins in earning coverage of fixed financial
charges and high internal cash generation; and 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.
625922307
0090702B (10/94)
OHIO MUNICIPAL INCOME FUND (FORTRESS SHARES)
- --------------------------------------------------------------------------------
ANNUAL REPORT FOR FISCAL YEAR ENDED AUGUST 31, 1994
MANAGEMENT DISCUSSION AND ANALYSIS
---------------------------------------------------------------------------
The fiscal year ended August 31, 1994, was difficult for investors in
long-term, fixed-income securities. Fueled by fears of the potential for
accelerating inflation driven by a steadily expanding economy, yields for
thirty-year U.S. Treasury bonds rose sharply from their cyclical low of
5.79% on October 15, 1993 to 6.38% on November 22, 1993. Yields then
remained in a relatively narrow trading range until February 4, 1994. The
Federal Reserve Board then effected the first of several rate hikes which
reignited inflation fears, sending yields soaring. The yield for
thirty-year U.S. Treasury bonds closed at 7.45% on August 31, 1994.
Ohio Municipal Income Fund (the "Fund") was established in October,
1990 to provide investors the ability to invest in a non-diversified
portfolio of investment grade, long-term Ohio municipal issues. The
investment objective of the Fund is the provision of current income which
is exempt from federal regular income tax and the personal income taxes
imposed by the State of Ohio and Ohio municipalities.*
When ascertaining the credit quality of issues for potential
investment by the Fund, the investment adviser focuses upon a variety of
economic and financial parameters. For general obligation issues, analysis
is directed towards demographic constitution, income distribution, property
value levels and growth, provision of governmental services, and debt
authorization. For revenue issues, examination is made of issuer cash flow
generation, sensitivity to product or service pricing, competition and
industry/sector make-up, debt structure, debt service coverage, financial
flexibility, and contingent liabilities, if any.
Issues purchased by the Fund during the last twelve months consisted
largely of hospital revenue obligations; pollution control revenue
obligations; and airport revenue obligations.
For the fiscal year ended August 31, 1994, an investor in the Fund
experienced a total return of (0.72%)**. This performance was comprised of
4.86% income and reinvestment return (net of Fund expenses) and a (5.58%)
depreciation in the net asset value per share of the Fund. Past performance
is neither indicative nor predictive of future investment performance.
* Income may be subject to the federal alternative minimum tax.
** Based on net asset value, which does not reflect a sales load or
contingent deferred sales charge, if applicable. Performance quoted
represents past performance. Investment return and principal value will
fluctuate, so that an investor's shares, when redeemed, may be worth
more or less than their original cost.
OHIO MUNICIPAL INCOME FUND (FORTRESS SHARES)
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN OHIO MUNICIPAL INCOME FUND (FORTRESS SHARES)
The graph below illustrates the hypothetical investment of $10,000 in Ohio
Municipal Income Fund (Fortress Shares) (the "Fund") from October 12, 1990
(start of performance) to August 31, 1994, compared to the Lehman Brothers
Revenue Bond Index (LBRB).+
Graphic Representation Omitted. See Appendix A-3.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN FOR THE
PERIOD ENDED AUGUST 31, 1994
<C> <C>
1 Year.................................................................... (2.72)%
Start of Performance (10/12/90)........................................... 7.81%
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
This report must be preceded or accompanied by the Fund's prospectus dated
October 31, 1994, and, together with the financial statements contained therein,
constitutes the Fund's annual report.
* Represents a hypothetical investment of $10,000 in the Fund after deducting
the maximum sales load of 1.00% ($10,000 investment minus $100 sales load =
$9,900). The Fund's performance assumes the reinvestment of all dividends and
distributions. The LBRB has been adjusted to reflect reinvestment of
dividends on securities in the index.
** The ending value of the Fund reflects a contingent deferred sales charge of
1.00% on any redemption less than 4 years from the purchase date.
+ The LBRB is not adjusted to reflect sales loads, expenses or other fees that
the Securities and Exchange Commission requires to be reflected in the Fund's
performance.
FEDERATED SECURITIES CORP.
(LOGO)
- --------------------------------------------------------------------------------
Distributor
625922307
G00579-01 (10/94)
- --------------------------------------------------------------------------------
MICHIGAN INTERMEDIATE MUNICIPAL TRUST
(FORMERLY, MICHIGAN MUNICIPAL INCOME FUND)
(A PORTFOLIO OF MUNICIPAL SECURITIES INCOME TRUST)
PROSPECTUS
The shares of Michigan Intermediate Municipal Trust (the "Fund")
offered by this prospectus 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 exempt from federal
regular income tax and the personal income taxes imposed by the state
of Michigan and Michigan municipalities. The Fund invests primarily in
a portfolio of Michigan municipal securities.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS
OF ANY BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE
SHARES INVOLVES INVESTMENT RISKS INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
This prospectus contains the information you should read and know
before you invest in the Fund. Keep this prospectus for future
reference.
The Fund has also filed a Statement of Additional Information dated
October 31, 1994, with the Securities and Exchange Commission. The
information contained in the Statement of Additional Information is
incorporated by reference in 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 October 31, 1994
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
SUMMARY OF FUND EXPENSES 1
- ------------------------------------------------------------
FINANCIAL HIGHLIGHTS 2
- ------------------------------------------------------------
GENERAL INFORMATION 3
- ------------------------------------------------------------
LIBERTY FAMILY OF FUNDS 3
- ------------------------------------------------------------
INVESTMENT INFORMATION 4
- ------------------------------------------------------------
Investment Objective 4
Investment Policies 5
Michigan Municipal Securities 7
Investment Risks 7
Non-Diversification 7
Investment Limitations 8
NET ASSET VALUE 8
- ------------------------------------------------------------
INVESTING IN THE FUND 8
- ------------------------------------------------------------
Share Purchases 8
Minimum Investment Required 9
What Shares Cost 9
Eliminating/Reducing the Sales Load 10
Systematic Investment Program 11
Certificates and Confirmations 12
Dividends and Distributions 12
EXCHANGE PRIVILEGE 12
- ------------------------------------------------------------
Requirements for Exchange 12
Tax Consequences 12
Making an Exchange 13
REDEEMING SHARES 13
- ------------------------------------------------------------
Through a Financial Institution 13
Directly from the Fund 14
Receiving Payment 14
Contingent Deferred Sales Charge 15
Systematic Withdrawal Program 15
Accounts with Low Balances 15
MUNICIPAL SECURITIES INCOME TRUST INFORMATION 16
- ------------------------------------------------------------
Management of Municipal Securities Income Trust 16
Distribution of Fund Shares 17
Administration of the Fund 17
SHAREHOLDER INFORMATION 18
- ------------------------------------------------------------
Voting Rights 18
Massachusetts Partnership Law 18
TAX INFORMATION 19
- ------------------------------------------------------------
Federal Income Tax 19
Michigan Taxes 20
Other State and Local Taxes 20
PERFORMANCE INFORMATION 20
- ------------------------------------------------------------
FINANCIAL STATEMENTS 22
- ------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT 39
- ------------------------------------------------------------
ADDRESSES 40
- ------------------------------------------------------------
</TABLE>
I
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
<S> <C> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)............................................................. 3.00%
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)........................................... None
Redemption Fee (as a percentage of amount redeemed, if applicable)................................ None
Exchange Fee...................................................................................... None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)
<S> <C> <C>
Management Fee (after waiver) (1)................................................................. 0.00%
12b-1 Fee......................................................................................... None
Total Other Expenses (after expense reimbursement)................................................ 0.50%
Shareholder Services Fee (2)....................................................... 0.05%
Total Fund Operating Expenses (3)......................................................... 0.50%
<FN>
(1) The management fee has been reduced to reflect the 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%.
(2) The maximum shareholder services fee is 0.25%.
(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 0.50% for the fiscal year ended August 31, 1994,
and would have been 1.07% absent the voluntary waiver of the management fee
and the voluntary reimbursement of certain other operating expenses.
</TABLE>
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.
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end of
each time period............................................... $35 $46 $57 $91
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
1
MICHIGAN INTERMEDIATE MUNICIPAL TRUST
(FORMERLY, MICHIGAN MUNICIPAL INCOME FUND)
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 39.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
------------------------------------------------
1994 1993 1992*
- ---------------------------------------------------------------------- -------------- -------------- --------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.02 $10.38 $10.00
- ----------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------------------
Net investment income 0.53 0.55 0.56
- ----------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.43) 0.64 0.38
- ---------------------------------------------------------------------- -------------- -------------- --------------
Total from investment operations 0.10 1.19 0.94
- ----------------------------------------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------------------------------------
Dividends to shareholders from net investment income (0.53) (0.55) (0.56)
- ---------------------------------------------------------------------- -------------- -------------- --------------
NET ASSET VALUE, END OF PERIOD $10.59 $11.02 $10.38
- ---------------------------------------------------------------------- -------------- -------------- --------------
TOTAL RETURN** 0.88% 11.73% 9.60%
- ----------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------
Expenses 0.50% 0.37% 0.07%(a)
- ----------------------------------------------------------------------
Net investment income 4.87% 5.11% 5.66%(a)
- ----------------------------------------------------------------------
Expense waiver/reimbursement (b) 0.57% 1.06% 1.26%(a)
- ----------------------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------------------
Net assets, end of period (000 omitted) $58,480 $50,625 $26,998
- ----------------------------------------------------------------------
Portfolio turnover rate 13% 3% 26%
- ----------------------------------------------------------------------
<FN>
* Reflects operations for the period from September 18, 1991 (date of initial
public investment) to August 31, 1992.
** Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
</TABLE>
(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 for the fiscal year ended August 31, 1994, which can be obtained
free of charge.
2
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. This prospectus relates only to the portfolio known
as Michigan Intermediate Municipal Trust. On June 1, 1994, Michigan Municipal
Income Fund changed its name to Michigan Intermediate Municipal Trust.
The Fund is designed for customers of financial institutions such as banks,
fiduciaries, investment advisers and broker/dealers as a convenient means of
accumulating an interest in a professionally managed, non-diversified portfolio
investing primarily in Michigan municipal securities. A minimum initial
investment of $1,000 is required. Subsequent investments must be in amounts of
at least $100. The Fund is not likely to be a suitable investment for
non-Michigan taxpayers or retirement plans since Michigan 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, Fund shares are sold at net asset
value plus an applicable sales load and are redeemed at net asset value.
LIBERTY FAMILY OF FUNDS
- --------------------------------------------------------------------------------
This Fund is a member of a family of mutual funds, collectively known as the
Liberty Family of Funds. The other funds in the Liberty Family of Funds are:
- American Leaders Fund, Inc., providing growth of capital and income
through high-quality stocks;
- Capital Growth Fund, providing appreciation of capital primarily through
equity securities;
- Fund for U.S. Government Securities, Inc., providing current income
through long-term U.S. government securities;
- International Equity Fund, providing long-term capital growth and income
through international securities;
- International Income Fund, providing a high level of current income
consistent with prudent investment risk through high-quality debt
securities denominated primarily in foreign currencies;
- Liberty Equity Income Fund, Inc., providing above-average income and
capital appreciation through income producing equity securities;
- Liberty High Income Bond Fund, Inc., providing high current income through
high-yielding, lower-rated, corporate bonds;
- Liberty Municipal Securities Fund, Inc., providing a high level of current
income exempt from federal regular income tax through municipal bonds;
3
- Liberty U.S. Government Money Market Trust, providing current income
consistent with stability of principal through high-quality U.S.
government securities;
- Liberty Utility Fund, Inc., providing current income and long-term growth
of income, primarily through electric, gas, and communications utilities;
- Limited Term Fund, providing a high level of current income consistent
with minimum fluctuation in principal through investment grade securities;
- Limited Term Municipal Fund, providing a high level of current income
exempt from federal regular income tax consistent with the preservation of
principal, primarily limited to municipal securities;
- Pennsylvania Municipal Income Fund, providing current income exempt from
federal regular income tax and the personal income taxes imposed by the
Commonwealth of Pennsylvania, primarily through Pennsylvania municipal
securities;
- Strategic Income Fund, providing a high level of current income, primarily
through domestic and foreign corporate debt obligations;
- Tax-Free Instruments Trust, providing current income consistent with the
stability of principal and exempt from federal income tax, through
high-quality, short-term municipal securities; and
- World Utility Fund, providing total return primarily through securities
issued by domestic and foreign companies in the utilities industries.
Prospectuses for these funds are available by writing to Federated Securities
Corp. Each of the funds may also invest in certain other types of securities as
described in each Fund's prospectus.
The Liberty Family of Funds provides flexibility and diversification for an
investor's long-term investment planning. It enables an investor to meet the
challenges of changing market conditions by offering convenient exchange
privileges which give access to various investment vehicles and by providing the
investment services of a proven, professional investment adviser.
INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
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 Michigan and Michigan 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 shareholders. However,
income distributed by the Fund may not necessarily be exempt from state or
municipal taxes in states other than Michigan.
4
INVESTMENT POLICIES
The Fund pursues its investment objective by investing primarily in a portfolio
of Michigan municipal securities. 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 securities in which the Fund invests include:
- obligations issued by or on behalf of the state of Michigan, its political
subdivisions, or agencies;
- debt obligations of any state, territory, or possession of the United
States, 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 Michigan. At least 80% of the value of the Fund's total assets
will be invested in Michigan municipal securities.
The prices of fixed income securities fluctuate inversely to the direction of
interest rates.
CHARACTERISTICS. The Michigan municipal securities which the Fund buys are
investment grade bonds rated Aaa, Aa or A by Moody's Investors Service, Inc.
("Moody's"), AAA, AA or A by Standard & Poor's Ratings Group ("S&P"), and AAA,
AA or A by Fitch Investors Service, Inc ("Fitch"). In certain cases the Fund's
adviser may choose bonds which are unrated if it judges the bonds to have the
same characteristics as the investment grade bonds described above. A
description of the ratings 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 Michigan 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 (the
"Trustees") of the Trust will determine that participation interests meet the
prescribed quality standards for the Fund.
VARIABLE RATE MUNICIPAL SECURITIES. Some of the Michigan 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.
5
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. 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. In the
event of failure of appropriation, unless the participation interests are credit
enhanced, it is unlikely that the participants would be able to obtain an
acceptable substitute source of payment.
RESTRICTED SECURITIES. As a matter of fundamental policy, the Fund may invest
up to 10% of its net 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 upon resale under
federal securities laws. The Fund will limit investments in illiquid securities,
including certain restricted securities not determined by the Trustees to be
liquid, 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 these transactions may cause the
Fund to miss a price or yield considered to be advantageous. Settlement dates
may be a month or more after entering into these transactions, and the market
values of the securities purchased may vary from the purchase prices.
Accordingly, the Fund may pay more/less than the market value of the securities
on the settlement date.
The Fund may dispose of a commitment prior to settlement if the adviser deems it
appropriate to do so. In addition, the Fund may enter 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.
TEMPORARY INVESTMENTS. The Fund invests its assets so that at least 80% of its
annual interest income is exempt from federal regular income tax and the state
of Michigan and Michigan municipalities personal income taxes. However, from
time to time when the investment adviser determines that market conditions call
for a temporary defensive posture, the Fund may invest in short-term
non-Michigan municipal tax-exempt obligations 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 (if unrated) those which the
investment adviser judges to have the same characteristics as such investment
grade securities.
6
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 Michigan or Michigan
municipalities.
MICHIGAN MUNICIPAL SECURITIES
Michigan 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.
Michigan municipal securities include industrial development bonds 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.
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.
INVESTMENT RISKS
Yields on Michigan municipal securities depend on a variety of factors,
including: 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 Michigan 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 Michigan 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 Michigan
municipal securities which meet the Fund's quality standards may not be possible
if the state of Michigan or its municipalities do not maintain their current
credit ratings. In addition, any Michigan constitutional amendments, legislative
measures, executive orders, administrative regulations, and voter initiatives
could result in adverse consequences affecting Michigan municipal securities.
A further discussion of the risks of a portfolio which invests largely in
Michigan 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 would exist 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
7
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 of
1986, as amended. 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) beyond that, 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 other assets, less
liabilities, by the number of shares outstanding.
INVESTING IN THE FUND
- --------------------------------------------------------------------------------
SHARE PURCHASES
Fund shares are sold on days on which the New York Stock Exchange is open.
Shares of the Fund may be purchased through a financial institution which has a
sales agreement with the distributor, or directly from the distributor,
Federated Securities Corp., 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 broker/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 financial
institution must be received by the financial institution before 4:00 P.M.
(Eastern time) and must be transmitted by the financial institution to the Fund
before 5:00 P.M. (Eastern time) in order for shares to be purchased at that
day's price. It is the financial institution's responsibility to transmit orders
promptly.
8
DIRECTLY FROM THE DISTRIBUTOR. An investor may place an order to purchase
shares directly from the distributor, once an account has been established. To
do so: complete and sign the new account form available from the Fund; enclose a
check made payable to Michigan Intermediate Municipal Trust; and mail both to
Michigan Intermediate Municipal Trust, P.O. Box 8604, Boston, MA 02266-8604.
The order is considered received after the check is converted by the transfer
agent's bank, State Street Bank and Trust Company ("State Street Bank") into
federal funds. This is generally the next business day after State Street Bank
receives the check. To purchase shares of the Fund by wire from the distributor,
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.
Federal funds should be wired as follows: State Street Bank and Trust Company,
Boston, Massachusetts 02266-8604; Attention: EDGEWIRE; For Credit to: Michigan
Intermediate Municipal Trust, Fund Number; Group Number or Order Number; Nominee
or Institution Name; and ABA Number 011000028. Shares cannot be purchased by
wire on Columbus Day, Veterans Day, or Martin Luther King Day.
SUBACCOUNTING SERVICES. Financial institutions are encouraged to open
single master accounts. However, certain financial institutions may wish to
use the transfer agent's subaccounting system to minimize their internal
recordkeeping requirements. The transfer agent may charge a fee based on the
level of subaccounting services rendered. Financial institutions holding
Fund shares in a fiduciary, agency, custodial, or similar capacity may
charge or pass through subaccounting fees as part of or in addition to
normal trust or agency account fees. They may also charge fees for other
services provided which may be related to the ownership of Fund shares. This
prospectus should, therefore, be read together with any agreement between
the customer and the institution with regard to the services provided, the
fees charged for those services, and any restrictions and limitations
imposed.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in the Fund is $1,000. Subsequent investments
must be in amounts of at least $100.
WHAT SHARES COST
Fund shares are sold at their net asset value, less any applicable sales load,
next determined after an order is received:
<TABLE>
<CAPTION>
SALES LOAD AS A SALES LOAD AS A
PERCENTAGE PERCENTAGE
OF PUBLIC OF NET AMOUNT
AMOUNT OF TRANSACTION OFFERING PRICE INVESTED
- ---------------------------------------------------------- ----------------- -----------------
<S> <C> <C>
Less than $50,000......................................... 3.00% 3.09%
$50,000 but less than $100,000............................ 2.50% 2.56%
$100,000 but less than $250,000........................... 2.00% 2.04%
$250,000 but less than $500,000........................... 1.50% 1.52%
$500,000 but less than $1 million......................... 1.00% 1.01%
$1 million or greater..................................... 0.00% 0.00%
</TABLE>
9
The net asset value is determined at 4:00 P.M. (Eastern 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; and (iii) the
following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
DEALER CONCESSION. For sales of shares, the distributor will normally offer to
pay dealers up to 100% of the sales load retained by it. On purchases of $1
million or more, the investor pays no sales load; however, the distributor will
make twelve monthly payments to the dealer totaling 0.25% of the public offering
price over the first year following the purchase. Such payments are based on the
original purchase price of shares outstanding at each month end. No sales load
is imposed for fund shares purchased through bank trust departments or
investment advisers registered under the Investment Advisers Act of 1940, as
amended. However, investors who purchase shares through a trust department or
investment adviser may be charged an additional service fee by that institution.
ELIMINATING/REDUCING THE SALES LOAD
The sales load can be reduced or eliminated on the purchase of Fund shares
through:
- quantity discounts and accumulated purchases;
- signing a 13-month letter of intent;
- using the reinvestment privilege;
- concurrent purchases; or
- purchases with proceeds from redemptions of unaffiliated mutual fund
shares.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES. As shown in the table above,
larger purchases reduce the sales load paid. The Fund will combine purchases
made on the same day by the investor, his spouse, and his children under age 21
when it calculates the sales load.
If an additional purchase of Fund shares is made, the Fund will consider the
previous purchases still invested in the Fund. For example, if a shareholder
already owns shares having a current value at the public offering price of
$40,000 and he purchases $10,000 more at the current public offering price, the
sales load on the additional purchase according to the schedule now in effect
would be 2.50%, not 3.00%.
To receive the sales load reduction, Federated Securities Corp. must be notified
by the shareholder in writing or by his financial institution at the time the
purchase is made that Fund shares are already owned or that purchases are being
combined. The Fund will reduce the sales load effective as of the date on which
the Fund confirms the previous purchases (which, under normal circumstances,
would be the date on which the Fund received the notice from the shareholder
that Fund shares are already owned).
LETTER OF INTENT. If a shareholder intends to purchase a specific dollar amount
of shares in the Fund over the next 13 months, the sales load may be reduced by
signing a letter of intent to that effect. For
10
example, if a shareholder intends to purchase at least $50,000 in shares, the
letter of intent shall include a provision for a sales load adjustment depending
on the amount actually purchased within the 13-month period and a provision for
the custodian to hold 3.00% of the total amount intended to be purchased in
escrow (in shares) until such purchase is completed.
The applicable portion of the 3.00% held in escrow will be applied to the
shareholder's account at the end of the 13-month period unless the amount
specified in the letter of intent is not purchased. In this event, an
appropriate number of escrowed shares may be redeemed in order to realize the
difference in the sales load.
This letter of intent will not obligate the shareholder to purchase shares, but
if he does, each purchase during the period will be at the sales load applicable
to the total amount intended to be purchased. This letter may be dated as of a
prior date to include any purchases made within the past 90 days towards the
dollar fulfillment of the letter of intent.
REINVESTMENT PRIVILEGE. If shares in the Fund have been redeemed, the
shareholder has a one-time right, within 120 days, to reinvest the redemption
proceeds at the next-determined net asset value without any sales load.
Federated Securities Corp. must be notified by the shareholder in writing or by
his financial institution of the reinvestment in order to eliminate a sales
load. If the shareholder redeems his shares in the Fund, there may be tax
consequences.
CONCURRENT PURCHASES. For purposes of qualifying for a sales load elimination,
a shareholder has the privilege of combining concurrent purchases of two or more
funds in the Liberty Funds, the purchase prices of which include a sales load.
For example, if a shareholder concurrently invested $400,000 in one of the other
Liberty Funds and $600,000 in shares of the Fund, the sales load would be
eliminated.
To receive this sales load elimination, Federated Securities Corp. must be
notified by the shareholder in writing or by his financial institution at the
time the concurrent purchases are made. The Fund will eliminate the sales load
after it confirms the purchases.
PURCHASES WITH PROCEEDS FROM REDEMPTION OF UNAFFILIATED MUTUAL FUND
SHARES. Investors may purchase shares of the Fund at net asset value, without a
sales load, with the proceeds from the redemption of shares of a mutual fund
which was sold with a sales load or commission and was not distributed by
Federated Securities Corp. The purchase must be made within 60 days of the
redemption, and Federated Securities Corp. must be notified by the investor in
writing or by his financial institution at the time the purchase is made.
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 Federated Services Company, plus the applicable sales load. A
shareholder may apply for participation in this program through his financial
institution.
11
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
in writing to the transfer agent.
Detailed confirmations of each purchase and redemption are sent to each
shareholder. Monthly confirmations are sent to report dividends paid during that
month.
DIVIDENDS AND DISTRIBUTIONS
Dividends are declared daily and paid monthly to all shareholders invested in
the Fund on the record date. Distributions of any net realized long-term capital
gains will be made at least once every twelve months. Dividends and
distributions are automatically reinvested in additional shares on payment dates
at the ex-dividend date net asset value without a sales load, unless
shareholders request cash payments on the new account form or by writing to
Federated Services Company. All shareholders on the record date are entitled to
the dividend.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
Shareholders may exchange all or some of their shares for Class A Shares in
other funds in the Liberty Family of Funds. Neither the Fund nor any of the
funds in the Liberty Family of Funds imposes any additional fees on exchanges.
Shareholders in certain other Federated funds may exchange their shares in the
Federated funds for Class A Shares.
REQUIREMENTS FOR EXCHANGE
Shareholders using this privilege must exchange shares having a net asset value
equal to the minimum investment requirements of the fund into which the exchange
is being made. Before the exchange, the shareholder must receive the prospectus
of the fund into which the exchange is being made. This privilege is available
to shareholders resident in any state in which the fund shares being acquired
may be sold. Upon receipt of proper instructions and required supporting
documents, shares submitted for exchange are redeemed and the proceeds invested
in shares of the other fund. The exchange privilege may be modified or
terminated at any time. Shareholders will be notified of the modification or
termination of the exchange privilege.
Shares in certain Federated Funds which are advised by subsidiaries or
affiliates of Federated Investors may also be exchanged for shares of the Fund
at net asset value. With the exception of exchanges into Pennsylvania Municipal
Income Fund and other Liberty Funds, such exchanges will be subject to a CDSC
and possibly a sales load.
Further information on the exchange privilege and prospectuses for the Liberty
Family of Funds are available by contacting the Fund.
TAX CONSEQUENCES
An exercise of the exchange privilege is treated as a sale for federal income
tax purposes. Depending upon circumstances, a capital gain or loss may be
realized.
12
MAKING AN EXCHANGE
Instructions for exchanges for the Liberty Family of Funds may be given in
writing or by telephone. Written instructions may require a signature guarantee.
Shareholders of the Fund may have difficulty in making exchanges by telephone
through brokers and other financial institutions during times of drastic
economic or market changes. If a shareholder cannot contact his broker or
financial institution by telephone, it is recommended that an exchange request
be made in writing and sent by overnight mail to Federated Services Company, c/o
State Street Bank and Trust Company, Two Heritage Drive, North Quincy,
Massachusetts 02171.
Shareholders who desire to automatically exchange Fund shares of a predetermined
amount on a monthly, quarterly, annual or other periodic basis may take
advantage of a systematic exchange privilege. Further information on these
exchange privileges is available by calling Federated Securities Corp. or the
shareholder's financial institution.
TELEPHONE INSTRUCTIONS. Telephone instructions made by the investor may be
carried out only if a telephone authorization form completed by the investor is
on file with the Fund. If the instructions are given by a broker, a telephone
authorization form completed by the broker must be on file with the Fund. Shares
may be exchanged between two funds by telephone only if the two funds have
identical shareholder registrations. Telephone exchange instructions may be
recorded. If reasonable procedures are not followed by the Fund, it may be
liable for losses due to unauthorized or fraudulent telephone instructions. Any
Fund shares held in certificate form cannot be exchanged by telephone, but must
be forwarded to Federated Services Company, P.O. Box 8604, Boston, Massachusetts
02266-8604, and deposited to the shareholder's account before being exchanged.
Telephone instructions will be processed as of 4:00 P.M. (Eastern time) and must
be received by the Fund before that time for shares to be exchanged the same
day. Shareholders exchanging into a fund will not receive any dividend that is
payable to shareholders of record on that date. This privilege may be modified
or terminated at any time.
REDEEMING SHARES
- --------------------------------------------------------------------------------
The Fund redeems shares at their net asset value next determined after Federated
Services Company receives the redemption request. Redemptions will be made on
days on which the Fund computes its net asset value. Redemptions can be made
through a financial institution or directly from the Fund. Redemption requests
must be received in proper form.
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 By Mail should be considered.
THROUGH A FINANCIAL INSTITUTION
A shareholder may redeem shares of the Fund by calling his financial institution
(such as a bank or a broker/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. The financial institution is
responsible for promptly submitting redemption requests and providing proper
13
written redemption instructions to the Fund. The financial institution may
charge customary fees and commissions for this service.
DIRECTLY FROM THE FUND
BY TELEPHONE. Shareholders who have not purchased through a financial
institution may redeem their shares of a Fund by telephoning the Fund. The
proceeds will be mailed to the shareholder's address of record or wire
transferred to the shareholder's account at a domestic commercial bank that is a
member of the Federal Reserve System, normally within one business day, but in
no event longer than seven days after the request. The minimum amount for a wire
transfer is $1,000. If at any time, the Fund shall determine it necessary to
terminate or modify this method of redemption, shareholders would be promptly
notified.
An authorization form permitting the Fund to accept telephone requests must
first be completed. Authorization forms and information on this service are
available from Federated Securities Corp. 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.
BY MAIL. Any shareholder may redeem Fund shares by sending a written request to
Federated Services Company. The written request should include the shareholder's
name, the Fund name, the account number, and the share or dollar amount
requested. 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 should 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, which is administered by the Federal Deposit Insurance
Corporation ("FDIC");
- a member 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, 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. Normally, a check for the proceeds is mailed within one business day,
but in no event more than seven days, after receipt of a proper written
redemption request.
BY WIRE. Redemption proceeds will be wired on the business day following
receipt of a proper redemption request.
14
CONTINGENT DEFERRED SALES CHARGE
Shareholders who purchased shares with the proceeds of a redemption of shares of
a mutual fund sold with a sales charge and not distributed by Federated
Securities Corp. prior to June 1, 1994 will be charged a contingent deferred
sales charge ("CDSC") by the Fund's distributor of .50 of 1% for redemptions
made within one year of purchase. Purchases under the program made after that
date will not be subject to any type of CDSC. The CDSC will be calculated based
upon the lesser of the original purchase price of the shares or the net asset
value of the shares when redeemed.
The CDSC will not be imposed on shares acquired through reinvestment of
dividends or distributions of long-term capital gains. Redemptions are deemed to
have occurred in the following order: 1) shares acquired through the
reinvestment of dividends and long-term capital gains, 2) purchases of shares
occurring more than one year before the date of redemption, 3) purchases of
shares within the previous year without the use of redemption proceeds as
described above, and 4) purchases of shares within the previous year through the
use of redemption proceeds as described above.
The CDSC will not be imposed when a redemption results from a tax-free return
from the death or disability of the beneficial owner as defined in Section
72(m)(7) of the Internal Revenue Code of 1986, as amended.
A CDSC will not be charged in connection with redemptions by the Fund of
accounts with low balances.
SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders who desire to receive payments of a predetermined amount may take
advantage of the Systematic Withdrawal Program. Under this program, Fund shares
are redeemed to provide for periodic withdrawal payments in an amount directed
by the shareholder. Depending upon the amount of the withdrawal payments, the
amount of dividends paid and capital gains distributions with respect to Fund
shares, and the fluctuation of the net asset value of Fund 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 an account
value of at least $10,000. A shareholder may apply for participation in this
program through his financial institution. Due to the fact that shares are sold
with a sales load, it is not advisable for shareholders to be purchasing shares
while participating in this program.
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 $1,000. This
requirement does not apply, however, if the balance falls below $1,000 because
of changes in the Fund's net asset value. Before shares are redeemed to close an
account, the shareholder is notified in writing and allowed 30 days to purchase
additional shares to meet the minimum requirement.
15
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 Trustees are responsible for managing the business affairs of the
Trust and for exercising all of the powers of the Trust except those reserved
for the shareholders. The Executive Committee of the Board of Trustees handles
the Trustees' responsibilities between meetings of the Board.
INVESTMENT ADVISER. Pursuant to an investment advisory contract with the Trust,
investment decisions for the Fund are made by Federated Advisers, the Fund's
investment adviser (the "Adviser"), subject to direction by the Trustees. The
Adviser continually conducts investment research and supervision for the Fund
and is responsible for the purchase or sale of portfolio instruments, for which
it receives an annual fee from the Fund.
ADVISORY FEES. The 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 of expenses at any time in 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 wholly-owned by 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 are
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.
J. Scott Albrecht has been the Fund's portfolio manager since April, 1994.
Mr. Albrecht joined Federated Investors in 1989 and has been an Assistant
Vice President of the Adviser since 1992. From 1989 until 1991, Mr. Albrecht
acted as an investment analyst. Mr. Albrecht is a Chartered Financial
Analyst and received his M.S. in Management from Carnegie Mellon University.
16
DISTRIBUTION OF FUND SHARES
Federated Securities Corp. is the principal 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.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides administrative personnel and services (including
certain legal and financial reporting services) necessary to operate the Fund.
Federated Administrative Services provides these at an annual rate which relates
to the average aggregate daily net assets of all funds advised by subsidiaries
of Federated Investors ("Federated Funds") as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY NET ASSETS
ADMINISTRATIVE FEE OF THE FEDERATED FUNDS
-------------------- ------------------------------------
<C> <S>
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
</TABLE>
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of shares.
Federated Administrative Services may choose voluntarily to waive a portion of
its fee.
SHAREHOLDER SERVICES PLAN. The Trust has adopted a Shareholder Services Plan
(the "Services Plan") under which it may make payments up to 0.25 of 1% of the
average daily net asset value of the shares to obtain certain personal services
for shareholders and the maintenance of shareholder accounts ("shareholder
services"). The Trust has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, under which
Federated Shareholder Services will either perform shareholder services directly
or will select financial institutions to perform shareholder services. Financial
institutions will receive fees based upon shares owned by their clients or
customers. The schedules of such fees and the basis upon which such fees will be
paid will be determined from time to time by the Trust and Federated Shareholder
Services.
OTHER PAYMENTS TO FINANCIAL INSTITUTIONS. In addition to periodic payments to
financial institutions under the Services Plan, the distributor may offer to pay
a fee from its own assets to financial institutions as financial assistance for
providing substantial marketing and sales support. The support may include
participating in sales, educational and training seminars at recreational-type
facilities, providing sales literature, and engineering computer software
programs that emphasize the attributes of the Fund. Such assistance will be
predicated upon the amount of Shares the financial institution sells or may sell
and/or upon the type and nature of sales or marketing support furnished by the
financial institution. Any payments made by the distributor may be reimbursed by
the Adviser or its affiliates.
17
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 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.
CUSTODIAN. State Street Bank and Trust Company, P.O. Box 8604, Boston,
Massachusetts 02266-8604, is custodian for the securities and cash of the Fund.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company, P.O.
Box 8604, Boston, Massachusetts 02266-8604, is transfer agent for the shares of
the Fund and dividend disbursing agent for the Fund.
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.
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 each portfolio
in the Trust have equal voting rights except that only shares of the Fund are
entitled to vote on matters affecting only the Fund. 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 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 of 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.
18
In the unlikely event 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 of 1986, as amended, 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.
The alternative minimum tax, up to 28% of alternative minimum taxable income for
individuals and 20% for corporations, applies when it exceeds the regular tax
for the taxable year. Alternative minimum taxable income is equal to the regular
taxable income of the taxpayer increased by certain "tax preference" items not
included in regular taxable income and reduced by only a portion of the
deductions allowed in the calculation of the regular tax.
The Tax Reform Act of 1986 treats interest on certain "private activity" bonds
issued after August 7, 1986, as a tax preference item for both individuals and
corporations. Unlike traditional governmental purpose municipal bonds, which
finance roads, schools, libraries, prisons, and other public facilities, private
activity bonds provide benefits to private parties. The Fund may purchase all
types of municipal bonds, including private activity bonds. Thus, should it
purchase any such bonds, a portion of the Fund's dividends may be treated as a
tax preference item.
In addition, in the case of a corporate shareholder, dividends of the Fund which
represent interest on municipal bonds 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 the taxpayer's "adjusted current earnings" over the taxpayer's
alternative minimum taxable income as a tax preference item. "Adjusted current
earnings" is based upon the concept of a corporation's "earnings and profits."
Since "earnings and profits" generally includes the full amount of any Fund
dividend, and alternative minimum taxable income
19
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.
MICHIGAN TAXES
Under existing Michigan laws, distribution made by the Fund will not be subject
to Michigan income taxes to the extent that such distributions qualify as
"exempt-interest dividends" under the Internal Revenue Code of 1986, as amended,
and represent (i) interest income and dividends from obligations of Michigan,
which obligations are excluded from federal adjusted gross income; or (ii)
income from obligations of the United States government which Michigan is
prohibited by law from subjecting to a net income tax.
That portion of a shareholder's shares in the Fund representing bonds or other
similar obligations of Michigan, a political subdivision of Michigan, or the
United States, and dividends paid by the Fund representing interest payments on
such securities, will be exempt from Michigan intangibles tax.
Distributions by the Fund are not subject to the Michigan Single Business Tax to
the extent that such distributions are derived from interest on obligations that
would be exempt if owned directly by the shareholder, such as obligations of
Michigan and the United States government.
Certain municipalities in Michigan also impose an income tax on individuals and
corporations. However, to the extent that the dividends from the Funds are
exempt from federal regular income taxes, such dividends also will be exempt
from Michigan municipal income taxes.
OTHER STATE AND LOCAL TAXES
Income from the Fund is not necessarily free from state income taxes in states
other than Michigan 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.
Total return represents the change, over a specific period of time, in the value
of an investment in the Fund after reinvesting all income and capital gains
distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.
The yield of the Fund is calculated by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by the Fund
over a thirty-day period by the offering price per share of the Fund on the last
day of the period. This number is then annualized using semi-annual compounding.
The tax-equivalent yield of the Fund is calculated similarly to the yield, but
is
20
adjusted to reflect the taxable yield that the Fund would have had to earn to
equal its actual yield, assuming a specific tax rate. The yield and the
tax-equivalent yield do not necessarily reflect income actually earned by the
Fund and, therefore, may not correlate to the dividends or other distributions
paid to shareholders.
The performance information reflects the effect of the maximum sales load and
other similar non-recurring charges, such as the CDSC, 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.
21
MICHIGAN INTERMEDIATE MUNICIPAL TRUST
(FORMERLY, MICHIGAN MUNICIPAL INCOME FUND)
PORTFOLIO OF INVESTMENTS
AUGUST 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- --------- ---------------------------------------------------------- --------- ----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--98.0%
- ---------------------------------------------------------------------
MICHIGAN--98.0%
----------------------------------------------------------
$ 100,000 Alpena County, MI, 8.00% UT GO Bonds (Series 1985B)/
(AMBAC Insured), 6/1/95 Aaa $ 102,886
----------------------------------------------------------
160,000 Alpena County, MI, 8.15% UT GO Bonds (Series 1985B)/
(AMBAC Insured), 6/1/96 Aaa 167,899
----------------------------------------------------------
230,000 Ann Arbor (City--Washtenaw County), MI, 6.00% UT GO Bonds
(Environmental Protection Series 1992B), 9/1/2000 A1 241,309
----------------------------------------------------------
215,000 Ann Arbor (City--Washtenaw County), MI, 6.00% UT GO Bonds,
(Environmental Protection Series 1992B), 9/1/2001 A1 225,883
----------------------------------------------------------
500,000 Ann Arbor, MI 5.20% UT GO Environmental Bonds (Series
C)/(Original Issue Yield: 5.25%), 9/1/2004 A1 491,215
----------------------------------------------------------
100,000 Ann Arbor, MI, School District, 6.50% UT GO Bonds (Series
1988)/(Q-SBLF Program)/(Original Issue Yield: 6.70%),
5/1/99 Aa 105,961
----------------------------------------------------------
100,000 Auburn Hills (City), MI, 6.50% LT GO Bonds (Series 1989)/
(Public Improvement Purpose), 5/1/97 A 104,862
----------------------------------------------------------
600,000 Avondale, MI, School District, 5.40% UT GO Bonds (Series
1992)/(School Building)/(Q-SBLF Program)/(Original Issue
Yield: 5.45%), 5/1/2003 A1 601,596
----------------------------------------------------------
500,000 Avondale, MI, School District, 6.75% UT GO Refunding Bonds
(Series 1991)/(Q-SBLF Program)/(Original Issue Yield:
6.90%), 5/1/2014 A1 521,715
----------------------------------------------------------
500,000 Battle Creek (Calhoun County), MI, Building Authority,
6.00% LT Bonds (Series 1992)/(Justice Centre), 4/1/2002 A 524,140
----------------------------------------------------------
500,000 Battle Creek (Calhoun County), MI, Building Authority,
6.10% LT Bonds (Series 1992)/(Justice Centre), 4/1/2003 A 526,305
----------------------------------------------------------
100,000 Battle Creek, MI, 6.90% Water Supply System Revenue Bonds
(Series 1990B), 9/1/2001 A 109,595
----------------------------------------------------------
</TABLE>
22
MICHIGAN INTERMEDIATE MUNICIPAL TRUST
- ---------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- --------- ---------------------------------------------------------- --------- ----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- ---------------------------------------------------------------------
MICHIGAN--CONTINUED
----------------------------------------------------------
$ 335,000 Calhoun County, MI, 6.60% UT GO Bonds (Series 1990-II)/
(AMBAC Insured), 7/1/2002 Aaa $ 353,241
----------------------------------------------------------
600,000 Chippewa Valley, MI, School District, 4.70% UT GO
Refunding Bonds (Original Issue Yield: 4.80%)/(FGIC
Insured), 5/1/2005 AAA 550,686
----------------------------------------------------------
1,600,000 Chippewa Valley, MI, School District, 4.90% UT GO
Refunding Bonds (Original Issue Yield: 5.00%)/(FGIC
Insured), 5/1/2004 AAA 1,539,072
----------------------------------------------------------
350,000 Chippewa Valley, MI, School District, 7.00% UT GO Bonds
(Series 1990)/(AMBAC Insured), 5/1/2001 Aaa 388,402
----------------------------------------------------------
100,000 Detroit, MI, City School District, 7.15% UT GO Refunding
Bonds (Series 1987A)/(BIG Insured), 5/1/98 Aaa 107,632
----------------------------------------------------------
1,000,000 Eastern Michigan University, 6.10% College and University
Revenue Bonds (Series 1992)/(AMBAC Insured)/(Original
Issue Yield: 6.15%), 6/1/2004 Aaa 1,055,570
----------------------------------------------------------
270,000 Economic Development Corporation of the City of Dearborn,
MI, 5.10% Revenue Refunding Bonds (Oakwood Obligated
Group)/(MBIA Insured)/(Original Issue Yield: 5.20%),
8/15/2006 AAA 254,521
----------------------------------------------------------
500,000 Economic Development Corporation of the City of Detroit,
MI, 6.875% Resource Recovery Revenue Bonds (Series 1991A)/
(FSA Insured)/(Original Issue Yield: 7.00%), 5/1/2009 Aaa 525,725
----------------------------------------------------------
200,000 Farmington Hills, MI, Hospital Finance Authority, 6.60%
Revenue Bonds (Series 1991A)/(Botsford General Hospital)/
(MBIA Insured), 2/15/2000 Aaa 215,206
----------------------------------------------------------
455,000 Fitzgerald, MI, Public School District, 4.80% UT GO Bonds
(MBIA Insured)/(Original Issue Yield: 4.90%), 5/1/2006 AAA 416,775
----------------------------------------------------------
425,000 Forest Hills, MI, Public School District, 7.375% UT GO
Bonds (Series 1990), 5/1/2015 Aa 478,308
----------------------------------------------------------
</TABLE>
23
MICHIGAN INTERMEDIATE MUNICIPAL TRUST
- ---------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- --------- ---------------------------------------------------------- --------- ----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- ---------------------------------------------------------------------
MICHIGAN--CONTINUED
----------------------------------------------------------
$1,200,000 Grand Rapids, MI, Public School District, 5.00% UT GO
Bonds (1992 School Building & Site)/(Original Issue Yield:
5.40%), 5/1/2002 Aa $1,196,136
----------------------------------------------------------
400,000 Grand Rapids, MI, Sanitary Sewer System, 5.30% Improvement
Revenue Bonds (Series 1992)/(Original Issue Yield: 5.35%),
1/1/2001 A1 404,036
----------------------------------------------------------
250,000 Grand Rapids, MI, Sanitary Sewer System, 5.40% Improvement
Revenue Bonds (Series 1992)/(Original Issue Yield: 5.45%),
1/1/2002 A1 252,845
----------------------------------------------------------
300,000 Grand Rapids, MI, Sanitary Sewer System, 5.50% Improvement
Revenue Bonds (Series 1992)/(Original Issue Yield: 5.55%),
1/1/2003 A1 303,774
----------------------------------------------------------
250,000 Grand Rapids, MI, Sanitary Sewer System, 5.60% Improvement
Revenue Bonds (Series 1992)/(Original Issue Yield: 5.65%),
1/1/2004 A1 253,605
----------------------------------------------------------
130,000 Grand Valley, MI, 6.60% State College Housing Revenue
Bonds (Series 1986)/(ETM), 10/1/96 Aaa 135,191
----------------------------------------------------------
150,000 Huron Valley, MI, 6.50% School District UT GO Refunding
Bonds (Series 1991)/(Q-SBLF Program), 5/1/2002 A1 164,275
----------------------------------------------------------
270,000 Ingham County, MI, 5.70% LT GO Bonds (Charter Township of
Delhi)/(Sanitary Project #4), 11/1/2003 A1 279,323
----------------------------------------------------------
360,000 Ingham County, MI, 5.80% LT GO Bonds (Charter Township of
Delhi)/(Sanitary Project #4), 11/1/2004 A1 372,841
----------------------------------------------------------
465,000 Ingham County, MI, 5.90% LT GO Bonds (Charter Township of
Delhi)/(Sanitary Project #4), 11/1/2005 A1 481,796
----------------------------------------------------------
500,000 Jackson County, MI, Hospital Finance Authority, 4.70%
Revenue Bonds (Series A)/(W.A. Foote Memorial Hospital)/
(Original Issue Yield: 4.80%)/(FGIC Insured), 6/1/2004 AAA 465,075
----------------------------------------------------------
</TABLE>
24
MICHIGAN INTERMEDIATE MUNICIPAL TRUST
- ---------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- --------- ---------------------------------------------------------- --------- ----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- ---------------------------------------------------------------------
MICHIGAN--CONTINUED
----------------------------------------------------------
$ 100,000 Kalamazoo, MI, Hospital Finance Authority, 7.10% Revenue
Bonds (Series 1988)/(Borgess Medical Centre)/(FGIC
Insured)/ (Prerefunded), 1/1/97 (@ 102) Aaa $ 105,606
----------------------------------------------------------
265,000 Kent, MI, Hospital Finance Authority, 6.30% Revenue
Refunding Bonds (Pine Rest Christian Hospital)/(Series
1992)/ (Original Issue Yield: 6.40%)/(FGIC Insured),
11/1/2003 Aaa 283,227
----------------------------------------------------------
415,000 Kent, MI, Hospital Finance Authority, 6.30% Revenue
Refunding Bonds (Pine Rest Christian Hospital)/(Series
1992)/ (Original Issue Yield: 6.45%)/(FGIC Insured),
11/1/2004 Aaa 440,763
----------------------------------------------------------
900,000 Lansing, MI, 5.30% Sewage Disposal System Refunding
Revenue Bonds (Series 1994)/(FGIC Insured)/(Original Issue
Yield: 5.35%), 5/1/2005 AAA 890,541
----------------------------------------------------------
500,000 Lansing, MI, 5.50% Sewage Disposal System Refunding
Revenue Bonds (Series 1994)/(FGIC Insured)/(Original Issue
Yield: 5.60%), 5/1/2007 AAA 491,905
----------------------------------------------------------
750,000 Livonia Public School District, Wayne County, MI, 6.00% UT
GO Bonds, (School Building Series 1992), 5/1/2001 A1 790,710
----------------------------------------------------------
100,000 Michigan Higher Education Student Loan Authority, 7.10%
Student Loan Revenue Refunding Bonds (Series X1)/(AMBAC
Insured)/(Subject to AMT), 10/1/97 Aaa 106,631
----------------------------------------------------------
1,500,000 Michigan Municipal Bond Authority, 6.00% Revenue Refunding
Bonds (Qualified School District Bond Program)/ (Original
Issue Yield: 6.10%), 5/1/2002 A1 1,573,020
----------------------------------------------------------
1,000,000 Michigan Public Power Agency, 5.10% Revenue Refunding
Bonds (Series 1993A)/(Belle River)/(Original Issue Yield:
5.15%), 1/1/2003 A1 989,900
----------------------------------------------------------
1,000,000 Michigan Public Power Agency, 5.20% Revenue Refunding
Bonds (Belle River)/(Original Issue Yield: 5.25%),
1/1/2004 AA- 989,010
----------------------------------------------------------
3,000,000 Michigan Public Power Agency, 5.70% Revenue Refunding
Bonds (Series 1992)/(Belle River)/(Original Issue Yield:
5.80%), 1/1/2003 AA- 3,091,950
----------------------------------------------------------
</TABLE>
25
MICHIGAN INTERMEDIATE MUNICIPAL TRUST
- ---------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- --------- ---------------------------------------------------------- --------- ----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- ---------------------------------------------------------------------
MICHIGAN--CONTINUED
----------------------------------------------------------
$1,000,000 Michigan State Environmental Program, 5.75% GO Bonds
(Series 1992)/(Original Issue Yield: 5.80%), 11/1/2001 A1 $1,042,790
----------------------------------------------------------
750,000 Michigan State Hospital Finance Authority, 4.90% Revenue
Refunding Bonds (Detroit Medical Center)/(AMBAC Insured)/
(Original Issue Yield: 5.10%), 8/15/2005 AAA 701,003
----------------------------------------------------------
600,000 Michigan State Hospital Finance Authority, 4.90% Revenue
Refunding Bonds (Series 1993P)/(Sisters of Mercy Health
Corp.)/(MBIA Insured)/(Original Issue Yield: 5.10%),
8/15/2005 AAA 560,802
----------------------------------------------------------
400,000 Michigan State Hospital Finance Authority, 5.00% Revenue
Bonds (Crittenton Hospital)/(Original Issue Yield: 5.10%),
3/1/2003 A1 379,532
----------------------------------------------------------
500,000 Michigan State Hospital Finance Authority, 5.50% Revenue
Bonds (Series 1992A)/(Henry Ford Health System)/(Original
Issue Yield: 5.55%), 9/1/2001 Aa 510,765
----------------------------------------------------------
1,500,000 Michigan State Hospital Finance Authority, 5.50% Revenue
Refunding Bonds (St. John's Hospital), 5/15/2001 Aa 1,482,510
----------------------------------------------------------
800,000 Michigan State Hospital Finance Authority, 5.95% Revenue
Bonds (Oakwood Hospital Group)/(FGIC Insured)/(Original
Issue Yield: 6.05%), 5/1/2002 Aaa 832,344
----------------------------------------------------------
415,000 Michigan State Hospital Finance Authority, 6.15% Revenue
Bonds (Series 1992A)/(Crittenton Hospital), 3/1/2001 A1 428,658
----------------------------------------------------------
440,000 Michigan State Hospital Finance Authority, 6.25% Revenue
Bonds (Series 1992A)/(Crittenton Hospital), 3/1/2002 A1 455,686
----------------------------------------------------------
100,000 Michigan State Hospital Finance Authority, 6.70% Revenue
Refunding Bonds (Series 1988A)/(Henry Ford Health System),
5/1/96 Aa 103,177
----------------------------------------------------------
100,000 Michigan State Hospital Finance Authority, 6.90% Revenue
Refunding Bonds (Series 1988A)/(Henry Ford Health System),
5/1/97 Aa 106,177
----------------------------------------------------------
</TABLE>
26
MICHIGAN INTERMEDIATE MUNICIPAL TRUST
- ---------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- --------- ---------------------------------------------------------- --------- ----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- ---------------------------------------------------------------------
MICHIGAN--CONTINUED
----------------------------------------------------------
$ 375,000 Michigan State Hospital Finance Authority, 6.85% Revenue
Refunding Bonds (Series 1989)/(Oakland General Hospital)/
(AMBAC Insured), 7/1/2000 Aaa $ 406,342
----------------------------------------------------------
500,000 Michigan State Hospital Finance Authority, 7.00% Revenue
Bonds (Series 1991)/(Daughters of Charity National Health
System Providence Hospital)/(Original Issue Yield: 7.04%),
11/1/2021 Aa 532,625
----------------------------------------------------------
100,000 Michigan State Hospital Finance Authority, 7.10% Revenue
Refunding Bonds (Series 1988A)/(Sisters of Mercy Health
System)/(Original Issue Yield: 7.15%)/(MBIA Insured),
8/15/97 Aaa 107,003
----------------------------------------------------------
100,000 Michigan State Hospital Finance Authority, 7.20% Revenue
Refunding Bonds (Series 1988A)/(Mercy Memorial Hospital)/
(BIG Insured), 6/1/97 Aaa 106,714
----------------------------------------------------------
500,000 Michigan State Housing Development Authority, 5.90% Single
Family Housing Mortgage Revenue Bonds (Series 1994A),
12/1/2005 AA- 505,195
----------------------------------------------------------
500,000 Michigan State Housing Development Authority, 5.90% Single
Family Housing Revenue Bonds (Series 1994A), 6/1/2005 AA- 505,050
----------------------------------------------------------
430,000 Michigan State Housing Development Authority, 6.25% Single
Family Housing Mortgage Revenue Bonds (Series 1992A)/
(Subject to AMT), 6/1/2002 AA- 440,918
----------------------------------------------------------
280,000 Michigan State Housing Development Authority, 6.30% Single
Family Housing Mortgage Revenue Bonds (Series A),
12/1/2003 AA- 287,277
----------------------------------------------------------
200,000 Michigan State Housing Development Authority, 6.95% Single
Family Housing Mortgage Revenue Bonds (Series B)/(Subject
to AMT), 12/1/2020 AA- 206,456
----------------------------------------------------------
100,000 Michigan State Housing Development Authority, 7.00% Single
Family Housing Mortgage Revenue Bonds (Series 1988B)/
(Subject to AMT), 6/1/96 AA- 101,890
----------------------------------------------------------
</TABLE>
27
MICHIGAN INTERMEDIATE MUNICIPAL TRUST
- ---------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- --------- ---------------------------------------------------------- --------- ----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- ---------------------------------------------------------------------
MICHIGAN--CONTINUED
----------------------------------------------------------
$ 200,000 Michigan State Housing Development Authority, 7.00% Single
Family Housing Mortgage Revenue Bonds (Series 1991A)/
(Subject to AMT), 12/1/2005 AA- $ 204,008
----------------------------------------------------------
1,850,000 Michigan State South Central Power Agency, 5.00% Supply
System Revenue Refunding Bonds (Original Issue Yield:
7.20%)/(AMBAC Insured), 11/1/2009 AAA 1,662,188
----------------------------------------------------------
250,000 Michigan State Strategic Fund, 7.10% Limited Obligation
Revenue Bonds (Series 1992A)/(Ford Motor Company)/
(Original Issue Yield: 7.125%), 2/1/2006 A2 273,778
----------------------------------------------------------
1,000,000 Michigan State, 5.50% Comprehensive Transportation Revenue
Refunding Bonds (Series 1992B)/(Original Issue Yield:
5.60%), 5/15/2002 A1 1,021,940
----------------------------------------------------------
1,000,000 Michigan State, 6.00% Comprehensive Transportation Revenue
Bonds (Series B)/(Original Issue Yield: 6.05%), 5/15/2007 A1 1,035,590
----------------------------------------------------------
100,000 Michigan State, 6.55% Comprehensive Transportation Revenue
Refunding Bonds (Series 1988I), 9/1/97 A1 105,463
----------------------------------------------------------
100,000 Michigan State, 6.55% Comprehensive Transportation Revenue
Refunding Bonds (Series 1988II), 11/1/97 A1 105,737
----------------------------------------------------------
925,000 Novi, MI, 4.75% UT GO Bonds (Series 1993)/(Original Issue
Yield: 4.80%), 10/1/2004 A1 871,803
----------------------------------------------------------
950,000 Novi, MI, 4.80% UT GO Bonds (Series 1993)/(Original Issue
Yield: 4.90%), 10/1/2005 A1 889,314
----------------------------------------------------------
300,000 Oakland County, MI, 4.60% UT GO Bonds (Series 1993)/
(Pontiac-Clinton River Drainage District #3)/(Original
Issue Yield: 4.70%), 5/1/2003 AA- 281,760
----------------------------------------------------------
250,000 Oakland County, MI, 4.70% UT GO Bonds (Series 1993)/
(Pontiac-Clinton River Drainage District #3)/(Original
Issue Yield: 4.80%), 5/1/2004 AA- 233,715
----------------------------------------------------------
</TABLE>
28
MICHIGAN INTERMEDIATE MUNICIPAL TRUST
- ---------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- --------- ---------------------------------------------------------- --------- ----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- ---------------------------------------------------------------------
MICHIGAN--CONTINUED
----------------------------------------------------------
$ 250,000 Oakland County, MI, 4.80% UT GO Bonds (Series 1993)/
(Pontiac-Clinton River Drainage District #3)/(Original
Issue Yield: 4.90%), 5/1/2005 AA- $ 233,605
----------------------------------------------------------
1,750,000 Oakland County, MI, 5.45% UT GO School Building & Site
Bonds (Novi Community Schools)/(Original Issue Yield:
5.50%), 5/1/2003 A1 1,769,110
----------------------------------------------------------
250,000 Oakland County, MI, 6.30% LT GO Bonds (Series 1991)/
(Evergreen Farmington Sewer Disposal System), 5/1/2005 A 261,458
----------------------------------------------------------
300,000 Oakland, MI, 6.65% LT GO Bonds (Series 1991)/(Community
College District)/(Original Issue Yield: 6.745%), 5/1/2011 AA- 324,684
----------------------------------------------------------
1,000,000 Oakland, MI, Community College, 5.00% Improvement
Refunding Bonds, 5/1/2006 AA- 943,300
----------------------------------------------------------
610,000 Okemos, MI, Public School District, 6.00% UT GO Bonds
(Q-SBLF Program), 5/1/2002 A1 642,055
----------------------------------------------------------
795,000 Ottawa County, MI, 5.40% Water System Revenue Bonds
(Series 1992)/(Northwest Ottawa Water Supply)/(Original
Issue Yield: 5.45%), 8/1/2002 A1 805,685
----------------------------------------------------------
220,000 Ottawa County, MI, 6.50% Water System Revenue Bonds
(Series 1990)/((Northwest Ottawa Water Supply), 10/1/2001 A1 234,458
----------------------------------------------------------
140,000 Ottawa County, MI, 6.50% Water System Revenue Bonds
(Series 1990)/(Northwest Ottawa Water Supply)/(Original
Issue Yield: 6.55%), 10/1/2002 A1 148,667
----------------------------------------------------------
100,000 Ottawa County, MI, 6.85% Water System Revenue Bonds
(Series 1990)/(Northwest Ottawa Water Supply), 5/1/2000 A1 106,154
----------------------------------------------------------
400,000 Plymouth-Canton, MI, Community School District (Wayne &
Washtenaw Counties), 6.00% UT GO Bonds (Series 1992C)/
(Q-SBLF Program)/(Original Issue Yield: 6.10%), 5/1/2003 A1 419,504
----------------------------------------------------------
500,000 Plymouth-Canton, MI, Community School District (Wayne &
Washtenaw Counties), 6.80% UT GO Bonds (Q-SBLF
Program)/(Original Issue Yield: 6.90%), 5/1/2017 A1 552,250
----------------------------------------------------------
</TABLE>
29
MICHIGAN INTERMEDIATE MUNICIPAL TRUST
- ---------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- --------- ---------------------------------------------------------- --------- ----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- ---------------------------------------------------------------------
MICHIGAN--CONTINUED
----------------------------------------------------------
$ 570,000 Riverview, MI, Community School District (Wayne County),
6.20% UT GO Bonds (School Building Series 1992)/(FGIC
Insured), 5/1/2003 Aaa $ 613,252
----------------------------------------------------------
615,000 Riverview, MI, Community School District (Wayne County),
6.20% UT GO Bonds (School Building Series 1992)/(FGIC
Insured), 5/1/2004 Aaa 661,666
----------------------------------------------------------
795,000 Riverview, MI, Community School District, 4.85% Refunding
UT GO Bonds (Series 1994)/(Original Issue Yield: 4.95%)/
(AMBAC Insured), 5/1/2005 AAA 750,591
----------------------------------------------------------
350,000 Rochester, Community School District (Counties of Macomb
and Oakland), MI, 6.50% UT GO Bonds (Series 1991)/(Q-SBLF
Program)/(Original Issue Yield: 6.60%), 5/1/2007 A1 379,418
----------------------------------------------------------
250,000 Rochester, Community School District (Counties of Macomb
and Oakland), MI, 6.50% UT GO Bonds (Series 1991)/(Q-SBLF
Program)/(Original Issue Yield: 6.75%), 5/1/2011 A1 271,013
----------------------------------------------------------
600,000 Royal Oak, MI, Hospital Finance Authority, 6.75% Revenue
Bonds (Series 1991A)/(William Beaumont Hospital)/(Original
Issue Yield: 7.078%), 1/1/2020 Aa 618,012
----------------------------------------------------------
270,000 Shelby Township (Macomb County), MI, Building Authority,
6.25% LT GO Bonds (Series 1991)/(AMBAC Insured)/(Original
Issue Yield: 6.45%), 11/1/2006 Aaa 283,360
----------------------------------------------------------
230,000 Shelby Township (Macomb County), MI, Building Authority,
6.25% LT GO Bonds (Series 1991)/(AMBAC Insured)/(Original
Issue Yield: 6.50%), 11/1/2007 Aaa 239,993
----------------------------------------------------------
500,000 Troy, MI, City School District, 4.90% UT GO Refunding
Bonds (Original Issue Yield: 5.00%)/(AMBAC Insured),
5/1/2005 AAA 475,220
----------------------------------------------------------
1,000,000 University of Michigan Board of Regents, 5.20% Student Fee
Bonds (Series B)/(Original Issue Yield: 5.33%), 4/1/2004 Aa 990,290
----------------------------------------------------------
250,000 University of Michigan Board of Regents, 7.00% Revenue
Bonds (Series 1990A)/(University Hospital)/(Original Issue
Yield: 7.25%), 12/1/2021 Aa 280,720
----------------------------------------------------------
</TABLE>
30
MICHIGAN INTERMEDIATE MUNICIPAL TRUST
- ---------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- --------- ---------------------------------------------------------- --------- ----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- ---------------------------------------------------------------------
MICHIGAN--CONTINUED
----------------------------------------------------------
$1,500,000 University of Michigan, 5.70% Revenue Bonds (Series
1990A), 12/1/2004 Aa $1,544,445
----------------------------------------------------------
1,000,000 Wayne County, MI, 5.00% Airport Revenue Refunding Bonds
(Series B)/(MBIA Insured)/(Original Issue Yield:
5.10%)/(Subject to AMT), 12/1/2004 AAA 964,930
----------------------------------------------------------
1,000,000 Western Michigan University, 5.50% General Revenue Bonds
(Series 1992A)/(FGIC Insured)/(Original Issue Yield:
5.55%), 11/15/2002 Aaa 1,025,790
----------------------------------------------------------
885,000 Wyandotte (Wayne County), MI, Electric System, 6.10%
Revenue Refunding Bonds (Series 1992)/(MBIA Insured),
10/1/2002 Aaa 941,472
----------------------------------------------------------
295,000 Wyoming Public Schools, Kent County, MI, 5.10% UT GO
Revenue Bonds, (1993 School Building & Site), 5/1/2003 AA 290,315
----------------------------------------------------------
365,000 Wyoming Public Schools, Kent County, MI, 5.20% UT GO
Revenue Bonds, (1993 School Building & Site), 5/1/2004 AA 358,722
---------------------------------------------------------- ----------
TOTAL MUNICIPAL SECURITIES (IDENTIFIED COST,
$56,566,206) $57,289,013+
---------------------------------------------------------- ----------
<FN>
* Please refer to the Appendix of the Statement of Additional Information
for an explanation of the credit ratings. Current credit ratings are
unaudited.
+ The cost of investments for federal tax purposes amounts to $56,566,206.
The net unrealized appreciation on a federal tax basis amounts to
$722,807, and is comprised of $1,465,773 appreciation and $742,966
depreciation at August 31, 1994.
Note: The categories of investments are shown as a percentage of net assets
($58,480,220) at August 31, 1994.
</TABLE>
31
MICHIGAN INTERMEDIATE MUNICIPAL TRUST
- ---------------------------------------------------------
<TABLE>
<S> <C>
The following abbreviations are used in this portfolio:
AMBAC --American Municipal Bond Assurance Corporation
AMT --Alternative Minimum Tax
BIG --Bond Investors Guaranty
ETM --Escrowed to Maturity
FGIC --Financial Guaranty Insurance Company
FSA --Financial Security Assurance
GO --General Obligation
LT --Limited Tax
MBIA --Municipal Bond Investors Assurance
Q-SBLF --Qualified State Bond Loan Fund
UT --Unlimited Tax
</TABLE>
(See Notes which are an integral part of the Financial Statements)
32
MICHIGAN INTERMEDIATE MUNICIPAL TRUST
(FORMERLY, MICHIGAN MUNICIPAL INCOME FUND)
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- -----------------------------------------------------------------------------------
Investments in securities, at value (identified and tax cost
$56,566,206) $ 57,289,013
- -----------------------------------------------------------------------------------
Cash 504,767
- -----------------------------------------------------------------------------------
Interest receivable 959,194
- -----------------------------------------------------------------------------------
Receivable for Fund shares sold 73,448
- -----------------------------------------------------------------------------------
Deferred expenses 9,364
- ----------------------------------------------------------------------------------- ------------
Total assets 58,835,786
- -----------------------------------------------------------------------------------
LIABILITIES:
- -----------------------------------------------------------------------------------
Dividends payable $ 216,505
- ----------------------------------------------------------------------
Payable for Fund shares redeemed 106,714
- ----------------------------------------------------------------------
Accrued expenses 32,347
- ---------------------------------------------------------------------- ----------
Total liabilities 355,566
- ----------------------------------------------------------------------------------- ------------
NET ASSETS for 5,522,526 shares of beneficial interest outstanding $ 58,480,220
- ----------------------------------------------------------------------------------- ------------
NET ASSETS CONSIST OF:
- -----------------------------------------------------------------------------------
Paid-in capital $ 58,023,203
- -----------------------------------------------------------------------------------
Accumulated net realized gain (loss) on investments (265,790)
- -----------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments 722,807
- ----------------------------------------------------------------------------------- ------------
Total Net Assets $ 58,480,220
- ----------------------------------------------------------------------------------- ------------
NET ASSET VALUE per Share ($58,480,220 DIVIDED BY 5,522,526 shares of
beneficial interest outstanding) $ 10.59
- ----------------------------------------------------------------------------------- ------------
OFFERING PRICE per Share (100/97 of $10.59)* $ 10.92
- ----------------------------------------------------------------------------------- ------------
REDEMPTION PROCEEDS per Share (99.5/100 of $10.59)** $ 10.54
- ----------------------------------------------------------------------------------- ------------
<FN>
* See "What Shares Cost" in the prospectus.
** See "Redeeming Shares" in the prospectus.
</TABLE>
(See Notes which are an integral part of the Financial Statements)
33
MICHIGAN INTERMEDIATE MUNICIPAL TRUST
(FORMERLY, MICHIGAN MUNICIPAL INCOME FUND)
STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- -------------------------------------------------------------------------------------
Interest income $ 3,077,571
- -------------------------------------------------------------------------------------
EXPENSES:
- -------------------------------------------------------------------------------------
Investment advisory fee $ 229,413
- -----------------------------------------------------------------------
Trustees' fees 2,290
- -----------------------------------------------------------------------
Administrative personnel and services 197,395
- -----------------------------------------------------------------------
Custodian and portfolio accounting fees 71,241
- -----------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 29,045
- -----------------------------------------------------------------------
Fund share registration costs 22,908
- -----------------------------------------------------------------------
Shareholder services fee 14,615
- -----------------------------------------------------------------------
Legal fees 6,611
- -----------------------------------------------------------------------
Printing and postage 11,901
- -----------------------------------------------------------------------
Auditing fees 16,469
- -----------------------------------------------------------------------
Insurance premiums 5,761
- -----------------------------------------------------------------------
Miscellaneous 3,367
- ----------------------------------------------------------------------- ----------
Total expenses 611,016
- -----------------------------------------------------------------------
Deduct--
- ------------------------------------------------------------
Waiver of investment advisory fee $229,413
- ------------------------------------------------------------
Reimbursement of other operating expenses by Adviser 94,835 324,248
- ------------------------------------------------------------ -------- ----------
Net expenses 286,768
- ------------------------------------------------------------------------------------- -----------
Net investment income 2,790,803
- ------------------------------------------------------------------------------------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- -------------------------------------------------------------------------------------
Net realized gain (loss) on investments (identified cost basis) (249,785)
- -------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments (2,310,979)
- ------------------------------------------------------------------------------------- -----------
Net realized and unrealized gain (loss) on investments (2,560,764)
- ------------------------------------------------------------------------------------- -----------
Change in net assets resulting from operations $ 230,039
- ------------------------------------------------------------------------------------- -----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
34
MICHIGAN INTERMEDIATE MUNICIPAL TRUST
(FORMERLY, MICHIGAN MUNICIPAL INCOME FUND)
STATEMENT OF CHANGES IN NET ASSETS
- ---------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
------------------------------
1994 1993
------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ---------------------------------------------------------------------------
OPERATIONS--
- ---------------------------------------------------------------------------
Net investment income $ 2,790,803 $ 1,972,851
- ---------------------------------------------------------------------------
Net realized gain (loss) on investments ($3,738 and $12,267 net loss,
respectively, as computed for federal income tax purposes) (249,785) (3,738)
- ---------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments (2,310,979) 2,434,646
- --------------------------------------------------------------------------- ------------- -------------
Change in net assets resulting from operations 230,039 4,403,759
- --------------------------------------------------------------------------- ------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS--
- ---------------------------------------------------------------------------
Dividends to shareholders from net investment income (2,790,803) (1,972,851)
- --------------------------------------------------------------------------- ------------- -------------
FUND SHARE (PRINCIPAL) TRANSACTIONS--
- ---------------------------------------------------------------------------
Proceeds from sale of shares 26,346,131 32,334,217
- ---------------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of dividends
declared 221,749 177,979
- ---------------------------------------------------------------------------
Cost of shares redeemed (16,151,756) (11,316,461)
- --------------------------------------------------------------------------- ------------- -------------
Change in net assets resulting from Fund share transactions 10,416,124 21,195,735
- --------------------------------------------------------------------------- ------------- -------------
Change in net assets 7,855,360 23,626,643
- ---------------------------------------------------------------------------
NET ASSETS:
- ---------------------------------------------------------------------------
Beginning of period 50,624,860 26,998,217
- --------------------------------------------------------------------------- ------------- -------------
End of period $ 58,480,220 $ 50,624,860
- --------------------------------------------------------------------------- ------------- -------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
35
MICHIGAN INTERMEDIATE MUNICIPAL TRUST
(FORMERLY, MICHIGAN MUNICIPAL INCOME FUND)
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1994
- --------------------------------------------------------------------------------
(1) ORGANIZATION
Municipal Securities Income Trust (the "Trust") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as an open-end
management investment company. The Trust consists of ten, non-diversified
portfolios. The financial statements included herein present only those of
Michigan Intermediate Municipal Trust (the "Fund"). The financial statements of
the other portfolios are presented separately. The assets of each portfolio are
segregated and a shareholder's interest is limited to the portfolio in which
shares are held.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
A. INVESTMENT VALUATIONS--Municipal bonds are valued by an independent pricing
service taking into consideration yield, liquidity, risk, credit, quality,
coupon, maturity, type of issue, and any other factors or market data it
deems relevant in determining valuations for normal institutional size
trading units of debt securities. The independent pricing service does not
rely exclusively on quoted prices. Short-term securities with remaining
maturities of sixty days or less may be stated at amortized cost, which
approximates value.
B. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and expenses
are accrued daily. Bond premium and discount, if applicable, are amortized
as required by the Internal Revenue Code, as amended (the "Code").
Distributions to shareholders are recorded on the ex-dividend date.
C. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its tax-exempt income.
Accordingly, no provisions for federal tax are necessary. At August 31,
1994, the Fund, for federal tax purposes, had a capital loss carryforward of
$16,005, which will reduce the Fund's taxable income arising from future net
realized gain on investments, if any, to the extent permitted by the Code,
and thus will reduce the amount of the distributions to shareholders which
would otherwise be necessary to relieve the Fund of any liability for
federal tax. Pursuant to the Code, such capital loss carryforward will
expire in 2001 ($12,267), and 2002 ($3,738). Additionally, net capital
losses of $249,785 attributable to security transactions incurred after
October 31, 1993 are treated as arising on September 1, 1994, the first day
of the Fund's next taxable year.
D. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when-issued
securities on the trade date and
36
MICHIGAN INTERMEDIATE MUNICIPAL TRUST
- --------------------------------------------------------------------------------
maintains security positions such that sufficient liquid assets will be
available to make payment for the securities purchased. Securities purchased
on a when-issued or delayed delivery basis are marked to market daily and
begin earning interest on the settlement date.
E. CONCENTRATION OF CREDIT RISK--Since the Fund invests a substantial portion
of its assets in issuers located in one state, it will be more susceptible
to factors adversely affecting issuers of that state than would be a
comparable general tax-exempt mutual fund. In order to reduce the credit
risk associated with such factors, at August 31, 1994, 32.3% of the
securities in the portfolio of investments are backed by letters of credit
or bond insurance of various financial institutions and financial guaranty
assurance agencies. The value of investments insured by or supported
(backed) by a letter of credit for any one institution or agency did not
exceed 13.8% of total investments.
F. DEFERRED EXPENSES--The costs incurred by the Fund with respect to
registration of its shares in its first fiscal year, excluding the initial
expense of registering its shares, have been deferred and are being
amortized using the straight-line method not to exceed a period of five
years from the Fund's commencement date.
G. OTHER--Investment transactions are accounted for on the trade date.
(3) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-------------------------
1994 1993
- ------------------------------------------------------ ----------- -----------
<S> <C> <C>
Shares sold 2,416,275 3,040,690
- ------------------------------------------------------
Shares issued to shareholders in payment of dividends
declared 20,450 16,535
- ------------------------------------------------------
Shares redeemed (1,508,248) (1,063,790)
- ------------------------------------------------------ ----------- -----------
Net change resulting from Fund share transactions 928,477 1,993,435
- ------------------------------------------------------ ----------- -----------
</TABLE>
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
ADVISORY FEE--Federated Advisers, the Fund's investment adviser (the "Adviser"),
receives for its services 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 and reimburse certain operating expenses of the Fund.
The Adviser can modify or terminate this voluntary waiver and reimbursement at
any time at its sole discretion.
37
MICHIGAN INTERMEDIATE MUNICIPAL TRUST
- --------------------------------------------------------------------------------
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS") provides the Fund
with administrative personnel and services. Prior to March 1, 1994, these
services were provided at approximate cost. Effective March 1, 1994, the FAS fee
is based on the level of average aggregate daily net assets of all funds advised
by subsidiaries of Federated Investors for the period. The administrative fee
received during the period of the Administrative Services Agreement shall be at
least $125,000 per portfolio and $30,000 per each additional class of shares.
SHAREHOLDER SERVICES FEE--Under the terms of a Shareholder Services Agreement
with Federated Shareholder Services ("FSS"), the Fund will pay FSS up to .25 of
1% of average net assets for the Fund for the period. This fee is to obtain
certain personal services for shareholders and the maintenance of shareholder
accounts.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES--Federated Services Company
("FServ") serves as transfer agent and dividend disbursing agent for the Fund.
The FServ fee is based on the size, type and number of accounts and transactions
made by shareholders.
ORGANIZATIONAL EXPENSES--Organizational expenses of $29,550 and start-up
administrative services expenses of $82,009 were borne initially by the Adviser.
The Fund has agreed to reimburse the Adviser for the organizational expenses and
start-up administrative expenses during the five year period following September
9, 1991 (date the Fund first became effective). For the year ended August 31,
1994, the Fund paid $2,833 and $5,666, respectively, pursuant to this agreement.
INTERFUND TRANSACTIONS--During the year ended August 31, 1994, the Fund engaged
in purchase and sale transactions with other affiliated funds at current value
on the date of the transaction pursuant to Rule 17a-7 under the Act amounting to
$19,200,000 and $18,200,000, respectively.
Certain of the Officers and Trustees of the Fund are Officers and Directors or
Trustees of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
fiscal year ended August 31, 1994, were as follows:
<TABLE>
<S> <C>
- --------------------------------------------------
PURCHASES $17,667,323
- -------------------------------------------------- -----------
SALES $ 7,430,325
- -------------------------------------------------- -----------
</TABLE>
38
INDEPENDENT AUDITORS' REPORT
- ---------------------------------------------------------
To the Board of Trustees of MUNICIPAL SECURITIES INCOME TRUST
and Shareholders of MICHIGAN INTERMEDIATE MUNICIPAL TRUST:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Michigan Intermediate Municipal Trust (a
portfolio of Municipal Securities Income Trust) as of August 31, 1994, the
related statement of operations for the year then ended, the statement of
changes in net assets for the years ended August 31, 1994 and 1993, and the
financial highlights (see page 2 of the prospectus) for each of the years in the
three-year period ended August 31, 1994. These financial statements and
financial highlights are the responsibility of the Trust's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
August 31, 1994 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Michigan
Intermediate Municipal Trust as of August 31, 1994, the results of its
operations, the changes in its net assets, and its financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
October 7, 1994
39
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Michigan Intermediate Municipal Trust 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 Trust Company P.O. Box 8604
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
</TABLE>
40
- --------------------------------------------------------------------------------
MICHIGAN INTERMEDIATE
MUNICIPAL TRUST
PROSPECTUS
A Non-Diversified Portfolio of
Municipal Securities Income Trust,
An Open-End, Management
Investment Company
October 31, 1994
[LOGO]
Federated Securities Corp.
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
[LOGO]
RECYCLED
625922703 PAPER
1041202A (10/94)
MICHIGAN INTERMEDIATE MUNICIPAL TRUST
(FORMERLY, MICHIGAN 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 Michigan Intermediate Municipal Trust (the "Fund")
dated October 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 October 31, 1994
[LOGO]
Federated Securities Corp.
Distributor
A subsidiary of FEDERATED INVESTORS
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
GENERAL INFORMATION ABOUT THE FUND 1
- ------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES 1
- ------------------------------------------------------------
Acceptable Investments 1
When-Issued and Delayed Delivery
Transactions 2
Temporary Investments 2
Portfolio Turnover 3
INVESTMENT LIMITATIONS 3
- ------------------------------------------------------------
Michigan Investment Risks 5
MUNICIPAL SECURITIES INCOME TRUST MANAGEMENT 6
- ------------------------------------------------------------
Fund Ownership 8
The Funds 9
Trustee Liability 9
INVESTMENT ADVISORY SERVICES 9
- ------------------------------------------------------------
Adviser to the Fund 9
Advisory Fees 9
ADMINISTRATIVE SERVICES 10
- ------------------------------------------------------------
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT 10
- ------------------------------------------------------------
SHAREHOLDER SERVICES PLAN 10
- ------------------------------------------------------------
BROKERAGE TRANSACTIONS 10
- ------------------------------------------------------------
PURCHASING SHARES 11
- ------------------------------------------------------------
Conversion to Federal Funds 11
Purchases by Sales Representatives, Fund
Trustees, and Employees 11
DETERMINING NET ASSET VALUE 11
- ------------------------------------------------------------
Valuing Municipal Bonds 11
Use of Amortized Cost 11
REDEEMING SHARES 11
- ------------------------------------------------------------
Redemption in Kind 12
TAX STATUS 12
- ------------------------------------------------------------
The Fund's Tax Status 12
Shareholder's Tax Status 12
TOTAL RETURN 12
- ------------------------------------------------------------
YIELD 13
- ------------------------------------------------------------
TAX-EQUIVALENT YIELD 13
- ------------------------------------------------------------
Tax-Equivalency Table 13
PERFORMANCE COMPARISONS 14
- ------------------------------------------------------------
APPENDIX 15
- ------------------------------------------------------------
</TABLE>
I
GENERAL INFORMATION ABOUT THE FUND
- --------------------------------------------------------------------------------
The Fund is a portfolio in Municipal Securities Income Trust (the "Trust"). 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. On June 1, 1994, Michigan
Municipal Income Fund changed its name to Michigan Intermediate Municipal Trust.
The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated August 6, 1990.
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 Michigan and Michigan municipalities. The investment objective cannot
be changed without approval of shareholders.
ACCEPTABLE INVESTMENTS
The Fund invests primarily in a portfolio of municipal securities, which are
exempt from federal regular income tax and Michigan state and local tax
("Michigan Municipal Securities"). These securities include those issued by or
on behalf of the State of Michigan and Michigan municipalities, and those issued
by states, territories, and possessions of the United States which are exempt
from federal regular income tax and the personal income tax imposed by the State
of Michigan and Michigan municipalities.
CHARACTERISTICS
The Michigan Municipal Securities in which the Fund invests have the
characteristics set forth in the prospectus.
If a rated bond loses its rating or has its rating reduced after the Fund
has purchased it, the Fund is not required to drop the bond from the
portfolio, but will consider doing so. If ratings made by Moody's
Investors Service, Inc., Standard & Poor's Ratings Group or Fitch's
Investors Service, Inc. 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 Michigan Municipal Securities are:
- municipal notes and municipal commercial paper;
- serial bonds sold with differing maturity dates;
- tax anticipation notes sold to finance working capital needs of
municipalities;
- bond anticipation notes sold prior to the issuance of longer-term
bonds;
- pre-refunded municipal bonds; and
- general obligation bonds secured by a municipality pledge of
taxation.
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.
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.
1
- --------------------------------------------------------------------------------
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 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 investment
adviser, under the authority delegated by the Trustees, will base its
determination on the following factors:
- whether the lease can be terminated by the lessee;
- the potential recovery, if any, from a sale of the leased property
upon termination of the lease;
- the lessee's general credit strength (e.g., its debt, administrative,
economic and financial characteristics and prospects);
- the likelihood that the lessee will discontinue appropriating funding
for the leased property because the property is no longer deemed
essential to its operations (e.g., the potential for an "event of
non-appropriation");
- 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.
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 investment adviser to be
creditworthy pursuant to guidelines established by the Trustees.
2
- --------------------------------------------------------------------------------
From time to time, such as when suitable Michigan municipal bonds 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 Michigan municipal bonds and thereby reduce the Fund's yield.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements. This
transaction is similar to borrowing cash. In a reverse repurchase
agreement the Fund transfers possession of a portfolio instrument to
another person, such as a financial institution, broker, or dealer, in
return for a percentage of the instrument's market value in cash, and
agrees that on a stipulated date in the future the Fund will repurchase
the portfolio instrument by remitting the original consideration plus
interest at an agreed upon rate. The use of reverse repurchase agreements
may enable the Fund to avoid selling portfolio instruments at a time when
a sale may be deemed to be disadvantageous, but the ability to enter into
reverse repurchase agreements does not ensure that the Fund will be able
to avoid selling portfolio instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund,
in a dollar amount sufficient to make payment for the obligations to be
purchased, are segregated at the trade date. These securities are marked
to market daily and 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 years ended August 31, 1994 and 1993, the Fund's
portfolio turnover rate was 13% and 3%, 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 or to facilitate management of the portfolio by enabling
the Fund to meet redemption requests when the liquidation of portfolio
securities is deemed to be inconvenient or disadvantageous. The Fund will
not purchase any securities while borrowings in excess of 5% of its total
assets are outstanding. During the period any reverse repurchase
agreements are outstanding, but only to the extent necessary to assure
completion of the reverse repurchase agreements, the Fund will restrict
the purchase of portfolio instruments to money market instruments maturing
on or before the expiration date of the reverse repurchase agreements.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate 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.
3
- --------------------------------------------------------------------------------
INVESTING IN REAL ESTATE
The Fund will not buy 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 buy or sell commodities, commodity contracts, or
commodities futures contracts.
INVESTING IN RESTRICTED SECURITIES
The Fund will not invest more than 10% of the value of its assets in
securities subject to restrictions on resale under the Securities Act of
1933.
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.
DEALING IN PUTS AND CALLS
The Fund will not buy or sell puts, calls, straddles, spreads, or any
combination of these.
CONCENTRATION OF INVESTMENTS
The Fund will not purchase securities if, as a result of such purchase,
25% or more of the value of its total assets would be invested in any one
industry or in industrial development bonds or other securities, the
interest upon which is paid from revenues of similar types of projects.
However, the Fund may invest as temporary investments more than 25% of the
value of its assets in cash or cash items, securities issued or guaranteed
by the U.S. government, its agencies, or instrumentalities, or instruments
secured by these money market instruments, 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 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 ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS OF THE FUND
The Fund will not purchase or retain the securities of any issuer if the
officers and 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 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.
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 or sell, oil, gas, or other mineral exploration
or development programs, or leases, although it may invest in the
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
4
- --------------------------------------------------------------------------------
of such restriction. During the fiscal year ended August 31, 1994, the Fund did
not borrow or pledge securities in excess of 5% of the value of its net assets.
The Fund does not expect to borrow money or pledge securities or invest in
repurchase agreements in excess of 5% of the value of its net assets during the
coming fiscal year.
For purposes of its policies and limitations, the Fund considers certificates of
deposit and demand and time deposits issued by a U.S. branch of a domestic bank
or savings and loan having capital, surplus, and undivided profits in excess of
$100,000,000 at the time of investment to be "cash items."
MICHIGAN INVESTMENT RISKS
The Michigan economy has diversified away from durable goods manufacturing with
service sector employment currently at 25.7% of total employment. However,
manufacturing and the automobile sector in particular, still have significant
influence over the State's economy. Michigan's economy tends to fluctuate with
the cyclical trends of the manufacturing sector, which still accounts for nearly
23% of total State employment. The states unemployment rate is currently below
the national unemployment rate for the first time reflecting both the
diversification of the regional economy and significant improvement in the
automobile sector and related industries.
In March of 1994 voters approved a tax restructuring plan which replaced
property taxes with a $.02 increase in the sales tax and a $.50 increase in
cigarette taxes. This tax restructuring was in response to discontent over high
property taxes and inequality in State funding for education. The success of
these tax initiatives will not be clear for some time and may constrain the
state and its local governments ability to operate. Additional fiscal
constraints on Michigan's state and local governments ability to raise taxes
include a 5% or rate of inflation cap on property tax increases and a limit on
the amount of sales tax revenue which can be raised by the state to a percentage
of personal income.
Michigan's finances were hard hit during the 1990 and 1991 fiscal periods.
Spending cuts and an improving state economy resulted in surplus revenues of
$254 million in fiscal 1992. As a result of continuing surplus funds in fiscal
years 1993 and 1994 Michigan expects to increase the budget stabilization fund
to a record level of $573 million by fiscal year end 1994. The state of Michigan
maintains a conservative debt position with per capita debt remaining below the
national average. Michigan also uses its general obligation borrowing capacity
to lower the borrowing cost of local school districts through the School Bond
Loan Program.
5
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.
- --------------------------------------------------------------------------------
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.
6
- --------------------------------------------------------------------------------
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.
7
- --------------------------------------------------------------------------------
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
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 Trustees between meetings of the
Board.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the outstanding shares.
As of September 28, 1994, the following shareholders of record owned 5% or more
of the outstanding shares of the Fund: CHEMBACO, Midland, MI, owned
approximately 310,600 shares 6.09%; Shoreline Co., South Haven, MI, owned
approximately 490,928 shares 9.63%; First Mar and Company, Marquette, MI, owned
approximately 268,523 shares 5.27%; Merrill Lynch Pierce Fenner & Smith,
Jacksonville, FL, owned approximately 20,942 shares 6.79%; and FESCA, Escanaba,
MI, owned approximately 1,130,603 shares 22.17%.
8
- --------------------------------------------------------------------------------
THE FUNDS
As used in the prospectus and this Statement of Additional Information, "the
Funds" and "Funds" mean the following investment companies: American Leaders
Fund, Inc.; Annuity Management Series; Arrow Funds; Automated Cash Management
Trust; Automated Government Money Trust; California Municipal Cash 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 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; 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; 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.
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that the Trustees will not be liable
for errors of judgment or mistakes of fact or law. However, they are not
protected against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICES
- --------------------------------------------------------------------------------
ADVISER TO THE FUND
The Fund'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 Trust.
ADVISORY FEES
For its advisory services, Federated Advisers receives an annual investment
advisory fee as described in the prospectus. For the fiscal years ended August
31, 1994, and 1993, and for the period from September 18, 1991 (date of initial
public investment) to August 31, 1992, the Adviser earned advisory fees of
$229,413, $154,387, and $59,327, respectively, 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.
9
- --------------------------------------------------------------------------------
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 in 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
$197,395, none of which was waived. For the fiscal year ended August 31, 1993,
and for the period from September 18, 1991 (date of initial public investment)
to August 31, 1992 Federated Administrative Services, Inc., earned $237,374 and
$75,794, respectively, 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.
SHAREHOLDER SERVICES PLAN
- --------------------------------------------------------------------------------
This arrangement permits the payment of fees to Federated Shareholder Services
and, indirectly, to financial institutions to cause services to 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, 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.
For the fiscal year ended August 31, 1994, payments in the amount of $14,615
were made pursuant to the Shareholder Services Plan.
BROKERAGE TRANSACTIONS
- --------------------------------------------------------------------------------
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally use those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. The Adviser makes
decisions on portfolio transactions and selects brokers and dealers subject to
review by the Trustees. The Adviser may select brokers and dealers who offer
brokerage and research services. These services may be furnished directly to the
Fund or to the Adviser and may include:
- advice as to the advisability of investing in securities;
- security analysis and reports;
- economic studies;
- industry studies;
- receipt of quotations for portfolio evaluations; and
- similar services.
10
- --------------------------------------------------------------------------------
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.
PURCHASING SHARES
- --------------------------------------------------------------------------------
Except under certain circumstances described in the prospectus, shares are sold
at their net asset value plus a sales load 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."
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 and Trust Company ("State Street Bank") acts
as the shareholder's agent in depositing checks and converting them to federal
funds.
PURCHASES BY SALES REPRESENTATIVES, FUND TRUSTEES, AND EMPLOYEES
Trustees, employees, and sales representatives of the Fund, Federated Advisers,
and Federated Securities Corp. or their affiliates, or any investment dealer who
has a sales agreement with Federated Securities Corp. and their spouses and
children under 21, may buy shares at net asset value without a sales load.
Shares may also be sold without a sales load to trusts or pension or
profit-sharing plans for these persons. These sales are made with the
purchaser's written assurance that the purchase is for investment purposes and
that the securities will not be resold except through redemption by the Fund.
DETERMINING NET ASSET VALUE
- --------------------------------------------------------------------------------
Net asset value generally changes each day. The days on which net asset value is
calculated by the Fund are described in the prospectus.
VALUING MUNICIPAL BONDS
The 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. Redemption procedures 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.
11
- --------------------------------------------------------------------------------
REDEMPTION IN KIND
The Trust is obligated to redeem Shares solely in cash up to $250,000 or 1% of
the respective class'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 Fund 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 transaction costs.
TAX STATUS
- --------------------------------------------------------------------------------
THE FUND'S TAX STATUS
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code of 1986, as amended,
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:
- derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities;
- derive less than 30% of its gross income from the sale of securities held
less than three months;
- invest in securities within certain statutory limits; and
- distribute to its shareholders at least 90% of its net income earned
during the year.
SHAREHOLDER'S TAX STATUS
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;
- differentials in market values;
- new investment opportunities;
- changes in creditworthiness of an issuer; or
- an attempt to preserve gains or limit losses.
Distribution of long-term capital gains are taxed as such, whether they
are taken in cash or reinvested, and regardless of the length of time the
shareholder has owned the shares. Any loss by a shareholder on Fund shares
held for less than six months and sold after a capital gains distribution
will be treated as a long-term capital loss to the extent of the capital
gains distribution.
TOTAL RETURN
- --------------------------------------------------------------------------------
The Fund's average annual total return for the one-year period ended August 31,
1994, and for the period from September 18, 1991 (date of initial public
investment) to August 31, 1994, was (2.14%) and 19.82%, respectively.
The average annual total return of the Fund is the average compounded rate of
return for a given period of time 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 less any applicable sales load, adjusted
over the period by any additional shares, assuming a monthly reinvestment of all
dividends and distributions. 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 offering price of shares redeemed.
12
YIELD
- --------------------------------------------------------------------------------
The Fund's yield for the thirty-day period ended August 31, 1994 was 4.72%.
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 7.00%.
The tax-equivalent yield for the Fund is calculated similarly to the yield, but
is adjusted to reflect the taxable yield that the Fund would have had to earn to
equal its actual yield, assuming a 28% tax rate 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 the income
taxes imposed by the State of Michigan. 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.
<TABLE>
<CAPTION>
TAXABLE YIELD EQUIVALENT FOR 1994
STATE OF MICHIGAN
- ---------------------------------------------------------------------------------------------------
COMBINED FEDERAL AND STATE INCOME TAX BRACKET:
19.60% 32.60% 35.60% 40.60% 44.20%
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
JOINT RETURN $1-38,000 $38,001-91,850 $91,851-140,000 $140,001-250,000 OVER $250,000
- ---------------------------------------------------------------------------------------------------
SINGLE RETURN $1-22,750 $22,751-55,100 $55,101-115,000 $115,001-250,000 OVER $250,000
- ---------------------------------------------------------------------------------------------------
TAX-EXEMPT YIELD TAXABLE YIELD EQUIVALENT
1.50% 1.87% 2.23% 2.33% 2.53% 2.69%
2.00% 2.49% 2.97% 3.11% 3.37% 3.58%
2.50% 3.11% 3.71% 3.88% 4.21% 4.48%
3.00% 3.73% 4.45% 4.66% 5.05% 5.38%
3.50% 4.35% 5.19% 5.43% 5.89% 6.27%
4.00% 4.98% 5.93% 6.21% 6.73% 7.17%
4.50% 5.60% 6.68% 6.99% 7.58% 8.06%
5.00% 6.22% 7.42% 7.76% 8.42% 8.96%
5.50% 6.84% 8.16% 8.54% 9.26% 9.86%
6.00% 7.46% 8.90% 9.32% 10.10% 10.75%
- ---------------------------------------------------------------------------------------------------
<FN>
* Some portions of the Fund's income may be subject to the federal
alternative minimum tax and state and local taxes.
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.
</TABLE>
13
PERFORMANCE COMPARISONS
- --------------------------------------------------------------------------------
The Fund's performance depends upon such variables as:
- portfolio quality;
- average portfolio maturity;
- type of instruments in which the portfolio is invested;
- changes in interest rates and market value of portfolio securities;
- changes in the Fund's expenses; and
- various other factors.
The Fund's performance fluctuates on a daily basis largely because net earnings
and offering price per share fluctuate daily. Both net earnings and offering
price per share are factors in the computation of yield and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute offering price. The financial
publications and/or indices which the Fund uses in advertising may include:
LEHMAN BROTHERS SEVEN YEAR STATE GENERAL OBLIGATION BOND INDEX is an index of
general obligation bonds rated A or better with 6-8 years to maturity.
LIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes the
reinvestment of all capital gains distributions and income dividends and takes
into account any change in net asset value over a specific period of time. From
time to time, the Fund will quote its Lipper ranking in the "general municipal
bond funds" category in advertising and sales literature.
MORNINGSTAR, INC., an independent rating service, is the publisher of the
bi-weekly MUTUAL FUND VALUES. MUTUAL FUND VALUES rates more than 1,000 NASDAQ
listed mutual funds of all types, according to their risk-adjusted returns. The
maximum rating is five stars, and ratings are effective for two weeks.
Advertisements and other sales literature for the Fund may refer to total
return. Total return is the historic change in the value of an investment in the
Fund based on monthly reinvestment of dividends over a specific period of time.
Advertisements may quote performance information which does not reflect the
effect of the sales load.
14
APPENDIX
- --------------------------------------------------------------------------------
STANDARD AND POOR'S RATINGS GROUP MUNICIPAL BOND RATINGS
AAA--Debt rated "AAA" has the highest rating assigned by Standard & Poor's
Ratings Group ("S&P"). Capacity to pay interest and repay principal is extremely
strong.
AA--Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A--Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt 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. CORPORATE BOND RATINGS DEFINITIONS
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
NR--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 corporate or municipal bond rating
system. The modifier 1 indicates that the security ranks in the higher end of
its generic rating 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 very high 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.
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
(+) designation.
SP-2--Satisfactory capacity to pay principal and interest.
15
- --------------------------------------------------------------------------------
MOODY'S INVESTORS SERVICE 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
broadbased 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 the
F-1+ and F-1 categories.
STANDARD AND POOR'S RATINGS GROUP COMMERCIAL PAPER RATINGS DEFINITIONS
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 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 structures with moderate reliance on debt
and ample asset protection; broad margins in earning coverage of fixed financial
charges and high internal cash generation; and 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.
625922703
1041202B (10/94) 16
MICHIGAN INTERMEDIATE MUNICIPAL TRUST
- --------------------------------------------------------------------------------
ANNUAL REPORT FOR FISCAL YEAR ENDED AUGUST 31, 1994
MANAGEMENT DISCUSSION AND ANALYSIS:
----------------------------------------------------------------------------
Michigan Intermediate Municipal Trust (the "Fund") was established in
September, 1991, to provide investors the ability to invest in a
non-diversified portfolio of intermediate maturity (five to ten year)
Michigan municipal issues which have a credit rating of "A" or better by a
nationally recognized statistical rating organization ("NRSRO"). The
investment objective of the Fund is to provide current income which is
exempt from federal regular income tax and the personal income taxes of the
State of Michigan and Michigan municipalities.*
When ascertaining the credit quality of issues for potential investment
in the Fund, the adviser focuses on a variety of economic and financial
variables. For general obligation issues, analysis is directed towards
demographic data, income distribution, property value levels and growth,
provision of government services, and debt authorization. For revenue
issues, examination is made of issuer cash flow generation, sensitivity to
product or service pricing, competition and industry/ sector make-up, debt
structure, debt service coverage, financial flexibility, and contingent
liabilities, if any.
The Fund's manager is currently stressing credit quality, since in a
rising interest rate environment high quality securities will tend to
out-perform lower quality debt instruments. The Fund currently has 70% of
its assets invested in securities rated "AA" or better by an NRSRO. The Fund
has concentrated on buying general obligation issues due to the stable to
improving credit quality in this sector. Management has also focused on
"essential service" revenue bonds of stable, established projects which
generate strong cash flow. Examples of such projects would include electric
power authorities and water and sewer utilities. Management has avoided debt
backed by municipal leases such as certificates of participation. These debt
instruments are subject to annual appropriation and present risks which are
not present in bonds backed by a general obligation, full faith and credit
pledge. Insured municipal bonds have also been purchased in the Fund.
However, the use of bond insurance is limited to monoline bond insurers who
indemnify municipal obligations only.
For the twelve months ending August 31, 1994, the fixed income
securities markets demonstrated high levels of volatility. From September 1,
1993 to August 31, 1994, the price of the "bellwether" U.S. Treasury bond
depreciated 17.0%. A steadily improving economy, fears of accelerating
inflation, and the requisite moves by the Federal Reserve Board drove
interest rates higher. Municipal bonds were not as volatile. The Bond Buyer
Municipal Bond Index of prices declined by 11.9% during the same period.**
For the fiscal year ending August 31, 1994, an investor in the Fund
experienced a total return of 0.88%.*** The performance was comprised of
4.78% income and reinvestment return (net of Fund expenses) and (3.90%)
depreciation in the net asset value per share of the Fund. Past performance
is neither indicative nor predictive of future investment performance.
*INCOME MAY BE SUBJECT TO THE FEDERAL ALTERNATIVE MINIMUM TAX.
**THIS INDEX IS UNMANAGED.
***BASED ON THE NET ASSET VALUE, WHICH DOES NOT REFLECT THE SALES LOAD OR
CONTINGENT DEFERRED SALES CHARGE, IF APPLICABLE. PERFORMANCE QUOTED
REPRESENTS PAST PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL
FLUCTUATE, SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR
LESS THAN THEIR ORIGINAL COST.
MICHIGAN INTERMEDIATE MUNICIPAL TRUST
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN MICHIGAN INTERMEDIATE MUNICIPAL TRUST
The graph below illustrates the hypothetical investment of $10,000 in the
Michigan Intermediate Municipal Trust (the "Fund") from September 18, 1991
(start of performance) to August 31, 1994, compared to the Lehman Brothers 7
Year State General Obligation Bond Index (LB7YSGOB).+
Graphic representation "A4" omitted. See Appendix.
AVERAGE ANNUAL TOTAL RETURN FOR THE PERIOD ENDED AUGUST 31, 1994
<TABLE>
<S> <C>
1 Year........................................ (2.14%)
Start of Performance (9/18/91)................ 6.32%
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE, SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF, OR
GUARANTEED BY, ANY BANK AND ARE NOT FEDERALLY INSURED.
This report must be preceded or accompanied by the Fund's prospectus dated
October 31, 1994, and, together with financial statements contained therein,
constitutes the Fund's annual report.
*Represents a hypothetical investment of $9,700 in the Fund after deducting the
maximum sales load of 3.00% ($10,000 investment minus $300 sales load =
$9,700). The Fund's performance assumes the reinvestment of all dividends and
distributions. The LB7YSGOB has been adjusted to reflect reinvestment of
dividends on securities in the index.
+The LB7YSGOB is not adjusted to reflect sales loads, expenses, or other fees
that the Securities and Exchange Commission requires to be reflected in the
Fund's performance.
[LOGO]
Federated Securities Corp.
---------------------------------------------------------------------------
Distributor
625922703
G00574-02 (10/94) [RECYCLED PAPER LOGO]
CALIFORNIA MUNICIPAL INCOME FUND
(A PORTFOLIO OF MUNICIPAL SECURITIES INCOME TRUST)
FORTRESS SHARES
PROSPECTUS
The Fortress Shares of California Municipal Income Fund (the "Fund") offered by
this prospectus 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 California and California municipalities. The Fund invests
primarily in a portfolio of California municipal securities.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF ANY
BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in Fortress Shares. Keep this prospectus for future reference.
The Fund has also filed a Statement of Additional Information for Fortress
Shares dated October 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 October 31, 1994
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES 1
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS 2
- ------------------------------------------------------
GENERAL INFORMATION 3
- ------------------------------------------------------
FORTRESS INVESTMENT PROGRAM 3
- ------------------------------------------------------
INVESTMENT INFORMATION 4
- ------------------------------------------------------
Investment Objective 4
Investment Policies 4
California Municipal Securities 7
Investment Risks 7
Non-Diversification 7
Investment Limitations 8
NET ASSET VALUE 8
- ------------------------------------------------------
INVESTING IN FORTRESS SHARES 8
- ------------------------------------------------------
Share Purchases 8
Minimum Investment Required 9
What Shares Cost 9
Eliminating the Sales Load 10
Systematic Investment Program 11
Exchange Privilege 12
Certificates and Confirmations 12
Dividends and Distributions 12
REDEEMING FORTRESS SHARES 13
- ------------------------------------------------------
Through a Financial Institution 13
Directly by Mail 13
Contingent Deferred Sales Charge 14
Systematic Withdrawal Program 15
Accounts with Low Balances 16
MUNICIPAL SECURITIES INCOME
TRUST INFORMATION 16
- ------------------------------------------------------
Management of Municipal Securities
Income Trust 16
Distribution of Fortress Shares 17
Administration of the Fund 18
SHAREHOLDER INFORMATION 19
- ------------------------------------------------------
Voting Rights 19
Massachusetts Partnership Law 19
TAX INFORMATION 19
- ------------------------------------------------------
Federal Income Tax 19
California Income Taxes 21
Other State and Local Taxes 21
PERFORMANCE INFORMATION 21
- ------------------------------------------------------
FINANCIAL STATEMENTS 22
- ------------------------------------------------------
INDEPENDENT AUDITORS' REPORT 32
- ------------------------------------------------------
ADDRESSES Inside Back Cover
- ------------------------------------------------------
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
FORTRESS SHARES
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)......................................................... 1.00%
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).................................... 1.00%
Redemption Fee (as a percentage of amount redeemed, if applicable)............................ None
Exchange Fee.................................................................................. None
ANNUAL FORTRESS SHARES OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver)(2).............................................................. 0.00%
12b-1 Fee (after waiver)(3)................................................................... 0.26%
Total Other Expenses (after expense reimbursement)............................................ 0.74%
Shareholder Services Fee(4)....................................................... 0.24%
Total Fortress Shares Operating Expenses(5).......................................... 1.00%
</TABLE>
(1) The contingent deferred sales charge is 1.00% of the lesser of the original
purchase price or the net asset value of shares redeemed within four years of
their purchase date. For a more complete description see "Contingent Deferred
Sales Charge."
(2) The 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 maximum 12b-1 fee is 0.50%.
(4) The maximum shareholder services fee is 0.25%.
(5) The Total Fortress Shares Operating Expenses in the table above are based on
expenses expected during the fiscal year ending August 31, 1995. The Total
Fortress Shares Operating Expenses were 0.25% for the fiscal year ended August
31, 1994, and would have been 3.11% absent the voluntary waiver of the
management fee, waiver of a portion of the 12b-1 fee, and 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 FORTRESS SHARES OF THE FUND
WILL BEAR, EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE
VARIOUS COSTS AND EXPENSES, SEE "INVESTING IN FORTRESS SHARES" 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.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
- ------------------------------------------------------------- ------- -------- -------- ---------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment
assuming (1) 5% annual return and (2) redemption at the end
of each time period........................................ $30 $ 53 $ 65 $ 131
You would pay the following expenses on the same investment,
assuming no redemption..................................... $20 $ 42 $ 65 $ 131
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
CALIFORNIA MUNICIPAL INCOME FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 32.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------
1994 1993*
------ ------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.92 $10.00
- -----------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------------------------
Net investment income 0.59 0.44
- -----------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.91) 0.92
- ----------------------------------------------------------------- ------ ------
Total from investment operations (0.32) 1.36
- ----------------------------------------------------------------- ------ ------
LESS DISTRIBUTIONS
- -----------------------------------------------------------------
Dividends to shareholders from net investment income (0.59) (0.44)
- ----------------------------------------------------------------- ------ ------
NET ASSET VALUE, END OF PERIOD $10.01 $10.92
- ----------------------------------------------------------------- ------ ------
TOTAL RETURN** (3.04%) 14.08%
- -----------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------------------
Expenses 0.25% 0.25%(a)
- -----------------------------------------------------------------
Net investment income 5.61% 5.58%(a)
- -----------------------------------------------------------------
Expense waiver/reimbursement (b) 2.86% 1.98%(a)
- -----------------------------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------------------------
Net assets, end of period (000 omitted) $15,059 $11,513
- -----------------------------------------------------------------
Portfolio turnover rate 63% 0%
- -----------------------------------------------------------------
</TABLE>
* Reflects operations for the period from December 2, 1992 (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) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
Further information about the Fund's performance is contained in the Fund's
annual report for the fiscal year ended 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 (the "Trustees") has established one class of
shares, known as Fortress Shares ("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
California municipal securities. A minimum initial investment of $1,500 is
required. Subsequent investments must be in amounts of at least $100. The Fund
is not likely to be a suitable investment for non-California taxpayers or
retirement plans since California 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 are sold at net asset value
plus an applicable sales load and are redeemed at net asset value. However, a
contingent deferred sales charge ("CDSC") is imposed on certain Shares, other
than Shares purchased through reinvestment of dividends, which are redeemed
within four years of their purchase dates. Fund assets may be used in connection
with the distribution of Shares.
FORTRESS INVESTMENT PROGRAM
- --------------------------------------------------------------------------------
This class of shares is a member of a family of funds, collectively known as the
Fortress Investment Program. The other funds in the Program are:
- American Leaders Fund, Inc. (Fortress Shares only), providing growth of
capital and income through high-quality stocks;
- Fortress Adjustable Rate U.S. Government Fund, Inc., providing current
income consistent with lower volatility of principal through a
diversified portfolio of adjustable and floating rate mortgage securities
which are issued or guaranteed by the U.S. government, its agencies or
instrumentalities;
- Fortress Bond Fund, providing current income primarily through
high-quality corporate debt;
- Fortress Municipal Income Fund, Inc., providing a high level of current
income generally exempt from the federal regular income tax by investing
primarily in a diversified portfolio of municipal bonds;
- Fortress Utility Fund, Inc., providing high current income and moderate
capital appreciation primarily through equity and debt securities of
utility companies;
- Government Income Securities, Inc., providing current income through
long-term U.S. government securities;
- Liberty Equity Income Fund, Inc. (Fortress Shares only), providing above
average income and capital appreciation through income producing equity
securities;
- Limited Term Fund (Fortress Shares only), providing a high level of
current income consistent with minimum fluctuation in principal value;
- Limited Term Municipal Fund (Fortress Shares only), providing a high
level of current income which is exempt from federal regular income tax
consistent with the preservation of capital;
- Money Market Management, Inc., providing current income consistent with
stability of principal through high-quality money market instruments;
- New York Municipal Income Fund (Fortress Shares only), providing current
income exempt from federal regular income tax, New York personal income
taxes, and New York municipalities income taxes;
- Ohio Municipal Income Fund (Fortress Shares only), providing current
income exempt from federal regular income tax and Ohio personal income
taxes; and
- World Utility Fund, providing total return by investing primarily in
securities issued by domestic and foreign companies in the utilities
industry.
Each of the funds may also invest in certain other types of securities as
described in each fund's prospectus.
The Fortress Investment Program provides flexibility and diversification for an
investor's long-term investment planning. It enables an investor to meet the
challenges of changing market conditions by offering convenient exchange
privileges which give access to various investment vehicles, and by providing
the investment services of a proven, professional investment adviser.
INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide current income 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 California and California 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 shareholders. Income
distributed by the Fund may not necessarily be exempt from state or municipal
taxes in states other than California.
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 California and California municipalities. At least 65%
of the value of the Fund's total assets will be invested in obligations issued
by or on behalf of the state of California, its political subdivisions, or
agencies. Unless indicated otherwise, 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 securities in which the Fund invests include:
- obligations issued by or on behalf of the state of California, 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 California and California municipalities.
The prices of fixed income securities fluctuate inversely to the direction
of interest rates.
CHARACTERISTICS. The California municipal securities which the Fund buys
are investment grade bonds rated 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 Fitch Investors Service, Inc. ("Fitch"). In
certain cases the Fund's adviser may choose bonds which are unrated if it
judges the bonds to have the same characteristics as the investment grade
bonds described above. If a bond is rated below investment grade according
to the characteristics set forth here after the Fund has purchased it, the
Fund is not required to drop the bond from the portfolio, but will consider
appropriate action. Bonds rated "BBB" by S&P or Fitch or "Baa" by Moody's
have speculative characteristics. Changes in economic or other
circumstances are more likely to lead to weakened capacity to make
principal and interest payments than higher rated bonds. 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 California 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 Trustees of the Trust will determine that participation interests meet
the prescribed quality standards for the Fund.
VARIABLE-RATE MUNICIPAL SECURITIES. Some of the California 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. 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. In the event of failure of appropriation, unless the
participation interests are credit enhanced, it is unlikely that the
participants would be able to obtain an acceptable substitute source of
payment.
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 upon 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 these transactions may cause the
Fund to miss a price or yield considered to be advantageous. Settlement dates
may be a month or more after entering into these transactions, and the market
values of the securities purchased may vary from the purchase prices.
Accordingly, the Fund may pay more/less than the market value of the securities
on the settlement date.
The Fund may dispose of a commitment prior to settlement if the adviser deems it
appropriate to do so. In addition, the Fund may enter 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.
TEMPORARY INVESTMENTS. Under normal circumstances, the Fund invests its assets
so that at least 80% of its annual interest income is exempt from federal
regular income tax and the personal income taxes imposed by the state of
California and California municipalities. This policy cannot be changed without
shareholder approval. However, from time to time, when the investment adviser
determines that market conditions call for a temporary defensive posture, the
Fund may invest in short-term non-California municipal tax-exempt obligations 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 (if unrated) those which the
investment adviser judges to have the same characteristics as such investment
grade securities.
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 California or California
municipalities.
CALIFORNIA MUNICIPAL SECURITIES
California 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.
California municipal securities include industrial development bonds 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.
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. Interest on and principal of revenue bonds, however, 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.
INVESTMENT RISKS
Yields on California municipal securities depend on a variety of factors,
including: the general conditions of the short-term municipal note market and of
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 California 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 California municipal securities meeting the Fund's
quality standards may not be possible if the state of California or its
municipalities do not maintain their current credit ratings. In addition,
certain California constitutional amendments, legislative measures, executive
orders, administrative regulations, and voter initiatives could result in
adverse consequences affecting California municipal securities. Further, any
adverse economic conditions or developments affecting the state of California 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
California 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 would exist 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 of
1986, as amended (the "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 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 FORTRESS SHARES
- --------------------------------------------------------------------------------
SHARE PURCHASES
Shares are sold on days on which the New York Stock Exchange is open. Shares may
be purchased through an investment dealer who has a sales agreement with the
distributor, Federated Securities Corp., or directly from Federated Securities
Corp. (once an account has been established), 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.
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. (Eastern time) and
must be transmitted by the broker to the Fund before 5:00 P.M. (Eastern time) in
order for Shares to be purchased at that day's price. Purchase orders through
other financial institutions must be received by
the financial institution and transmitted to the Fund before 4:00 P.M. (Eastern
time) in order for Shares to be purchased at that day's price. It is the
financial institution's responsibility to transmit orders promptly.
The financial institution which maintains investor accounts with the Fund must
do so on a fully disclosed basis unless it accounts for share ownership periods
used in calculating the CDSC (see "Contingent Deferred Sales Charge"). In
addition, advance payments made to financial institutions may be subject to
reclaim by the distributor for accounts transferred to financial institutions
which do not maintain investor accounts on a fully disclosed basis and do not
account for share ownership periods (see "Other Payments to Financial
Institutions").
DIRECTLY BY MAIL. To purchase Shares by mail directly from Federated Securities
Corp. once an account has been established:
- complete and sign the new account form available from the Fund;
- enclose a check made payable to California Municipal Income
Fund--Fortress Shares; and
- send both to the Fund's transfer agent, Federated Services Company, c/o
State Street Bank and Trust Company ("State Street Bank"), P.O. Box 8604,
Boston, MA 02266-8604.
Purchases by mail are considered received after payment by check is converted by
the transfer agent's bank, State Street Bank, into federal funds. This is
generally the next business day after State Street Bank receives the check.
DIRECTLY BY WIRE. To purchase Shares directly from Federated Securities Corp.
by Federal Reserve wire, call the Fund. All information needed will be taken
over the telephone, and the order is considered received when 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.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received, plus a sales load of 1% of the offering price (which is 1.01% of the
net amount invested). Further, there is no sales load for purchases of $1
million or more. In addition, no sales load is imposed for Shares purchased
through bank trust departments or investment advisers registered under the
Investment Advisers Act of 1940 purchasing on behalf of their clients, or by
sales representatives, Trustees, and employees of the Fund, Federated Advisers,
and Federated Securities Corp., or their affiliates, or any investment dealer
who has a sales agreement with Federated Securities Corp., their spouses and
children under age 21, or any trusts or pension or profit-sharing plans for
these persons. Unaffiliated institutions through whom Shares are purchased may
charge fees for services provided which may be related to the ownership of Fund
Shares. This prospectus should, therefore, be read together with any agreement
between the customer and the institution with regard to services provided, the
fees charged for these services, and any restrictions and limitations imposed.
The net asset value is determined at 4:00 P.M. (Eastern 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; and (iii) the
following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
Under certain circumstances, described under "Redeeming Fortress Shares,"
shareholders may be charged a CDSC by the distributor at the time Shares are
redeemed.
DEALER CONCESSION. For sales of Shares, the distributor will normally offer to
pay dealers up to 100% of the sales load retained by it. Any portion of the
sales load which is not paid to a broker/dealer will be retained by the
distributor. However, from time to time, and at the sole discretion of the
distributor, all or part of that portion may be paid to a dealer.
The sales load for Shares sold other than through registered broker/dealers will
be retained by Federated Securities Corp. Federated Securities Corp. may pay
fees to banks out of the sales load in exchange for sales and/or administrative
services performed on behalf of the bank's customers in connection with the
initiation of customer accounts and purchases of Shares.
ELIMINATING THE SALES LOAD
The sales load can be eliminated on the purchase of Shares through:
- quantity discounts and accumulated purchases;
- signing a 13-month letter of intent;
- using the reinvestment privilege;
- purchases with proceeds from redemptions of unaffiliated investment
companies; or
- concurrent purchases.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES. There is no sales load for
purchases of $1 million or more. The Fund will combine purchases made on the
same day by the investor, his spouse, and his children under age 21 when it
calculates the sales load.
If an additional purchase of Shares is made, the Fund will consider the previous
purchases still invested in the Fund. For example, if a shareholder already owns
Shares having a current value at the public offering price of $900,000 and he
purchases $100,000 more at the current public offering price, there will be no
sales load on the additional purchase. The Fund will also combine purchases for
the purpose of reducing the CDSC imposed on some Share redemptions. For example,
if a shareholder already owns Shares having a current value at public offering
price of $1 million and purchases an additional $1 million at the current public
offering price, the applicable CDSC would be reduced to .50% of those additional
Shares. For more information on the levels of CDSCs and holding periods, see the
section entitled "Contingent Deferred Sales Charge."
To receive the sales load elimination and/or the CDSC reduction, Federated
Securities Corp. must be notified by the shareholder in writing or by the
shareholder's financial institution at the time the purchase is made that Shares
are already owned or that purchases are being combined. The Fund will eliminate
the sales load and/or reduce the CDSC after it confirms the purchases.
LETTER OF INTENT. If a shareholder intends to purchase at least $1 million of
Shares over the next 13 months, the sales load may be reduced by signing a
letter of intent to that effect. This letter of intent includes a provision for
a sales load elimination depending on the amount actually purchased within the
13-month period and a provision for the Fund's custodian to hold 1.00% of the
total amount intended to be purchased in escrow (in Shares) until such purchase
is completed.
The 1.00% held in escrow will be applied to the shareholder's account at the end
of the 13-month period unless the amount specified in the letter of intent,
which must be $1 million or more of Shares, is not purchased. In this event, an
appropriate number of escrowed Shares may be redeemed in order to realize the
1.00% sales load.
This letter of intent also includes a provision for reductions in the CDSC and
holding period depending on the amount actually purchased within the 13-month
period. For more information on the various levels of CDSCs and holding periods,
see the section entitled "Contingent Deferred Sales Charge."
This letter of intent will not obligate the shareholder to purchase Shares. The
letter may be dated as of a prior date to include any purchases made within the
past 90 days. Purchases within the prior 90 days may be used to fulfill the
requirements of the letter of intent; however, the sales load on prior purchases
will not be adjusted to reflect a lower sales load.
REINVESTMENT PRIVILEGE. If Shares have been redeemed, the shareholder has a
one-time right, within 120 days, to reinvest the redemption proceeds at the
next-determined net asset value without any sales load. Federated Securities
Corp. must be notified by the shareholder in writing or by his financial
institution of the reinvestment in order to receive this elimination of the
sales load. If the shareholder redeems his Shares, there may be tax
consequences.
PURCHASES WITH PROCEEDS FROM REDEMPTIONS OF UNAFFILIATED INVESTMENT COMPANIES.
Investors may purchase Shares at net asset value, without a sales charge, with
the proceeds from the redemption of shares of an investment company which was
sold with a sales charge or commission and was not distributed by Federated
Securities Corp. The purchase must be made within 60 days of the redemption, and
Federated Securities Corp. must be notified by the investor in writing, or by
his financial institution at the time the purchase is made.
CONCURRENT PURCHASES. For purposes of qualifying for a sales load elimination,
a shareholder has the privilege of combining concurrent purchases of two or more
funds in the Fortress Investment Program, the purchase prices of which include a
sales load. For example, if a shareholder concurrently invested $400,000 in one
of the other Fortress Funds and $600,000 in Shares, the sales load would be
eliminated. To receive this sales load elimination, Federated Securities Corp.
must be notified by the shareholder in writing or by his financial institution
at the time the concurrent purchases are made. The Fund will eliminate the sales
load after it confirms the purchases.
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their investment on
a regular basis. Under this program, funds may be automatically withdrawn
periodically from the shareholder's checking account and invested in Shares at
the net asset value next determined after an order is received by Federated
Services Company, plus the 1% sales load for purchases under $1 million. A
shareholder may apply for participation in this program through Federated
Securities Corp. or his financial institution.
EXCHANGE PRIVILEGE
Shares in California Municipal Cash Trust or in other Fortress Funds may be
exchanged for Shares at net asset value without a sales load (if previously
paid) or a CDSC. The exchange privilege is available to shareholders residing in
any state in which the shares being acquired may be legally sold.
Shares in certain Federated Funds which are advised by subsidiaries or
affiliates of Federated Investors may also be exchanged for Shares at net asset
value. With the exception of exchanges into California Municipal Cash Trust and
other Fortress Funds, such exchanges will be subject to a CDSC and possibly a
sales load.
Shareholders using this privilege must exchange shares having a net asset value
which at least meets the minimum investment required for the fund into which the
exchange is being made. 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. Further information on these
exchange privileges is available by calling Federated Securities Corp. or the
shareholder's financial institution.
Before a financial institution may request exchange by telephone on behalf of a
shareholder, an authorization form permitting the Fund to accept exchange by
telephone must first be completed. Telephone exchange instructions may be
recorded. If reasonable procedures are not followed by the Fund, it may be
liable for losses due to unauthorized or fraudulent telephone instructions.
Exercise of the exchange privilege is treated as a sale for federal income tax
purposes. Depending on the circumstances, a short-term or long-term capital gain
or loss may be realized. Before making an exchange, a shareholder must receive a
prospectus of the fund for which the exchange is being made.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Services Company maintains a share
account for each shareholder. Share certificates are not issued unless requested
on the application or by contacting the Fund.
Detailed confirmations of each purchase and redemption are sent to each
shareholder. Monthly statements are sent to report dividends paid during that
month.
DIVIDENDS AND DISTRIBUTIONS
Dividends are declared daily and paid monthly. 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 at net asset value without a sales load, 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 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 that proper written redemption
instructions are received by Federated Services Company.
REDEEMING FORTRESS SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at their net asset value, less any applicable CDSC, next
determined after Federated Services Company receives the redemption request.
Redemptions will be made on days on which the Fund computes its net asset value.
Redemption requests must be received in proper form and can be made through a
financial institution or directly from the Fund by written request.
THROUGH A FINANCIAL INSTITUTION
A shareholder may redeem Shares 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. (Eastern time) and
must be transmitted by the broker to the Fund before 5:00 P.M. (Eastern time) in
order for Shares to be redeemed at that day's net asset value. Redemption
requests through other financial institutions must be received by the financial
institution and transmitted to the Fund before 4:00 P.M. (Eastern time) in order
for Shares to be redeemed at that day's net asset value. The financial
institution is responsible for promptly submitting redemption requests and
providing proper written redemption instructions to the Fund. The financial
institution may charge customary fees and commissions for this service. If, at
any time, the Fund shall determine it necessary to terminate or modify this
method of redemption, shareholders will be promptly notified.
Before a financial institution may request redemption by telephone on behalf of
a shareholder, an authorization form permitting the Fund to accept redemption
requests by telephone must first be completed. Telephone redemption instructions
may be recorded. If reasonable procedures are not followed by the Fund, it may
be liable for losses due to unauthorized or fraudulent telephone instructions.
In the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption, such as "Directly by Mail," should be considered.
DIRECTLY BY MAIL
Shareholders may also redeem Shares by sending a written request to Federated
Services Company, c/o 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, less any applicable
CDSC, next determined after the transfer agent 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, which is administered by the Federal Deposit Insurance
Corporation ("FDIC");
- a member 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, which is administered by the
FDIC; or
- any other "eligible guarantor institution", as defined in the Securities
Exchange Act of 1934.
The Fund does not accept signatures guaranteed by a notary public.
The Fund and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Fund may elect in the future to
limit eligible signature guarantors to institutions that are members of a
signature guarantee program. The Fund and its transfer agent reserve the right
to amend these standards at any time without notice.
RECEIVING PAYMENT. A check for the proceeds is mailed within seven days after
receipt of proper written redemption instructions from a broker or from the
shareholder.
CONTINGENT DEFERRED SALES CHARGE
Shareholders redeeming Shares from their Fund accounts within certain time
periods of the purchase date of those Shares will be charged a CDSC by the
Fund's distributor of the lesser of the original price or the net asset value of
the Shares redeemed as follows:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
AMOUNT OF PURCHASE SHARES HELD SALES CHARGE
- ---------------------------------------------------- ------------------ ---------------------
<S> <C> <C>
Up to $1,999,999.................................... less than 4 years 1%
$2,000,000 to $4,999,999............................ less than 2 years .50%
$5,000,000 or more.................................. less than 1 year .25%
</TABLE>
In instances in which Shares have been acquired in exchange for shares in other
Fortress Funds, (i) the purchase price is the price of the shares when
originally purchased and (ii) the time period during which the shares are held
will run from the date of the original purchase. The CDSC will not be imposed on
Shares acquired through the reinvestment of dividends or distributions of
long-term capital gains. In computing the amount of CDSC for accounts with
shares subject to a single holding period, if any, redemptions are deemed to
have occurred in the following order: (1) Shares acquired through the
reinvestment of dividends and long-term capital gains, (2) purchases of Shares
occurring prior to the number of years necessary to satisfy the applicable
holding period, and (3) purchases of Shares occurring within the current holding
period. For accounts with Shares subject to multiple Share holding periods, the
redemption sequence will be determined first, with reinvested dividends and
long-term capital gains, and second, on a first-in, first-out basis.
The CDSC will not be imposed when a redemption results from a return from the
death or disability of the beneficial owner. CDSCs are not charged in connection
with exchanges of Shares for shares in
California Municipal Cash Trust or shares in other Fortress Funds, or in
connection with redemptions by the Fund of accounts with low balances. Shares of
the Fund originally purchased through a bank trust department or investment
adviser registered under the Investment Advisers Act of 1940, as amended, are
not subject to the CDSC. A different CDSC will be charged when Shares purchased
with the proceeds of a redemption of an unaffiliated mutual fund as described
below are redeemed within one year of purchase.
Shareholders who purchased Shares with the proceeds of a redemption of shares of
a mutual fund sold with a sales load or commission and not distributed by
Federated Securities Corp. will be charged a CDSC by the Fund's distributor of
.50 of 1% for redemptions made within one year of purchase. The CDSC will be
calculated based upon the lesser of the original purchase price of the Shares or
the net asset value of the Shares when redeemed. The redemption fee will not be
imposed on Shares acquired through reinvestment of dividends or distributions of
short-term or long-term capital gains. Redemptions are deemed to have occurred
in the following order: (1) Shares acquired through the reinvestment of
dividends and long-term capital gains; (2) purchases of Shares occurring more
than one year before the date of the redemption; (3) purchases of Shares within
the previous year without the use of redemption proceeds as described above; and
(4) purchases of Shares within the previous year through the use of redemption
proceeds as described above.
The CDSC will not be imposed when a redemption results from a tax-free return
under the following circumstances: (i) a total or partial distribution from a
qualified plan, other than an IRA, Keogh Plan, or a custodial account, following
retirement; (ii) a total or partial distribution from an IRA, Keogh Plan, or a
custodial account, after the beneficial owner attains age 59 1/2; or (iii) from
the death or permanent and total disability of the beneficial owner. The
exemption from the CDSC for qualified plans, an IRA, Keogh Plan, or a custodial
account does not extend to account transfers, rollovers, and other redemptions
made for purposes of reinvestment.
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. Due to the fact that Shares are sold with a sales load, it is
not advisable for shareholders to be purchasing Shares while participating in
this program.
CDSCs are charged for Shares redeemed through this program within four years of
their purchase dates.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account and pay the proceeds to the shareholder if the
account balance falls below the required minimum value of $1,500. 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.
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 Trustees are 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.
The Executive Committee of the Board of Trustees handles the Trustees'
responsibilities between meetings of the Board.
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 (the "Adviser"), subject to direction by
the Trustees. The Adviser continually conducts investment research and
supervision for the Fund and is responsible for the purchase or sale of
portfolio instruments, for which it receives an annual fee from the Fund.
ADVISORY FEES. The 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 of expenses at any time in 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, as amended. 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 are
approximately $70 billion, including over $8 billion in municipal
investments. 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 has been the Fund's portfolio manager since June, 1993.
Mr. Roberge joined Federated Investors in 1990 and has been an Assistant
Vice President of the Fund's 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.
DISTRIBUTION OF FORTRESS SHARES
Federated Securities Corp. is the principal 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 AND SHAREHOLDER SERVICES PLANS. Under a distribution plan adopted
in accordance with Investment Company Act Rule 12b-1 (the "Distribution Plan"),
the Fund may pay to the distributor an amount, computed at an annual rate of
0.50 of 1% of the average daily net asset value of Shares to finance any
activity which is principally intended to result in the sale of Shares subject
to the Distribution Plan. The distributor may select financial institutions such
as banks, fiduciaries, custodians for public funds, investment advisers, and
broker/dealers to provide sales support services as agents for their clients or
customers.
The Distribution 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 amount or may earn a profit from future payments made by the Fund
under the Distribution Plan.
In addition, the Trust has adopted a Shareholder Services Plan (the "Services
Plan") under which it may make payments up to 0.25 of 1% of the average daily
net asset value of Shares to obtain certain personal services for shareholders
and the maintenance of shareholder accounts ("shareholder services"). The Trust
has entered into a Shareholder Services Agreement with Federated Shareholder
Services, a subsidiary of Federated Investors, under which Federated Shareholder
Services will either perform shareholder services directly or will select
financial institutions to perform shareholder services. Financial institutions
will receive fees based upon Shares owned by their clients or customers. The
schedules of such fees and the basis upon which such fees will be paid will be
determined from time to time by the Trust and Federated Shareholder Services.
OTHER PAYMENTS TO FINANCIAL INSTITUTIONS. In addition, the distributor will pay
financial institutions, for distribution and/or administrative services, an
amount equal to 1.00% of the offering price of the Shares acquired by their
clients or customers on purchases up to $1,999,999, .50% of the offering price
on purchases of $2,000,000 to $4,999,999, and .25% of the offering price on
purchases of $5,000,000 or more. (This fee is in addition to the 1.00% sales
charge on purchases of less than $1 million.)
Furthermore, the distributor may offer to pay a fee from its own assets to
financial institutions as financial assistance for providing substantial
marketing and sales support. The support may include participating in sales,
educational and training seminars at recreational-type facilities, providing
sales literature, and engineering computer software programs that emphasize the
attributes of the Fund. Such assistance will be predicated upon the amount of
Shares the financial institution sells or may sell and/or upon the type and
nature of sales or marketing support furnished by the financial institution. Any
payments made by the distributor may be reimbursed by the Adviser or its
affiliates.
The Glass-Steagall Act prohibits a depository institution (such as a commercial
bank or a savings and loan association) from being an underwriter or distributor
of most securities. 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.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides administrative personnel and services (including
certain legal and financial reporting services) necessary to operate the Fund.
Federated Administrative Services provides these at an annual rate which relates
to the average aggregate daily net assets of all funds advised by subsidiaries
of Federated Investors ("Federated Funds") as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY NET
ADMINISTRATIVE FEE ASSETS OF THE FEDERATED FUNDS
- --------------------- ------------------------------------
<S> <C>
0.150 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.100 of 1% on the next $250 million
0.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio 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, P.O. Box 8604, Boston,
Massachusetts 02266-8604, is custodian for the securities and cash of the Fund.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company, P.O.
Box 8604, Boston, Massachusetts 02266-8604, is transfer agent for the Shares of
the Fund and dividend disbursing agent for the Fund.
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.
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 September 28, 1994, Merrill Lynch Pierce Fenner & Smith,
Jacksonville, FL, owned 38.28% 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 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 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, 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.
The alternative minimum tax, up to 28% of alternative minimum taxable income for
individuals and 20% for corporations, applies when it exceeds the regular tax
for the taxable year. Alternative minimum taxable income is equal to the regular
taxable income of the taxpayer increased by certain "tax preference" items not
included in regular taxable income and reduced by only a portion of the
deductions allowed in the calculation of the regular tax.
The Tax Reform Act of 1986 treats interest on certain "private activity" bonds
issued after August 7, 1986, as a tax preference item for both individuals and
corporations. Unlike traditional governmental purpose municipal bonds, which
finance roads, schools, libraries, prisons, and other public facilities, private
activity bonds provide benefits to private parties. The Fund may purchase all
types of municipal bonds, including private activity bonds. Thus, should it
purchase any such bonds, a portion of the Fund's dividends may be treated as a
tax preference item.
In addition, in the case of a corporate shareholder, dividends of the Fund which
represent interest on municipal bonds 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" is based upon the concept of a corporation's
"earnings and profits." Since "earnings and profits" generally includes the full
amount of any Fund dividend, and alternative minimum taxable income does not
include the portion of the Fund's dividend attributable to municipal bonds which
are not private activity bonds, the difference will be included in the
calculation of the corporation's alternative minimum tax.
Dividends of the Fund representing net interest income earned on some temporary
investments and any realized net short-term gains are taxed as ordinary income.
These tax consequences apply whether dividends are received in cash or as
additional Shares. Information on the tax status of dividends and distributions
is provided annually.
CALIFORNIA INCOME TAXES
Under existing California laws, distributions made by the Fund will not be
subject to California individual income taxes provided that such distributions
qualify as "exempt-interest dividends" under the California Revenue and Taxation
Code, and provided further that at the close of each quarter, at least 50
percent of the value of the total assets of the Fund consists of obligations the
interest on which is exempt from California taxation under either the
Constitution or laws of California or the Constitution or laws of the United
States. The Fund will furnish its shareholders with a written note designating
exempt-interest dividends within 60 days after the close of its taxable year.
Conversely, to the extent that distributions made by the Fund are derived from
other types of obligations, such distributions will be subject to California
individual income taxes.
Dividends of the Fund are not exempt from the California taxes payable by
corporations.
OTHER STATE AND LOCAL TAXES
Income from the Fund is not necessarily free from state income taxes in states
other than California 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 maximum sales load and
other similar non-recurring charges, such as the CDSC, 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.
CALIFORNIA MUNICIPAL INCOME FUND
PORTFOLIO OF INVESTMENTS
AUGUST 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- --------- ---------------------------------------------------------- --------- -----------
<C> <S> <C> <C>
</TABLE>
<TABLE>
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--97.7%
- -----------------------------------------------------------------------
CALIFORNIA--93.0%
----------------------------------------------------------
$400,000 ABAG Finance Authority, CA, 5.25% COPS (Series 1993)/
(Stanford University Hospital), 11/1/2020 Aa $ 346,448
----------------------------------------------------------
650,000 California Educational Facilities Authority, 6.20% Revenue
Bonds (National University)/(Connie Lee Insured)/
(Original Issue Yield: 6.277%), 5/1/2021 AAA 645,041
----------------------------------------------------------
625,000 California Educational Facilities Authority, 6.60% Revenue
Bonds (Series 1994)/(Loyola Marymount University),
10/1/2022 A1 633,206
----------------------------------------------------------
1,000,000 California Health Facilities Finance Authority, 5.75%
Revenue Bonds (Series A)/(St. Francis Medical
Center)/(Original Issue Yield: 5.839%), 10/1/2023 Aa 917,080
----------------------------------------------------------
250,000 California Health Facilities Finance Authority, 6.25%
Revenue Bonds (Kaiser Permanente), 3/1/2021 Aa2 246,025
----------------------------------------------------------
400,000 California HFA Multi Family Housing, 5.50% Revenue Bonds
(Series A), 8/1/2015 A+ 352,092
----------------------------------------------------------
1,340,000 California HFA, 6.45% Revenue Bonds (1994 Series B-1)/
(Subject to AMT), 2/1/2011 Aa 1,352,100
----------------------------------------------------------
2,000,000 California HFA, 6.75% Revenue Bonds (1994 Series C)/
(Subject to AMT), 2/1/2025 Aa 2,024,320
----------------------------------------------------------
300,000 California Pollution Control Financing Authority, 5.85%
Refunding Revenue Bonds (Pacific Gas & Electric Co.)/
(Series 1993B)/(Subject to AMT), 12/1/2023 A1 275,679
----------------------------------------------------------
500,000 California Pollution Control Financing Authority, 5.875%
Refunding Revenue Bonds (Pacific Gas & Electric Co.)/
(Subject to AMT), 6/1/2023 A1 461,330
----------------------------------------------------------
</TABLE>
CALIFORNIA MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- --------- ---------------------------------------------------------- --------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- -----------------------------------------------------------------------
CALIFORNIA--CONTINUED
----------------------------------------------------------
$500,000 California Pollution Control Financing Authority, 6.35%
Revenue Bonds (Pacific Gas & Electric Co.)/(Series 1992B)/
(Subject to AMT), 6/1/2009 A1 $ 504,055
----------------------------------------------------------
500,000 California Pollution Control Financing Authority, 6.40%
Refunding Revenue Bonds (Series 1992)/(Southern California
Edison Co.)/(Subject to AMT), 12/1/2024 Aa3 497,285
----------------------------------------------------------
600,000 California State, UT, 6.00% GO Bonds (Original Issue
Yield: 6.25%)/(MBIA Insured), 10/1/2021 AAA 585,846
----------------------------------------------------------
500,000 Chula Vista, CA, 6.40% IDR Bonds (San Diego Gas & Electric
Co.)/(Series 1992A)/(Subject to AMT), 12/1/2027 Aa3 500,865
----------------------------------------------------------
500,000 East Bay, CA, Municipal Utility District, 6.00% Water
System Revenue Bonds (Series 1992), 6/1/2020 A1 482,800
----------------------------------------------------------
200,000 Fresno, CA, Health Facilities, 5.625% Revenue Bonds
(Original Issue: 5.85%)/(Holy Cross Health System Corp),
12/1/2018 AA- 178,984
----------------------------------------------------------
1,000,000 Los Angeles, CA, Community Redevelopment Agency of the
City Housing, 6.55% Revenue Refunding Bonds (Series
1994A)/(AMBAC Insured), 1/1/2027 AAA 1,012,200
----------------------------------------------------------
200,000 Los Angeles, CA, Community Redevelopment Financing
Authority, 5.90% Qualified Redevelopment Bonds (Series
1993A)/(Grand Central Square)/(Original Issue Yield:
6.00%)(Subject to AMT), 12/1/2026 A 182,362
----------------------------------------------------------
500,000 Los Angeles, CA, Department of Water & Power, 6.00%
(Electric Plant Revenue Bonds), 8/15/2032 Aa 474,305
----------------------------------------------------------
500,000 Marin, CA, Municipal Water District, 5.65% Water Revenue
Bonds, 7/1/2023 AA 449,675
----------------------------------------------------------
250,000 San Francisco, CA, City & County, 6.10% Refunding Revenue
Bonds (San Francisco International Airport)/(MBIA
Insured)/ (Subject to AMT), 5/1/2013 Aaa 251,140
----------------------------------------------------------
</TABLE>
CALIFORNIA MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- --------- ---------------------------------------------------------- --------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- -----------------------------------------------------------------------
CALIFORNIA--CONTINUED
----------------------------------------------------------
975,000 Santa Cruz, CA, Sewer Secondary Waste Water Treatment,
6.25% Refunding Bonds (Series C), 11/1/2023 A 948,158
----------------------------------------------------------
</TABLE>
CALIFORNIA MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- --------- ---------------------------------------------------------- --------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- -----------------------------------------------------------------------
CALIFORNIA--CONTINUED
----------------------------------------------------------
$500,000 Sequoia, CA, Hospital District, 5.375% Refunding Bonds
(Original Issue Yield: 5.55%), 8/15/2013 A- $ 438,195
----------------------------------------------------------
300,000 Sequoia, CA, Hospital District, 5.375% Refunding Bonds
(Original Issue Yield: 5.65%), 8/15/2023 A- 250,122
---------------------------------------------------------- -----------
Total 14,009,313
---------------------------------------------------------- -----------
PUERTO RICO--4.7%
----------------------------------------------------------
250,000 Puerto Rico Electric Power Authority, 6.25% Refunding
Revenue Bonds (Series R), 7/1/2017 A- 249,643
----------------------------------------------------------
450,000 Puerto Rico Electric Power Authority, 6.375% Revenue Bonds
(Series T)/(Original Issue Yield: 6.58%), 7/1/2024 A- 454,680
---------------------------------------------------------- -----------
Total 704,323
---------------------------------------------------------- -----------
TOTAL LONG-TERM MUNICIPAL SECURITIES
(IDENTIFIED COST, $15,004,252) $14,713,636+
---------------------------------------------------------- -----------
</TABLE>
*Please refer to the Appendix of the Statement of Additional Information for an
explanation of the credit ratings. Current credit ratings are unaudited.
+ The cost of investments for federal tax purposes amounts to $15,004,252. The
net unrealized depreciation on a federal tax basis amounts to $290,616, which
is comprised of $385,541 depreciation and $94,925 appreciation at August 31,
1994.
Note: The categories of investments are shown as a percentage of net assets
($15,058,526) at August 31, 1994.
CALIFORNIA MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
The following abbreviations are used in this portfolio:
<TABLE>
<S> <C>
AMBAC --American Municipal Bond Assurance Corporation
AMT --Alternative Minimum Tax
COPs --Certificates of Participation
GO --General Obligations
HFA --Housing Finance Authority/Agency
IDR --Industrial Development Revenue
MBIA --Municipal Bond Investors Assurance
UT --Unlimited Tax
</TABLE>
(See Notes which are an integral part of the Financial Statements)
CALIFORNIA MUNICIPAL INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- --------------------------------------------------------------------------------
Investments in securities, at value (identified and tax cost $15,004,252) $14,713,636
- --------------------------------------------------------------------------------
Cash 131,986
- --------------------------------------------------------------------------------
Receivable for investments sold 631,107
- --------------------------------------------------------------------------------
Interest receivable 258,055
- --------------------------------------------------------------------------------
Receivable for Fund shares sold 17,347
- --------------------------------------------------------------------------------
Receivable from distributor 6,436
- --------------------------------------------------------------------------------
Deferred expenses 6,026
- -------------------------------------------------------------------------------- -----------
Total assets 15,764,593
- --------------------------------------------------------------------------------
LIABILITIES:
- ---------------------------------------------------------------------
Payable for investments purchased $599,850
- ---------------------------------------------------------------------
Dividends payable 51,518
- ---------------------------------------------------------------------
Payable for Fund shares redeemed 31,317
- ---------------------------------------------------------------------
Accrued expenses 23,382
- --------------------------------------------------------------------- --------
Total liabilities 706,067
- -------------------------------------------------------------------------------- -----------
NET ASSETS FOR 1,504,452 shares of beneficial interest outstanding $15,058,526
- -------------------------------------------------------------------------------- -----------
NET ASSETS CONSIST OF:
- --------------------------------------------------------------------------------
Paid-in capital $15,894,985
- --------------------------------------------------------------------------------
Accumulated net realized gain (loss) on investments (545,843)
- --------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on investments (290,616)
- -------------------------------------------------------------------------------- -----------
Total Net Assets $15,058,526
- -------------------------------------------------------------------------------- -----------
NET ASSET VALUE per Share ($15,058,526 / 1,504,452 shares of
beneficial interest outstanding) $ 10.01
- -------------------------------------------------------------------------------- -----------
OFFERING PRICE per Share (100/99 of 10.01)* $ 10.11
- -------------------------------------------------------------------------------- -----------
REDEMPTION PROCEEDS per Share (99/100 of 10.01)** $ 9.91
- -------------------------------------------------------------------------------- -----------
</TABLE>
* See "What Shares Cost" in the prospectus.
** See "Redeeming Fortress Shares" in the prospectus.
(See Notes which are an integral part of the Financial Statements)
CALIFORNIA MUNICIPAL INCOME FUND
STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- --------------------------------------------------------------------------------------------
Interest income $ 886,548
- --------------------------------------------------------------------------------------------
EXPENSES:
- --------------------------------------------------------------------------------
Investment advisory fee $ 60,519
- --------------------------------------------------------------------------------
Administrative personnel and services 176,127
- --------------------------------------------------------------------------------
Trustees' fees 1,031
- --------------------------------------------------------------------------------
Custodian and portfolio accounting fees 62,056
- --------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 17,357
- --------------------------------------------------------------------------------
Fund share registration costs 16,505
- --------------------------------------------------------------------------------
Shareholder services fee 17,986
- --------------------------------------------------------------------------------
Distribution services fee 75,651
- --------------------------------------------------------------------------------
Printing and postage 15,961
- --------------------------------------------------------------------------------
Legal fees 4,172
- --------------------------------------------------------------------------------
Auditing fees 16,114
- --------------------------------------------------------------------------------
Insurance premiums 5,188
- --------------------------------------------------------------------------------
Taxes 339
- --------------------------------------------------------------------------------
Miscellaneous 2,150
- -------------------------------------------------------------------------------- --------
Total expenses 471,156
- --------------------------------------------------------------------------------
Deduct--
- ---------------------------------------------------------------------
Waiver of investment advisory fee $ 60,519
- ---------------------------------------------------------------------
Waiver of distribution services fee 55,812
- ---------------------------------------------------------------------
Reimbursement of other operating expenses by Adviser 317,000 433,331
- --------------------------------------------------------------------- -------- --------
Net expenses 37,825
- -------------------------------------------------------------------------------------------- -----------
Net investment income 848,723
- -------------------------------------------------------------------------------------------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- --------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (identified cost basis) (545,843)
- --------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments (926,760)
- -------------------------------------------------------------------------------------------- -----------
Net realized and unrealized gain (loss) on investments (1,472,603)
- -------------------------------------------------------------------------------------------- -----------
Change in net assets resulting from operations $ (623,880)
- -------------------------------------------------------------------------------------------- -----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
CALIFORNIA MUNICIPAL INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
---------------------------
1994 1993*
----------- ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ------------------------------------------------------------------
OPERATIONS--
- ------------------------------------------------------------------
Net investment income $ 848,723 $ 326,733
- ------------------------------------------------------------------
Net realized gain (loss) on investments ($0 and 0, respectively,
as computed for federal tax purposes) (545,843) --
- ------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on
investments (926,760) 636,144
- ------------------------------------------------------------------ ----------- ------------
Change in net assets resulting from operations (623,880) 962,877
- ------------------------------------------------------------------ ----------- ------------
DISTRIBUTIONS TO SHAREHOLDERS--
- ------------------------------------------------------------------
Dividends to shareholders from net investment income (848,723) (326,733)
- ------------------------------------------------------------------ ----------- ------------
FUND SHARE (PRINCIPAL) TRANSACTIONS--
- ------------------------------------------------------------------
Proceeds from sale of shares 9,167,860 21,292,789
- ------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of
dividends declared 273,901 97,272
- ------------------------------------------------------------------
Cost of shares redeemed (4,424,058) (10,512,779)
- ------------------------------------------------------------------ ----------- ------------
Change in net assets resulting from Fund share transactions 5,017,703 10,877,282
- ------------------------------------------------------------------ ----------- ------------
Change in net assets 3,545,100 11,513,426
- ------------------------------------------------------------------
NET ASSETS:
- ------------------------------------------------------------------
Beginning of period 11,513,426 --
- ------------------------------------------------------------------ ----------- ------------
End of period $15,058,526 $ 11,513,426
- ------------------------------------------------------------------ ----------- ------------
</TABLE>
* For the period from December 2, 1992 (date of initial public investment) to
August 31, 1993.
(See Notes which are an integral part of the Financial Statements)
CALIFORNIA MUNICIPAL INCOME FUND
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1994
- --------------------------------------------------------------------------------
(1) ORGANIZATION
Municipal Securities Income Trust (the "Trust"), is registered under the
Investment Company Act of 1940, as amended (the "Act"), as an open-end
management investment company. The Trust consists of ten, non-diversified
portfolios. The financial statements included herein are only those of
California Municipal Income Fund (the "Fund"). The financial statements of the
other portfolios are presented separately. The assets of each portfolio are
segregated and a shareholder's interest is limited to the portfolio in which
shares are held.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
<TABLE>
<S> <C>
A. INVESTMENT VALUATIONS--Municipal bonds are valued by an independent pricing service
taking into consideration yield, liquidity, risk, credit, quality, coupon, maturity, type
of issue, and any other factors or market data it deems relevant in determining
valuations for normal institutional size trading units of debt securities. The
independent pricing service does not rely exclusively on quoted prices. Short-term
securities with remaining maturities of sixty days or less may be stated at amortized
cost, which approximates value.
B. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and expenses are accrued
daily. Bond premium and discount, if applicable, are amortized as required by the
Internal Revenue Code, as amended (the "Code"). Distributions to shareholders are
recorded on the ex-dividend date.
C. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the Code
applicable to regulated investment companies and to distribute to shareholders each year
substantially all of its tax-exempt income. Accordingly, no provisions for federal tax
are necessary. Additionally, net capital losses of $545,843 attributable to security
transactions incurred after October 31, 1993 are treated as arising on September 1, 1994,
the first day of the Fund's next taxable year.
D. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in when-issued or
delayed delivery transactions. The Fund records when-issued securities on the trade date
and maintains security positions such that sufficient liquid assets will be available to
make payment for the securities purchased. Securities purchased on a when-issued or
delayed delivery basis are marked to market daily and begin earning interest on the
settlement date.
E. CONCENTRATION OF CREDIT RISK--Since the Fund invests a substantial portion of its assets
in issuers located in one state, it will be more susceptible to factors adversely
affecting issuers of that
</TABLE>
CALIFORNIA MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
state than would be a comparable general tax-exempt mutual fund. In order to reduce the
credit risk associated with such factors, at August 31, 1994, 12.6% of the securities of
the portfolio of investments are backed by letters of credit or bond insurance of various
financial institutions and financial guaranty assurance agencies. The value of
investments insured by or supported (backed) by a letter of credit for any one
institution or agency did not exceed 6.9% of total investments.
F. DEFERRED EXPENSES--The costs incurred by the Fund with respect to registration of its
shares in its first fiscal year, excluding the initial expense of registering its shares,
have been deferred and are being amortized using the straight-line method not to exceed a
period of five years from the Fund's commencement date.
G. OTHER--Investment transactions are accounted for on the trade date.
</TABLE>
(3) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
------------------------
1994 1993*
- -------------------------------------------------------------------- -------- -----------
<S> <C> <C>
Shares sold 848,498 2,063,128
- --------------------------------------------------------------------
Shares issued to shareholders in payment of dividends declared 26,342 9,157
- --------------------------------------------------------------------
Shares redeemed (424,266) (1,018,407)
- -------------------------------------------------------------------- -------- -----------
Net change resulting from Fund share transactions 450,574 1,053,878
- -------------------------------------------------------------------- -------- -----------
</TABLE>
* For the period from December 2, 1992 (date of initial public investment) to
August 31, 1993.
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
ADVISORY FEE--Federated Advisers, the Fund's investment adviser (the "Adviser"),
receives for its services 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 and reimburse certain operating expenses of the Fund.
The Adviser can modify or terminate this voluntary waiver and reimbursement at
any time at its sole discretion.
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS") provides the Fund
with administrative personnel and services. Prior to March 1, 1994, these
services were provided at approximate cost. Effective March 1, 1994, the FAS fee
is based on the level of average aggregate daily net assets of all funds advised
by subsidiaries of Federated Investors for the period. The administrative fee
received during the period of the Administrative Services Agreement shall be at
least $125,000 per portfolio and $30,000 per additional class of shares.
CALIFORNIA MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
DISTRIBUTION AND SHAREHOLDER SERVICES FEE--The Fund has adopted a Distribution
Plan (the "Plan") pursuant to Rule 12b-1 under the Act. Under the terms of the
Plan, the Fund will compensate Federated Securities Corp. ("FSC"), the principal
distributor, from the net assets of the Fund to finance activities intended to
result in the sale of the Fund's Fortress Shares. The Plan provides that the
Fund may incur distribution expenses up to .50 of 1% of the average daily net
assets of the Fortress Shares, annually, to compensate FSC.
Under the terms of a Shareholder Services Agreement with Federated Shareholder
Services ("FSS"), the Fund will pay FSS up to .25 of 1% of average net assets
for the Fund for the period. This fee is to obtain certain personal services for
shareholders and the maintenance of shareholder accounts.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES--Federated Services Company
("FServ") serves as transfer agent and dividend disbursing agent for the Fund.
The FServ fee is based on the size, type and number of accounts and transactions
made by shareholders.
ORGANIZATIONAL EXPENSES--Organizational expenses of $26,245 and start-up
administrative service expenses of $54,398 were borne initially by the Adviser.
The Fund has agreed to reimburse the Adviser for the organizational expenses and
start-up administrative expenses during the five year period following November
24, 1992 (date the Fund first became effective). For the year ended August 31,
1994, the Fund paid $3,499 and $7,253, respectively, pursuant to this agreement.
INTERFUND TRANSACTIONS--During the year ended August 31, 1994, the Fund engaged
in purchase and sale transactions with other affiliated funds at current value
on the date of the transaction pursuant to Rule 17a-7 under the Act amounting to
$6,000,000 and $6,900,000, respectively.
Certain of the Officers and Trustees of the Fund are Officers and Directors or
Trustees of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
fiscal year ended August 31, 1994, were as follows:
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------
PURCHASES $14,321,702
- ------------------------------------------------------------------------------- -----------
SALES $ 9,443,141
- ------------------------------------------------------------------------------- -----------
</TABLE>
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
To the Board of Trustees of
MUNICIPAL SECURITIES INCOME TRUST
and Shareholders of CALIFORNIA MUNICIPAL INCOME FUND:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of California Municipal Income Fund (a portfolio
of Municipal Securities Income Trust) as of August 31, 1994, the related
statement of operations for the year then ended, and the statement of changes in
net assets and the financial highlights (see page 2 of the prospectus) for the
years ended August 31, 1994 and 1993. These financial statements and financial
highlights are the responsibility of the Trust's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
August 31, 1994 by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of California Municipal
Income Fund as of August 31, 1994, the results of its operations, the changes in
its net assets, and its financial highlights for the respective stated periods
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
October 7, 1994
ADDRESSES
<TABLE>
<S> <C> <C>
- ------------------------------------------------------------------------------------------------
California Municipal Income Fund Federated Investors Tower
Fortress Shares 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
- ------------------------------------------------------------------------------------------------
</TABLE>
CALIFORNIA MUNICIPAL
INCOME FUND
FORTRESS SHARES
PROSPECTUS
A Non-Diversified Portfolio of
Municipal Securities Income
Trust,
An Open-End, Management
Investment Company
October 31, 1994
FEDERATED SECURITIES CORP.
(LOGO)
- ---------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
625922109
2092918A (10/94)
CALIFORNIA MUNICIPAL INCOME FUND
(A PORTFOLIO OF MUNICIPAL SECURITIES INCOME TRUST)
FORTRESS SHARES
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the prospectus of
Fortress Shares of California Municipal Income Fund (the "Fund") dated October
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 October 31, 1994
FEDERATED SECURITIES CORP.
(LOGO)
- ---------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND 1
- ---------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES 1
- ---------------------------------------------------------------
Acceptable Investments 1
When-Issued and Delayed
Delivery Transactions 2
Temporary Investments 2
Portfolio Turnover 3
Investment Limitations 3
California Investment Risks 4
MUNICIPAL SECURITIES INCOME TRUST MANAGEMENT 6
- ---------------------------------------------------------------
Fund Ownership 8
The Funds 8
INVESTMENT ADVISORY SERVICES 9
- ---------------------------------------------------------------
Adviser to the Fund 9
Advisory Fees 9
ADMINISTRATIVE SERVICES 9
- ---------------------------------------------------------------
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT 9
- ---------------------------------------------------------------
BROKERAGE TRANSACTIONS 9
- ---------------------------------------------------------------
PURCHASING FORTRESS SHARES 10
- ---------------------------------------------------------------
Distribution and Shareholder Services Plans 10
Conversion to Federal Funds 10
Purchases by Sales Representatives,
Fund Trustees, and Employees 10
DETERMINING NET ASSET VALUE 11
- ---------------------------------------------------------------
Valuing Municipal Bonds 11
Use of Amortized Cost 11
REDEEMING FORTRESS SHARES 11
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Redemption in Kind 11
EXCHANGE PRIVILEGE 11
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Reduced Sales Load 11
Requirements for Exchange 11
Tax Consequences 12
Making an Exchange 12
TAX STATUS 12
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The Fund's Tax Status 12
TOTAL RETURN 12
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YIELD 12
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TAX-EQUIVALENT YIELD 13
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Tax-Equivalency Table 13
PERFORMANCE COMPARISONS 14
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APPENDIX 15
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GENERAL INFORMATION ABOUT THE FUND
- --------------------------------------------------------------------------------
The Fund is a portfolio of Municipal Securities Income Trust (the "Trust"). The
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. Shares of the Fund are presently offered in one class known as Fortress
Shares ("Shares").
INVESTMENT OBJECTIVE AND POLICIES
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The Fund's investment objective is to provide current income which is exempt
from federal regular income tax and personal income taxes imposed by the state
of California and California municipalities. The investment objective cannot be
changed without approval of shareholders.
ACCEPTABLE INVESTMENTS
The Fund invests primarily in California municipal securities.
CHARACTERISTICS
The California municipal securities in which the Fund invests have the
characteristics set forth in the prospectus. If ratings made by Moody's
Investors Service, Inc., Standard & Poor's Ratings Group or Fitch's
Investors Service Inc. 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 California municipal securities include:
- 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;
- municipal notes and tax-exempt commercial paper;
- serial bonds;
- tax anticipation notes sold to finance working capital needs of
municipalities in anticipation of receiving taxes;
- bond anticipation notes sold in anticipation of the issuance of
long-term bonds;
- pre-refunded municipal bonds whose timely payment of interest and
principal is ensured by an escrow of U.S. government obligations; and
- 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.
In determining the liquidity of municipal lease securities, the
investment adviser, under the authority delegated by the Trustees, will
base its determination on the following factors:
- whether the lease can be terminated by the lessee:
-the potential recovery, if any, from a sale of the leased property upon
termination of the lease;
-the lessee's general credit strength (e.g., its debt, administrative,
economic and financial characteristics and prospects);
-the likelihood that the lessee will discontinue appropriating funding
for the leased property because the property is no longer deemed
essential to its operations (e.g., the potential for an "event of non-
appropriation");
-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.
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
investment adviser to be creditworthy pursuant to guidelines established
by the Trustees.
From time to time, such as when suitable California municipal bonds 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
California municipal bonds and thereby reduce the Fund's yield.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements. This
transaction is similar to borrowing cash. In a reverse repurchase
agreement the Fund transfers possession of a portfolio instrument to
another person, such as a financial institution, broker, or dealer, in
return for a percentage of the instrument's market value in cash, and
agrees that on a stipulated date in the future the Fund will repurchase
the portfolio instrument by remitting the original consideration plus
interest at an agreed upon rate. The use of reverse repurchase agreements
may enable the Fund to avoid selling portfolio instruments at a time when
a sale may be deemed to be disadvantageous, but the ability to enter into
reverse repurchase agreements does not ensure that the Fund will be able
to avoid selling portfolio instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund,
in a dollar amount sufficient to make payment for the obligations to be
purchased, are segregated on the Fund's records at the trade date. These
assets are marked to market daily and are maintained until the
transaction is settled.
- --------------------------------------------------------------------------------
PORTFOLIO TURNOVER
The Fund may trade or dispose of portfolio securities as considered necessary to
meet its investment objective. For the fiscal year ended August 31, 1994 and for
the period from December 2, 1992 (date of initial public investment) to August
31, 1993, the Fund's portfolio turnover rate was 63% 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 although it may invest in
municipal bonds secured by real estate, including limited partnership
interests, or interests in real estate.
INVESTING IN COMMODITIES
The Fund will not buy or sell commodities, commodity contracts, or
commodities futures contracts.
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.
DEALING IN PUTS AND CALLS
The Fund will not buy or sell puts, calls, straddles, spreads, or any
combination of these.
CONCENTRATION OF INVESTMENTS
The Fund will not purchase securities if, as a result of such purchase,
25% or more of the value of its total assets would be invested in any one
industry or in industrial development bonds or other securities, the
interest upon which is paid from revenues of similar types of projects.
However, the Fund may invest as temporary investments more than 25% of
the value of its assets in cash or cash items, securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities, or
instruments secured by these money market instruments, 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 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 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 RESTRICTED SECURITIES
The Fund will not invest more than 10% of the value of its total assets
in securities subject to restrictions on resale under the Securities Act
of 1933.
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.
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.
For purposes of its policies and limitations, the Fund considers certificates of
deposit and demand and time deposits issued by a U.S. branch of a domestic bank
or savings and loan having capital, surplus, and undivided profits in excess of
$100,000,000 at the time of investment to be "cash items."
CALIFORNIA INVESTMENT RISKS
LIMITS ON TAXING AND SPENDING AUTHORITY
Developments in California which constrain the taxing and spending
authority of California governmental entities could adversely affect the
ability of such entities to meet their interest and/or principal payment
obligations on securities they have issued or will issue. The following
information constitutes only a brief summary and is not intended as a
complete description.
In 1978, a statewide referendum approved Proposition 13, an amendment to
the California Constitution limiting both the valuation of real property
for property tax purposes and the power of local taxing authorities to
increase real property tax revenues. To provide revenue to local
governments, legislation was enacted shortly thereafter providing for the
redistribution to local governments of the state's then existing surplus
in its General Fund, reallocation of revenues to local governments, and
assumption by the state of certain local government obligations. More
recent California legislation has, however, reduced state assistance
payments to local governments and reallocated a portion of such payments
to the state's General Fund. There can be no assurance that any
particular level of state aid to local governments will be maintained in
future years. The U.S. Supreme Court has accepted for review a case
challenging the constitutionality of certain provisions of Proposition
13. The outcome of such litigation could substantially impact local
property tax collections and the ability of state agencies, local
governments and districts to make future payments on outstanding debt
obligations.
In 1979, California voters again amended the California Constitution,
this time imposing an appropriations limit on the spending authority of
certain state and local government entities. The state's appropriations
limit is based on its 1978-1979 fiscal year authorizations to expend
proceeds of taxes and is adjusted annually to reflect changes in cost of
living and population and transfer of financial responsibility from one
governmental unit to another. If a California governmental entity raises
revenues beyond its appropriations limit, the excess must be returned to
the entity's taxpayers within the two subsequent fiscal years, generally
by a tax credit, refund, or temporary suspension of tax rates or fee
schedules. These spending limitations do not, however, apply to the debt
service on obligations existing or legally authorized as of January 1,
1979, or on bonded indebtedness thereafter approved by the voters.
In 1986, California voters approved an initiative statute known as
Proposition 62. This initiative (i) requires that any tax for general
governmental purposes imposed by local governments be approved by
resolution or ordinance adopted by a two-thirds vote of the governmental
entity's legislative body and by a majority vote
- --------------------------------------------------------------------------------
of the electorate of the governmental entity, (ii) requires that any
special tax (defined as taxes levied for other than general governmental
purposes) imposed by a local governmental entity be approved by a two-
thirds vote of the voters within that jurisdiction, (iii) restricts the
use of revenues from a special tax to the purposes or for the service for
which the special tax was imposed, (iv) prohibits the imposition of ad
valorem taxes on real property by local governmental entities except as
permitted by the Proposition 13 amendment, (v) prohibits the imposition
of transaction taxes and sales taxes on the sale of real property by
local governments, (vi) requires that any tax imposed by a local
government on or after August 1, 1985, be ratified by a majority vote of
the electorate within two years of the adoption of the initiative or be
terminated by November 15, 1988, (vii) requires that, in the event a
local government fails to comply with the provisions of this measure, a
reduction in the amount of property tax revenue allocated to such local
government occurs in an amount equal to the revenues received by such
entity attributable to the tax levied in violation of the initiative, and
(viii) permits these provisions to be amended exclusively by the voters
of the state of California.
In September 1988, the California Court of Appeals in City of Westminster
v. County of Orange held that Proposition 62 is unconstitutional to the
extent that it requires a general tax by a general law city, enacted on
or after August 1, 1985, and prior to the effective date of Proposition
62, to be subject to approval by a majority of voters. The Court held
that the California Constitution prohibits the imposition of a
requirement that local tax measures be submitted to the electorate by
either referendum or initiative. It is not possible to predict the impact
of this decision on charter cities, on special taxes or on new taxes
imposed after the effective date of Proposition 62.
In November 1988, California voters approved Proposition 98. This
initiative requires that (i) revenues in excess of amounts permitted to
be spent and which would otherwise be returned by revision of tax rates
or fee schedules, be transferred and allocated (up to a maximum of 4%) to
the State School Fund and be expended solely for purposes of
instructional improvement and accountability. No such transfer or
allocation of funds will be required if certain designated state
officials determine that annual student expenditures and class size meet
certain criteria as set forth in Proposition 98. Any funds allocated to
the State School Fund shall cause the appropriation limits to be annually
increased for any such allocation made in the prior year.
Proposition 98 also requires the state of California to provide a minimum
level of funding for public schools and community colleges. The
initiative permits the enactment of legislation, by a two-thirds vote, to
suspend the minimum funding requirement for one year.
The effect of these various constitutional and statutory changes upon the
ability of California municipal securities issuers to pay interest and
principal on their obligations remains unclear. Furthermore, other
measures affecting the taxing or spending authority of California or its
political subdivisions may be approved or enacted in the future.
RECENT ECONOMIC DEVELOPMENTS
California experienced strong growth in the 1980s reflecting strong
in-migration. The state has significant concentration in electronics,
aerospace and non-electrical equipment. Declines in the aerospace and
high technology sectors have been particularly severe. Unemployment at
May, 1994 stood at 8.1% versus 5.9% for the nation. In spite of these
concerns, California's economy is larger than most sovereign nations,
with per capita income levels significantly higher than national
averages.
Despite signs of an improving economy, California continues to struggle
with fiscal stress. The State's Fiscal 1995 Budget has not addressed
fundamental structural imbalances. Debt levels remain significantly above
other state levels. As a result of these concerns, Moody's, Standard &
Poor's, and Fitch downgraded the state's general obligation debt to an
"A1", "A", and "A" rating, respectively.
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. Reductions
in state revenues and spending may also adversely affect the ratings of
California's counties, municipalities, and other public financing
authorities.
MUNICIPAL SECURITIES INCOME TRUST MANAGEMENT
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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, AEEtna 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.
- --------------------------------------------------------------------------------
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
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, S177,907 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 Trustees between meetings of the
Board.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the outstanding Shares.
As of September 28, 1994, the following shareholders of record owned 5% or more
of the outstanding Shares of the Fund: Merrill Lynch Pierce Fenner & Smith,
Jacksonville, FL, owned approximately 572,772 Shares 38.28% and BHC Securities
Inc., Philadelphia, PA, owned approximately 76,508 Shares 5.11%.
THE FUNDS
"The Funds" and "Funds" mean the following investment companies: Arrow American
Leaders Fund, Inc.; Annuity Management Series; Automated Cash Management Trust;
Automated Government Money Trust; California Municipal Cash 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 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; 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; 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 Fund'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 Trust.
ADVISORY FEES
For its advisory services, the Adviser receives an annual investment advisory
fee as described in the prospectus. For the fiscal year ended August 31, 1994,
and for the period from December 2, 1992 (date of initial public investment) to
August 31, 1993, the Adviser earned advisory fees of $60,519 and $23,414,
respectively, 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 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
$176,127, none of which was waived. For the period from December 2, 1992 (date
of initial public investment) to August 31, 1993, Federated Administrative
Services, Inc., earned $39,577, 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 who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. The Adviser makes
decisions on portfolio transactions and selects brokers and dealers subject to
review by the Trustees. The Adviser may select brokers and dealers who offer
brokerage and research services. These services may be furnished directly to the
Fund or to the Adviser and may include:
- - advice as to the advisability of investing in securities;
- - security analysis and reports;
- --------------------------------------------------------------------------------
- - economic studies;
- - industry studies;
- - receipt of quotations for portfolio evaluations; and
- - similar services.
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.
PURCHASING FORTRESS SHARES
- --------------------------------------------------------------------------------
Except under certain circumstances described in the prospectus, Shares are sold
at their net asset value plus a sales load on days the New York Stock Exchange
is open for business. The procedure for purchasing Shares is explained in the
prospectus under "Investing in Fortress Shares."
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 year ended August 31, 1994, and for the period from December 2,
1992 (date of initial public investment) to August 31, 1993, payments in the
amount of $75,651 and $29,255, respectively, were made pursuant to the
Distribution Plan. In addition, for the fiscal year ended August 31, 1994,
payments in the amount of $17,986 were made pursuant to the Shareholder Services
Plan.
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 and Trust Company ("State Street Bank") acts
as the shareholder's agent in depositing checks and converting them to federal
funds.
PURCHASES BY SALES REPRESENTATIVES, FUND TRUSTEES, AND EMPLOYEES
Trustees, employees, and sales representatives of the Fund, Federated Advisers,
and Federated Securities Corp. or their affiliates, or any investment dealer who
has a sales agreement with Federated Securities Corp. and their spouses and
children under 21, may buy Shares at net asset value without a sales load.
Shares may also be sold without a sales load to trusts or pension or
profit-sharing plans for these persons. These sales are made with the
purchaser's written assurance that the purchase is for investment purposes and
that the securities will not be resold except through redemption by the Fund.
DETERMINING NET ASSET VALUE
- --------------------------------------------------------------------------------
Net asset value generally changes each day. The days on which net asset value is
calculated for Shares are described in the prospectus.
VALUING MUNICIPAL BONDS
The Trustees use an independent pricing service to determine the market value of
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 FORTRESS SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at the next computed net asset value after the Fund
receives the redemption request. Redemption procedures and contingent deferred
sales charges are explained in the prospectus under "Redeeming Fortress 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
The Trust is obligated to redeem Shares solely in cash up to $250,000 or 1% of
the respective class'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 Fund 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.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
Fund shareholders are allowed to exchange all or some of their Shares for shares
in other Fortress Funds, California Municipal Cash Trust, or certain Federated
Funds which are sold with a sales load different from that of the Fund's or with
no sales load and which are advised by subsidiaries or affiliates of Federated
Investors. These exchanges are made at net asset value plus the difference
between the Fund's sales load already paid and any sales load of the fund into
which the Shares are to be exchanged, if higher.
REDUCED SALES LOAD
If a shareholder making such an exchange qualifies for a reduction or an
elimination of the sales load, the shareholder must notify Federated Securities
Corp. or Federated Services Company in writing.
REQUIREMENTS FOR EXCHANGE
Shareholders using this privilege must exchange Shares having a net asset value
which at least meets the minimum investment required for the fund into which the
exchange is being made. Before the exchange, the shareholder must receive a
prospectus of the fund for which the exchange is being made.
This privilege is available to shareholders residing in any state in which the
fund shares being acquired may be sold. Upon receipt of proper instructions and
required supporting documents, Shares submitted for exchange are redeemed and
the proceeds invested in shares of the other fund.
A shareholder may obtain further information on the exchange privilege and
prospectuses for Fortress Funds, California Municipal Cash Trust, or certain
Federated Funds by calling the Fund or his financial institution.
- --------------------------------------------------------------------------------
TAX CONSEQUENCES
Exercise of this exchange privilege is treated as a sale for federal income tax
purposes. Depending upon the circumstances, a short or long-term capital gain or
loss may be realized.
MAKING AN EXCHANGE
Instructions for exchanges for Fortress Funds, California Municipal Cash Trust,
or certain Federated Funds must be given in writing by the shareholder. Written
instructions may require a signature guarantee.
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 of 1986, as amended,
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:
- - derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;
- - derive less than 30% of its gross income from the sale of securities held less
than three months;
- - invest in securities within certain statutory limits; and
- - distribute to its shareholders at least 90% of its net income earned during
the year.
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;
- differentials in market values;
- new investment opportunities;
- changes in creditworthiness of an issuer; or
- 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 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, and for the period from December 2, 1992 (date of initial public
investment) to August 31, 1994, was (4.96%) and 8.21%, respectively.
The average annual total return for the Fund is the average compounded rate of
return for a given period that would equate a $1,000 initial investment to the
ending redeemable value of that investment. The ending redeemable value is
computed by multiplying the number of Shares owned at the end of the period by
the 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.
Any applicable contingent deferred sales charge is deducted from the ending
value of the investment based on the lesser of the original purchase price per
Share or the offering price per Share of Shares redeemed.
YIELD
- --------------------------------------------------------------------------------
The Fund's yield for the thirty-day period ended August 31, 1994 was 6.17%.
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 9.84%.
The tax-equivalent yield of the Fund is calculated similarly to the yield, but
is adjusted to reflect the taxable yield that the Fund would have had to earn to
equal its actual yield, assuming a 28% tax rate 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 the
income taxes imposed by the State of California. 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.
<TABLE>
<S> <C> <C> <C> <C> <C>
TAXABLE YIELD EQUIVALENT FOR 1994 STATE OF CALIFORNIA
- -------------------------------------------------------------------------------------------------------------
COMBINED FEDERAL AND STATE INCOME TAX BRACKET:
21.00% 37.30% 41.00% 47.00% 50.60%
- -------------------------------------------------------------------------------------------------------------
Single Return: $1-22,750 $22,751-55,100 $55,101-115,000 $115,001-250,000 Over $250,000
- -------------------------------------------------------------------------------------------------------------
TAX-EXEMPT YIELD TAXABLE YIELD EQUIVALENT**
- -------------------------------------------------------------------------------------------------------------
1.50% 1.90% 2.39% 2.54% 2.83% 3.04%
2.00% 2.53% 3.19% 3.39% 3.77% 4.05%
2.50% 3.16% 3.99% 4.24% 4.72% 5.06%
3.00% 3.80% 4.78% 5.08% 5.66% 6.07%
3.50% 4.43% 5.58% 5.93% 6.60% 7.09%
4.00% 5.06% 6.38% 6.78% 7.55% 8.10%
4.50% 5.70% 7.18% 7.63% 8.49% 9.11%
5.00% 6.33% 7.97% 8.47% 9.43% 10.12%
5.50% 6.96% 8.77% 9.32% 10.38% 11.13%
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
TAXABLE YIELD EQUIVALENT FOR 1994 STATE OF CALIFORNIA
- ---------------------------------------------------------------------------------------------------------------------------
COMBINED FEDERAL AND STATE INCOME TAX BRACKET:
21.00% 37.30% 40.30% 46.00% 49.60%
- ---------------------------------------------------------------------------------------------------------------------------
Joint Return: $1-$38,000 $38,001-$91,850 $91,851-$140,000 $140,001-$250,000 $251,001-$424,760
- ---------------------------------------------------------------------------------------------------------------------------
TAX-EXEMPT YIELD TAXABLE YIELD EQUIVALENT**
- ---------------------------------------------------------------------------------------------------------------------------
1.50% 1.90% 2.39% 2.51% 2.78% 2.98%
2.00% 2.53% 3.19% 3.35% 3.70% 3.97%
2.50% 3.16% 3.99% 4.19% 4.63% 4.96%
3.00% 3.80% 4.78% 5.03% 5.56% 5.95%
3.50% 4.43% 5.58% 5.86% 6.48% 6.94%
4.00% 5.06% 6.38% 6.70% 7.41% 7.94%
4.50% 5.70% 7.18% 7.54% 8.33% 8.93%
5.00% 6.33% 7.97% 8.38% 9.26% 9.92%
5.50% 6.96% 8.77% 9.21% 10.19% 10.91%
<CAPTION>
<S> <C>
- -------------------------------------
50.60%
- -----------------------------------------------------
Joint Return: Over-$424,760
- ---------------------------------------------------------------------
TAX-EXEMPT YIELD
- -------------------------------------------------------------------------------------
1.50% 3.04%
2.00% 4.05%
2.50% 5.06%
3.00% 6.07%
3.50% 7.09%
4.00% 8.10%
4.50% 9.11%
5.00% 10.12%
5.50% 11.13%
</TABLE>
The chart above is for illustrative purposes only. It is not an indicator of
past or future performance of the Fund.
* Some portion of the Fund's income may be subject to the federal alternative
minimum tax and state and local taxes.
** The maximum marginal tax rate for each bracket was used in calculating the
taxable yield equivalent. Furthermore, additional state and local taxes paid
on comparable taxable investments were not used to increase federal
deductions.
PERFORMANCE COMPARISONS
- --------------------------------------------------------------------------------
The performance of Shares depends upon such variables as:
- - portfolio quality;
- - average portfolio maturity;
- - type of instruments in which the portfolio is invested;
- - changes in interest rates and market value of portfolio securities;
- - changes in the Fund's expenses; and
- - various other factors.
The Fund's performance fluctuates on a daily basis largely because net earnings
and offering price per share fluctuate daily. Both net earnings and offering
price per share are factors in the computation of yield and total return 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 compute offering price. The financial
publications and/or indices which the Fund uses in advertising may include:
- - LEHMAN BROTHERS REVENUE BOND INDEX is a total return performance benchmark for
the long-term, investment grade, revenue bond market. Returns and attributes
for the index are calculated semi-monthly.
- - LIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes the
reinvestment of all capital gains distributions and income dividends and takes
into account any change in net asset value over a specific period of time.
From time to time, the Fund will quote its Lipper ranking in the "general
municipal bond funds" category in advertising and sales literature.
- - MORNINGSTAR, INC., an independent rating service, is the publisher of the
bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000
NASDAQ-listed mutual funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and ratings are effective for two
weeks.
Advertisements and other sales literature for the Fund may quote total returns
which are calculated on non-standardized base periods. 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.
Advertisements may quote performance information which does not reflect the
effect of the sales load.
APPENDIX
- --------------------------------------------------------------------------------
STANDARD AND POOR'S RATINGS GROUP MUNICIPAL BOND RATINGS
AAA--Debt rated "AAA" has the highest rating assigned by Standard & Poor's
Ratings Group ("S&P"). Capacity to pay interest and repay principal is extremely
strong.
AA--Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A--Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse 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
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 rating
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 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
(+) 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
broadbased 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 the
F-1+ and F-1 categories.
STANDARD AND POOR'S RATINGS GROUP COMMERCIAL PAPER RATINGS DEFINITIONS
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 structures with moderate reliance on debt
and ample asset protection; broad margins in earning coverage of fixed financial
charges and high internal cash generation; and 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.
625922109
2092918B (10/94)
CALIFORNIA MUNICIPAL INCOME FUND
FORTRESS SHARES
- --------------------------------------------------------------------------------
ANNUAL REPORT FOR FISCAL YEAR ENDED AUGUST 31, 1994
MANAGEMENT DISCUSSION AND ANALYSIS
---------------------------------------------------------------------------
The twelve months ended August 31, 1994, was difficult for investors
in long-term, fixed-income securities. Fueled by fears of the potential for
accelerating inflation driven by a steadily expanding economy, yields for
thirty-year U.S. Treasury bonds rose sharply from their cyclical low of
5.79% on October 15, 1993 to 6.38% on November 22, 1993. Yields then
remained in a relatively narrow trading range until February 4, 1994. The
Federal Reserve Board then effected the first of several rate hikes which
reignited inflation fears, sending yields soaring. The yield for
thirty-year U.S. Treasury bonds closed at 7.45% on August 31, 1994.
California Municipal Income Fund (the "Fund") was established in
November, 1992, to provide investors the ability to invest in a
non-diversified portfolio of investment grade, long-term California
municipal issues. The investment objective of the Fund is the provision of
current income which is exempt from federal regular income tax and the
personal income taxes imposed by the State of California and California
municipalities.*
When ascertaining the credit quality of issues for potential
investment by the Fund, the adviser focuses upon a variety of economic and
financial parameters. For general obligation issues, analysis is directed
towards demographic constitution, income distribution, property value
levels and growth, provision of governmental services, and debt
authorization. For revenue issues, examination is made of issuer cash flow
generation, sensitivity to product or service pricing, competition and
industry/sector make-up, debt structure, debt service coverage, financial
flexibility, and contingent liabilities, if any.
Issues purchased by the Fund during the last twelve months consisted
largely of: single-family mortgage revenue obligations; pollution control
revenue obligations; and hospital revenue obligations.
For the twelve months ending August 31, 1994, an investor in the Fund
experienced a total return of (3.04%).** This performance was comprised of
5.29% income and reinvestment return (net of Fund expenses) and of (8.33%)
depreciation in the net asset value per share of the Fund. Past performance
is neither indicative nor predictive of future investment performance.
* Income may be subject to the federal alternative minimum tax.
** Based on net asset value, which does not reflect the sales load or the
contingent deferred sales charge, if applicable. Performance quoted
represents past performance. Investment return and principal value will
fluctuate, so that an investor's shares, when redeemed, may be worth
more or less than their original cost.
CALIFORNIA MUNICIPAL INCOME FUND
FORTRESS SHARES
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN CALIFORNIA MUNICIPAL INCOME FUND (FORTRESS SHARES)
The graph below illustrates the hypothetical investment of $10,000 in the
California Municipal Income Fund (the "Fund") from December 2, 1992 (start of
performance) to August 31, 1994 compared to the Lehman Brothers Revenue Bond
Index (LBRB).+
Graphic representation "A5" omitted. See Appendix.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN FOR THE PERIOD ENDED
AUGUST 31, 1994
<C> <C>
1 Year......................................................... (4.96)%
Start of Performance (12/02/92)................................. 4.63%
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO, WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF, OR
GUARANTEED BY, ANY BANK AND ARE NOT FEDERALLY INSURED.
THIS REPORT MUST BE PRECEDED OR ACCOMPANIED BY THE FUND'S PROSPECTUS DATED
OCTOBER 31, 1994, AND, TOGETHER WITH FINANCIAL STATEMENTS CONTAINED THEREIN,
CONSTITUTES THE FUND'S ANNUAL REPORT.
* Represents a hypothetical investment of $9,900 in the Fund after deducting
the maximum sales load of 1.00% ($10,000 investment minus $100 sales load =
$9,900). The Fund's performance assumes the reinvestment of all dividends and
distributions. The LBRB has been adjusted to reflect reinvestment of
dividends on securities in the index.
** The ending value of the Fund reflects a contingent deferred sales charge of
1.00% on any redemption less than 4 years from the purchase date.
+ The LBRB is not adjusted to reflect sales loads, expenses, or other fees that
the Securities and Exchange Commission requires to be reflected in the Fund's
performance.
FEDERATED SECURITIES CORP.
(LOGO)
- --------------------------------------------------------------------------------
Distributor
625922109
G00574-05 (10/94)
- --------------------------------------------------------------------------------
NEW YORK MUNICIPAL INCOME FUND
(A PORTFOLIO OF MUNICIPAL SECURITIES INCOME TRUST)
FORTRESS SHARES
PROSPECTUS
The Fortress Shares of New York Municipal Income Fund (the "Fund")
offered by this prospectus 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 York and New York municipalities. The Fund invests
primarily in a portfolio of New York municipal securities.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS
OF ANY BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE
SHARES INVOLVES INVESTMENT RISKS INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
This prospectus contains the information you should read and know
before you invest in Fortress Shares. Keep this prospectus for future
reference.
The Fund has also filed a Statement of Additional Information for
Fortress Shares dated October 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 to make inquiries about the Fund, contact your
financial institution.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Prospectus dated October 31, 1994
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
SUMMARY OF FUND EXPENSES 1
- --------------------------------------------
FINANCIAL HIGHLIGHTS 2
- --------------------------------------------
GENERAL INFORMATION 3
- --------------------------------------------
FORTRESS INVESTMENT PROGRAM 3
- --------------------------------------------
INVESTMENT INFORMATION 4
- --------------------------------------------
Investment Objective 4
Investment Policies 4
New York Municipal Securities 7
Investment Risks 7
Non-Diversification 7
Investment Limitations 8
NET ASSET VALUE 8
- --------------------------------------------
INVESTING IN FORTRESS SHARES 8
- --------------------------------------------
Share Purchases 8
Minimum Investment Required 9
What Shares Cost 9
Eliminating the Sales Load 10
Systematic Investment Program 11
Exchange Privilege 11
Certificates and Confirmations 12
Dividends and Distributions 12
REDEEMING FORTRESS SHARES 13
- --------------------------------------------
Through a Financial Institution 13
Directly By Mail 13
Contingent Deferred Sales Charge 14
Systematic Withdrawal Program 15
Accounts with Low Balances 15
MUNICIPAL SECURITIES INCOME TRUST
INFORMATION 16
- --------------------------------------------
Management of Municipal Securities
Income Trust 16
Distribution of Fortress Shares 17
Administration of the Fund 18
SHAREHOLDER INFORMATION 19
- --------------------------------------------
Voting Rights 19
Massachusetts Partnership Law 19
TAX INFORMATION 19
- --------------------------------------------
Federal Income Tax 19
New York Taxes 20
Other State and Local Taxes 21
PERFORMANCE INFORMATION 21
- --------------------------------------------
FINANCIAL STATEMENTS 22
- --------------------------------------------
INDEPENDENT AUDITORS' REPORT 32
- --------------------------------------------
ADDRESSES 33
- --------------------------------------------
</TABLE>
I
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FORTRESS SHARES
SHAREHOLDER TRANSACTION EXPENSES
<S> <C> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)............................................................. 1.00%
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)....................................... 1.00%
Redemption Fee (as a percentage of amount redeemed, if applicable)................................ None
Exchange Fee...................................................................................... None
<CAPTION>
ANNUAL FORTRESS SHARES OPERATING EXPENSES
(As a percentage of average net assets)
<S> <C> <C>
Management Fee (after waiver) (2)................................................................. 0.00%
12b-1 Fee (after waiver) (3)...................................................................... 0.27%
Total Other Expenses (after expense reimbursement)................................................ 0.73%
Shareholder Services Fee (4)....................................................... 0.23%
Total Fortress Shares Operating Expenses (5).............................................. 1.00%
<FN>
(1) The contingent deferred sales charge is 1.00% of the lesser of the original
purchase price or the net asset value of shares redeemed within four years
of their purchase date. For a more complete description see "Contingent
Deferred Sales Charge."
(2) The management fee has been reduced to reflect the 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 maximum 12b-1 fee is 0.50%.
(4) The maximum shareholder services fee is 0.25%.
(5) The Total Fortress Shares operating expenses in the table above are based
on expenses expected during the fiscal year ending August 31, 1995. The
total Fortress Shares operating expenses were 0.39% for the fiscal year
ended August 31, 1994, and would have been 2.46% absent the voluntary
waiver of the management fee, waiver of a portion of the 12b-1 fee, and
reimbursement of certain other operating expenses.
</TABLE>
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF FORTRESS SHARES OF THE FUND
WILL BEAR, EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE
VARIOUS COSTS AND EXPENSES, SEE "INVESTING IN FORTRESS SHARES" 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.
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end of
each time period............................................... $30 $53 $65 $131
You would pay the following expenses on the same investment,
assuming no redemption......................................... $20 $42 $65 $131
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
1
NEW YORK MUNICIPAL INCOME FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditor's report on page 32.
<TABLE>
<CAPTION>
YEAR ENDED
AUGUST 31,
-------------------------
1994 1993*
- ---------------------------------------------------------------------- ---------- -------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.92 $ 10.04
- ----------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------------------
Net investment income 0.57 0.44
- ----------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.82) 0.88
- ---------------------------------------------------------------------- ---------- -------------
Total from investment operations (0.25) 1.32
- ----------------------------------------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------------------------------------
Dividends to shareholders from net investment income (0.57) (0.44)
- ---------------------------------------------------------------------- ---------- -------------
NET ASSET VALUE, END OF PERIOD $ 10.10 $ 10.92
- ---------------------------------------------------------------------- ---------- -------------
---------- -------------
TOTAL RETURN** (2.31)% 13.38%
- ----------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------
Expenses 0.39% 0.25%(a)
- ----------------------------------------------------------------------
Net investment income 5.49% 5.53%(a)
- ----------------------------------------------------------------------
Expense waiver/reimbursement (b) 2.07% 1.91%(a)
- ----------------------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------------------
Net assets, end of period (000 omitted) $ 23,152 $ 14,495
- ----------------------------------------------------------------------
Portfolio turnover rate 37% 0%
- ----------------------------------------------------------------------
<FN>
* Reflects operations for the period from December 2, 1992 (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) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
</TABLE>
(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 for the fiscal year ended August 31, 1994, which can be obtained
free of charge.
2
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 established one class of
shares, known as Fortress Shares ("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 York municipal securities. A minimum
initial investment of $1,500 is required. Subsequent investments must be in
amounts of at least $100. The Fund is not likely to be a suitable investment for
non-New York taxpayers or retirement plans since New York 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 are sold at net asset value
plus an applicable sales load and are redeemed at net asset value. However, a
contingent deferred sales charge ("CDSC") is imposed on certain Shares, other
than Shares purchased through reinvestment of dividends, which are redeemed
within four years of their purchase dates. Fund assets may be used in connection
with the distribution of Shares.
FORTRESS INVESTMENT PROGRAM
- --------------------------------------------------------------------------------
This class of shares is a member of a family of funds, collectively known as the
Fortress Investment Program. The other funds in the Program are:
- American Leaders Fund, Inc. (Fortress Shares only), providing growth of
capital and income through high-quality stocks;
- California Municipal Income Fund (Fortress Shares only), providing current
income exempt from federal regular income tax and California personal
income taxes;
- Fortress Adjustable Rate U.S. Government Fund, Inc., providing current
income consistent with lower volatility of principal through a diversified
portfolio of adjustable and floating rate mortgage securities which are
issued or guaranteed by the U.S. government, its agencies or
instrumentalities;
- Fortress Bond Fund, providing current income primarily through
high-quality corporate debt;
- Fortress Municipal Income Fund, Inc., providing a high level of current
income generally exempt from the federal regular income tax by investing
primarily in a diversified portfolio of municipal bonds;
- Fortress Utility Fund, Inc., providing high current income and moderate
capital appreciation primarily through equity and debt securities of
utility companies;
3
- Government Income Securities, Inc., providing current income through
long-term U.S. government securities;
- Liberty Equity Income Fund, Inc. (Fortress Shares only), providing above
average income and capital appreciation through income producing equity
securities;
- Limited Term Fund (Fortress Shares only), providing a high level of
current income consistent with minimum fluctuation in principal value;
- Limited Term Municipal Fund (Fortress Shares only), providing a high level
of current income which is exempt from federal regular income tax
consistent with the preservation of capital;
- Money Market Management, Inc., providing current income consistent with
stability of principal through high-quality money market instruments;
- Ohio Municipal Income Fund (Fortress Shares only), providing current
income exempt from federal regular income tax and the personal income
taxes imposed by the state of Ohio and Ohio municipalities; and
- World Utility Fund, providing total return by investing primarily in
securities issued by domestic and foreign companies in the utilities
industry.
Each of the funds may also invest in certain other types of securities as
described in each fund's prospectus.
The Fortress Investment Program provides flexibility and diversification for an
investor's long-term investment planning. It enables an investor to meet the
challenges of changing market conditions by offering convenient exchange
privileges which give access to various investment vehicles, and by providing
the investment services of a proven, professional investment adviser.
INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide current income 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 York and New York 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 shareholders. Income
distributed by the Fund may not necessarily be exempt from state or municipal
taxes in states other than New York.
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 York and New
4
York municipalities. At least 65% of the value of the Fund's total assets will
be invested in obligations issued by or on behalf of the state of New York, its
political subdivisions, or agencies. Unless indicated otherwise, 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 securities in which the Fund invests include:
- obligations issued by or on behalf of the state of New York, 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 York and New York municipalities.
The prices of fixed income securities fluctuate inversely to the direction of
interest rates.
CHARACTERISTICS. The New York municipal securities which the Fund buys are
investment grade bonds rated 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") 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. In
certain cases the Fund's adviser may choose bonds which are unrated if it judges
the bonds to have the same characteristics as the investment grade bonds
described above. If a bond is rated below investment grade according to the
characteristics set forth here after the Fund has purchased it, the Fund is not
required to drop the bond from the portfolio, but will consider appropriate
action. 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 York 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 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 York 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,
5
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. 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. In the
event of failure of appropriation, unless the participation interests are credit
enhanced, it is unlikely that the participants would be able to obtain an
acceptable substitute source of payment.
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 upon 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 these transactions may cause the
Fund to miss a price or yield considered to be advantageous. Settlement dates
may be a month or more after entering into these transactions, and the market
values of the securities purchased may vary from the purchase prices.
Accordingly, the Fund may pay more/less than the market value of the securities
on the settlement date.
The Fund may dispose of a commitment prior to settlement if the adviser deems it
appropriate to do so. In addition, the Fund may enter 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.
TEMPORARY INVESTMENTS. Under normal circumstances, the Fund invests its assets
so that at least 80% of its annual interest income is exempt from federal
regular income tax and the personal income taxes imposed by the state of New
York and New York municipalities. This policy cannot change without shareholder
approval. However, from time to time, when the investment adviser determines
that market conditions call for a temporary defensive posture, the Fund may
invest in short-term non-New York municipal tax-exempt obligations 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
6
described under "Acceptable Investments--Characteristics" (if rated) or (if
unrated) those which the investment adviser judges to have the same
characteristics as such investment grade securities.
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 York or New York
municipalities.
NEW YORK MUNICIPAL SECURITIES
New York 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.
New York municipal securities include industrial development bonds 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.
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. Interest on and principal of revenue bonds, however, 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.
INVESTMENT RISKS
Yields on New York 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 or city of
New York 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 York 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 York municipal securities which meet the Fund's
quality standards may not be possible if the state and city of New York do not
maintain their current credit ratings.
A further discussion of the risks of a portfolio which invests largely in New
York 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 would exist 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
7
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 of
1986, as amended (the "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 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 FORTRESS SHARES
- --------------------------------------------------------------------------------
SHARE PURCHASES
Shares are sold on days on which the New York Stock Exchange is open. Shares may
be purchased through an investment dealer who has a sales agreement with the
distributor, Federated Securities Corp. 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.
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. (Eastern time) and
must be transmitted by the broker to the Fund before 5:00 P.M. (Eastern time) in
order for Shares to be purchased at that day's price. Purchase orders through
other financial institutions must be received
8
by the financial institution and transmitted to the Fund before 4:00 P.M.
(Eastern time) in order for Shares to be purchased at that day's price. It is
the financial institution's responsibility to transmit orders promptly.
The financial institution which maintains investor accounts with the Fund must
do so on a fully disclosed basis unless it accounts for share ownership periods
used in calculating the CDSC (see "Contingent Deferred Sales Charge"). In
addition, advance payments made to financial institutions may be subject to
reclaim by the distributor for accounts transferred to financial institutions
which do not maintain investor accounts on a fully disclosed basis and do not
account for share ownership periods (see "Other Payments to Financial
Institutions").
DIRECTLY BY MAIL. To purchase Shares by mail directly from Federated Securities
Corp. once an account has been established:
- complete and sign the new account form available from the Fund;
- enclose a check made payable to New York Municipal Income
Fund--Fortress Shares; and
- send both to the Fund's transfer agent, Federated Services Company, c/o
State Street Bank and Trust Company ("State Street Bank"), P.O. Box
8604, Boston, MA 02266-8604.
Purchases by mail are considered received after payment by check is converted by
the transfer agent's bank, State Street Bank into federal funds. This is
generally the next business day after State Street Bank receives the check.
DIRECTLY BY WIRE. To purchase Shares directly from Federated Securities Corp.
by Federal Reserve Wire, call the Fund. All information needed will be taken
over the telephone, and the order is considered received when 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.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received, plus a sales load of 1% of the offering price (which is 1.01% of the
net amount invested). Further, there is no sales load for purchases of $1
million or more. In addition, no sales load is imposed for Shares purchased
through bank trust departments or investment advisers registered under the
Investment Advisers Act of 1940 purchasing on behalf of their clients, or by
sales representatives, Trustees, and employees of the Fund, Federated Advisers,
and Federated Securities Corp., or their affiliates, or any investment dealer
who has a sales agreement with Federated Securities Corp., their spouses and
children under age 21, or any trusts or pension or profit-sharing plans for
these persons. Unaffiliated institutions through whom Shares are purchased may
charge fees for services provided which may be related to the ownership of Fund
Shares. This prospectus should, therefore, be read together with any agreement
between customer and institution with regard to services provided, the fees
charged for these services, and any restrictions and limitations imposed.
9
The net asset value is determined at 4:00 P.M. (Eastern 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; and (iii) the
following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
Under certain circumstances, described under "Redeeming Fortress Shares,"
shareholders may be charged a CDSC by the distributor at the time Shares are
redeemed.
DEALER CONCESSION. For sales of Shares, the distributor will normally offer to
pay dealers up to 100% of the sales load retained by it. Any portion of the
sales load which is not paid to a broker/dealer will be retained by the
distributor. However, from time to time, and at the sole discretion of the
distributor, all or part of that portion may be paid to a dealer.
The sales load for Shares sold other than through registered broker/dealers will
be retained by Federated Securities Corp. Federated Securities Corp. may pay
fees to banks out of the sales load in exchange for sales and/or administrative
services performed on behalf of the bank's customers in connection with the
initiation of customer accounts and purchases of Shares.
ELIMINATING THE SALES LOAD
The sales load can be eliminated on the purchase of Shares through:
- quantity discounts and accumulated purchases;
- signing a 13-month letter of intent;
- using the reinvestment privilege; or
- concurrent purchases.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES. There is no sales load for
purchases of $1 million or more. The Fund will combine purchases made on the
same day by the investor, his spouse, and his children under age 21 when it
calculates the sales load.
If an additional purchase of Shares is made, the Fund will consider the previous
purchases still invested in the Fund. For example, if a shareholder already owns
Shares having a current value at the public offering price of $900,000 and he
purchases $100,000 more at the current public offering price, there will be no
sales load on the additional purchase. The Fund will also combine purchases for
the purpose of reducing the CDSC imposed on some Share redemptions. For example,
if a shareholder already owns Shares having a current value at public offering
price of $1 million and purchases an additional $1 million at the current public
offering price, the applicable CDSC would be reduced to .50% of those additional
Shares. For more information on the levels of CDSCs and holding periods, see the
section entitled "Contingent Deferred Sales Charge."
To receive the sales load elimination and/or the CDSC reduction, Federated
Securities Corp. must be notified by the shareholder in writing or by their
financial institution at the time the purchase is made that Shares are already
owned or that purchases are being combined. The Fund will eliminate the sales
load and/or reduce the CDSC after it confirms the purchases.
10
LETTER OF INTENT. If a shareholder intends to purchase at least $1 million of
Shares over the next 13 months, the sales load may be eliminated by signing a
letter of intent to that effect. This letter of intent includes a provision for
a sales load elimination depending on the amount actually purchased within the
13-month period and a provision for the Fund's custodian to hold 1.00% of the
total amount intended to be purchased in escrow (in Shares) until such purchase
is completed.
The 1.00% held in escrow will be applied to the shareholder's account at the end
of the 13-month period unless the amount specified in the letter of intent,
which must be $1 million or more of Shares, is not purchased. In this event, an
appropriate number of escrowed Shares may be redeemed in order to realize the
1.00% sales load.
This letter of intent also includes a provision for reductions in the CDSC and
holding period depending on the amount actually purchased within the 13 month
period. For more information on the various levels of CDSCs and holding periods,
see the section entitled "Contingent Deferred Sales Charge."
This letter of intent will not obligate the shareholder to purchase Shares. This
letter may be dated as of a prior date to include any purchases made within the
past 90 days purchases within the prior 90 days may be used to fulfill the
requirements of the letter of intent; however, the sales load on prior purchases
will not be adjusted to reflect a lower sales load.
REINVESTMENT PRIVILEGE. If Shares have been redeemed, the shareholder has a
one-time right, within 120 days, to reinvest the redemption proceeds at the
next-determined net asset value without any sales load. Federated Securities
Corp. must be notified by the shareholder in writing or by his financial
institution of the reinvestment in order to receive this elimination of the
sales load. If the shareholder redeems his Shares, there may be tax
consequences.
CONCURRENT PURCHASES. For purposes of qualifying for a sales load elimination,
a shareholder has the privilege of combining concurrent purchases of two or more
funds in the Fortress Investment Program, the purchase prices of which include a
sales load. For example, if a shareholder concurrently invested $400,000 in one
of the other Fortress Funds and $600,000 in Shares, the sales load would be
eliminated. To receive this sales load elimination, Federated Securities Corp.
must be notified by the shareholder in writing or by his financial institution
at the time the concurrent purchases are made. The Fund will eliminate the sales
load after it confirms the purchases.
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their investment on
a regular basis. Under this program, funds may be automatically withdrawn
periodically from the shareholder's checking account and invested in Shares at
the net asset value next determined after an order is received by Federated
Services Company, plus the 1% sales load for purchases under $1 million. A
shareholder may apply for participation in this program through Federated
Securities Corp. or his financial institution.
EXCHANGE PRIVILEGE
Shares in New York Municipal Cash Trust or in other Fortress Funds may be
exchanged for Shares at net asset value without a sales load (if previously
paid) or a CDSC. The exchange privilege is available to shareholders residing in
any state in which the shares being acquired may be legally sold.
11
Shares in certain Federated Funds which are advised by subsidiaries or
affiliates of Federated Investors may also be exchanged for Shares at net asset
value. With the exception of exchanges into New York Municipal Cash Trust and
other Fortress Funds, such exchanges will be subject to a CDSC and possibly a
sales load.
Shareholders using this privilege must exchange shares having a net asset value
which at least meets the minimum investment required for the fund into which the
exchange is being made. 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. Further information on these
exchange privileges is available by calling Federated Securities Corp. or the
shareholder's financial institution.
Before a financial institution may request exchange by telephone on behalf of a
shareholder, an authorization form permitting the Fund to accept exchange by
telephone must first be completed. Telephone exchange instructions may be
recorded. If reasonable procedures are not followed by the Fund, it may be
liable for losses due to unauthorized or fraudulent telephone instructions.
Exercise of the exchange privilege is treated as a sale for federal income tax
purposes. Depending on the circumstances, a short-term or long-term capital gain
or loss may be realized. Before making an exchange, a shareholder must receive a
prospectus of the fund for which the exchange is being made.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Services Company maintains a share
account for each shareholder. Share certificates are not issued unless requested
on the application or by contacting the 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. 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 at net asset value without a sales load, 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 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 that proper written redemption
instructions are received by Federated Services Company.
12
REDEEMING FORTRESS SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at their net asset value, less any applicable CDSC, next
determined after Federated Services Company receives the redemption request.
Redemptions will be made on days on which the Fund computes its net asset value.
Redemption requests must be received in proper form and can be made through a
financial institution or directly from the Fund by written request.
THROUGH A FINANCIAL INSTITUTION
A shareholder may redeem Shares 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. (Eastern time) and
must be transmitted by the broker to the Fund before 5:00 P.M. (Eastern time) in
order for Shares to be redeemed at that day's net asset value. Redemption
requests through other financial institutions must be received by the financial
institution and transmitted to the Fund before 4:00 P.M. (Eastern time) in order
for Shares to be redeemed at that day's net asset value. The financial
institution is responsible for promptly submitting redemption requests and
providing proper written redemption instructions to the Fund. The financial
institution may charge customary fees and commissions for this service. If, at
any time, the Fund shall determine it necessary to terminate or modify this
method of redemption, shareholders will be promptly notified.
Before a financial institution may request redemption by telephone on behalf of
a shareholder, an authorization form permitting the Fund to accept redemption
requests by telephone must first be completed. 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 Federated
Services Company,
c/o 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, less any applicable CDSC, next determined
after the transfer agent 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.
13
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, which is administered by the Federal Deposit Insurance
Corporation ("FDIC");
- a member 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, which is administered by the
FDIC; or
- any other "eligible guarantor institution", as defined in the Securities
Exchange Act of 1934.
The Fund does not accept signatures guaranteed by a notary public.
The Fund and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Fund may elect in the future to
limit eligible signature guarantors to institutions that are members of a
signature guarantee program. The Fund and its transfer agent reserve the right
to amend these standards at any time without notice.
RECEIVING PAYMENT. A check for the proceeds is mailed within seven days after
receipt of proper written redemption instructions from a broker or from the
shareholder.
CONTINGENT DEFERRED SALES CHARGE
Shareholders redeeming Shares from their Fund accounts within certain time
periods of the purchase date of those Shares will be charged a CDSC by the
Fund's distributor of the lesser of the original price or the net asset value of
the Shares redeemed as follows:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
AMOUNT OF PURCHASE SHARES HELD SALES CHARGE
------------------------------------ ----------------- -------------------
<S> <C> <C>
Up to $1,999,999 less than 4 years 1%
$2,000,000 to $4,999,999 less than 2 years .50%
$5,000,000 or more less than 1 year .25%
</TABLE>
In instances in which Shares have been acquired in exchange for shares in other
Fortress Funds, (i) the purchase price is the price of the shares when
originally purchased and (ii) the time period during which the shares are held
will run from the date of the original purchase. The CDSC will not be imposed on
Shares acquired through the reinvestment of dividends or distributions of
long-term capital gains. In computing the amount of CDSC for accounts with
shares subject to a single holding period, if any, redemptions are deemed to
have occurred in the following order: (1) Shares acquired through the
reinvestment of dividends and long-term capital gains, (2) purchases of Shares
occurring
14
prior to the number of years necessary to satisfy the applicable holding period,
and (3) purchases of Shares occurring within the current holding period. For
accounts with Shares subject to multiple Share holding periods, the redemption
sequence will be determined first, with reinvested dividends and long-term
capital gains, and second, on a first-in, first-out basis.
The CDSC will not be imposed when a redemption results from a return from the
death or disability of the beneficial owner. CDSCs are not charged in connection
with exchanges of Shares for shares in New York Municipal Cash Trust or shares
in other Fortress Funds, or in connection with redemptions by the Fund of
accounts with low balances. Shares of the Fund originally purchased through a
bank trust department or investment adviser registered under the Investment
Advisers Act of 1940, as amended, are not subject to the CDSC.
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. Due to the fact that Shares are sold with a sales load, it is
not advisable for shareholders to be purchasing Shares while participating in
this program.
CDSCs are charged for Shares redeemed through this program within four years of
their purchase dates.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account and pay the proceeds to the shareholder if the
account balance falls below the required minimum value of $1,500. 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.
15
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 are 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. The Executive Committee of the Board of Trustees handles the
Trustees' responsibilities between meetings of the Board.
INVESTMENT ADVISER. Pursuant to an investment advisory contract with Municipal
Securities Income Trust (the "Adviser"), 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 modify or terminate this
voluntary waiver of expenses at any time at its sole discretion. The Adviser
can terminate this voluntary waiver or reimbursement 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 are
approximately $70 billion, including over $8 billion in municipal
investments. 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 Roberge has been the Fund's portfolio manager since November, 1992.
Mr. Roberge joined Federated Investors in 1990 and has been an Assistant
Vice President of the Fund's Adviser since
16
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.
DISTRIBUTION OF FORTRESS SHARES
Federated Securities Corp. is the principal 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 AND SHAREHOLDER SERVICES PLANS. Under a distribution plan adopted
in accordance with Investment Company Act Rule 12b-1 (the "Distribution Plan"),
the Fund may pay to the distributor an amount, computed at an annual rate of
0.50 of 1% of the average daily net asset value of Shares to finance any
activity which is principally intended to result in the sale of Shares subject
to the Distribution Plan. The distributor may select financial institutions such
as banks, fiduciaries, custodians for public funds, investment advisers, and
broker/dealers to provide sales support services as agents for their clients or
customers.
The Distribution 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 amount or may earn a profit from future payments made by the Fund
under the Distribution Plan.
In addition, the Trust has adopted a Shareholder Services Plan (the "Services
Plan") under which it may make payments up to 0.25 of 1% of the average daily
net asset value of Shares to obtain certain personal services for shareholders
and the maintenance of shareholder accounts ("shareholder services"). The Trust
has entered into a Shareholder Services Agreement with Federated Shareholder
Services, a subsidiary of Federated Investors, under which Federated Shareholder
Services will either perform shareholder services directly or will select
financial institutions to perform shareholder services. Financial institutions
will receive fees based upon Shares owned by their clients or customers. The
schedules of such fees and the basis upon which such fees will be paid will be
determined from time to time by the Trust and Federated Shareholder Services.
OTHER PAYMENTS TO FINANCIAL INSTITUTIONS. In addition, the distributor will pay
financial institutions, for distribution and/or administrative services, an
amount equal to 1.00% of the offering price of the Shares acquired by their
clients or customers on purchases up to $1,999,999, .50% of the offering price
on purchases of $2,000,000 to $4,999,999, and .25% of the offering price on
purchases of $5,000,000 or more. (This fee is in addition to the 1.00% sales
charge on purchases of less than $1 million.)
Furthermore, the distributor may offer to pay a fee from its own assets to
financial institutions as financial assistance for providing substantial
marketing and sales support. The support may include participating in sales,
educational and training seminars at recreational-type facilities, providing
sales literature, and engineering computer software programs that emphasize the
attributes of the Fund.
17
Such assistance will be predicated upon the amount of Shares the financial
institution sells or may sell and/or upon the type and nature of sales or
marketing support furnished by the financial institution. Any payments made by
the distributor may be reimbursed by the Adviser or its affiliates.
The Glass-Steagall Act prohibits a depository institution (such as a commercial
bank or a savings and loan association) from being an underwriter or distributor
of most securities. 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.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides administrative personnel and services (including
certain legal and financial reporting services) necessary to operate the Fund.
Federated Administrative Services provides these at an annual rate which relates
to the average aggregate daily net assets of all funds advised by subsidiaries
of Federated Investors ("Federated Funds") as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY NET ASSETS
ADMINISTRATIVE FEE OF THE FEDERATED FUNDS
-------------------- ------------------------------------
<C> <S>
0.150 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.100 of 1% on the next $250 million
0.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio 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, P.O. Box 8604, Boston,
Massachusetts 02266-8604, is custodian for the securities and cash of the Fund.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company, P.O.
Box 8604, Boston, Massachusetts 02266-8604, is transfer agent for the Shares of
the Fund and dividend disbursing agent for the Fund.
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.
18
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 each portfolio
in the Trust have equal voting rights except that in matters affecting only a
particular fund, only shares of that fund are entitled to vote. As of September
28, 1994, Merrill Lynch Pierce Fenner & Smith, Jacksonville, FL, owned 45.62% 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 of 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 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 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.
19
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.
The alternative minimum tax, up to 28% of alternative minimum taxable income for
individuals and 20% for corporations, applies when it exceeds the regular tax
for the taxable year. Alternative minimum taxable income is equal to the regular
taxable income of the taxpayer increased by certain "tax preference" items not
included in regular taxable income and reduced by only a portion of the
deductions allowed in the calculation of the regular tax.
The Tax Reform Act of 1986 treats interest on certain "private activity" bonds
issued after August 7, 1986, as a tax preference item for both individuals and
corporations. Unlike traditional governmental purpose municipal bonds, which
finance roads, schools, libraries, prisons, and other public facilities, private
activity bonds provide benefits to private parties. The Fund may purchase all
types of municipal bonds, including private activity bonds. Thus, should it
purchase any such bonds, a portion of the Fund's dividends may be treated as a
tax preference item.
In addition, in the case of a corporate shareholder, dividends of the Fund which
represent interest on municipal bonds 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" is based upon the concept of a corporation's
"earnings and profits." Since "earnings and profits" generally includes the full
amount of any Fund dividend, and alternative minimum taxable income does not
include the portion of the Fund's dividend attributable to municipal bonds which
are not private activity bonds, the difference will be included in the
calculation of the corporation's alternative minimum tax.
Dividends of the Fund representing net interest income earned on some temporary
investments and any realized net short-term gains are taxed as ordinary income.
These tax consequences apply whether dividends are received in cash or as
additional shares. Information on the tax status of dividends and distributions
is provided annually.
NEW YORK TAXES
Under existing New York laws, distributions made by the Fund will not be subject
to New York State or New York City personal income taxes to the extent that such
distributions qualify as "exempt-interest dividends" under the Code, and
represent interest income attributable to obligations of the State of New York
and its political subdivisions, as well as certain other obligations, the
interest on which is exempt from New York State and New York City personal
income taxes, such as, for example, certain obligations of the Commonwealth of
Puerto Rico. Conversely, to the extent that distributions made by the Fund are
derived from other types of obligations, such distributions will be subject to
New York State and New York City personal income taxes.
20
The Fund cannot predict in advance the exact portion of its dividends that will
be exempt from New York State and New York City personal income taxes. However,
the Fund will report to shareholders at least annually what percentage of the
dividends it actually paid is exempt from such taxes.
Dividends paid by the Fund are exempt from the New York City unincorporated
business tax to the extent that they are exempt from the New York City personal
income tax.
Dividends paid by the Fund are not excluded from net income in determining New
York State or New York City franchise taxes on corporations or financial
institutions.
OTHER STATE AND LOCAL TAXES
Income from the Fund is not necessarily free from regular state income taxes in
states other than New York 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 maximum sales load and
other similar non-recurring changes, such as the CDSC, 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.
21
NEW YORK MUNICIPAL INCOME FUND
PORTFOLIO OF INVESTMENTS
AUGUST 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- ---------- ------------------------------------------------------------ ------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--97.4%
- ------------------------------------------------------------------------
NEW YORK--92.9%
------------------------------------------------------------
$ 250,000 Albany, NY, Municipal Water Finance Authority, 5.50% Water
and Sewer Refunding Revenue Bonds (Series 1993A)/(FGIC
Insured)/(Original Issue Yield: 5.95%), 12/1/2022 Aaa $ 228,323
------------------------------------------------------------
500,000 New York City, NY, 5.625% UT GO Bonds (Fiscal 1994)/
(Original Issue Yield: 5.90%), 8/1/2011 A- 466,905
------------------------------------------------------------
1,000,000 New York City, NY, 5.75% UT GO Bonds (Fiscal 1994 Series
D)/(Original Issue Yield: 6.03%), 8/15/2013 A- 928,530
------------------------------------------------------------
1,985,000 New York City, NY, 6.00% UT GO Bonds (Original Issue Yield:
6.25%), 5/15/2021 A- 1,873,840
------------------------------------------------------------
500,000 New York City, NY, 6.00% UT GO Bonds (Series E)/(Original
Issue Yield: 6.25%), 5/15/2020 A- 473,630
------------------------------------------------------------
500,000 New York City, NY, 6.125% GO Bonds (Series H)/(Original
Issue Yield: 6.30%), 8/1/2011 A- 491,665
------------------------------------------------------------
500,000 New York City, NY, 6.75% UT GO Bonds (Fiscal 1993 Series
B)/(Original Issue Yield: 7.15%), 10/1/2015 Baa1 513,445
------------------------------------------------------------
750,000 New York City, NY, IDA, 6.90% Special Facility Revenue Bonds
(Series 1994)/(American Airlines, Inc.)/(Subject to AMT),
8/1/2024 Baa2 752,550
------------------------------------------------------------
500,000 New York City, NY, IDA, 7.00% Civil Facility Revenue Bonds
(College of Mt. Saint Vincent)/(Series 1993), 5/1/2008 NR 517,605
------------------------------------------------------------
500,000 New York City, NY, Municipal Water Finance Authority, 6.00%
Water and Sewer System Revenue Bonds (Original Issue Yield:
7.40%), 6/15/2019 A 483,070
------------------------------------------------------------
350,000 New York City, NY, Municipal Water Finance Authority, 6.375%
Revenue Bonds (Series B), 6/15/2022 A- 352,107
------------------------------------------------------------
400,000 New York State, 5.30% GO Refunding Bonds (Series 1993A)/
(Original Issue Yield: 5.50%), 3/15/2018 A 355,264
------------------------------------------------------------
</TABLE>
22
NEW YORK MUNICIPAL INCOME FUND
- ---------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- ---------- ------------------------------------------------------------ ------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- ------------------------------------------------------------------------
NEW YORK--CONTINUED
------------------------------------------------------------
$1,000,000 New York State, 5.50% Mortgage Agency Revenue Bonds (Series
32A)/(Subject to AMT), 10/1/2025 Aa $ 864,780
------------------------------------------------------------
3,975,000 New York State, 6.70% Mortgage Agency Revenue Bonds (Series
40A)/(Subject to AMT), 4/1/2025 Aa 4,016,300
------------------------------------------------------------
300,000 New York State, Dormitory Authority, 5.50% College and
University Refunding Revenue Bonds (University of
Rochester--Strong Memorial Hospital)/(Original Issue Yield:
5.96%), 7/1/2021 A+ 270,516
------------------------------------------------------------
250,000 New York State, Dormitory Authority, 5.75% College and
University Refunding Revenue Bonds (Series 1992)/(Columbia
University)/(Original Issue Yield: 6.129%), 7/1/2015 Aaa 241,447
------------------------------------------------------------
250,000 New York State, Dormitory Authority, 5.625% College and
University Refunding Revenue Bonds (Series 1993)/(Colgate
University)/(FGIC Insured)/(Original Issue Yield: 5.75%),
7/1/2023 Aaa 233,950
------------------------------------------------------------
350,000 New York State, Energy Research and Development Authority,
5.375% Facilities Revenue Refunding Bonds (Consolidated
Edison Company of New York)/(Subject to AMT), 9/15/2022 AA- 301,896
------------------------------------------------------------
500,000 New York State, Energy Research and Development Authority,
6.375% Facilities Revenue Refunding Bonds (Series
1992B)/(Consolidated Edison Company of New York)/ (Original
Issue Yield: 6.521%)/(Subject to AMT), 12/1/2027 Aa2 495,500
------------------------------------------------------------
1,000,000 New York State, Environmental Facilities Corp. Solid Waste,
Disposal, 5.70% Revenue Bonds (Series 1993)/(Occidential
Petroleum Corp.)/(Original IssueYield: 5.75%)/(Subject to
AMT), 9/1/2028 BBB 882,100
------------------------------------------------------------
1,000,000 New York State, Environmental Facilities Corp. 6.30% Water
Facilities Refunding Revenue Bonds (Series 1994A)/(Spring
Valley Water Company)/(AMBAC Insured)/(Subject to AMT),
8/1/2024 AAA 1,005,760
------------------------------------------------------------
</TABLE>
23
NEW YORK MUNICIPAL INCOME FUND
- ---------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- ---------- ------------------------------------------------------------ ------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- ------------------------------------------------------------------------
NEW YORK--CONTINUED
------------------------------------------------------------
$ 150,000 New York State, Local Government Assistance Corp. 5.50%
(Series C)/(Original Issue Yield: 5.70%), 4/1/2018 A $ 135,864
------------------------------------------------------------
400,000 New York State, Local Government Assistance Corp. 5.50%
(Series C)/(Original Issue Yield: 6.39%), 4/1/2022 A 358,836
------------------------------------------------------------
500,000 New York State, Local Government Assistance Corp. 6.25% GO
Bonds (Series 1992B)/(Original Issue Yield: 6.30%), 4/1/2021 A 501,395
------------------------------------------------------------
500,000 New York State, Mortgage Agency, 5.375% Revenue Bonds
(Series 30A)/(Subject to AMT), 10/1/2024 Aa 424,905
------------------------------------------------------------
250,000 New York State, Power Authority, 6.00% Revenue and General
Purposes Bonds (Series 1991Y)/(Original Issue Yield: 6.96%),
1/1/2020 Aa 246,452
------------------------------------------------------------
500,000 New York State, Throughway Authority, 5.75% Highway
Improvement Refunding Revenue Bonds (Series 1992)/ (Original
Issue Yield: 6.08%), 1/1/2019 A1 469,490
------------------------------------------------------------
1,000,000 New York, NY, 6.125% Revenue Bonds (Terminal One Group
Association)/(Original Issue Yield: 6.50%)/(Subject to AMT),
1/1/2024 A 959,860
------------------------------------------------------------
750,000 Niagara County, NY, Frontier Transporation Authority, 6.25%
Revenue Bonds (Greater Buffalo International Airport)/
(AMBAC Insured)/(Original Issue Yield: 6.536%)/(Subject to
AMT), 4/1/2024 AAA 753,015
------------------------------------------------------------
250,000 Niagara County, NY, Frontier Transporation Authority, 5.75%
GO Public Improvement Bonds (Series 1993)/(MBIA Insured)/
(Original Issue Yield: 5.90%), 8/15/2019 Aaa 239,465
------------------------------------------------------------
500,000 Port Authority of New York and New Jersey, 6.50% Refunding
Revenue Bonds (Series 76)/(Original Issue Yield:
6.782%)/(Subject to AMT), 11/1/2026 A1 507,175
------------------------------------------------------------
1,000,000 UFA Development Corp., NY 5.95% FHA Insured Mortgage Revenue
Bonds (Series 1993)/(Loretto-Utica Project), 7/1/2035 Aa 910,950
------------------------------------------------------------
</TABLE>
24
NEW YORK MUNICIPAL INCOME FUND
- ---------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- ---------- ------------------------------------------------------------ ------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- ------------------------------------------------------------------------
NEW YORK--CONTINUED
------------------------------------------------------------
$ 250,000 United Nations Development Corporation, NY, 6.00% Refunding
Revenue Bonds (Series 1992A)/(Original Issue Yield: 6.337%),
7/1/2012 A $ 246,478
------------------------------------------------------------ -----------
Total 21,503,068
------------------------------------------------------------ -----------
PUERTO RICO--4.5%
------------------------------------------------------------
500,000 Puerto Rico Electric Power Authority, 6.25% Refunding
Revenue Bonds (Series R), 7/1/2017 A- 499,285
------------------------------------------------------------
550,000 Puerto Rico Electric Power Authority, 6.375% Revenue Bonds
(Series T)/(Original Issue Yield: 6.58%), 7/1/2024 A- 555,720
------------------------------------------------------------ -----------
Total 1,055,005
------------------------------------------------------------ -----------
23,460,000 TOTAL LONG-TERM MUNICIPAL SECURITIES
(IDENTIFIED COST $23,196,825) $22,558,073+
------------------------------------------------------------ -----------
<FN>
* Please refer to the Appendix of the Statement of Additional Information
for an explanation of the credit ratings. Current credit ratings are
unaudited.
+ The cost of investments for federal tax purposes amounts to $23,196,825.
The net unrealized depreciation on a federal tax basis amounts to
$638,752, which is comprised of $186,735 appreciation and $825,487
depreciation at August 31, 1994.
Note: The categories of investments are shown as a percentage of net assets
($23,152,218) at August 31, 1994.
</TABLE>
<TABLE>
<S> <C>
The following abbreviations are used in this portfolio:
AMBAC --American Municipal Bond Assurance Corporation
AMT --Alternative Minimum Tax
FGIC --Financial Guaranty Insurance Company
FHA --Federal Housing Administration
GO --General Obligations
IDA --Industrial Development Authority
MBIA --Municipal Bond Investors Assurance
UT --Unlimited Tax
</TABLE>
(See Notes which are an integral part of the Financial Statements)
25
NEW YORK MUNICIPAL INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
- --------------------------------------------------------------------------------
Investments in securities, at value (identified and tax cost; $23,196,825) $22,558,073
- --------------------------------------------------------------------------------
Cash 319,432
- --------------------------------------------------------------------------------
Interest receivable 383,396
- --------------------------------------------------------------------------------
Receivable for Fund shares sold 24,672
- --------------------------------------------------------------------------------
Deferred expenses 5,329
- -------------------------------------------------------------------------------- -----------
Total assets 23,290,902
- --------------------------------------------------------------------------------
LIABILITIES:
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C>
Dividends payable $84,064
- ----------------------------------------------------------------------
Payable for Fund shares redeemed 27,586
- ----------------------------------------------------------------------
Accrued expenses and other liabilities 27,034
- ---------------------------------------------------------------------- -------
</TABLE>
<TABLE>
<S> <C>
Total liabilities 138,684
- -------------------------------------------------------------------------------- -----------
NET ASSETS for 2,292,521 shares of beneficial interest outstanding $23,152,218
- -------------------------------------------------------------------------------- -----------
NET ASSETS CONSIST OF:
- --------------------------------------------------------------------------------
Paid-in capital $24,273,015
- --------------------------------------------------------------------------------
Accumulated net realized gain (loss) on investments (482,045)
- --------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments (638,752)
- -------------------------------------------------------------------------------- -----------
Total Net Assets $23,152,218
- -------------------------------------------------------------------------------- -----------
NET ASSET VALUE per Share ($23,152,218 DIVIDED BY 2,292,521 shares of
beneficial interest outstanding) $ 10.10
- -------------------------------------------------------------------------------- -----------
OFFERING PRICE per Share (100/99 of $10.10)* $ 10.20
- -------------------------------------------------------------------------------- -----------
REDEMPTION PROCEEDS per Share (99/100 of $10.10)** $ 10.00
- -------------------------------------------------------------------------------- -----------
<FN>
* See "What Shares Cost" in the prospectus.
** See "Redeeming Shares" in the prospectus.
</TABLE>
(See Notes which are an integral part of the Financial Statements)
26
NEW YORK MUNICIPAL INCOME FUND
STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- -----------------------------------------------------------------------------------
Interest income $ 1,238,919
- -----------------------------------------------------------------------------------
EXPENSES:
- -----------------------------------------------------------------------
Investment advisory fee $ 84,319
- -----------------------------------------------------------------------
Administrative personnel and services fees 177,907
- -----------------------------------------------------------------------
Trustees' fees 1,190
- -----------------------------------------------------------------------
Custodian and portfolio accounting fees 60,751
- -----------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 20,999
- -----------------------------------------------------------------------
Fund share registration costs 19,936
- -----------------------------------------------------------------------
Shareholder services fee 9,029
- -----------------------------------------------------------------------
Distribution services fee 105,399
- -----------------------------------------------------------------------
Printing and postage 13,107
- -----------------------------------------------------------------------
Legal fees 4,109
- -----------------------------------------------------------------------
Auditing fees 16,115
- -----------------------------------------------------------------------
Insurance premiums 5,211
- -----------------------------------------------------------------------
Miscellaneous 559
- ----------------------------------------------------------------------- --------
Total expenses 518,631
- -----------------------------------------------------------------------
Deduct--
- ------------------------------------------------------------
Waiver of investment advisory fee $ 84,319
- ------------------------------------------------------------
Waiver of distribution services fee 61,717
- ------------------------------------------------------------
Reimbursement of other operating expenses by Adviser 290,750 436,786
- ------------------------------------------------------------ -------- --------
Net expenses 81,845
- ----------------------------------------------------------------------------------- -----------
Net investment income 1,157,074
- ----------------------------------------------------------------------------------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- -----------------------------------------------------------------------------------
Net realized gain (loss) on investments (identified cost basis) (482,045)
- -----------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments (1,327,995)
- ----------------------------------------------------------------------------------- -----------
Net realized and unrealized gain (loss) on investments (1,810,040)
- ----------------------------------------------------------------------------------- -----------
Change in net assets resulting from operations $ (652,966)
- ----------------------------------------------------------------------------------- -----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
27
NEW YORK MUNICIPAL INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
--------------------------
1994 1993*
----------- -----------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ---------------------------------------------------------------------------
OPERATIONS--
- ---------------------------------------------------------------------------
Net investment income $ 1,157,074 $ 349,935
- ---------------------------------------------------------------------------
Net realized gain (loss) on investments ($0 and $0, respectively, as
computed for federal income tax purposes) (482,045) --
- ---------------------------------------------------------------------------
Change in unrealized appreciation (depreciation) on investments (1,327,995) 689,243
- --------------------------------------------------------------------------- ----------- -----------
Change in net assets resulting from operations (652,966) 1,039,178
- --------------------------------------------------------------------------- ----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS--
- ---------------------------------------------------------------------------
Dividends to shareholders from net investment income (1,157,074) (349,935)
- --------------------------------------------------------------------------- ----------- -----------
FUND SHARE (PRINCIPAL) TRANSACTIONS--
- ---------------------------------------------------------------------------
Net proceeds from sale of shares 12,080,816 19,352,830
- ---------------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of dividends
declared 266,053 73,239
- ---------------------------------------------------------------------------
Cost of shares redeemed (1,879,694) (5,620,229)
- --------------------------------------------------------------------------- ----------- -----------
Change in net assets from Fund share transactions 10,467,175 13,805,840
- --------------------------------------------------------------------------- ----------- -----------
Change in net assets 8,657,135 14,495,083
- ---------------------------------------------------------------------------
NET ASSETS:
- ---------------------------------------------------------------------------
Beginning of period 14,495,083 --
- --------------------------------------------------------------------------- ----------- -----------
End of period $23,152,218 $14,495,083
- --------------------------------------------------------------------------- ----------- -----------
<FN>
*For the period from December 2, 1992 (date of initial public investment) to
August 31, 1993.
</TABLE>
(See Notes which are an integral part of the Financial Statements)
28
NEW YORK MUNICIPAL INCOME FUND
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1994
- --------------------------------------------------------------------------------
(1) ORGANIZATION
Municipal Securities Income Trust (the "Trust") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as an open-ended
management investment company. The Trust consists of ten, non-diversified
portfolios. The financial statements included herein present only those of New
York Municipal Income Fund (the "Fund"). The financial statements of the other
portfolios are presented separately. The assets of each portfolio are segregated
and a shareholder's interest is limited to the portfolio in which shares are
held.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
A. INVESTMENT VALUATIONS--Municipal bonds are valued by an independent pricing
service taking into consideration yield, liquidity, risk, credit, quality,
coupon, maturity, type of issue, and any other factors or market data it
deems relevant in determining valuations for normal institutional size
trading units of debt securities. The independent pricing service does not
rely exclusively on quoted prices. Short-term securities with remaining
maturities of sixty days or less may be stated at amortized cost, which
approximates value.
B. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and expenses
are accrued daily. Bond premium and discount, if applicable, are amortized
as required by the Internal Revenue Code, as amended (the "Code").
Distributions to shareholders are recorded on the ex-dividend date.
C. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its tax-exempt income.
Accordingly, no provisions for federal tax are necessary. Additionally, net
capital losses of $482,045 attributable to security transactions incurred
after October 31, 1993, are treated as arising on September 1, 1994, the
first day of the Funds next taxable year.
D. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when-issued
securities on the trade date and maintains security positions such that
sufficient liquid assets will be available to make payment for the
securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
E. CONCENTRATION OF RISK--Since the Fund invests a substantial portion of its
assets in issuers located in one state, it will be more susceptible to
factors adversely affecting issuers of that state than would be a comparable
general tax-exempt mutual fund. In order to reduce the credit risk
29
NEW YORK MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
associated with such factors, at August 31, 1994, 15.0% of the securities in
the portfolio of investments are backed by letters of credit or bond
insurance of various financial institutions and financial guaranty assurance
agencies. The value of investments insured by or supported (backed) by a
letter of credit for any one institution or agency did not exceed 7.8% of
total investments.
F. DEFERRED EXPENSES--The costs incurred by the Fund with respect to
registration of its shares in its first fiscal year, excluding the initial
expense of registering its shares, have been deferred and are being
amortized using the straight-line method not to exceed a period of five
years from the Fund's commencement date.
G. OTHER--Investment transactions are accounted for on the trade date.
(3) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-------------------------
1994 1993*
- ------------------------------------------------------------ ---------- ----------
<S> <C> <C>
Shares sold 1,122,810 1,866,527
- ------------------------------------------------------------
Shares issued to shareholders in payment of dividends
declared 25,601 6,903
- ------------------------------------------------------------
Shares redeemed (183,192) (546,128)
- ------------------------------------------------------------ ---------- ----------
Net change resulting from Fund share transactions 965,219 1,327,302
- ------------------------------------------------------------ ---------- ----------
<FN>
* For the period from December 2, 1992 (date of initial public investment) to
August 31, 1993.
</TABLE>
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
ADVISORY FEE--Federated Advisers, the Fund's investment adviser (the "Adviser"),
receives for its services 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 and reimburse certain operating expenses of the Fund.
The Adviser can modify or terminate this voluntary waiver and reimbursement at
any time at its sole discretion.
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS") provides the Fund
with administrative personnel and services. Prior to March 1, 1994, these
services were provided at approximate cost. Effective March 1, 1994, the FAS fee
is based on the level of average aggregate daily net assets of all funds advised
by subsidiaries of Federated Investors for the period. The administrative fee
received during the period of the Administrative Services Agreement shall be at
least $125,000 per portfolio and $30,000 per each additional class of shares.
DISTRIBUTION AND SHAREHOLDER SERVICES FEE--The Fund has adopted a Distribution
Plan (the "Plan") pursuant to Rule 12b-1 under the Act. Under the terms of the
Plan, the Fund will reimburse Federated
30
NEW YORK MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
Securities Corp. ("FSC"), the principal distributor, from the net assets of the
Fund to finance activities intended to result in the sale of the Fund's Fortress
Shares. The Plan provides that the Fund may incur distribution expenses up to
.50 of 1% of the average daily net assets of the Fortress Shares, annually, to
compensate FSC. The distributor may voluntarily choose to waive a portion of its
fee. The distributor can modify or terminate this voluntary waiver at any time
at its sole discretion.
Under the terms of a Shareholder Services Agreement with Federated Shareholder
Services ("FSS"), the Fund will pay FSS up to .25 of 1% of average net assets
for the Fund for the period. The fee is to obtain certain personal services for
shareholders and to maintain the shareholder accounts.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES--Federated Services Company
("FServ") serves as transfer agent and dividend disbursing agent for the Fund.
The FServ fee is based on the size, type and number of accounts and transactions
made by shareholders.
ORGANIZATIONAL EXPENSES--Organizational expenses of $24,367 and start-up
administrative services expenses of $54,637 were borne initially by the Adviser.
The Fund has agreed to reimburse the Adviser for the organizational expenses and
start-up administrative expenses during the five year period following November
24, 1992 (date the Fund first became effective). For the year ended August 31,
1994, the Fund paid $3,249 and $7,285, respectively, pursuant to this agreement.
INTERFUND TRANSACTIONS--During the year ended August 31, 1994, the Fund engaged
in purchase and sale transactions with other affiliated funds at current value
on the date of the transaction pursuant to Rule 17a-7 under the Act amounting to
$9,500,000 and $9,400,000, respectively.
Certain of the Officers and Trustees of the Fund are Officers and Directors or
Trustees of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
fiscal year ended August 31, 1994, were as follows:
<TABLE>
<S> <C>
PURCHASES $ 17,837,741
- -------------------------------------------------------------------- ------------
SALES $ 7,520,764
- -------------------------------------------------------------------- ------------
</TABLE>
31
INDEPENDENT AUDITOR'S REPORT
- ---------------------------------------------------------
To the Board of Trustees of MUNICIPAL SECURITIES INCOME TRUST
and Shareholders of NEW YORK MUNICIPAL INCOME FUND:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of New York Municipal Income Fund (a portfolio of
Municipal Securities Income Trust) as of August 31, 1994 and the related
statement of operations, the statement of changes in net assets, and the
financial highlights (see page 2 of the prospectus) for the year ended August
31, 1994, and for the period from December 2, 1992 (date of initial public
investment) to August 31, 1993. These financial statements and financial
highlights are the responsibility of the Trust's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
August 31, 1994 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of New York Municipal
Income Fund as of August 31, 1994, the results of its operations, the changes in
its net assets, and its financial highlights for the respective stated periods
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
October 7, 1994
32
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
New York Municipal Income Fund
Fortress Shares 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 Trust Company P.O. Box 8604
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
</TABLE>
33
- --------------------------------------------------------------------------------
NEW YORK MUNICIPAL
INCOME FUND
FORTRESS SHARES
PROSPECTUS
A Non-Diversified Portfolio of
Municipal Securities Income Trust,
An Open-End, Management
Investment Company
October 31, 1994
[LOGO]
Federated Securities Corp.
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
625922208
2092919A-FS (10/94)
(LOGO)
RECYCLED
PAPER
NEW YORK MUNICIPAL INCOME FUND
(A PORTFOLIO OF MUNICIPAL SECURITIES INCOME TRUST)
FORTRESS SHARES
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the
prospectus of Fortress Shares of New York Municipal Income Fund (the
"Fund") dated October 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 October 31, 1994
[LOGO]
Federated Securities Corp.
Distributor
A subsidiary of FEDERATED INVESTORS
TABLE OF CONTENTS
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<TABLE>
<S> <C>
GENERAL INFORMATION ABOUT THE FUND 1
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INVESTMENT OBJECTIVE AND POLICIES 1
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Acceptable Investments 1
When-Issued and Delayed Delivery
Transactions 2
Temporary Investments 2
Portfolio Turnover 3
INVESTMENT LIMITATIONS 3
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New York Investment Risks 5
MUNICIPAL SECURITIES INCOME TRUST MANAGEMENT 5
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Fund Ownership 8
The Funds 8
INVESTMENT ADVISORY SERVICES 9
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Adviser to the Fund 9
Advisory Fees 9
ADMINISTRATIVE SERVICES 9
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TRANSFER AGENT AND DIVIDEND DISBURSING AGENT 9
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BROKERAGE TRANSACTIONS 10
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PURCHASING FORTRESS SHARES 10
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Distribution and Shareholder Services Plans 10
Conversion to Federal Funds 10
Purchases by Sales Representatives, Fund
Trustees, and Employees 11
DETERMINING NET ASSET VALUE 11
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Valuing Municipal Bonds 11
Use of Amortized Cost 11
REDEEMING FORTRESS SHARES 11
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Redemption in Kind 11
EXCHANGE PRIVILEGE 11
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Reduced Sales Load 12
Requirements for Exchange 12
Tax Consequences 12
Making An Exchange 12
TAX STATUS 12
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The Fund's Tax Status 12
TOTAL RETURN 13
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YIELD 13
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TAX-EQUIVALENT YIELD 13
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Tax-Equivalency Table 14
PERFORMANCE COMPARISONS 14
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APPENDIX 16
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</TABLE>
I
GENERAL INFORMATION ABOUT THE FUND
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The Fund is a portfolio of Municipal Securities Income Trust (the "Trust"). The
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.
Shares of the Fund are presently offered in one class known as Fortress Shares
("Shares").
INVESTMENT OBJECTIVE AND POLICIES
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The Fund's investment objective is to provide current income which is exempt
from federal regular income tax and personal income taxes imposed by the State
of New York and New York municipalities. The investment objective cannot be
changed without approval of shareholders.
ACCEPTABLE INVESTMENTS
The Fund invests primarily in New York municipal securities.
CHARACTERISTICS
The New York municipal securities in which the Fund invests have the
characteristics set forth in the prospectus. If ratings made by Moody's
Investors Service, Inc., Standard & Poor's Ratings Group or 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 York municipal securities include:
- 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;
- municipal notes and tax-exempt commercial paper;
- serial bonds;
- tax anticipation notes sold to finance working capital needs of
municipalities in anticipation of receiving taxes;
- bond anticipation notes sold in anticipation of the issuance of
long-term bonds;
- pre-refunded municipal bonds whose timely payment of interest and
principal is ensured by an escrow of U.S. government obligations;
and
- 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.
1
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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 investment
adviser, under the authority delegated by the Trustees, will base its
determination on the following factors:
- whether the lease can be terminated by the lessee;
- the potential recovery, if any, from a sale of the leased property
upon termination of the lease;
- the lessee's general credit strength (e.g., its debt,
administrative, economic and financial characteristics and
prospects);
- the likelihood that the lessee will discontinue appropriating
funding for the leased property because the property is no longer
deemed essential to its operations (e.g., the potential for an
"event of non-appropriation");
- 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.
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 investment adviser to be
creditworthy pursuant to guidelines established by the Trustees.
2
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From time to time, such as when suitable New York municipal bonds 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
York municipal bonds and thereby reduce the Fund's yield.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements. This
transaction is similar to borrowing cash. In a reverse repurchase
agreement the Fund transfers possession of a portfolio instrument to
another person, such as a financial institution, broker, or dealer, in
return for a percentage of the instrument's market value in cash, and
agrees that on a stipulated date in the future the Fund will repurchase
the portfolio instrument by remitting the original consideration plus
interest at an agreed upon rate. The use of reverse repurchase agreements
may enable the Fund to avoid selling portfolio instruments at a time when
a sale may be deemed to be disadvantageous, but the ability to enter into
reverse repurchase agreements does not ensure that the Fund will be able
to avoid selling portfolio instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund,
in a dollar amount sufficient to make payment for the obligations to be
purchased, are segregated on the Fund's records at the trade date. These
assets are marked to market daily and are maintained until the transaction
is settled.
PORTFOLIO TURNOVER
The Fund 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 December 2, 1992 (date of initial public investment) to August 31, 1993,
the Fund's portfolio turnover rate was 37% 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.
3
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INVESTING IN COMMODITIES
The Fund will not buy or sell commodities, commodity contracts, or
commodities futures contracts.
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.
DEALING IN PUTS AND CALLS
The Fund will not buy or sell puts, calls, straddles, spreads, or any
combination of these.
CONCENTRATION OF INVESTMENTS
The Fund will not purchase securities if, as a result of such purchase,
25% or more of the value of its total assets would be invested in any one
industry or in industrial development bonds or other securities, the
interest upon which is paid from revenues of similar types of projects.
However, the Fund may invest as temporary investments more than 25% of the
value of its assets in cash or cash items, securities issued or guaranteed
by the U.S. government, its agencies or instrumentalities, or instruments
secured by these money market instruments, 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 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 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 RESTRICTED SECURITIES
The Fund will not invest more than 10% of the value of its total assets in
securities subject to restrictions on resale under the Securities Act of
1933.
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.
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.
For purposes of its policies and limitations, the Fund considers certificates of
deposit and demand and time deposits issued by a U.S. branch of a domestic bank
or savings and loan having capital, surplus, and undivided profits in excess of
$100,000,000 at the time of investment to be "cash items."
4
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NEW YORK INVESTMENT RISKS
The Fund invests in obligations of New York 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 York issuers and from other sources
believed to be accurate but should not be relied upon as a complete description
of all relevant information.
The State of New York has begun to see economic improvement after several
difficult years. Job growth in 1993 exceeded estimates, but remains below the
rest of the country. Future economic growth will be hampered by corporate
downsizing and continued defense cut backs. The State's economy remains highly
developed with a large emphasis in service, trade, financial services, and real
estate. In addition, per capita income remains high.
After five consecutive years of operating deficits, the State ended fiscal 1993
and 1994 with operating surpluses, fueled by both increased revenues and
decreased expenditures. The 1995 budget contains conservative estimates without
reliance on "one-shot" actions that were adopted during recessionary periods.
The importance of New York City to the State's economy is also an important
consideration since it represents a significant portion of the overall economy
of the State. The City has struggled to maintain fiscal stability and has
performed adequately in contrast to the difficult economic conditions in the New
York/New Jersey metropolitan area. Any major changes to the financial condition
of the City would ultimately have an effect on the State.
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
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.
- --------------------------------------------------------------------------------
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.
5
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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.
6
- --------------------------------------------------------------------------------
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.
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Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
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.
7
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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 outstanding Shares.
As of September 28, 1994, the following shareholders of record owned 5% or more
of the outstanding Shares of the Fund: Merrill Lynch Pierce Fenner & Smith,
Jacksonville, FL, owned approximately 1,046,544 Shares 45.62% and NFSC FEBO,
Hauppage, NY, owned approximately 155,393 Shares 6.77%.
THE FUNDS
"The Funds" and "Funds" mean the following investment companies:
American Leaders Fund, Inc.; Annuity Management Series; Arrow Funds; Automated
Cash Management Trust; Automated Government Money Trust; California Municipal
Cash 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
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; 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; Star Funds; The Starburst
8
- --------------------------------------------------------------------------------
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 Fund'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 Trust.
ADVISORY FEES
For its advisory services, the Adviser receives an annual investment advisory
fee as described in the prospectus. For the fiscal year ended August 31, 1994,
and for the period from December 2, 1992 (date of initial public investment) to
August 31, 1993, the Adviser earned advisory fees of $84,319 and $25,302,
respectively, 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 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
$177,907, none of which was waived. For the period from December 2, 1992 (date
of initial public investment) to August 31, 1993, Federated Administrative
Services, Inc., earned $39,402, 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.
9
BROKERAGE TRANSACTIONS
- --------------------------------------------------------------------------------
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally use those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. The Adviser makes
decisions on portfolio transactions and selects brokers and dealers subject to
review by the Trustees. The Adviser may select brokers and dealers who offer
brokerage and research services. These services may be furnished directly to the
Fund or to the Adviser and may include:
- advice as to the advisability of investing in securities;
- security analysis and reports;
- economic studies;
- industry studies;
- receipt of quotations for portfolio evaluations; and
- similar services.
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.
PURCHASING FORTRESS SHARES
- --------------------------------------------------------------------------------
Except under certain circumstances described in the prospectus, Shares are sold
at their net asset value plus a sales load on days the New York Stock Exchange
is open for business. The procedure for purchasing Shares is explained in the
prospectus under "Investing in Fortress Shares."
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 year ended August 31, 1994, and for the period from December 2,
1992 (date of initial public investment) to August 31, 1993 payments in the
amount of $105,399 and $31,628, respectively, were made pursuant to the
Distribution Plan. In addition, for the fiscal year ended August 31, 1994,
payments in the amount of $9,029 were made pursuant to the Shareholder Services
Plan.
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 and Trust Company ("State Street Bank") acts
as the shareholder's agent in depositing checks and converting them to federal
funds.
10
- --------------------------------------------------------------------------------
PURCHASES BY SALES REPRESENTATIVES, FUND TRUSTEES, AND EMPLOYEES
Trustees, employees, and sales representatives of the Fund, Federated Advisers,
and Federated Securities Corp. or their affiliates, or any investment dealer who
has a sales agreement with Federated Securities Corp. and their spouses and
children under 21, may buy Shares at net asset value without a sales load.
Shares may also be sold without a sales load to trusts or pension or
profit-sharing plans for these persons. These sales are made with the
purchaser's written assurance that the purchase is for investment purposes and
that the securities will not be resold except through redemption by the Fund.
DETERMINING NET ASSET VALUE
- --------------------------------------------------------------------------------
Net asset value generally changes each day. The days on which net asset value is
calculated for Shares are described in the prospectus.
VALUING MUNICIPAL BONDS
The Trustees use an independent pricing service to determine the market value of
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 FORTRESS SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at the next computed net asset value after the Fund
receives the redemption request. Redemption procedures and contingent deferred
sales charges are explained in the prospectus under "Redeeming Fortress 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
The Trust is obligated to redeem Shares solely in cash up to $250,000 or 1% of
the respective class'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.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
Fund shareholders are allowed to exchange all or some of their Shares for shares
in other Fortress Funds, New York Municipal Cash Trust, or certain of the Funds
which are sold with a sales load different from that of the Fund's or with no
sales load and which are advised by subsidiaries or affiliates of Federated
Investors. These exchanges are made at net asset value plus the difference
between the Fund's sales load already paid and any sales load of the fund into
which the Shares are to be exchanged, if higher.
11
- --------------------------------------------------------------------------------
REDUCED SALES LOAD
If a shareholder making such an exchange qualifies for a reduction or an
elimination of the sales load, the shareholder must notify Federated Securities
Corp. or Federated Services Company in writing.
REQUIREMENTS FOR EXCHANGE
Shareholders using this privilege must exchange Shares having a net asset value
which at least meets the minimum investment required for the fund into which the
exchange is being made. Before the exchange, the shareholder must receive a
prospectus of the fund for which the exchange is being made.
This privilege is available to shareholders residing in any state in which the
fund shares being acquired may be sold. Upon receipt of proper instructions and
required supporting documents, Shares submitted for exchange are redeemed and
the proceeds invested in shares of the other fund.
A shareholder may obtain further information on the exchange privilege and
prospectuses for Fortress Funds, New York Municipal Cash Trust, or certain
Federated Funds by calling the Fund or his financial institution.
TAX CONSEQUENCES
Exercise of this exchange privilege is treated as a sale for federal income tax
purposes. Depending upon the circumstances, a short or long-term capital gain or
loss may be realized.
MAKING AN EXCHANGE
Instructions for exchanges for Fortress Funds, New York Municipal Cash Trust, or
certain Federated Funds must be given in writing by the shareholder. Written
instructions may require a signature guarantee.
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 of 1986, as amended,
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:
- derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities;
- derive less than 30% of its gross income from the sale of securities held
less than three months;
- invest in securities within certain statutory limits; and
- distribute to its shareholders at least 90% of its net income earned
during the year.
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;
- differentials in market values;
- new investment opportunities;
- changes in creditworthiness of an issuer; or
- 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 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.
12
TOTAL RETURN
- --------------------------------------------------------------------------------
The Fund's average annual total return for the one-year period ended August 31,
1994, and for the period from December 2, 1992 (date of initial public
investment) to August 31, 1994, was (2.31%) and 6.28%, respectively.
The average annual total return for the Fund is the average compounded rate of
return for a given period that would equate a $1,000 initial investment to the
ending redeemable value of that investment. The ending redeemable value is
computed by multiplying the number of Shares owned at the end of the period by
the 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.
Any applicable contingent deferred sales charge is deducted from the ending
value of the investment based on the lesser of the original purchase price per
Share of redeemed Shares at the time of purchase or the offering price per Share
of Shares redeemed.
YIELD
- --------------------------------------------------------------------------------
The Fund's yield for the thirty-day period ended August 31, 1994 was 5.99%.
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 9.30%.
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.
13
- --------------------------------------------------------------------------------
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 the
income taxes imposed by the State of New York. 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.
<TABLE>
<CAPTION>
TAXABLE YIELD EQUIVALENT FOR 1994
STATE OF NEW YORK
- ---------------------------------------------------------------------------------------------------
TAX BRACKET FEDERAL:
15.00% 28.00% 31.00% 36.00% 39.60%
- ---------------------------------------------------------------------------------------------------
COMBINED FEDERAL AND STATE:
22.594% 35.594% 38.594% 43.594% 47.194%
- ---------------------------------------------------------------------------------------------------
JOINT RETURN: $1-38,000 $38,001-91,850 $91,851-140,000 $140,001-250,000 Over $250,000
- ---------------------------------------------------------------------------------------------------
SINGLE RETURN: $1-22,750 $22,751-55,100 $55,101-115,000 $115,001-250,000 Over $250,000
- ---------------------------------------------------------------------------------------------------
TAX-EXEMPT YIELD TAXABLE YIELD EQUIVALENT
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1.50% 1.94% 2.33% 2.44% 2.66% 2.84%
2.00% 2.58% 3.11% 3.26% 3.55% 3.79%
2.50% 3.23% 3.88% 4.07% 4.43% 4.73%
3.00% 3.88% 4.66% 4.89% 5.32% 5.68%
3.50% 4.52% 5.43% 5.70% 6.20% 6.63%
4.00% 5.17% 6.21% 6.51% 7.09% 7.57%
4.50% 5.81% 6.99% 7.33% 7.98% 8.52%
5.00% 6.46% 7.76% 8.14% 8.86% 9.47%
5.50% 7.11% 8.54% 8.96% 9.75% 10.42%
6.00% 7.75% 9.32% 9.77% 10.64% 11.36%
- ---------------------------------------------------------------------------------------------------
<FN>
The chart above is for illustrative purposes only. It is not an indication of
past or future performance of the Fund.
* Some portions of the Fund's income may be subject to the federal alternative
minimum tax and state and local taxes.
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.
</TABLE>
PERFORMANCE COMPARISONS
- --------------------------------------------------------------------------------
The performance of Shares depends upon such variables as:
- portfolio quality;
- average portfolio maturity;
- type of instruments in which the portfolio is invested;
- changes in interest rates and market value of portfolio securities;
- changes in the Fund's expenses; and
- various other factors.
The Fund's performance fluctuates on a daily basis largely because net earnings
and offering price per share fluctuate daily. Both net earnings and offering
price per share are factors in the computation of yield and total return 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
14
- --------------------------------------------------------------------------------
value portfolio securities and compute offering price. The financial
publications and/or indices which the Fund uses in advertising may include:
- - LEHMAN BROTHERS REVENUE BOND INDEX is a total return performance benchmark for
the long-term, investment grade, revenue bond market. Returns and attributes
for the index are calculated semi-monthly.
- - LIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes the
reinvestment of all capital gains distributions and income dividends and takes
into account any change in net asset value over a specific period of time.
From time to time, the Fund will quote its Lipper ranking in the "New York
Municipal Bond Funds" category in advertising and sales literature.
- - MORNINGSTAR, INC., an independent rating service, is the publisher of the
bi-weekly MUTUAL FUND VALUES. MUTUAL FUND VALUES rates more than 1,000
NASDAQ-listed mutual funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and ratings are effective for two
weeks.
Advertisements and other sales literature for the Fund may quote total returns
which are calculated on non-standardized base periods. 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.
Advertisements may quote performance information which does not reflect the
effect of the sales load.
15
APPENDIX
- --------------------------------------------------------------------------------
STANDARD AND POOR'S RATINGS GROUP MUNICIPAL BOND RATINGS
AAA--Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Ratings Group ("S&P"). Capacity to pay interest and repay principal is extremely
strong.
AA--Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A--Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse 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
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 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+.
16
- --------------------------------------------------------------------------------
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
(+) 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
broadbased 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 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 either overwhelming or very 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 structures with moderate reliance on debt
and ample asset protection; broad margins in earning coverage of fixed financial
charges and high internal cash generation; and 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.
625922208
2092919B (10/94) 17
NEW YORK MUNICIPAL INCOME FUND
(FORTRESS SHARES)
- --------------------------------------------------------------------------------
ANNUAL REPORT FOR FISCAL YEAR ENDED AUGUST 31, 1994
MANAGEMENT DISCUSSION AND ANALYSIS:
----------------------------------------------------------------------------
The twelve months ended August 31, 1994, were difficult for investors in
long-term, fixed-income securities. Fueled by fears of the potential for
accelerating inflation driven by a steadily expanding economy, yields for
thirty-year U.S. Treasury bonds rose sharply from their cyclical low of
5.79% on October 15, 1993 to 6.38% on November 22, 1993. Yields then
remained in a relatively narrow trading range until February 4, 1994. The
Federal Reserve Board then effected the first of several rate hikes which
reignited inflation fears, sending yields soaring. The yield for thirty-year
U.S. Treasury bonds closed at 7.45% on August 31, 1994.
New York Municipal Income Fund (the "Fund") was established in December,
1992, to provide investors the ability to invest in a non-diversified
portfolio of investment grade, long-term New York municipal issues. The
investment objective of the Fund is the provision of current income which is
exempt from federal regular income tax and the personal income taxes imposed
by the State of New York and New York municipalities.*
When ascertaining the credit quality of issues for potential investment
by the Fund, the adviser focuses upon a variety of economic and financial
parameters. For general obligation issues, analysis is directed towards
demographic constitution, income distribution, property value levels and
growth, provision of governmental services, and debt authorization. For
revenue issues, examination is made of issuer cash flow generation,
sensitivity to product or service pricing, competition and industry/sector
make-up, debt structure, debt service coverage, financial flexibility, and
contingent liabilities, if any.
Issues purchased by the Fund during the last twelve months consisted
largely of: single-family mortgage revenue obligations; pollution control
revenue obligations; and airport special facilities revenue obligations.
For the twelve months ended August 31, 1994, an investor in the Fund
experienced a total return of (2.31%).** This performance was comprised of
5.20% income and reinvestment return (net of Fund expenses) and of (7.51%)
depreciation in the net asset value per share of the Fund. Past performance
is neither indicative nor predictive of future investment performance.
*INCOME MAY BE SUBJECT TO THE FEDERAL ALTERNATIVE MINIMUM TAX.
**BASED OF NET ASSET VALUE, WHICH DOES NOT REFLECT THE SALES LOAD OR CONTINGENT
DEFERRED SALES CHARGE, IF APPLICABLE. PERFORMANCE QUOTED REPRESENTS PAST
PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, SO THAT AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST.
NEW YORK MUNICIPAL INCOME FUND
(FORTRESS SHARES)
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN NEW YORK MUNICIPAL INCOME FUND
(FORTRESS SHARES)
The graph below illustrates the hypothetical investment of $10,000 in the
New York Municipal Income Fund (Fortress Shares) (the "Fund") from December 2,
1992 (start of performance) to August 31, 1994, compared to the Lehman Brothers
Revenue Bond Index (LBRB).+
Graphic representation "A6" omitted. See Appendix.
AVERAGE ANNUAL TOTAL RETURN FOR THE PERIOD ENDED AUGUST 31, 1994
<TABLE>
<S> <C>
1 Year......................................................................... (4.23%)
Start of Performance (12/02/92)................................................ 9.03%
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE, SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF, OR
GUARANTEED BY, ANY BANK AND ARE NOT FEDERALLY INSURED.
This report must be preceded or accompanied by the Fund's prospectus dated
October 31, 1994, and, together with the financial statements contained therein,
constitutes the Fund's annual report.
*Represents a hypothetical investment of $9,900 in the Fund after deducting the
maximum sales load of 1.00% ($10,000 investment minus $100 sales load =
$9,900). The Fund's performance assumes the reinvestment of all dividends and
distributions. The LBRB has been adjusted to reflect reinvestment of dividends
on the securities in the index.
**The ending value of the Fund reflects a contingent deferred sales charge of
1.00% on any redemption less than four years from the purchase date.
+The LBRB is not adjusted to reflect sales loads, expenses, or other fees that
the Securities and Exchange Commission requires to be reflected in the Fund's
performance.
[LOGO]
Federated Securities Corp.
---------------------------------------------------------------------------
Distributor
625922208
G00574-04 (10/94) [LOGO]
RECYCLED
PAPER
PRESIDENT'S MESSAGE
- -------------------------------------------------------------
Dear Shareholder:
I am pleased to present the Annual Report of New Jersey Municipal Income Fund
(the "Fund"), covering the 12 month period ended August 31, 1994.
This report begins with a review of the economy and the municipal market.
Following the review are the Fund's Portfolio of Investments and Financial
Statements.
We introduced this Fund on June 1, 1993 to give tax-sensitive New Jersey
residents the opportunity for double tax-free monthly income. This income is
exempt from federal regular income tax and personal income taxes imposed by the
state of New Jersey.
During the 12 month reporting period, the Fund's portfolio of investment-grade,
long-term New Jersey municipal securities paid a total of $0.56 per share in
tax-free distributions to shareholders. As all bond investments tend to do when
interest rates rise, the Fund's net asset value declined from $10.30 to $9.47.
At the end of the period, the Fund's total net assets stood at $11.2 million.
We thank you for your confidence in New Jersey Municipal Income Fund.
Sincerely,
Richard B. Fisher
President
October 14, 1994
1
MANAGEMENT DISCUSSION & ANALYSIS
- ---------------------------------------------------------
The fiscal year ended August 31, 1994 was difficult for investors in long-term,
fixed-income securities. Fueled by fears of the potential for accelerating
inflation driven by a steadily expanding economy, yields for thirty-year U.S.
Treasury bonds rose sharply from their cyclical low of 5.79% on October 15, 1993
to 6.38% on November 22, 1993. Yields then remained in a relatively narrow
trading range until February 4, 1994. The Federal Reserve Board then effected
the first of several rate hikes which reignited inflation fears, sending yields
soaring. The yield for thirty-year U.S. Treasury bonds closed at 7.45% on August
31, 1994.
The Fund was established in June, 1993 to provide investors the ability to
invest in a non-diversified portfolio of investment-grade, long-term New Jersey
municipal issues. The investment objective of the Fund is the provision of
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.*
When ascertaining the credit quality of issues for potential investment by the
Fund, the investment adviser focuses upon a variety of economic and financial
parameters. For general obligation issues, analysis is directed towards
demographic constitution, income distribution, property value levels and growth,
provision of governmental services, and debt authorization. For revenue issues,
examination is made of issuer cash flow generation, sensitivity to product or
service pricing, competition and industry/sector make-up, debt structure, debt
service coverage, financial flexibility, and contingent liabilities, if any.
Issues purchased by the Fund during the last twelve months consisted largely of
single-family mortgage revenue obligations, hospital revenue obligations,
pollution control revenue obligations, and college and university tuition and
fee revenue issues.
For the fiscal year ended August 31, 1994, an investor in the Fund experienced a
"total return" of (2.62%).** This performance was comprised of 4.99% income and
reinvestment return (net of fund expenses) and of (7.61%) depreciation in the
net asset value per share of the Fund.
*INCOME MAY BE SUBJECT TO THE FEDERAL ALTERNATIVE MINIMUM TAX.
**BASED ON NET ASSET VALUE, WHICH DOES NOT REFLECT SALES LOAD OR CONTINGENT
DEFERRED SALES CHARGE, IF APPLICABLE. PERFORMANCE QUOTED REPRESENTS PAST
PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, SO THAT AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST.
2
NEW JERSEY MUNICIPAL INCOME FUND
- ---------------------------------------------------------
GROWTH OF $10,000 INVESTED IN NEW JERSEY MUNICIPAL INCOME FUND
The graph below illustrates the hypothetical investment of $10,000 in the
New Jersey Municipal Income Fund (the "Fund") from June 2, 1993 (start of
performance) to August 31, 1994 compared to the Lehman Brothers Revenue Bond
Index (LBRB).+
Graphic representation "A7" omitted. See Appendix.
AVERAGE ANNUAL TOTAL RETURN FOR THE PERIOD ENDED AUGUST 31, 1994
<TABLE>
<S> <C>
1 Year.................................................................. (5.48)%
Start of Performance (6/2/93)........................................... (0.39)%
<FN>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
*Represents a hypothetical investment of $10,000 in the Fund. The ending value
of the Fund reflects a 2.00% contingent deferred sales charge on any redemption
less than three years, but greater than one year from the purchase date. The
Fund's performance assumes reinvestment of all dividends and distributions. The
LBRB has been adjusted to reflect reinvestment of dividends on securities in
the index.
+The LBRB is not adjusted to reflect sales loads, expenses, or other fees that
the Securities and Exchange Commission requires to be reflected in the Fund's
performance. This index is unmanaged.
</TABLE>
3
NEW JERSEY MUNICIPAL INCOME FUND
PORTFOLIO OF INVESTMENTS
AUGUST 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S OR
AMOUNT S&P* VALUE
- --------- --------------------------------------------------------- ---------- ----------
<C> <S> <C> <C>
SHORT-TERM MUNICIPAL SECURITIES--0.9%
- --------------------------------------------------------------------
PUERTO RICO--0.9%
---------------------------------------------------------
$ 100,000 Government Development Bank of Puerto Rico Weekly VRDNs
(Credit Suisse and Sumitomo Bank Ltd. LOCs)
(AT AMORTIZED COST) A-1 $ 100,000
--------------------------------------------------------- ----------
LONG-TERM MUNICIPAL SECURITIES--97.8%
- --------------------------------------------------------------------
NEW JERSEY--94%
---------------------------------------------------------
100,000 Bordentown, NJ, Sewerage Authority, 5.40% Revenue Bonds
(Series D)/(MBIA Insured)/(Original Issue Yield: 5.45%),
12/1/2020 AAA 91,985
---------------------------------------------------------
400,000 Camden County, NJ, Improvement Authority Revenue Bonds,
5.25% (Guaranty Health Service Center)/(AMBAC
Insured)/(Original Issue Yield: 5.45%), 12/1/2018 AAA 356,048
---------------------------------------------------------
100,000 Cape May County, NJ, Municipal Utilities Authority, 5.75%
Sewer Revenue Bonds (MBIA Insured)/(Original Issue Yield:
6.15%), 1/1/2016 AAA 96,770
---------------------------------------------------------
350,000 Gloucester County, NJ, Pollution Control Financing
Authority, 5.625% Revenue Refunding Bonds (Mobil Oil
Refining Corp.), 12/1/2028 AA 320,590
---------------------------------------------------------
450,000 Keansburg, NJ, Section 8 Assisted Elderly Housing
Mortgage, 5.625% Revenue Refunding Bonds (The Church
Street Corp.)/(Original Issue Yield: 5.75%), 3/1/2011 A+ 418,478
---------------------------------------------------------
100,000 Mercer County, NJ, 5.25% Improvement Authority (Series
1993)/(County Courthouse Project)/(Original Issue Yield:
5.35%), 11/1/2014 AA 90,097
---------------------------------------------------------
100,000 Montville Township, NJ, 5.50% Municipal Utility Authority
(Original Issue Yield: 5.60%)/(AMBAC Insured), 12/1/2013 AAA 94,544
---------------------------------------------------------
300,000 New Jersey EDA, 5.40% Economic Growth Bonds (Richard L.
Tauber Composite Issue)/(National Westminster Bank
LOC), 10/1/2013 AA- 268,854
---------------------------------------------------------
</TABLE>
4
NEW JERSEY MUNICIPAL INCOME FUND
- ---------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S OR
AMOUNT S&P* VALUE
- --------- --------------------------------------------------------- ---------- ----------
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
<C> <S> <C> <C>
- --------------------------------------------------------------------
NEW JERSEY--CONTINUED
---------------------------------------------------------
$ 200,000 New Jersey EDA, 6.25% (New Jersey Natural Gas)/(AMBAC
Insured), 8/1/2024 AAA $ 200,166
---------------------------------------------------------
250,000 New Jersey Health Care Facilities Financing Authority,
5.00% Revenue Bonds (Series D)/(Chilton Memorial
Hospital)/ (Original Issue Yield: 5.30%), 7/1/2013 A 214,430
---------------------------------------------------------
100,000 New Jersey Health Care Facilities Financing Authority,
5.50% Revenue Bonds (Mountainside Hospital)/(MBIA
Insured)/ (Original Issue Yield: 5.65%), 7/1/2014 AAA 93,359
---------------------------------------------------------
400,000 New Jersey Health Care Facilities Financing Authority,
5.875% Revenue Bonds (Dover General Hospital & Medical
Center)/(MBIA Insured)/(Original Issue Yield: 6.27%),
7/1/2012 AAA 392,812
---------------------------------------------------------
400,000 New Jersey Health Care Facilities Financing Authority,
6.25% Revenue Bonds (Jersey Shore Medical Center)/(AMBAC
Insured)/(Original Issue Yield: 6.38%), 7/1/2021 AAA 401,616
---------------------------------------------------------
100,000 New Jersey Health Care Facilities Financing Authority,
6.30% Revenue Bonds (Deborah Heart & Lung
Center)/(Original Issue Yield: 6.40%), 7/1/2023 BBB+ 96,866
---------------------------------------------------------
500,000 New Jersey Health Care Facilities Financing Authority,
6.375% Revenue Bonds (Irvington General Hospital)/(FHA
Insured)/(Original Issue Yield: 6.40%), 8/1/2015 AAA 501,745
---------------------------------------------------------
100,000 New Jersey State Educational Facilities Authority, 5.35%
Revenue Bonds (Richard Stockton State College)/(AMBAC
Insured)/(Original Issue Yield: 5.434%), 7/1/2023 AAA 89,870
---------------------------------------------------------
2,000,000 New Jersey State Educational Facilities Authority, 6.625%
OID Revenue Bonds (Series 1993C)/(Fairleigh Dickinson
University Issue)/(Original Issue Yield: 6.703%),
7/1/2023 NR 1,886,800
---------------------------------------------------------
800,000 New Jersey State Housing & Mortgage Finance Agency,
6.375% Revenue Bonds (MBIA Insured)/(Subject to AMT),
10/1/2026 AAA 800,896
---------------------------------------------------------
</TABLE>
5
NEW JERSEY MUNICIPAL INCOME FUND
- ---------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S OR
AMOUNT S&P* VALUE
- --------- --------------------------------------------------------- ---------- ----------
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
<C> <S> <C> <C>
- --------------------------------------------------------------------
NEW JERSEY--CONTINUED
---------------------------------------------------------
$ 450,000 New Jersey State Housing & Mortgage Finance, 6.30%
Revenue Bonds (MBIA Insured)/(Subject to AMT), 4/1/2025 AAA $ 450,814
---------------------------------------------------------
425,000 New Jersey State Turnpike Authority, 6.50% Toll Road
Revenue Bonds (Series 1991C)/(Original Issue
Yield: 6.732%), 1/1/2016 A 447,699
---------------------------------------------------------
1,000,000 New Jersey, EDA PCR, 6.40% Revenue Bonds (Public Service
Electric & Gas Co.), 5/1/2032 AAA 1,001,920
---------------------------------------------------------
400,000 New Jersey, EDA, 5.35% PCR (General Motors Corp),
4/1/2009 BBB+ 373,764
---------------------------------------------------------
350,000 New Jersey, EDA, 5.375% Facilities Revenue Bonds (New
Jersey Natural Gas)/(Original Issue Yield: 5.41%),
8/1/2023 A2 304,020
---------------------------------------------------------
200,000 New Jersey, EDA, 5.50% Water Facilities Revenue Refunding
Bonds (American Water Co.)/(FGIC Insured)/(Original Issue
Yield: 5.55%)/(Subject to AMT), 6/1/2023 AAA 182,294
---------------------------------------------------------
250,000 New Jersey, EDA, 5.55% Economic Development Bonds (Series
1993)/(United Cerebral Palsy)/(Corestates Bank N.A.
LOC)/(Original Issue Yield: 5.585%)/(Subject to AMT),
8/1/2015 Aa3 226,737
---------------------------------------------------------
260,000 New Jersey, EDA, 5.75% Economic Development Bonds (Series
1993)/(Dieter Weissenreider)/(Corestates Bank N.A.
LOC)/(Subject to AMT), 12/1/2013 Aa3 242,778
---------------------------------------------------------
100,000 Ocean County, NJ, Utilities Authority, 5.75% Wastewater
Revenue Refunding Bonds (Original Issue Yield: 6.06%),
1/1/2018 AA- 95,545
---------------------------------------------------------
100,000 Port Authority of New York & New Jersey, 5.625%
Consolidated Revenue Bonds (Series 77)/(Original Issue
Yield: 5.975%), 8/1/2014 AA- 94,670
---------------------------------------------------------
250,000 Port Authority of New York & New Jersey, 6.25%
Consolidated Revenue Bonds (Series 81)/(Original Issue
Yield: 6.60%), 1/15/2027 AA- 248,600
---------------------------------------------------------
</TABLE>
6
NEW JERSEY MUNICIPAL INCOME FUND
- ---------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S OR
AMOUNT S&P* VALUE
- --------- --------------------------------------------------------- ---------- ----------
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
<C> <S> <C> <C>
- --------------------------------------------------------------------
NEW JERSEY--CONTINUED
---------------------------------------------------------
$ 350,000 Salem County, NJ, Industrial Pollution Control Finance
Authority, 5.60% Revenue Bonds (Atlantic City Electric
Co.)/ FSA Insured), 11/1/2025 A- $ 315,389
---------------------------------------------------------
100,000 Sussex County, NJ, Municipal Utilities, 5.50% Revenue
Refunding Bonds (MBIA Insured)/(Original Issue
Yield: 6.14%), 12/1/2013 AAA 94,544
--------------------------------------------------------- ----------
Total 10,494,700
--------------------------------------------------------- ----------
PUERTO RICO--3.8%
---------------------------------------------------------
200,000 Puerto Rico Electric Power Authority, 5.00% Revenue Bonds
(Original Issue Yield: 6.90%), 7/1/2012 A- 175,002
---------------------------------------------------------
250,000 Puerto Rico Electric Power Authority, 6.375% Revenue
Bonds (Series T)/(Original Issue Yield: 6.58%), 7/1/2024 A- 252,600
--------------------------------------------------------- ----------
Total 427,602
--------------------------------------------------------- ----------
TOTAL LONG-TERM MUNICIPAL SECURITIES (IDENTIFIED COST,
$11,385,766) $10,922,302
--------------------------------------------------------- ----------
TOTAL MUNICIPAL SECURITIES (IDENTIFIED COST,
$11,485,726) $11,022,302+
--------------------------------------------------------- ----------
<FN>
* Please refer to the Appendix of the statement of Additional Information
for an explanation of the credit ratings. Current credit ratings are
unaudited.
+ The cost of investments for federal tax purposes amounts to $11,485,726.
The net unrealized depreciation on a federal tax basis amounts to
$463,424, which is comprised of $53,659 appreciation and $517,083
depreciation at August 31, 1994.
Note: The categories of investments are shown as a percentage of net assets
($11,166,179) at August 31, 1994.
</TABLE>
7
NEW JERSEY MUNICIPAL INCOME FUND
- ---------------------------------------------------------
The following abbreviations are used in this portfolio:
AMBAC --American Municipal Bond Assurance Corporation
AMT --Alternative Minimum Tax
EDA --Economic Development Authority
FGIC --Financial Guaranty Insurance Company
FHA --Federal Housing Administration
FSA --Financial Security Assurance
LOC --Letter of Credit
LOCs --Letters of Credit
MBIA --Municipal Bond Investors Assurance
OID --Original Issue Discount
PCR --Pollution Control Revenue
VRDNs --Variable Rate Demand Notes
(See Notes which are an integral part of the Financial Statements)
8
NEW JERSEY MUNICIPAL INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
- --------------------------------------------------------------------------------
Investments in securities, at value (identified and tax cost; $11,485,726) $ 11,022,302
- --------------------------------------------------------------------------------
Cash 32,158
- --------------------------------------------------------------------------------
Interest receivable 159,303
- --------------------------------------------------------------------------------
Receivable for Fund shares sold 200,877
- --------------------------------------------------------------------------------
Deferred expenses 13,820
- -------------------------------------------------------------------------------- ------------
Total assets 11,428,460
- --------------------------------------------------------------------------------
LIABILITIES:
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C>
Payable for investments purchased $ 200,556
- ----------------------------------------------------------------------
Dividends payable 39,502
- ----------------------------------------------------------------------
Accrued expenses 22,223
- ---------------------------------------------------------------------- ----------
</TABLE>
<TABLE>
<S> <C>
Total liabilities 262,281
- -------------------------------------------------------------------------------- ------------
NET ASSETS for 1,179,470 shares of beneficial interest outstanding $ 11,166,179
- -------------------------------------------------------------------------------- ------------
NET ASSETS CONSIST OF:
- --------------------------------------------------------------------------------
Paid-in capital $ 11,857,962
- --------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments (463,424)
- --------------------------------------------------------------------------------
Accumulated net realized gain (loss) on investments (228,359)
- -------------------------------------------------------------------------------- ------------
Total Net Assets $ 11,166,179
- -------------------------------------------------------------------------------- ------------
NET ASSET VALUE And Offering Price per Share ($11,166,179 DIVIDED BY 1,179,470
shares of beneficial interest outstanding) $ 9.47
- -------------------------------------------------------------------------------- ------------
REDEMPTION PROCEEDS per Share (97/100 of $9.47)* $ 9.19
- -------------------------------------------------------------------------------- ------------
<FN>
* See "Redeeming Shares" in the prospectus.
</TABLE>
(See Notes which are an integral part of the Financial Statements)
9
NEW JERSEY MUNICIPAL INCOME FUND
STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ---------------------------------------------------------------------------------------
Interest income $ 485,429
- ---------------------------------------------------------------------------------------
EXPENSES:
- ---------------------------------------------------------------------------------------
Investment advisory fee $ 33,210
- -------------------------------------------------------------------------
Trustees' Fees 130
- -------------------------------------------------------------------------
Administrative personnel and services fees 101,062
- -------------------------------------------------------------------------
Custodian and portfolio accounting fees 58,842
- -------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 15,804
- -------------------------------------------------------------------------
Fund share registration costs 3,122
- -------------------------------------------------------------------------
Auditing fees 16,115
- -------------------------------------------------------------------------
Legal fees 1,897
- -------------------------------------------------------------------------
Printing and postage 12,079
- -------------------------------------------------------------------------
Shareholder Services fee 19,615
- -------------------------------------------------------------------------
Insurance premiums 5,042
- -------------------------------------------------------------------------
Taxes 39
- -------------------------------------------------------------------------
Distribution services fee 62,268
- -------------------------------------------------------------------------
Miscellaneous 438
- ------------------------------------------------------------------------- ----------
Total expenses 329,663
- -------------------------------------------------------------------------
Deduct--
- ------------------------------------------------------------
Waiver of investment advisory fee $ 33,210
- ------------------------------------------------------------
Reimbursement of other operating expenses 234,185 267,395
- ------------------------------------------------------------ ---------- ----------
Net expenses 62,268
- --------------------------------------------------------------------------------------- -----------
Net investment income 423,161
- --------------------------------------------------------------------------------------- -----------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
- ---------------------------------------------------------------------------------------
Net realized (loss) on investment transactions (identified
cost basis) (228,359)
- ---------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on
investments (537,756)
- --------------------------------------------------------------------------------------- -----------
Net realized and unrealized gain (loss) on investments (766,115)
- --------------------------------------------------------------------------------------- -----------
Change in net assets resulting from operations $ (342,954)
- --------------------------------------------------------------------------------------- -----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
10
NEW JERSEY MUNICIPAL INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
- ---------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
------------------------------
1994 1993*
------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ---------------------------------------------------------------------------
OPERATIONS--
- ---------------------------------------------------------------------------
Net investment income $ 423,161 $ 20,003
- ---------------------------------------------------------------------------
Net realized gain(loss) on investment transactions ($0 and $0,
respectively, as computed for federal income tax purposes) (228,359) --
- ---------------------------------------------------------------------------
Net change in unrealized appreciation(depreciation) on investments (537,756) 74,332
- --------------------------------------------------------------------------- ------------- -------------
Change in net assets resulting from operations (342,954) 94,335
- --------------------------------------------------------------------------- ------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS--
- ---------------------------------------------------------------------------
Dividends to shareholders from net investment income (423,161) (20,003)
- ---------------------------------------------------------------------------
Distributions in excess of net investment income (62,268) (3,086)
- --------------------------------------------------------------------------- ------------- -------------
Change in net assets from distributions to shareholders (485,429) (23,089)
- --------------------------------------------------------------------------- ------------- -------------
FUND SHARE (PRINCIPAL) TRANSACTIONS--
- ---------------------------------------------------------------------------
Net proceeds from sale of shares 9,997,039 5,887,786
- ---------------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of dividends
declared 135,785 4,402
- ---------------------------------------------------------------------------
Cost of shares redeemed (1,488,758) (2,612,938)
- --------------------------------------------------------------------------- ------------- -------------
Change in net assets from Fund share transactions 8,644,066 3,279,250
- --------------------------------------------------------------------------- ------------- -------------
Change in net assets 7,815,683 3,350,496
- ---------------------------------------------------------------------------
NET ASSETS:
- ---------------------------------------------------------------------------
Beginning of period 3,350,496
- --------------------------------------------------------------------------- ------------- -------------
End of period $ 11,166,179 $ 3,350,496
- --------------------------------------------------------------------------- ------------- -------------
<FN>
* For the period from June 1, 1993 (date of initial public investment) to August
31, 1993.
</TABLE>
(See Notes which are an integral part of the Financial Statements)
11
NEW JERSEY MUNICIPAL INCOME FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
------------------------------
1994 1993*
------------- -------------
<S> <C> <C>
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 (loss) 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%
- ---------------------------------------------------------------------------
<FN>
* 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 principle's. These
distributions do not represent a return of captial for federal income tax
purposes.
(b) Computed on an annualized basis.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
</TABLE>
(See Notes which are an integral part of the Financial Statements)
12
NEW JERSEY MUNICIPAL INCOME FUND
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1994
- --------------------------------------------------------------------------------
(1) ORGANIZATION
Municipal Securities Income Trust (the "Trust") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as an open-end
management investment company. The Trust consists of ten, non-diversified
portfolios. The financial statements included herein present only those of New
Jersey Municipal Income Fund (the "Fund"). The financial statements of the other
portfolios are presented separately. The assets of each portfolio are segregated
and a shareholder's interest is limited to the portfolio in which shares are
held.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
A. INVESTMENT VALUATIONS--Municipal bonds are valued by an independent pricing
service taking into consideration yield, liquidity, risk, credit, quality,
coupon, maturity, type of issue, and any other factors or market data it
deems relevant in determining valuations for normal institutional size
trading units of debt securities. The independent pricing service does not
rely exclusively on quoted prices. Short-term securities with remaining
maturities of sixty days or less may be stated at amortized cost, which
approximates value.
B. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and expenses
are accrued daily. Bond premium and discount, if applicable, are amortized
as required by the Internal Revenue Code, as amended (the "Code").
Distributions to shareholders are recorded on the ex-dividend date.
Distributions are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles. The excess
distributions are a result of the capitalization of the 12b-1 fees for
federal income tax purposes and do not represent a return of capital for
federal income tax purposes.
C. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its tax-exempt income.
Accordingly, no provisions for federal tax are necessary. Additionally, net
capital losses of $228,359 distributable to security transactions incurred
after October 31, 1993 are treated as arising on September 1, 1994, the
first day of the Fund's next taxable year.
D. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when-issued
securities on the trade date and maintains security positions such that
sufficient liquid assets will be available to make payment for the
securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
13
NEW JERSEY MUNICIPAL INCOME FUND
- ---------------------------------------------------------
E. CONCENTRATION OF RISK--Since the Fund invests a substantial portion of its
assets in issuers located in one state, it will be more susceptible to
factors adversely affecting issuers of that state than would be a comparable
general tax-exempt mutual fund. In order to reduce the credit risk
associated with such factors, at August 31, 1994, 45% of the securities in
the portfolio of investments are backed by letters of credit or bond
insurance of various financial institutions and financial guaranty assurance
agencies. The value of investments insured by or supported (backed) by a
letter of credit for any one institution or agency did not exceed 18% of
total investments.
F. DEFERRED EXPENSES--The costs incurred by the Fund with respect to
registration of its shares in its first fiscal year, excluding the initial
expense of registering its shares, have been deferred and are being
amortized using the straight-line method not to exceed a period of five
years from the Fund's commencement date.
G. OTHER--Investment transactions are accounted for on the trade date.
(3) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST
31,
--------------------
1994 1993*
--------- ---------
<S> <C> <C>
Shares sold 986,212 581,973
- -------------------------------------------------------------------------
Shares issued to shareholders in payment of dividends declared 14,045 430
- -------------------------------------------------------------------------
Shares redeemed (145,961) (257,229)
- ------------------------------------------------------------------------- --------- ---------
Net change resulting from Fund share transactions 854,296 325,174
- ------------------------------------------------------------------------- --------- ---------
<FN>
* For the period from June 1, 1993 (date of initial public investment) to
August 31, 1993.
</TABLE>
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
ADVISORY FEE--Federated Advisers, the Fund's investment adviser (the "Adviser"),
receives for its services 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 and reimburse certain operating expenses of the Fund.
The Adviser can modify or terminate this voluntary waiver and reimbursement at
any time at its sole discretion.
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS") provides the Fund
with administrative personnel and services. Prior to March 1, 1994, these
services were provided at approximate cost. Effective March 1, 1994, the FAS fee
is based on the level of average aggregate daily net assets of all funds advised
by subsidiaries of Federated Investors for the period. The
14
NEW JERSEY MUNICIPAL INCOME FUND
- ---------------------------------------------------------
administrative fee received during the period of the Administrative Services
Agreement shall be at least $125,000 per portfolio and $30,000 per each
additional class of shares.
DISTRIBUTION AND SHAREHOLDER SERVICES FEE--The Fund has adopted a Distribution
Plan (the "Plan") pursuant to Rule 12b-1 under the Act. Under the terms of the
Plan, the Fund will compensate Federated Securities Corp. ("FSC"), the principal
distributor, from the net assets of the Fund to finance activities intended to
result in the sale of the Fund's Shares. The Plan provides that the Fund may
incur distribution expenses up to 0.75 of 1% of the average daily net assets of
the Fund's Shares, annually, to compensate FSC.
Under the terms of a Shareholder Services Agreement with Federated Shareholder
Services ("FSS"), the Fund will pay FSS up to 0.25 of 1% of average net assets
for the Fund for the period. This fee is to obtain certain personal services for
shareholders and the maintenance of shareholder accounts.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES--Federated Services Company
("FServ") serves as transfer agent and dividend disbursing agent for the Fund.
The FServ fee is based on the size, type and number of accounts and transactions
made by shareholders.
ORGANIZATIONAL EXPENSES--Organizational expenses of $22,177 and start-up
administrative services expenses of $57,211 were borne initially by the Adviser.
The Fund has agreed to reimburse the Adviser for the organizational expenses and
start-up administrative expenses during the five year period following May 23,
1993 (date the Fund first became effective). For the year ended August 31, 1994,
the Fund paid $2,957 and $7,628, respectively, pursuant to this agreement.
INTERFUND TRANSACTIONS--During the year ended August 31, 1994, the Fund engaged
in purchase and sale transactions with other affiliated funds at current value
on the date of the transaction pursuant to Rule 17a-7 under the Act amounting to
$6,300,000 and $6,400,000, respectively.
Certain of the Officers and Trustees of the Fund are Officers and Directors or
Trustees of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
fiscal year ended August 31, 1994, were as follows:
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------
PURCHASES $11,611,096
- -------------------------------------------------------------------------------------------
SALES $ 3,836,309
- -------------------------------------------------------------------------------------------
</TABLE>
15
INDEPENDENT AUDITORS' REPORT
- ---------------------------------------------------------
To the Board of Trustees of MUNICIPAL SECURITIES INCOME TRUST
and Shareholders of NEW JERSEY MUNICIPAL INCOME FUND:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of New Jersey Municipal Income Fund (a portfolio
of Municipal Securities Income Trust) as of August 31, 1994, the related
statement of operations for the year then ended, and the statement of changes in
net assets and financial highlights for the years ended August 31, 1994 and
1993. These financial statements and financial highlights are the responsibility
of the Trust's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
August 31, 1994 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of New Jersey Municipal
Income Fund as of August 31, 1994, the results of its operations, the changes in
its net assets and its financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
October 7, 1994
16
<TABLE>
<CAPTION>
TRUSTEES OFFICERS
- ---------------------------------------------------------
<S> <C>
John F. Donahue John F. Donahue
John T. Conroy, Jr. CHAIRMAN
William J. Copeland Richard B. Fisher
J. Christopher Donahue PRESIDENT
James E. Dowd J. Christopher Donahue
Lawrence D. Ellis, M.D. VICE PRESIDENT
Edward L. Flaherty, Jr. Edward C. Gonzales
Peter E. Madden VICE PRESIDENT AND TREASURER
Gregor F. Meyer John W. McGonigle
Wesley W. Posvar VICE PRESIDENT AND SECRETARY
Marjorie P. Smuts David M. Taylor
ASSISTANT TREASURER
J. Crilley Kelly
ASSISTANT SECRETARY
</TABLE>
Mutual funds are not obligations of or insured by any bank, nor
are they insured by the federal government or any of its agencies.
Investment in these shares involves risk, including the possible
loss of principal.
This report is authorized for distribution to prospective
investors only when preceded or accompanied by the Fund's
prospectus, which contains facts concerning its objective and
policies, management fees, expenses and other information.
17
- --------------------------------------------------------------------------------
NEW JERSEY
- --------------------------------------------------------------------------------
MUNICIPAL
- --------------------------------------------------------------------------------
INCOME
- --------------------------------------------------------------------------------
FUND
ANNUAL REPORT
TO SHAREHOLDERS
AUGUST 31, 1994
[LOGO] Federated Securities Corp. ----------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
--------------------------------------------------------
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
-------------------------------------------------------------------------
[LOGO]
RECYCLED
PAPER
625922885
G00700-03 (10/94)
- ---------------------------------------------------
PRESIDENT'S MESSAGE
- -------------------------------------------------------------
Dear Shareholder:
I am pleased to present the Annual Report of Maryland Municipal Income Fund (the
"Fund"), covering the period from September 2, 1993 through August 31, 1994.
This report begins with a review of the economy and the municipal market.
Following the review are the Fund's Portfolio of Investments and Financial
Statements.
We introduced this Fund to give tax-sensitive Maryland residents the opportunity
for double tax-free monthly income. This income is exempt from federal regular
income tax and personal income taxes imposed by the state of Maryland and its
municipalities.
During the reporting period, the Fund's portfolio of investment-grade, long-term
Maryland municipal securities paid a total of $0.53 per share in tax-free
distributions to shareholders. As all bond investments tend to do when interest
rates rise, the Fund's net asset value declined from $10.00 to $8.81. At the end
of the period, the Fund's total net assets stood at $6.0 million.
We thank you for your confidence in Maryland Municipal Income Fund.
Sincerely,
Richard B. Fisher
President
October 14, 1994
1
MANAGEMENT DISCUSSION & ANALYSIS
- ---------------------------------------------------------
The fiscal year ended August 31, 1994 was difficult for investors in long-term,
fixed-income securities. Fueled by fears of the potential for accelerating
inflation driven by a steadily expanding economy, yields for thirty-year U.S.
Treasury bonds rose sharply from their cyclical low of 5.79% on October 15, 1993
to 6.38% on November 22, 1993. Yields then remained in a relatively narrow
trading range until February 4, 1994. The Federal Reserve Board then effected
the first of several rate hikes which reignited inflation fears, sending yields
soaring. The yield for thirty-year U.S. Treasury bonds closed at 7.45% on August
31, 1994.
The Fund was established in September, 1993 to provide investors the ability to
invest in a non-diversified portfolio of investment-grade, long-term Maryland
municipal issues. The investment objective of the Fund is the provision of
current income which is exempt from federal regular income tax and the personal
income taxes imposed by the state of Maryland and Maryland municipalities.*
When ascertaining the credit quality of issues for potential investment by the
Fund, the investment adviser focuses upon a variety of economic and financial
parameters. For general obligation issues, analysis is directed towards
demographic constitution, income distribution, property value levels and growth,
provision of governmental services, and debt authorization. For revenue issues,
examination is made of issuer cash flow generation, sensitivity to product or
service pricing, competition and industry/sector make-up, debt structure, debt
service coverage, financial flexibility and contingent liabilities, if any.
Issues purchased by the Fund since inception consisted largely of single-family
mortgage revenue obligations, hospital revenue obligations, and pollution
control revenue obligations.
From inception to August 31, 1994, an investor in the Fund experienced a "total
return" of (6.70%).** This performance was comprised of 5.20% income and
reinvestment return (net of fund expenses) and of (11.90%) depreciation in the
net asset value per share of the Fund.
*INCOME MAY BE SUBJECT TO THE FEDERAL ALTERNATIVE MINIMUM TAX.
**BASED ON NET ASSET VALUE, WHICH DOES NOT REFLECT SALES LOAD OR CONTINGENT
DEFERRED SALES CHARGE, IF APPLICABLE. PERFORMANCE QUOTED REPRESENTS PAST
PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, SO THAT AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST.
2
MARYLAND MUNICIPAL INCOME FUND
- ---------------------------------------------------------
GROWTH OF $10,000 INVESTED IN MARYLAND MUNICIPAL INCOME FUND
The graph below illustrates the hypothetical investment of $10,000 in the
Maryland Municipal Income Fund (the "Fund") from September 2, 1993 (start of
performance) to August 31, 1994, compared to the Lehman Brothers Revenue Bond
Index (LBRB).+
Graphic representation "A8" omitted. See Appendix.
AVERAGE ANNUAL TOTAL RETURN FOR THE PERIOD ENDED AUGUST 31, 1994
Start of Performance (9/2/93) (cumulative)........ (9.44)%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
*Represents a hypothetical investment of $10,000 in the Fund. The ending value
of the Fund reflects a contingent deferred sales charge of 3.00% on any
redemption less than 1 year from the purchase date. The Fund's performance
assumes reinvestment of all dividends and distributions. The LBRB has been
adjusted to reflect reinvestment of dividends on securities in the index.
+The LBRB is not adjusted to reflect sales loads, expenses, or other fees that
the Securities and Exchange Commission requires to be reflected in the Fund's
performance. This index is unmanaged.
3
MARYLAND MUNICIPAL INCOME FUND
PORTFOLIO OF INVESTMENTS
AUGUST 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- ----------- ----------------------------------------------------------- --------- ----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--97.9%
- ------------------------------------------------------------------------
MARYLAND
-----------------------------------------------------------
$ 200,000 Anne Arundel County, MD, PCR, 6.00% Refunding Revenue Bonds
(Series 1994)/(Baltimore Gas & Electric Co.)/(Original
Issue Yield: 6.10%), 4/1/2024 A $ 192,242
-----------------------------------------------------------
100,000 Baltimore, MD, 5.00% Refunding Revenue Bonds (Series
1994A)/(Water Program)/(Original Issue Yield: 5.40%)/ (FGIC
Insured), 7/1/2024 AAA 83,414
-----------------------------------------------------------
100,000 Baltimore, MD, PCR, 5.35% Bonds (General Motors Corp.),
4/1/2008 BBB+ 93,747
-----------------------------------------------------------
500,000 Gaithersburg, MD, 5.50% First Mortgage EDR Bonds (Asbury
Methodist Homes)/(Original Issue Yield: 6.05%), 1/1/2020 NR 437,875
-----------------------------------------------------------
250,000 Howard County, MD, 6.00% UT GO Bonds (Series A)/(Original
Issue Yield: 6.10%), 5/15/2014 AA+ 250,812
-----------------------------------------------------------
500,000 Maryland State Department of Housing & Community
Development, 6.75% SFH Bonds (1774 Fifth Series)/(Subject
to AMT), 4/1/2026 Aa 502,350
-----------------------------------------------------------
100,000 Maryland State HEFA, 5.00% Revenue Bonds (Frederick
Memorial Hospital)/(Original Issue Yield: 5.562%)/(FGIC
Insured), 7/1/2023 AAA 82,921
-----------------------------------------------------------
100,000 Maryland State HEFA, 5.00% Revenue Bonds (Peninusula
Regional Medical Center)/(Original Issue Yield:
5.44%)/(AMBAC Insured), 7/1/2023 AAA 82,921
-----------------------------------------------------------
100,000 Maryland State HEFA, 5.00% Revenue Bonds (University of
Maryland Medical System)/(Original Issue Yield:
5.72%)/(FGIC Insured), 7/1/2020 AAA 83,623
-----------------------------------------------------------
325,000 Maryland State HEFA, 5.125% Refunding Revenue Bonds
(Suburban Hospital)/(Original Issue Yield: 5.50%), 7/1/2021 A 269,643
-----------------------------------------------------------
</TABLE>
4
MARYLAND MUNICIPAL INCOME FUND
- ---------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- ----------- ----------------------------------------------------------- --------- ----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- ------------------------------------------------------------------------
MARYLAND--CONTINUED
-----------------------------------------------------------
$ 100,000 Maryland State HEFA, 5.25% Refunding Revenue Bonds (Sinai
Hospital of Baltimore)/(Original Issue Yield: 5.75%)/(AMBAC
Insured), 7/1/2023 AAA $ 86,347
-----------------------------------------------------------
100,000 Maryland State HEFA, 5.25% Revenue Bonds (Sinai Hospital of
Baltimore)/(Original Issue Yield: 5.74%)/(AMBAC Insured),
7/1/2019 AAA 87,121
-----------------------------------------------------------
100,000 Maryland State HEFA, 5.50% Revenue Bonds (Doctor's
Community Hospital)/(Original Issue Yield: 6.17%), 7/1/2024 BBB- 80,357
-----------------------------------------------------------
250,000 Maryland State HEFA, 5.50% Revenue Bonds (Series 1993)/
(Howard General Hospital Issue)/(Original Issue Yield:
5.80%), 7/1/2025 BBB 206,932
-----------------------------------------------------------
100,000 Maryland State HEFA, 5.625% Refunding Revenue Bonds (Jr.
Lein-Francis Scott Key)/(John Hopkins Guaranty), 7/1/2025 Aa 89,924
-----------------------------------------------------------
200,000 Maryland State HEFA, 6.10% Revenue Bonds (Series 1994)/
(James L. Kerman Rehab Hospital)/(Original Issue Yield:
6.20%)/ (Connie Lee Insured), 7/1/2024 AAA 194,926
-----------------------------------------------------------
250,000 Maryland State HEFA, 6.125% Revenue Bonds (Maryland General
Hospital)/(Original Issue Yield: 6.25%)/(MBIA Insured),
7/1/2019 AAA 248,868
-----------------------------------------------------------
250,000 Maryland State IDA, 6.625% Revenue Bonds (Series 1992)/
(American Center for Physics Headquarters
Facility)/(Original Issue Yield: 6.80%), 1/1/2017 BBB 249,045
-----------------------------------------------------------
100,000 Maryland State, IDFA, 5.50% Revenue Bonds (Series 1993)/
(Holy Cross Health System)/(Original Issue Yield: 5.80%),
12/1/2015 AA- 90,906
-----------------------------------------------------------
200,000 Montgomery County, MD, PCR, 5.375% Refunding Revenue Bonds
(Potomac Electric Power Co.)/(Original Issue Yield: 5.44%),
2/15/2024 A+ 175,834
-----------------------------------------------------------
800,000 Montgomery County, MD, Single Family Housing Opportunity
Commission, 6.70% Mortgage Revenue Bonds, 7/1/2024 Aa 809,016
-----------------------------------------------------------
</TABLE>
5
MARYLAND MUNICIPAL INCOME FUND
- ---------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- ----------- ----------------------------------------------------------- --------- ----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- ------------------------------------------------------------------------
MARYLAND--CONTINUED
-----------------------------------------------------------
$ 200,000 Ocean City, MD, UT GO, 5.75% Municipal Purpose & Refunding
Bonds (Original Issue Yield: 5.90%)/(MBIA Insured),
3/15/2017 AAA $ 194,098
-----------------------------------------------------------
450,000 Prince Georges County, MD, 5.30% Refunding Revenue Bonds
(Dimensions Health Corp.)/(Original Issue Yield: 5.60%),
7/1/2024 A 372,830
-----------------------------------------------------------
500,000 Prince Georges County, MD, 6.60% SFH Bonds (GNMA
Collateralized), 12/1/2025 AAA 503,115
-----------------------------------------------------------
200,000 Queen Annes County, MD, County Commissioners of Queen Annes
County, 6.00% GO Bonds (MBIA Insured)/(Original Issue
Yield: 6.10%), 11/1/2013 AAA 201,526
----------------------------------------------------------- ----------
Total 5,670,393
----------------------------------------------------------- ----------
PUERTO RICO--3.4%
-----------------------------------------------------------
200,000 Puerto Rico Electric Power Authority, 6.375% Revenue Bonds
(Series T)/(Original Issue Yield: 6.58%), 7/1/2024 A- 202,080
----------------------------------------------------------- ----------
TOTAL LONG-TERM MUNICIPAL SECURITIES (IDENTIFIED COST,
$6,144,386) $5,872,473+
----------------------------------------------------------- ----------
<FN>
* PLEASE REFER TO THE APPENDIX OF THE STATEMENT OF ADDITIONAL INFORMATION
FOR AN EXPLANATION OF THE CREDIT RATINGS. CURRENT CREDIT RATINGS ARE
UNAUDITED.
+ The cost of investments for federal tax purposes amounts to $6,144,386.
The net unrealized depreciation on a federal tax basis amounts to
$271,913, which is comprised of $33,417 appreciation and $305,330
depreciation at August 31, 1994.
Note: The categories of investments are shown as a percentage of net assets
($5,996,564) at August 31, 1994.
</TABLE>
6
MARYLAND MUNICIPAL INCOME FUND
- ---------------------------------------------------------
The following abbreviations are used in this portfolio:
<TABLE>
<S> <C>
AMBAC --American Municipal Bond Assurance Corporation
AMT --Alternative Minimum Tax
EDR --Economic Development Revenue
FGIC --Financial Guaranty Insurance Company
GNMA --Government National Mortgage Association
GO --General Obligation
HEFA --Health and Education Facilities Authority
IDA --Industrial Development Authority
IDFA --Industrial Development Finance Authority
MBIA --Municipal Bond Investors Assurance
PCR --Pollution Control Revenue
SFH --Single Family Housing
UT --Unlimited Tax
</TABLE>
(See Notes which are an integral part of the Financial Statements)
7
MARYLAND MUNICIPAL INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- -------------------------------------------------------------------------------------------
Investments in securities, at value (identified and tax cost; $6,144,386) $5,872,473
- -------------------------------------------------------------------------------------------
Cash 37,425
- -------------------------------------------------------------------------------------------
Interest receivable 84,242
- -------------------------------------------------------------------------------------------
Receivable for Fund shares sold 35,062
- -------------------------------------------------------------------------------------------
Deferred expenses 4,871
- ------------------------------------------------------------------------------------------- ----------
Total assets 6,034,073
- -------------------------------------------------------------------------------------------
LIABILITIES:
- -------------------------------------------------------------------------------------------
Dividends payable $ 11,396
- --------------------------------------------------------------------------------
Accrued expenses 26,113
- -------------------------------------------------------------------------------- --------
Total liabilities 37,509
- ------------------------------------------------------------------------------------------- ----------
NET ASSETS for 680,820 shares of beneficial interest outstanding $5,996,564
- ------------------------------------------------------------------------------------------- ----------
NET ASSETS CONSIST OF:
- -------------------------------------------------------------------------------------------
Paid-in capital $6,480,973
- -------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments (271,913)
- -------------------------------------------------------------------------------------------
Accumulated net realized gain (loss) on investments (212,496)
- ------------------------------------------------------------------------------------------- ----------
Total Net Assets $5,996,564
- ------------------------------------------------------------------------------------------- ----------
NET ASSET VALUE and Offering Price Per Share:
($5,996,564 DIVIDED BY 680,820 shares of beneficial interest outstanding) $ 8.81
- ------------------------------------------------------------------------------------------- ----------
REDEMPTION PROCEEDS per Share (97/100 of $8.81)* $ 8.55
- ------------------------------------------------------------------------------------------- ----------
<FN>
* See "Contingent Deferred Sales Charge" in the prospectus.
</TABLE>
(See Notes which are an integral part of the Financial Statements)
8
MARYLAND MUNICIPAL INCOME FUND
STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 1994*
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ----------------------------------------------------------------------------------
Interest income $ 204,728
- ----------------------------------------------------------------------------------
EXPENSES:
- ----------------------------------------------------------------------------------
Investment advisory fee $ 13,417
- -----------------------------------------------------------------------
Administrative personnel and services 56,198
- -----------------------------------------------------------------------
Custodian and portfolio accounting fees 58,997
- -----------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 7,977
- -----------------------------------------------------------------------
Shareholder services fees 6,745
- -----------------------------------------------------------------------
Fund share registration costs 2,705
- -----------------------------------------------------------------------
Printing and postage 8,495
- -----------------------------------------------------------------------
Distribution services fees 25,161
- -----------------------------------------------------------------------
Miscellaneous 1,198
- ----------------------------------------------------------------------- --------
Total expenses 180,893
- -----------------------------------------------------------------------
Deduct-
- ------------------------------------------------------------
Waiver of investment advisory fee $ 13,417
- ------------------------------------------------------------
Reimbursement of other operating expenses by Adviser 142,315 155,732
- ------------------------------------------------------------ -------- --------
Net expenses 25,161
- ---------------------------------------------------------------------------------- ---------
Net investment income 179,567
- ---------------------------------------------------------------------------------- ---------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ----------------------------------------------------------------------------------
Net realized gain (loss) on investments (identified cost
basis) (212,496)
- ----------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments (271,913)
- ---------------------------------------------------------------------------------- ---------
Net realized and unrealized gain (loss) on investments (484,409)
- ---------------------------------------------------------------------------------- ---------
Change in net assets resulting from operations $(304,842)
- ---------------------------------------------------------------------------------- ---------
<FN>
* For the period from September 2, 1993 (date of initial public investment) to
August 31, 1994.
</TABLE>
(See Notes which are an integral part of the Financial Statements)
9
MARYLAND MUNICIPAL INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
- ---------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
AUGUST 31,
1994*
------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ---------------------------------------------------------------------------
OPERATIONS--
- ---------------------------------------------------------------------------
Net investment income $ 179,567
- ---------------------------------------------------------------------------
Net realized gain (loss) on investment transactions ($0, as computed for
federal income tax purposes) (212,496)
- ---------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments (271,913)
- --------------------------------------------------------------------------- ------------
Change in net assets resulting from operations (304,842)
- --------------------------------------------------------------------------- ------------
DISTRIBUTIONS TO SHAREHOLDERS--
- ---------------------------------------------------------------------------
Dividends to shareholders from net investment income (179,567)
- ---------------------------------------------------------------------------
Distributions in excess of net investment income (25,161)
- --------------------------------------------------------------------------- ------------
Change in net assets resulting from distributions to shareholders (204,728)
- --------------------------------------------------------------------------- ------------
FUND SHARE (PRINCIPAL) TRANSACTIONS--
- ---------------------------------------------------------------------------
Proceeds from sale of shares 12,984,975
- ---------------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of dividends
declared 119,762
- ---------------------------------------------------------------------------
Cost of shares redeemed (6,598,603)
- --------------------------------------------------------------------------- ------------
Change in net assets resulting from Fund share transactions 6,506,134
- --------------------------------------------------------------------------- ------------
Change in net assets 5,996,564
- ---------------------------------------------------------------------------
NET ASSETS:
- ---------------------------------------------------------------------------
Beginning of period --
- --------------------------------------------------------------------------- ------------
End of period $ 5,996,564
- --------------------------------------------------------------------------- ------------
<FN>
*For the period from September 2, 1993 (date of initial public investment) to
August 31, 1994.
</TABLE>
(See Notes which are an integral part of the Financial Statements)
10
MARYLAND MUNICIPAL INCOME FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED
AUGUST 31, 1994*
----------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
- ----------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------------------
Net investment income 0.50
- ----------------------------------------------------------------------
Net realized and unrealized gain (loss) 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%
- ----------------------------------------------------------------------
<FN>
* Reflects operations for the period from September 2, 1993 (date of initial
public investment) to August 31, 1994.
** 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) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
</TABLE>
(See Notes which are an integral part of the Financial Statements)
11
MARYLAND MUNICIPAL INCOME FUND
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1994
- --------------------------------------------------------------------------------
(1) ORGANIZATION
Municipal Securities Income Trust (the "Trust") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as an open-end
management investment company. The Trust consists of ten non-diversified
portfolios. The financial statements included herein present only those of
Maryland Municipal Income Fund (the "Fund"). The financial statements of the
other portfolios are presented separately. The assets of each portfolio are
segregated and a shareholder's interest is limited to the portfolio in which
shares are held.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
A. INVESTMENT VALUATIONS--Municipal bonds are valued by an independent pricing
service taking into consideration yield, liquidity, risk, credit, quality,
coupon, maturity, type of issue, and any other factors or market data it
deems relevant in determining valuations for normal institutional size
trading units of debt securities. The independent pricing service does not
rely exclusively on quoted prices. Short-term securities with remaining
maturities of sixty days or less may be stated at amortized cost, which
approximates value.
B. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and expenses
are accrued daily. Bond premium and discount, if applicable, are amortized
as required by the Internal Revenue Code, as amended (the "Code").
Distributions to shareholders are recorded on the ex-dividend date.
Distributions are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles. The excess
distributions are a result of the capitalization of the 12b-1 fee for
federal income tax purposes and do not represent a return of capital for
federal income tax purposes.
C. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its tax-exempt income.
Accordingly, no provisions for federal tax are necessary. Additionally, net
capital losses of $212,496 attributable to security transactions incurred
after October 31, 1993 are treated as arising on September 1, 1994, the
first day of the Fund's next taxable year.
D. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when-issued
securities on the trade date and maintains security positions such that
sufficient liquid assets will be available to make payment for the
securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
12
MARYLAND MUNICIPAL INCOME FUND
- ---------------------------------------------------------
E. CONCENTRATION OF RISK--Since the Fund invests a substantial portion of its
assets in issuers located in one state, it will be more susceptible to
factors adversely affecting issuers of that state than would be a comparable
general tax-exempt mutual fund. In order to reduce the credit risk
associated with such factors, at August 31, 1994, 32.3% of the securities in
the portfolio of investments are backed by letters of credit or bond
insurance of various financial institutions and financial guaranty assurance
agencies. The value of investments insured by or supported (backed) by a
letter of credit for any one institution or agency did not exceed 10.7% of
total investments.
F. DEFERRED EXPENSES--The costs incurred by the Fund with respect to
registration of its shares in its first fiscal year, excluding the initial
expense of registering its shares, have been deferred and are being
amortized using the straight-line method not to exceed a period of five
years from the Fund's commencement date.
G. OTHER--Investment transactions are accounted for on the trade date.
(3) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
AUGUST 31,
1994*
- ---------------------------------------------------------------------- ----------
<S> <C>
Shares sold 1,365,537
- ----------------------------------------------------------------------
Shares issued to shareholders in payment of dividends declared 13,295
- ----------------------------------------------------------------------
Shares redeemed (698,012)
- ---------------------------------------------------------------------- ----------
Net change resulting from Fund share transactions 680,820
- ---------------------------------------------------------------------- ----------
<FN>
* For the period from September 2, 1993 (date of initial public investment) to
August 31, 1994.
</TABLE>
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
ADVISORY FEE--Federated Advisers, the Fund's investment adviser (the "Adviser"),
receives for its services 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 and reimburse certain operating expenses of the Fund.
The Adviser can modify or terminate this voluntary waiver and reimbursement at
any time at its sole discretion.
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS") provides the Fund
with administrative personnel and services. Prior to March 1, 1994, these
services were provided at approximate cost. Effective March 1, 1994, the FAS fee
is based on the level of average aggregate daily
13
MARYLAND MUNICIPAL INCOME FUND
- ---------------------------------------------------------
net assets of all funds advised by subsidiaries of Federated Investors for the
period. The administrative fee received during the period of the Administrative
Services Agreement, on an annualized basis, shall be at least $125,000 per
portfolio and $30,000 per each additional class of shares.
DISTRIBUTION AND SHAREHOLDER SERVICES FEE--The Fund has adopted a Distribution
Plan (the "Plan") pursuant to Rule 12b-1 under the Act. Under the terms of the
Plan, the Fund will compensate Federated Securities Corp. ("FSC"), the principal
distributor, from the net assets of the Fund to finance activities intended to
result in the sale of the Fund's shares. The Plan provides that the Fund may
incur distribution expenses up to .75 of 1% of the Fund's average daily net
assets, annually, to compensate FSC.
Under the terms of a Shareholder Services Agreement with Federated Shareholder
Services ("FSS"), the Fund will pay FSS up to .25 of 1% of average net assets of
the Fund for the period. This fee is to obtain certain personal services for
shareholders and to maintain shareholder accounts.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES--Federated Services Company
("FServ") serves as transfer and dividend disbursing agent for the Fund. The
FServ fee is based on the size, type and number of accounts and transactions
made by shareholders.
ORGANIZATIONAL EXPENSES--Organizational expenses of $14,124 and start-up
administrative services expenses of $57,000 were borne initially by the Adviser.
The Fund has agreed to reimburse the Adviser for the organizational expenses and
start-up administrative expenses during the five year period following August
31, 1993 (date the Fund first became effective). For the year ended August 31,
1994, the Fund paid $1,883 and $7,600, respectively, pursuant to this agreement.
INTERFUND TRANSACTIONS--During the year ended August 31, 1994, the Fund engaged
in purchase and sale transactions with other affiliated funds at current value
on the date of the transaction, pursuant to Rule 17a-7 under the Act amounting
to $3,800,000 and $3,800,000, respectively.
Certain Officers and Trustees of the Fund are Officers and Directors or Trustees
of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
fiscal year ended August 31, 1994, were as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
<S> <C>
PURCHASES $8,485,307
- ---------------------------------------------------------------------- ----------
SALES $2,129,632
- ---------------------------------------------------------------------- ----------
</TABLE>
14
INDEPENDENT AUDITORS' REPORT
- ---------------------------------------------------------
To the Board of Trustees of MUNICIPAL SECURITIES INCOME TRUST
and Shareholders of MARYLAND MUNICIPAL INCOME FUND:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Maryland Municipal Income Fund (a portfolio of
Municipal Securities Income Trust) as of August 31, 1994, and the related
statement of operations, the statement of changes in net assets and the
financial highlights for the period from September 2, 1993 (date of initial
public investment) to August 31, 1994. These financial statements and financial
highlights are the responsibility of the Trust's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of August 31, 1994 by
correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Maryland Municipal
Income Fund as of August 31, 1994, and the results of its operations, the
changes in its net assets and its financial highlights for the period from
September 2, 1993 (date of initial public investment) to August 31, 1994 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
October 7, 1994
15
<TABLE>
<CAPTION>
TRUSTEES OFFICERS
- ---------------------------------------------------------
<S> <C>
John F. Donahue John F. Donahue
John T. Conroy, Jr. CHAIRMAN
William J. Copeland Richard B. Fisher
J. Christopher Donahue PRESIDENT
James E. Dowd J. Christopher Donahue
Lawrence D. Ellis, M.D. VICE PRESIDENT
Edward L. Flaherty, Jr. Edward C. Gonzales
Peter E. Madden VICE PRESIDENT AND TREASURER
Gregor F. Meyer John W. McGonigle
Wesley W. Posvar VICE PRESIDENT AND SECRETARY
Marjorie P. Smuts David M. Taylor
ASSISTANT TREASURER
J. Crilley Kelly
ASSISTANT SECRETARY
</TABLE>
Mutual funds are not obligations of or insured by any bank, nor
are they insured by the federal government or any of its agencies.
Investment in these shares involves risk, including the possible
loss of principal.
This report is authorized for distribution to prospective
investors only when preceded or accompanied by the Fund's
prospectus, which contains facts concerning its objective and
policies, management fees, expenses and other information.
16
- --------------------------------------------------------------------------------
MARYLAND
- --------------------------------------------------------------------------------
MUNICIPAL
- --------------------------------------------------------------------------------
INCOME
- --------------------------------------------------------------------------------
FUND
ANNUAL REPORT
TO SHAREHOLDERS
AUGUST 31, 1994
[LOGO] Federated Securities Corp. ----------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
--------------------------------------------------------
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
-------------------------------------------------------------------------
[LOGO]
RECYCLED
PAPER
625922851
G00700-02 (10/94)
- ---------------------------------------------------
Florida Municipal Income Fund
Annual Report to Shareholders
August 31, 1994
[LOGO] Federated Securities Corp.
Distributor
A subsidiary of Federated Investors
Federated Investors Tower
Pittsburgh, PA 15222-3779
625922802
G00700-01(10/94)
PRESIDENT'S MESSAGE
- --------------------------------------------------------------------------------
Dear Shareholder:
I am pleased to present the Annual Report of Florida Municipal Income Fund (the
"Fund"), covering the period from September 1, 1993 through August 31, 1994.
This report begins with a review of the economy and the municipal market.
Following the review are the Fund's Portfolio of Investments and Financial
Statements.
We introduced this Fund to give tax-sensitive Florida residents the opportunity
for tax-free monthly income. This income is exempt from federal regular income
tax. The value of your investment is free from Florida intangibles tax.
During the reporting period, the Fund's portfolio of investment-grade, long-term
Florida municipal securities paid a total of $0.57 per share in tax-free
distributions to shareholders. As all bond investments tend to do when interest
rates rise, the Fund's net asset value declined from $10.35 to $9.36. At the end
of the period, the Fund's total net assets stood at $11.6 million.
We thank you for your confidence in Florida Municipal Income Fund.
Sincerely,
Richard B. Fisher
President
October 14, 1994
MANAGEMENT DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
The fiscal year ended August 31, 1994 was difficult for investors in long-term,
fixed-income securities. Fueled by fears of the potential for accelerating
inflation driven by a steadily expanding economy, yields for thirty-year U.S.
Treasury bonds rose sharply from their cyclical low of 5.79% on October 15, 1993
to 6.38% on November 22, 1993. Yields then remained in a relatively narrow
trading range until February 4, 1994. The Federal Reserve Board then effected
the first of several rate hikes which reignited inflation fears, sending yields
soaring. The yield for thirty-year U.S. Treasury bonds closed at 7.45% on August
31, 1994.
The Fund was established in June, 1993 to provide investors the ability to
invest in a non-diversified portfolio of investment-grade, long-term Florida
municipal issues. The investment objective of the Fund is the provision of
current income which is exempt from federal regular income tax and the personal
income taxes imposed by the state of Florida intangibles tax.*
When ascertaining the credit quality of issues for potential investment by the
Fund, the investment adviser focuses upon a variety of economic and financial
parameters. For general obligation issues, analysis is directed towards
demographic constitution, income distribution, property value levels and growth,
provision of governmental services, and debt authorization. For revenue issues,
examination is made of issuer cash flow generation, sensitivity to product or
service pricing, competition and industry/sector make-up, debt structure, debt
service coverage, financial flexibility, and contingent liabilities, if any.
Issues purchased by the Fund during the last twelve months consisted largely of
single-family mortgage revenue obligations, hospital revenue obligations, and
pollution control revenue obligations.
For the fiscal year ended August 31, 1994, an investor in the Fund experienced a
"total return" of (4.13%).** This performance was comprised of 5.44% income and
reinvestment return (net of fund expenses) and of (9.57%) depreciation in the
net asset value per share of the Fund.
* Income may be subject to the federal alternative minimum tax.
** Based on net asset value, which does not reflect sales load or contingent
deferred sales charge, if applicable. Performance quoted represents past
performance. Investment return and principal value will fluctuate, so that an
investor's shares, when redeemed, may be worth more or less than their
original cost.
FLORIDA MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN FLORIDA MUNICIPAL INCOME FUND
The graph below illustrates the hypothetical investment of $10,000 in the
Florida Municipal Income Fund (the "Fund") from June 2, 1993 (start of
performance) to August 31, 1994, compared to the Lehman Brothers Revenue Bond
Index (LBRB).+
Graphic representation "A9" omitted. See Appendix.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN FOR THE
PERIOD ENDED AUGUST 31, 1994
<C> <C>
1 Year............................................................. (6.99%)
Start of Performance 6/2/93........................................ (1.23%)
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
* Represents a hypothetical investment of $10,000 in the Fund. The ending value
of the Fund reflects a 2.00% contingent deferred sales charge on any
redemption less than three years, but greater than one year from the purchase
date. The Fund's performance assumes the reinvestment of all dividends and
distributions. LBRB has been adjusted to reflect reinvestment of dividends on
securities in the index.
+ The LBRB is not adjusted to reflect sales loads, expenses, or other fees that
the Securities and Exchange Commission requires to be reflected in the Fund's
performance. This index is unmanaged.
FLORIDA MUNICIPAL INCOME FUND
PORTFOLIO OF INVESTMENTS
AUGUST 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- ---------- --------------------------------------------------------- --------- -----------
<C> <S> <C> <C>
SHORT-TERM MUNICIPAL SECURITIES--0.9%
- -----------------------------------------------------------------------
PUERTO RICO--0.9%
---------------------------------------------------------
$ 100,000 Government Development Bank of Puerto Rico Weekly VRDNs
(Credit Suisse and Sumitomo Bank Ltd. LOCs)
(AT AMORTIZED COST) A-1 $ 100,000
--------------------------------------------------------- -----------
LONG-TERM MUNICIPAL SECURITIES--97.1%
- -----------------------------------------------------------------------
FLORIDA--93.9%
---------------------------------------------------------
240,000 Alachua County, FL, HFA, 6.05% Revenue Bonds (Santa Fe
Healthcare Facilities, 11/15/2016 BBB+ 219,826
---------------------------------------------------------
600,000 Bradford County, FL, Health Facilities Authority, 6.05%
Revenue Bonds (Santa Fe Healthcare Facility), 11/15/2016 BBB+ 549,564
---------------------------------------------------------
500,000 Brevard County, FL, 6.40% IDRB (NUI Corp.)/AMBAC
Insured)/(Subject to AMT), 10/1/2024 AAA 506,680
---------------------------------------------------------
500,000 Brevard County, FL, SFM, 6.70% Revenue Bonds (GNMA
Collateralized)/(Subject to AMT), 9/1/2027 AAA 507,825
---------------------------------------------------------
250,000 Celebration Community Development District, FL, 6.10%
Special Assessment Bonds (Series 1994)/(MBIA Insured)/
(Original Issue Yield: 6.25%), 5/1/2016 AAA 250,362
---------------------------------------------------------
400,000 Citrus County, FL, PCR, 6.35% Revenue Refunding Bonds
(Florida Power Corp.-Crystal River)/(Original Issue
Yield: 6.369%), 2/1/2022 A+ 403,188
---------------------------------------------------------
300,000 Denedin, FL, 5.375% Hospital Revenue Refunding Bonds
(Mease Health Care)/(MBIA Insured)/(Original Issue Yield:
5.669%), 11/15/2021 AAA 267,990
---------------------------------------------------------
200,000 East County Water Control District, FL, 6.30% Water
Management Construction Refunding Bonds (Series
1994)/(Original Issue Yield: 6.371%), 11/1/2011 AA 201,964
---------------------------------------------------------
</TABLE>
FLORIDA MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- ---------- --------------------------------------------------------- --------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- -----------------------------------------------------------------------
FLORIDA--CONTINUED
---------------------------------------------------------
$ 200,000 Escambia County, FL, Health Facilities Authority, 6.00%
Revenue Refunding Bonds (Baptist Hospital, Inc.)/
(Original Issue Yield: 6.18%), 10/1/2014 BBB+ $ 181,680
---------------------------------------------------------
1,000,000 Escambia County, FL, PCR, 5.875% Revenue Bonds
(Champion International Corp)/(Original Issue Yield:
5.939%)/(Subject to AMT), 6/1/2022 BBB 887,470
---------------------------------------------------------
100,000 Florida Keys Aqueduct Authority Water, 5.25% Water
Revenue Refunding Bonds (AMBAC Insured)/(Original Issue
Yield: 5.67%), 9/1/2021 AAA 87,506
---------------------------------------------------------
300,000 Florida State Board of Education Capital Outlay Public
Education, 5.40% UT GO Bonds (Series C)/(Original Issue
Yield: 5.50%), 6/1/2018 AA 271,026
---------------------------------------------------------
100,000 Florida State Department of Transportation, 5.50% UT GO
Bonds, (Original Issue Yield: 5.55%), 7/1/2023 AA 90,148
---------------------------------------------------------
300,000 Florida State Municipal Power Agency, 5.10% Revenue Bonds
(All Requirements Power Supply)/(AMBAC Insured)/
(Original Issue Yield: 5.388%), 10/1/2025 AAA 252,216
---------------------------------------------------------
100,000 Florida State Turnpike Authority, 5.00% Turnpike Revenue
Bonds (Department of Transportation)/(FGIC Insured)/
(Original Issue Yield: 5.65%), 7/1/2019 AAA 84,662
---------------------------------------------------------
250,000 Florida State, HFA, 5.875% SFM Revenue Bonds (Series B),
1/1/2027 AA 227,725
---------------------------------------------------------
500,000 Florida State, HFA, 6.65% SFM Revenue Refunding Bonds
(Series 1994B)/(Subject to AMT), 7/1/2026 AA 503,195
---------------------------------------------------------
100,000 Hillsborough County, FL, 5.50% UT GO Bonds (Parks and
Recreational Program)/(Original Issue Yield: 5.55%),
7/1/2023 AA- 91,264
---------------------------------------------------------
100,000 Jacksonville, FL, 5.75% Excise Tax Revenue Bonds (FGIC
Insured)/(Original Issue Yield: 6.088%), 10/1/2020 AAA 94,089
---------------------------------------------------------
100,000 Jacksonville, FL, Electric Authority, 5.25% Revenue Bonds
(Series 3-A)/(Original Issue Yield: 6.15%), 10/1/2028 AA 85,094
---------------------------------------------------------
</TABLE>
FLORIDA MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- ---------- --------------------------------------------------------- --------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- -----------------------------------------------------------------------
FLORIDA--CONTINUED
---------------------------------------------------------
$ 250,000 Jacksonville, FL, Health Facilities Authority, 6.40%
Revenue Bonds (National Benevolent Association),
12/1/2016 Baa1 $ 235,650
---------------------------------------------------------
500,000 Jacksonville, FL, HFDA, 6.25% Revenue Bonds (National
Benevolent Association-Cypress)/(Original Issue Yield:
6.50%), 12/1/2023 Baa1 461,050
---------------------------------------------------------
425,000 Kissimmee, FL, Utility Authority, 5.25% Electric System
Revenue Refunding Bonds (FGIC Insured)/(Original Issue
Yield: 5.68%), 10/1/2018 AAA 374,336
---------------------------------------------------------
700,000 Leesburg, FL, 5.625% Hospital Revenue Bonds
(Series 1993B)/(Leesburg Regional Medical Center)/
(Original Issue Yield: 5.75%), 7/1/2013 BBB+ 620,473
---------------------------------------------------------
100,000 Leesburg, FL, 5.70% Hospital Revenue Bonds (Leesburg
Regional Medical Center)/(Original Issue Yield: 5.80%),
7/1/2018 BBB+ 87,238
---------------------------------------------------------
450,000 Leesburg, FL, 6.125% Hospital Revenue Refunding Bonds
(Leesburg Medical Center)/(Original Issue Yield: 6.375%),
7/1/2018 BBB+ 414,936
---------------------------------------------------------
200,000 Miami, FL, Health Facilities Authority, 5.125% Revenue
Refunding Bonds (Mercy Hospital)/(MBIA Insured)/
(Original Issue Yield: 5.392%), 8/15/2020 AAA 171,736
---------------------------------------------------------
420,000 Orange County, FL, Health Facilities Authority, 6.00%
Revenue Bonds (Orlando Regional Healthcare)/(MBIA
Insured)/(Original Issue Yield: 6.20%), 11/1/2024 AAA 410,798
---------------------------------------------------------
130,000 Orlando and Orange County Expressway Authority, FL, 5.25%
Revenue Bonds (FGIC Insured)/(Original Issue Yield:
5.719%), 7/1/2023 AAA 113,181
---------------------------------------------------------
200,000 Orlando, FL, Utilities Commission, 5.25% Water and
Electric System Revenue Bonds (Series 1993A)/(Original
Issue Yield: 5.72%), 10/1/2023 AA- 172,854
---------------------------------------------------------
</TABLE>
FLORIDA MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- ---------- --------------------------------------------------------- --------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- -----------------------------------------------------------------------
FLORIDA--CONTINUED
---------------------------------------------------------
$ 150,000 Orlando, FL, Utilities Commission, 5.50% Water and
Electric System Revenue Bonds (Series A)/(Original Issue
Yield: 6.65%), 10/1/2026 AA- $ 133,922
---------------------------------------------------------
1,050,000 Palm Beach, FL, Health Facilities Authority, 6.30%
Hospital Revenue Bonds (Series 1993)/(Good Samaritan
Health
System, Inc.), 10/1/2022 A1 1,029,829
---------------------------------------------------------
200,000 Pinellas County, FL, 6.00% Sewer Revenue Bonds (FGIC
Insured)/(Original Issue Yield: 6.027%), 10/1/2024 AAA 196,974
---------------------------------------------------------
500,000 Pinellas County, FL, HFA, SFM, 6.55% Revenue Bonds
(Series 1994A)/(Multi County Program)/(GNMA/FNMA
Collateralized)/(Subject to AMT), 8/1/2027 AAA 505,735
---------------------------------------------------------
100,000 Vero Beach, FL, 5.375% Electric Revenue Refunding Bonds
(Series A)/(MBIA Insured)/(Original Issue Yield: 5.65%),
12/1/2021 AAA 89,444
---------------------------------------------------------
150,000 Volusia County, FL, Health Facilities Authority, 5.75%
Hospital Revenue Refunding Bonds (Series 1994)/(Memorial
Health System)/(AMBAC Insured)/(Original Issue Yield:
5.967%), 11/15/2020 AAA 141,664
--------------------------------------------------------- -----------
Total 10,923,294
--------------------------------------------------------- -----------
</TABLE>
FLORIDA MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- ---------- --------------------------------------------------------- --------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- -----------------------------------------------------------------------
PUERTO RICO--3.2%
---------------------------------------------------------
$ 200,000 Puerto Rico Electric Power Authority, 5.00% Revenue Bonds
(Original Issue Yield: 6.90%), 7/1/2012 A- $ 175,002
---------------------------------------------------------
200,000 Puerto Rico Electric Power Authority, 6.375% Revenue
Bonds (Series T)/(Original Issue Yield: 6.58%), 7/1/2024 A- 202,080
--------------------------------------------------------- -----------
Total 377,082
--------------------------------------------------------- -----------
TOTAL LONG-TERM MUNICIPAL SECURITIES
(IDENTIFIED COST $11,866,023) $11,300,376
--------------------------------------------------------- -----------
TOTAL MUNICIPAL SECURITIES (IDENTIFIED COST $11,966,023) $11,400,376+
--------------------------------------------------------- -----------
</TABLE>
* Please refer to the Appendix of the Statement of Additional Information for an
explanation of the credit ratings. Current credit ratings are unaudited.
+ The cost of investments for federal tax purposes amounts to $11,968,878. The
net unrealized depreciation on a federal tax basis amounts to $568,502, which
is comprised of $45,334 appreciation and $613,836 depreciation at August 31,
1994.
Note: The categories of investments are shown as a percentage of net assets
($11,634,652) at August 31, 1994.
FLORIDA MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
The following abbreviations are used in this portfolio:
<TABLE>
<S> <C>
AMBAC -- American Municipal Bond Assurance Corporation
AMT -- Alternative Minimum Tax
FGIC -- Financial Guaranty Insurance Company
GNMA -- Government National Mortgage Association
GO -- General Obligation
HFA -- Housing Finance Authority/Agency
HFDA -- Health Facility Development Authority
IDRB -- Industrial Development Revenue Bonds
LOCs -- Letters of Credit
MBIA -- Municipal Bond Investors Assurance
PCR -- Pollution Control Revenue
SFM -- Single Family Mortgage
UT -- Utah/Unlimited Tax
VRDNs -- Variable Rate Demand Notes
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FLORIDA MUNICIPAL INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- --------------------------------------------------------------------------------
Investments in securities, at value
(identified cost and tax cost; $11,966,023 and $11,968,878 respectively) $11,400,376
- --------------------------------------------------------------------------------
Cash 25,324
- --------------------------------------------------------------------------------
Interest receivable 177,822
- --------------------------------------------------------------------------------
Receivable for Fund shares sold 100,257
- --------------------------------------------------------------------------------
Deferred expenses 15,251
- -------------------------------------------------------------------------------- -----------
Total assets 11,719,030
- --------------------------------------------------------------------------------
LIABILITIES:
- ----------------------------------------------------------------------
Dividends payable $51,399
- ----------------------------------------------------------------------
Accrued expenses 32,979
- ---------------------------------------------------------------------- -------
Total liabilities 84,378
- -------------------------------------------------------------------------------- -----------
NET ASSETS for 1,242,600 shares of beneficial interest outstanding $11,634,652
- -------------------------------------------------------------------------------- -----------
NET ASSETS CONSIST OF:
- --------------------------------------------------------------------------------
Paid-in capital $12,406,759
- --------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments (565,647)
- --------------------------------------------------------------------------------
Accumulated net realized gain (loss) on investments (206,460)
- -------------------------------------------------------------------------------- -----------
Total Net Assets $11,634,652
- -------------------------------------------------------------------------------- -----------
NET ASSET VALUE and Offering Price per Share
($11,634,652 / 1,242,600 shares of beneficial interest outstanding) $9.36
- -------------------------------------------------------------------------------- -----------
REDEMPTION PROCEEDS per Share (97/100 of $9.36)* $9.08
- -------------------------------------------------------------------------------- -----------
</TABLE>
* See "Redeeming Shares" in the prospectus.
(See Notes which are an integral part of the Financial Statements)
FLORIDA MUNICIPAL INCOME FUND
STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ------------------------------------------------------------------------------------
Interest income $ 463,865
- ------------------------------------------------------------------------------------
EXPENSES:
- ------------------------------------------------------------------------------------
Investment advisory fee $ 31,280
- ------------------------------------------------------------------------
Administrative personnel and services 100,988
- ------------------------------------------------------------------------
Trustees' fees 125
- ------------------------------------------------------------------------
Custodian and portfolio accounting fees 60,663
- ------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 13,995
- ------------------------------------------------------------------------
Fund share registration costs 3,041
- ------------------------------------------------------------------------
Printing and postage 9,884
- ------------------------------------------------------------------------
Legal fees 2,370
- ------------------------------------------------------------------------
Auditing fees 16,114
- ------------------------------------------------------------------------
Shareholder services fee 18,581
- ------------------------------------------------------------------------
Distribution services fees 58,653
- ------------------------------------------------------------------------
Insurance premiums 5,046
- ------------------------------------------------------------------------
Taxes 31
- ------------------------------------------------------------------------
Miscellaneous 1,371
- ------------------------------------------------------------------------ --------
Total expenses 322,142
- ------------------------------------------------------------------------
Deduct--
- ------------------------------------------------------------------------
Waiver of investment advisory fee $ 31,280
- -------------------------------------------------------------
Reimbursement of other operating expenses by adviser 232,209 263,489
- ------------------------------------------------------------- -------- --------
Net expenses 58,653
- ------------------------------------------------------------------------------------ ---------
Net investment income 405,212
- ------------------------------------------------------------------------------------ ---------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ------------------------------------------------------------------------------------
Net realized gain (loss) on investments (identified cost
basis) (206,460)
- ------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments (646,820)
- ------------------------------------------------------------------------------------ ---------
Net realized and unrealized loss on investments (853,280)
- ------------------------------------------------------------------------------------ ---------
Change in net assets resulting from operations $(448,068)
- ------------------------------------------------------------------------------------ ---------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FLORIDA MUNICIPAL INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
--------------------------
1994 1993*
----------- -----------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ------------------------------------------------------------------
OPERATIONS--
- ------------------------------------------------------------------
Net investment income $ 405,212 $ 23,113
- ------------------------------------------------------------------
Net realized gain (loss) on investment transactions ($0 and $0,
respectively, as computed for federal tax purposes) (206,460) --
- ------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on
investments (646,820) 81,173
- ------------------------------------------------------------------ ----------- -----------
Change in net assets resulting from operations (448,068) 104,286
- ------------------------------------------------------------------ ----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS
- ------------------------------------------------------------------
Dividends to shareholders from net investment income (405,212) (23,113)
- ------------------------------------------------------------------
Distributions in excess of net investment income (58,653) (3,466)
- ------------------------------------------------------------------ ----------- -----------
Change in net assets resulting from distributions to
shareholders (463,865) (26,579)
- ------------------------------------------------------------------ ----------- -----------
FUND SHARE (PRINCIPAL) TRANSACTIONS
- ------------------------------------------------------------------
Proceeds from sale of shares 10,844,288 4,230,998
- ------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of
dividends declared 55,980 4,064
- ------------------------------------------------------------------
Cost of shares redeemed (1,371,975) (1,294,477)
- ------------------------------------------------------------------ ----------- -----------
Change in net assets resulting from Fund share transactions 9,528,293 2,940,585
- ------------------------------------------------------------------ ----------- -----------
Change in net assets 8,616,360 3,018,292
- ------------------------------------------------------------------
NET ASSETS:
- ------------------------------------------------------------------
Beginning of period 3,018,292 --
- ------------------------------------------------------------------ ----------- -----------
End of period $11,634,652 $ 3,018,292
- ------------------------------------------------------------------ ----------- -----------
</TABLE>
* For the period from June 1, 1993 (date of initial public investment) to August
31, 1993.
(See Notes which are an integral part of the Financial Statements)
FLORIDA MUNICIPAL INCOME FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
--------------------
1994 1993*
------ ------
<S> <C> <C>
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 (loss) 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%
- ----------------------------------------------------------------------
</TABLE>
* 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) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
FLORIDA MUNICIPAL INCOME FUND
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1994
- --------------------------------------------------------------------------------
(1) ORGANIZATION
Municipal Securities Income Trust (the "Trust") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as an open-end
management investment company. The Trust consists of ten, non-diversified
portfolios. The financial statements included herein present only those of
Florida Municipal Income Fund (the "Fund"). The financial statements of the
other portfolios are presented separately. The assets of each portfolio are
segregated and a shareholder's interest is limited to the portfolio in which
shares are held.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
<TABLE>
<S> <C>
A. INVESTMENT VALUATIONS--Municipal bonds are valued by an independent pricing service
taking into consideration yield, liquidity, risk, credit, quality, coupon, maturity, type
of issue, and any other factors or market data it deems relevant in determining
valuations for normal institutional size trading units of debt securities. The
independent pricing service does not rely exclusively on quoted prices. Short-term
securities with remaining maturities of sixty days or less may be stated at amortized
cost, which approximates value.
B. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and expenses are accrued
daily. Bond premium and discount, if applicable, are amortized as required by the
Internal Revenue Code, as amended (the "Code"). Distributions to shareholders are
recorded on the ex-dividend date. Distributions are determined in accordance with income
tax regulations which may differ from generally accepted accounting principles. The
excess distributions are a result of the capitalization of the 12b-1 fees for federal
income tax purposes and do not represent a return of capital for federal income tax
purposes.
C. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the Code
applicable to regulated investment companies and to distribute to shareholders each year
substantially all of its tax-exempt income. Accordingly, no provisions for federal tax
are necessary. Additionally, net capital losses of $203,605 attributable to security
transactions incurred after October 31, 1993 are treated as arising on September 1, 1994,
the first day of the Fund's next taxable year.
D. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in when-issued or
delayed delivery transactions. The Fund records when-issued securities on the trade date
and maintains security positions such that sufficient liquid assets will be available to
make payment for the securities purchased. Securities purchased on a when-issued or
delayed delivery basis are marked to market daily and begin earning interest on the
settlement date.
</TABLE>
FLORIDA MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
E. CONCENTRATION OF RISK--Since the Fund invests a substantial portion of its assets in
issuers located in one state, it will be more susceptible to factors adversely affecting
issuers of that state than would be a comparable general tax-exempt mutual fund. In order
to reduce the credit risk associated with such factors, at August 31, 1994, 36% of the
securities in the portfolio of investments are backed by letters of credit or bond
insurance of various financial institutions and financial guaranty assurance agencies.
The value of investments insured by or supported (backed) by a letter of credit for any
one institution or agency did not exceed 10% of total investments.
F. DEFERRED EXPENSES--The costs incurred by the Fund with respect to registration of its
shares in its first fiscal year, excluding the initial expense of registering its shares,
have been deferred and are being amortized using the straight-line method not to exceed a
period of five years from the Fund's commencement date.
G. OTHER--Investment transactions are accounted for on the trade date.
</TABLE>
(3) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
----------------------
1994 1993*
- ---------------------------------------------------------------------- --------- --------
<S> <C> <C>
Shares sold 1,080,585 419,085
- ----------------------------------------------------------------------
Shares issued to shareholders in payment of dividends declared 5,821 397
- ----------------------------------------------------------------------
Shares redeemed (135,560) (127,728)
- ---------------------------------------------------------------------- --------- --------
Net change resulting from Fund share transactions 950,846 291,754
- ---------------------------------------------------------------------- --------- --------
</TABLE>
* For the period from June 1, 1993 (date of initial public investment) to August
31, 1993.
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
ADVISORY FEE--Federated Advisers, the Fund's investment adviser (the "Adviser"),
receives for its services 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 and reimburse certain operating expenses of the Fund.
The Adviser can modify or terminate this voluntary waiver and reimbursement at
any time at its sole discretion.
FLORIDA MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS") provides the Fund
with administrative personnel and services. Prior to March 1, 1994, these
services were provided at approximate cost. Effective March 1, 1994, the FAS fee
is based on the level of average aggregate daily net assets of all funds advised
by subsidiaries of Federated Investors for the period. The administrative fee
received during the period of the Administrative Services Agreement shall be at
least $125,000 per portfolio and $30,000 per each additional class of shares.
DISTRIBUTION AND SHAREHOLDER SERVICES FEE--The Fund has adopted a Distribution
Plan (the "Plan") pursuant to Rule 12b-1 under the Act. Under the terms of the
Plan, the Fund will compensate Federated Securities Corp. ("FSC"), the principal
distributor, from the net assets of the Fund to finance activities intended to
result in the sale of the Fund's shares. The Plan provides that the Fund may
incur distribution expenses up to 0.75 of 1% of the average daily net assets of
the Fund's Shares, annually, to compensate FSC.
Under the terms of a Shareholder Services Agreement with Federated Shareholder
Services ("FSS"), the Fund will pay FSS up to 0.25 of 1% of average net assets
for the Fund for the period. This fee is to obtain certain personal services for
shareholders and the maintenance of shareholder accounts.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES--Federated Services Company
("FServ") serves as transfer agent and dividend disbursing agent for the Fund.
The FServ fee is based on the size, type and number of accounts and transactions
made by the shareholders.
ORGANIZATIONAL EXPENSES--Organizational expenses of $22,563 and start-up
administrative services expenses of $56,915 were borne initially by the Adviser.
The Fund has agreed to reimburse the Adviser for the organizational expenses and
start-up administrative expenses during the five year period following May 23,
1993 (date the Fund first became effective). For the year ended August 31, 1994,
the Fund paid $3,008 and $7,589, respectively, pursuant to this agreement.
INTERFUND TRANSACTIONS--During the year ended August 31, 1994, the Fund engaged
in purchase and sale transactions with other affiliated funds at current value
on the date of the transaction pursuant to Rule 17a-7 under the Act amounting to
$7,910,133 and $7,550,000 respectively.
Certain of the Officers and Trustees of the Fund are Officers and Directors or
Trustees of the above companies.
FLORIDA MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
fiscal year ended
August 31, 1994, were as follows:
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------
PURCHASES $11,721,756
- ------------------------------------------------------------------------------- -----------
SALES $ 2,534,704
- ------------------------------------------------------------------------------- -----------
</TABLE>
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
To the Board of Trustees of
MUNICIPAL SECURITIES INCOME TRUST
and Shareholders of FLORIDA MUNICIPAL INCOME FUND:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Florida Municipal Income Fund (a portfolio of
Municipal Securities Income Trust) as of August 31, 1994, the related statement
of operations for the year then ended, and the statement of changes in net
assets and the financial highlights for the years ended August 31, 1994 and
1993. These financial statements and financial highlights are the responsibility
of the Trust's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
August 31, 1994 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Florida Municipal
Income Fund as of August 31, 1994, the results of its operations, the changes in
its net assets and its financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
October 7, 1994
<TABLE>
<S> <C>
TRUSTEES OFFICERS
- ---------------------------------------------------------------------------------------------
John F. Donahue John F. Donahue
John T. Conroy, Jr. Chairman
William J. Copeland Richard B. Fisher
J. Christopher Donahue President
James E. Dowd J. Christopher Donahue
Lawrence D. Ellis, M.D. Vice President
Edward L. Flaherty, Jr. Edward C. Gonzales
Peter E. Madden Vice President and Treasurer
Gregor F. Meyer John W. McGonigle
Wesley W. Posvar Vice President and Secretary
Marjorie P. Smuts David M. Taylor
Assistant Treasurer
J. Crilley Kelly
Assistant Secretary
</TABLE>
Mutual funds are not bank deposits or obligations, are not guaranteed by any
bank, and are not insured or guaranteed by the FDIC, the Federal Reserve Board,
or any other government agency. Investment in mutual funds involves risk,
including possible loss of principal.
This report is authorized for distribution to prospective investors only when
preceded or accompanied by the Fund's prospectus which contains facts concerning
its objective and policies, management fees, expenses and other information.
- --------------------------------------------------------------------------------
TEXAS
- --------------------------------------------------------------------------------
MUNICIPAL
- --------------------------------------------------------------------------------
INCOME
- --------------------------------------------------------------------------------
FUND
- --------------------------------------------------------------------------------
ANNUAL REPORT
TO SHAREHOLDERS
AUGUST 31, 1994
FEDERATED SECURITIES CORP.
(LOGO)
- ---------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
006438 (10/94)
PRESIDENT'S MESSAGE
- --------------------------------------------------------------------------------
Dear Shareholder:
I am pleased to present the Annual Report of Texas Municipal Income Fund, (the
"Fund"), covering the period from September 1, 1993 through August 31, 1994.
This report begins with a review of the economy and the municipal market.
Following the review are the Fund's Portfolio of Investments and Financial
Statements.
We introduced this Fund to give tax-sensitive Texas residents the opportunity
for monthly income exempt from federal regular income tax.
During the reporting period, the Fund's portfolio of investment-grade, long-term
Texas municipal securities paid a total of $0.58 per share in tax-free
distributions to shareholders. As all bond investments tend to do when interest
rates rise, the Fund's net asset value declined from $10.43 to $9.45. At the end
of the period, the Fund's total net assets stood at $11.1 million.
We thank you for your confidence in Texas Municipal Income Fund.
Sincerely,
Richard B. Fisher
President
October 15, 1994
MANAGEMENT DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
The fiscal year ended August 31, 1994, was difficult for investors in long-term,
fixed-income securities. Fueled by fears of the potential for accelerating
inflation driven by a steadily expanding economy, yields for thirty-year U.S.
Treasury bonds rose sharply from their cyclical low of 5.79% on October 15, 1993
to 6.38% on November 22, 1993. Yields then remained in a relatively narrow
trading range until February 4, 1994. The Federal Reserve Board then effected
the first of several rate hikes which reignited inflation fears, sending yields
soaring. The yield for thirty-year U.S. Treasury bonds closed at 7.45% on August
31, 1994.
The Fund was established in June, 1993 to provide investors the ability to
invest in a non-diversified portfolio of investment-grade, long-term Texas
municipal issues. The investment objective of the Fund is the provision of
current income which is exempt from federal regular income tax.
When ascertaining the credit quality of issues for potential investment by the
Fund, the investment adviser focuses upon a variety of economic and financial
parameters. For general obligation issues, analysis is directed towards
demographic constitution, income distribution, property value levels and growth,
provision of governmental services, and debt authorization. For revenue issues,
examination is made of issuer cash flow generation, sensitivity to product or
service pricing, competition and industry/sector make-up, debt structure, debt
service coverage, financial flexibility, and contingent liabilities, if any.
Issues purchased by the Fund during the last twelve months consisted largely of
single-family mortgage revenue obligations; pollution control revenue
obligations; airport special facilities revenue obligations; hospital revenue
obligations; and water system revenue obligations.
For the fiscal year ended August 31, 1994, an investor in the Fund experienced a
total return of (3.97%).** This performance was comprised of 5.43% income and
reinvestment return (net of fund expenses) and a (9.40%) depreciation in the net
asset value per share of the Fund.
* Income may be subject to the federal alternative minimum tax.
** Based on net asset value, which does not reflect a sales load or contingent
deferred sales charge, if applicable. Performance quoted represents past
performance. Investment return and principal value will fluctuate, so that an
investor's shares, when redeemed, may be worth more or less than their
original cost.
TEXAS MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN TEXAS MUNICIPAL INCOME FUND
The graph below illustrates the hypothetical investment of $10,000 in Texas
Municipal Income Fund (the "Fund") from June 2, 1993 (start of performance) to
August 31, 1994, compared to the Lehman Brothers Revenue Bond Index (LBRB).+
Graphic representation "A10" omitted. See Appendix.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN FOR THE
PERIOD ENDED AUGUST 31, 1994
<C> <C>
1 Year............................................................. (6.80%)
Start of Performance 6/2/93........................................ (0.44%)
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
* Represents a hypothetical investment of $10,000 in the Fund. The ending value
of the Fund reflects a 2.00% contingent deferred sales charge on any
redemption less than three years, but greater than one year from the purchase
date. The Fund's performance assumes the reinvestment of all dividends and
distributions. The LBRB has been adjusted to reflect reinvestment of dividends
on securities in the index.
+ The LBRB is not adjusted to reflect sales loads, expenses, or other fees that
the Securities and Exchange Commission requires to be reflected in the Fund's
performance. This index is unmanaged.
TEXAS MUNICIPAL INCOME FUND
PORTFOLIO OF INVESTMENTS
AUGUST 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- ---------- --------------------------------------------------------- -------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--98.3%
- -----------------------------------------------------------------------
TEXAS--97.4%
---------------------------------------------------------
$ 100,000 Austin, TX, Utility System, 5.625% Refunding Revenue
Bonds (Series A)/(Original Issue Yield: 5.90%), 5/15/2016 A $ 92,284
---------------------------------------------------------
500,000 Brazos County, TX, Health Facilities, 6.00% Revenue Bonds
(Series B)/(St. Joseph Hospital & Health Center)/
(Original Issue Yield: 6.199%), 1/1/2019 A- 452,875
---------------------------------------------------------
100,000 Brazos River Authority, TX, PCR, 6.10% Refunding Bonds
(Texas Utilities Electric Company)/(FSA Insured)/
(Original Issue Yield: 6.152%), 4/1/2028 AAA 97,486
---------------------------------------------------------
400,000 Brenham, TX, Independent School District, 5.25% UT GO
Bonds (PSFG Guaranty)/(Original Issue Yield: 6.05%),
2/15/2014 AAA 359,880
---------------------------------------------------------
250,000 Dallas-Fort Worth, TX, International Airport Facilities
Improvement Corp., 7.25% Revenue Bonds
(American Airlines, Inc.)/(Original Issue Yield: 7.428%)/
(Subject to AMT), 11/1/2030 Baa2 241,877
---------------------------------------------------------
200,000 Dallas-Fort Worth, TX, International Airport Facilities
Improvement Corp., 7.50% Revenue Bonds
(American Airlines, Inc.)/(Original Issue Yield: 8.20%)/
(Subject to AMT), 11/1/2025 Baa2 199,476
---------------------------------------------------------
100,000 Gregg County, TX, HFDC, 5.50% Hospital Revenue Bonds
(Good Shepherd Medical Center)/(AMBAC Insured)/
(Original Issue Yield: 5.926%), 10/1/2015 AAA 91,163
---------------------------------------------------------
450,000 Harris County, TX, Toll Road, 6.125% UT and Sub. Lien
Revenue Bonds (Series 1994A)/(Original Issue Yield:
6.40%), 8/15/2020 AA+ 447,953
---------------------------------------------------------
200,000 Houston, TX, Water & Sewer System, 5.00% Revenue
Refunding Bonds (Series B)/(Original Issue Yield: 6.42%),
12/1/2018 A 166,582
---------------------------------------------------------
</TABLE>
TEXAS MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- ---------- --------------------------------------------------------- -------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- -----------------------------------------------------------------------
TEXAS--CONTINUED
---------------------------------------------------------
$ 100,000 Lower Colorado River Authority, TX, 5.375% Revenue
Refunding Bonds, Jr. Lien)/(Original Issue Yield:
5.882%), 1/1/2016 A $ 88,576
---------------------------------------------------------
250,000 Lower Colorado River Authority, TX, 5.625% Revenue
Bonds, (Unrefunded Balance Jr. Lien)/(FSA Insured)/
(Original Issue Yield: 6.175%), 1/1/2017 AAA 231,865
---------------------------------------------------------
300,000 Lower Neches Valley, TX, PCR, 5.35% Refunding Bonds
(NRTC-Mobil Oil Corp.), 11/1/2028 AA 260,916
---------------------------------------------------------
100,000 Lubbock, TX, HFDC, 5.25% Revenue Bonds (Series B)/ (AMBAC
Insured)/(Original Issue Yield: 5.90%), 12/1/2019 AAA 86,465
---------------------------------------------------------
300,000 Lubbock, TX, HFDC, 5.50% Revenue Bonds (St. Joseph Health
System)/(Original Issue Yield: 5.78%), 7/1/2014 AA 272,691
---------------------------------------------------------
1,650,000 Matagorda County, TX, Texas Navigation District #1, PCR
6.00% Refunding Bonds (Central Power & Light Co.),
7/1/2028 A- 1,585,336
---------------------------------------------------------
100,000 McAllen, TX, HFDC, 5.00% Revenue Refunding Bonds
(Sisters of Mercy Health System)/(Original Issue Yield:
5.75%), 6/1/2015 AA 84,642
---------------------------------------------------------
100,000 North Central, TX, HFDC, 5.80% Revenue Bonds
(Presbyterian Healthcare)/(Original Issue Yield: 5.852%),
6/1/2013 Aa 93,905
---------------------------------------------------------
300,000 North Central, TX, HFDC, 5.90% Revenue Bonds
(Presbyterian Healthcare)/(Original Issue Yield: 5.96%),
6/1/2021 Aa 273,747
---------------------------------------------------------
100,000 Nueces County, TX, Hospital District, 5.50% LT GO Bonds,
Refunding Revenue Bonds (FGIC Insured)/(Original Issue
Yield: 5.90%), 7/1/2015 AAA 90,995
---------------------------------------------------------
400,000 Red River Authority, TX, PCR, 6.875% Revenue Bonds
(Hoechst Celanese Corp.)/(Original Issue Yield: 6.939%)/
(Subject to AMT), 4/1/2017 AA- 412,844
---------------------------------------------------------
</TABLE>
TEXAS MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- ---------- --------------------------------------------------------- -------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- -----------------------------------------------------------------------
TEXAS--CONTINUED
---------------------------------------------------------
$ 210,000 Sabine River Authority, TX, PCR, 5.55% Refunding Bonds
(Texas Utilities Electric Company)/(FSA Insured)/
(Original Issue Yield: 5.60%), 5/1/2022 AAA $ 188,717
---------------------------------------------------------
650,000 Sabine River Authority, TX, PCR 5.85% Refunding Bonds
(Texas Utilities Electric Company)/(FSA Insured)/
(Original Issue Yield: 5.875%), 5/1/2022 AAA 588,315
---------------------------------------------------------
200,000 Tarrant County, TX, HFDC 5.25% Revenue Bonds
(Adventist Health System/Sun Belt, Inc.)/(CGIC Insured)/
(Original Issue Yield: 5.49%), 11/15/2023 AAA 170,680
---------------------------------------------------------
500,000 Tarrant County, TX, HFDC 6.00% Revenue Bonds (Series
1994)/(Harris Methodist Health System)/
(Original Issue Yield: 6.50%), 9/1/2024 AAA 477,950
---------------------------------------------------------
1,000,000 Texas State Veteran's Land, 6.40% GO Bonds (Series 1994)/
(Subject to AMT)/(Original Issue Yield: 6.45%), 12/1/2024 AA 1,000,610
---------------------------------------------------------
400,000 Travis County, TX, Housing Finance Corporation, SFM,
7.10% Revenue Bonds (GNMA & FNMA Mortgage Backed
Securities)/(Subject to AMT), 10/1/2027 AAA 411,628
---------------------------------------------------------
200,000 Tyler, TX, HFDC 6.75% Revenue Bonds (Series A)/
(East Texas Medical Center)/(Original Issue Yield:
7.00%), 11/1/2025 Baa 189,080
---------------------------------------------------------
1,000,000 Washington County, TX, HFDC, 7.50% Revenue Bonds (Series
1994)/(Lutheran Social Services of the South) 8/15/2015 NR 1,006,920
---------------------------------------------------------
120,000 Weslaco, TX, HFDC, 5.375% Revenue Bonds (Knapp Medical
Centre)/(Original Issue Yield: 5.625%)/(Connie Lee
Insured), 6/1/2023 AAA 103,948
---------------------------------------------------------
600,000 West Side Calhoun County, TX, Navigation District #1,
6.40% Solid Waste Revenue Bonds (Union Carbide
Chemicals)/ (Original Issue Yield: 6.438%), 5/1/2023 BBB 568,326
---------------------------------------------------------
</TABLE>
TEXAS MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- ---------- --------------------------------------------------------- -------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- -----------------------------------------------------------------------
TEXAS--CONTINUED
---------------------------------------------------------
$ 500,000 Winter Garden, TX, Housing Finance Corporation,
SFM 6.80% Revenue Bonds (Subject to AMT), 4/1/2014 AAA $ 504,490
--------------------------------------------------------- -----------
TOTAL LONG-TERM MUNICIPAL SECURITIES
(IDENTIFIED COST $11,290,299) 10,842,222
--------------------------------------------------------- -----------
SHORT-TERM MUNICIPAL SECURITIES--0.9%
- -----------------------------------------------------------------------
PUERTO RICO--0.9%
---------------------------------------------------------
100,000 Government Development Bank of Puerto Rico Weekly VRDNs
(Credit Suisse and Sumitomo Bank Ltd. LOCs) A-1 100,000
--------------------------------------------------------- -----------
TOTAL SHORT-TERM MUNICIPAL SECURITIES
(AT AMORTIZED COST) 100,000
--------------------------------------------------------- -----------
TOTAL MUNICIPAL SECURITIES (IDENTIFIED COST $11,390,299) $10,942,222+
--------------------------------------------------------- -----------
</TABLE>
Please refer to the Appendix of the Statement of Additional Information for an
explanation of the credit ratings. Current credit ratings are unaudited.
+ The cost of investments for federal tax purposes amounts to $11,390,299. The
net unrealized depreciation on a federal tax basis amounts to $448,077, which
is comprised of $44,369 appreciation and $492,446 depreciation at August 31,
1994.
Note: The categories of investments are shown as a percentage of net assets
($11,130,471) at
August 31, 1994.
TEXAS MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
The following abbreviations are used in this portfolio:
<TABLE>
<S> <C>
AMBAC -- American Municipal Bond Assurance Corporation
AMT -- Alternative Minimum Tax
CGIC -- Capital Guaranty Insurance Corporation
FGIC -- Financial Guaranty Insurance Company
FNMA -- Federal National Mortgage Association
FSA -- Financial Security Assurance
GNMA -- Government National Mortgage Association
GO -- General Obligations
HFDC -- Health Facility Development Corporation
LOCs -- Letters of Credit
LT -- Limited Term
PCR -- Pollution Control Revenue
PSFG -- Permanent School Fund Guarantee
SFM -- Single Family Mortgage
UT -- Unlimited Tax
VRDNs -- Variable Rate Demand Notes
</TABLE>
(See Notes which are an integral part of the Financial Statements)
TEXAS MUNICIPAL INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- --------------------------------------------------------------------------------
Investments in securities, at value (identified and tax cost; $11,390,299) $10,942,222
- --------------------------------------------------------------------------------
Cash 198,936
- --------------------------------------------------------------------------------
Receivable for Fund shares sold 504,579
- --------------------------------------------------------------------------------
Interest receivable 176,430
- --------------------------------------------------------------------------------
Deferred expenses 26,722
- -------------------------------------------------------------------------------- -----------
Total assets 11,848,889
- --------------------------------------------------------------------------------
LIABILITIES:
- --------------------------------------------------------------------------------
Payable for investments purchased $628,438
- ---------------------------------------------------------------------
Dividends payable 40,215
- ---------------------------------------------------------------------
Payable for Fund shares redeemed 22,751
- ---------------------------------------------------------------------
Accrued expenses 27,014
- --------------------------------------------------------------------- --------
Total liabilities 718,418
- -------------------------------------------------------------------------------- -----------
NET ASSETS for 1,177,980 shares of beneficial interest outstanding $11,130,471
- -------------------------------------------------------------------------------- -----------
NET ASSETS CONSIST OF:
- --------------------------------------------------------------------------------
Paid-in capital $12,035,524
- --------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments (448,077)
- --------------------------------------------------------------------------------
Accumulated net realized gain (loss) on investments (456,976)
- -------------------------------------------------------------------------------- -----------
Total $11,130,471
- -------------------------------------------------------------------------------- -----------
NET ASSET VALUE and Offering Price per Share
($11,130,471 / 1,177,980 shares of beneficial interest outstanding) $9.45
- -------------------------------------------------------------------------------- -----------
REDEMPTION PROCEEDS PER SHARE (97/100 of $9.45)* $9.17
- -------------------------------------------------------------------------------- -----------
</TABLE>
* See "Redeeming Shares" in the prospectus.
(See Notes which are an integral part of the Financial Statements)
TEXAS MUNICIPAL INCOME FUND
STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ------------------------------------------------------------------------------------
Interest income $ 548,244
- ------------------------------------------------------------------------------------
EXPENSES:
- ------------------------------------------------------------------------------------
Investment advisory fee $ 37,254
- ------------------------------------------------------------------------
Administrative personnel and services 101,210
- ------------------------------------------------------------------------
Custodian and portfolio accounting fees and expenses 56,511
- ------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 16,444
- ------------------------------------------------------------------------
Fund share registration costs 8,734
- ------------------------------------------------------------------------
Printing and postage 10,269
- ------------------------------------------------------------------------
Legal fees 2,345
- ------------------------------------------------------------------------
Auditing fees 16,114
- ------------------------------------------------------------------------
Shareholder services fee 22,103
- ------------------------------------------------------------------------
Distribution services fee 69,852
- ------------------------------------------------------------------------
Insurance premiums 5,043
- ------------------------------------------------------------------------
Miscellaneous 1,192
- ------------------------------------------------------------------------
Trustees' fees 130
- ------------------------------------------------------------------------
Taxes 28
- ------------------------------------------------------------------------ --------
Total expenses 347,229
- ------------------------------------------------------------------------
Deduct--
- -------------------------------------------------------------
Waiver of investment advisory fee $ 37,254
- -------------------------------------------------------------
Reimbursement of other operating expenses by Adviser 240,123 277,377
- ------------------------------------------------------------- -------- --------
Net expenses 69,852
- ------------------------------------------------------------------------------------ ---------
Net investment income 478,392
- ------------------------------------------------------------------------------------ ---------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ------------------------------------------------------------------------------------
Net realized gain (loss) on investments (identified cost basis) (456,976)
- ------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments (538,720)
- ------------------------------------------------------------------------------------ ---------
Net realized and unrealized gain (loss) on investments (995,696)
- ------------------------------------------------------------------------------------ ---------
Change in net assets resulting from operations $(517,304)
- ------------------------------------------------------------------------------------ ---------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
TEXAS MUNICIPAL INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
--------------------------
1994 1993*
----------- -----------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ------------------------------------------------------------------
OPERATIONS--
- ------------------------------------------------------------------
Net investment income $ 478,392 $ 22,648
- ------------------------------------------------------------------
Net realized gain (loss) on investment transactions ($0 and $0,
respectively, as computed for federal tax purposes) (456,976) --
- ------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on
investments (538,720) 90,643
- ------------------------------------------------------------------ ----------- -----------
Change in net assets resulting from operations (517,304) 113,291
- ------------------------------------------------------------------ ----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS--
- ------------------------------------------------------------------
Dividends to shareholders from net investment income (478,392) (22,648)
- ------------------------------------------------------------------
Distributions in excess of net investment income (69,852) (3,328)
- ------------------------------------------------------------------ ----------- -----------
Change in net assets resulting from distributions to shareholders (548,244) (25,976)
- ------------------------------------------------------------------ ----------- -----------
FUND SHARE (PRINCIPAL) TRANSACTIONS--
- ------------------------------------------------------------------
Proceeds from sale of shares 8,012,133 7,402,170
- ------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of
dividends declared 134,498 766
- ------------------------------------------------------------------
Cost of shares redeemed (973,492) (2,467,371)
- ------------------------------------------------------------------ ----------- -----------
Change in net assets resulting from Fund share transactions 7,173,139 4,935,565
- ------------------------------------------------------------------ ----------- -----------
Change in net assets 6,107,591 5,022,880
- ------------------------------------------------------------------
NET ASSETS:
- ------------------------------------------------------------------
Beginning of period 5,022,880 --
- ------------------------------------------------------------------ ----------- -----------
End of period $11,130,471 $ 5,022,880
- ------------------------------------------------------------------ ----------- -----------
</TABLE>
* For the period from June 1, 1993 (date of initial public investment) to August
31, 1993.
(See Notes which are an integral part of the Financial Statements)
TEXAS MUNICIPAL INCOME FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED
AUGUST 31,
------------------------
1994 1993*
------ ------
<S> <C> <C>
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 (loss) 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 (0.06)(a) (0.01)(a)
- ---------------------------------------------------------------------- ------ ------
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%
- ----------------------------------------------------------------------
</TABLE>
* 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) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
TEXAS MUNICIPAL INCOME FUND
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1994
- --------------------------------------------------------------------------------
(1) ORGANIZATION
Municipal Securities Income Trust (the "Trust") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as an open-end
management investment company. The Trust consists of ten, non-diversified
portfolios. The financial statements included herein present only those of Texas
Municipal Income Fund (the "Fund"). The financial statements of the other
portfolios are presented separately. The assets of each portfolio are segregated
and a shareholder's interest is limited to the portfolio in which shares are
held.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
<TABLE>
<S> <C>
A. INVESTMENT VALUATIONS--Municipal bonds are valued by an independent pricing service
taking into consideration yield, liquidity, risk, credit, quality, coupon, maturity, type
of issue, and any other factors or market data it deems relevant in determining
valuations for normal institutional size trading units of debt securities. The
independent pricing service does not rely exclusively on quoted prices. Short-term
securities with remaining maturities of sixty days or less may be stated at amortized
cost, which approximates value.
B. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and expenses are accrued
daily. Bond premium and discount, if applicable, are amortized as required by the
Internal Revenue Code, as amended (the "Code"). Distributions to shareholders are
recorded on the ex-dividend date. Distributions are determined in accordance with income
tax regulations which may differ from generally accepted accounting principles. The
excess distributions are the result of the capitalization of the 12b-1 fees for federal
income tax purposes and do not represent a return of capital for federal income tax
purposes.
C. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the Code
applicable to regulated investment companies and to distribute to shareholders each year
substantially all of its tax-exempt income. Accordingly, no provisions for federal tax
are necessary. Additionally, net capital losses of $456,976 attributable to security
transactions incurred after October 31, 1993 are treated as arising on September 1, 1994,
the first day of the Fund's next taxable year.
D. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in when-issued or
delayed delivery transactions. The Fund records when-issued securities on the trade date
and maintains security positions such that sufficient liquid assets will be available to
make payment for the securities purchased. Securities purchased on a when-issued or
delayed delivery basis are marked to market daily and begin earning interest on the
settlement date.
</TABLE>
TEXAS MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
E. DEFERRED EXPENSES--The costs incurred by the Fund with respect to registration of its
shares in its first fiscal year, excluding the initial expense of registering its shares,
have been deferred and are being amortized using the straight-line method not to exceed a
period of five years from the Fund's commencement date.
F. CONCENTRATION OF RISK--Since the Fund invests a substantial portion of its assets in
issuers located in one state, it will be more susceptible to factors adversely affecting
issuers of that state than would be a comparable general tax-exempt mutual fund. In order
to reduce the credit risk associated with such factors, at August 31, 1994, 23% of the
securities in the portfolio of investments are backed by letters of credit or bond
insurance of various financial institutions and financial guaranty assurance agencies.
The value of investments insured by or supported (backed) by a letter of credit for any
one institution or agency did not exceed 10.1% of total investments.
G. OTHER--Investment transactions are accounted for on the trade date.
</TABLE>
(3) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
------------------------
1994 1993*
- ------------------------------------------------------------------- ------- --------
<S> <C> <C>
Shares sold 779,446 721,782
- -------------------------------------------------------------------
Shares issued to shareholders in payment of dividends declared 13,834 74
- -------------------------------------------------------------------
Shares redeemed (97,053) (240,103)
- ------------------------------------------------------------------- ------- --------
Net change resulting from Fund share transactions 696,227 481,753
- ------------------------------------------------------------------- ------- --------
</TABLE>
* For the period from June 1, 1993 (date of initial public investment) to August
31, 1993.
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
ADVISORY FEE--Federated Advisers, the Fund's investment adviser (the "Adviser"),
receives for its services 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 and reimburse certain operating expenses of the Fund.
The Adviser can modify or terminate this voluntary waiver and reimbursement at
any time at its sole discretion.
TEXAS MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS") provides the Fund
with administrative personnel and services. Prior to March 1, 1994, these
services were provided at approximate cost. Effective March 1, 1994, the FAS fee
is based on the level of average aggregate daily net assets of all funds advised
by subsidiaries of Federated Investors for the period. The administrative fee
received during the period of the Administrative Services Agreement shall be at
least $125,000 per portfolio and $30,000 per each additional class of shares.
DISTRIBUTION AND SHAREHOLDER SERVICES FEES--The Fund has adopted a Distribution
Plan (the "Plan") pursuant to Rule 12b-1 under the Act. Under the terms of the
Plan, the Fund will compensate Federated Securities Corp. ("FSC"), the principal
distributor, from the net assets of the Fund to finance activities intended to
result in the sale of the Fund's shares. The Plan provides that the Fund may
incur distribution expenses up to 0.75 of 1% of the Fund's average daily net
assets, annually, to compensate FSC.
Under the terms of a Shareholder Services Agreement with Federated Shareholder
Services ("FSS"), the Fund will pay FSS up to 0.25 of 1% of average net assets
of the Fund for the period. This fee is to obtain certain personal services for
shareholders and to maintain the shareholder accounts.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES--Federated Services Company
("FServ") serves as transfer agent and dividend disbursing agent for the Fund.
The FServ fee is based on the size, type and number of accounts and transactions
made by the shareholders.
ORGANIZATIONAL EXPENSES--Organizational expenses of $16,702 and start-up
administrative services expenses of $57,355 were borne initially by the Adviser.
The Fund has agreed to reimburse the Adviser for the organizational expenses and
start-up administrative expenses during the five year period following May 23,
1993 (date the Fund first became effective). For the year ended August 31, 1994,
the Fund paid $3,340 and $11,471, respectively, pursuant to this agreement.
INTERFUND TRANSACTIONS--During the year ended August 31, 1994, the Fund engaged
in purchase and sale transactions with other affiliated funds at current value
on the date of the transaction pursuant to Rule 17a-7 under the Act amounting to
$5,700,000 and $4,700,000, respectively.
Certain of the Officers and Trustees of the Fund are Officers and Directors or
Trustees of the above companies.
TEXAS MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
fiscal year ended August 31, 1994, were as follows:
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------
PURCHASES $12,853,265
- ------------------------------------------------------------------------------- -----------
SALES $ 5,551,309
- ------------------------------------------------------------------------------- -----------
</TABLE>
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
To the Board of Trustees of MUNICIPAL SECURITIES INCOME TRUST
and Shareholders of TEXAS MUNICIPAL INCOME FUND:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Texas Municipal Income Fund (a portfolio of
Municipal Securities Income Trust) as of August 31, 1994, the related statement
of operations for the year then ended, and the statement of changes in net
assets and the financial highlights for the years ended August 31, 1994 and
1993. These financial statements and financial highlights are the responsibility
of the Trust's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
August 31, 1994 by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Texas Municipal
Income Fund as of August 31, 1994, the results of its operations, the changes in
its net assets and its financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
October 7, 1994
<TABLE>
<S> <C>
TRUSTEES OFFICERS
- ---------------------------------------------------------------------------------------------
John F. Donahue John F. Donahue
John T. Conroy, Jr. Chairman
William J. Copeland Richard B. Fisher
J. Christopher Donahue President
James E. Dowd J. Christopher Donahue
Lawrence D. Ellis, M.D. Vice President
Edward L. Flaherty, Jr. Edward C. Gonzales
Peter E. Madden Vice President and Treasurer
Gregor F. Meyer John W. McGonigle
Wesley W. Posvar Vice President and Secretary
Marjorie P. Smuts David M. Taylor
Assistant Treasurer
J. Crilley Kelly
Assistant Secretary
</TABLE>
Mutual funds are not bank deposits or obligations, are not guaranteed by any
bank, and are not insured or guaranteed by the FDIC, the Federal Reserve Board,
or any other government agency. Investment in mutual funds involves risk,
including possible loss of principal.
This report is authorized for distribution to prospective investors only when
preceded or accompanied by the Fund's prospectus which contains facts concerning
its objective and policies, management fees, expenses and other information.
- --------------------------------------------------------------------------------
VIRGINIA
- --------------------------------------------------------------------------------
MUNICIPAL
- --------------------------------------------------------------------------------
INCOME FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ANNUAL REPORT
TO SHAREHOLDERS
August 31, 1994
FEDERATED SECURITIES CORP.
(LOGO)
- ---------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
625922844
006437 (10/94)
PRESIDENT'S MESSAGE
- --------------------------------------------------------------------------------
Dear Shareholder:
I am pleased to present the Annual Report of Virginia Municipal Income Fund (the
"Fund"), covering the period from September 2, 1993 through August 31, 1994.
This report begins with a review of the economy and the municipal market.
Following the review are the Fund's Portfolio of Investments and Financial
Statements.
We introduced this Fund to give tax-sensitive Virginia residents the opportunity
for double tax-free monthly income. This income is exempt from federal regular
income tax and personal income taxes imposed by the state of Virginia and its
municipalities.
During the reporting period, the Fund's portfolio of investment-grade, long-term
Virginia municipal securities paid a total of $0.53 per share in tax-free
distributions to shareholders. As all bond investments tend to do when interest
rates rise, the Fund's net asset value declined from $10.00 to $8.96. At the end
of the period, the Fund's total net assets stood at $4.4 million.
We thank you for your confidence in Virginia Municipal Income Fund.
Sincerely,
Richard B. Fisher
President
October 14, 1994
MANAGEMENT DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
The fiscal year ended August 31, 1994 was difficult for investors in long-term,
fixed-income securities. Fueled by fears of the potential for accelerating
inflation driven by a steadily expanding economy, yields for thirty-year U.S.
Treasury bonds rose sharply from their cyclical low of 5.79% on October 15, 1993
to 6.38% on November 22, 1993. Yields then remained in a relatively narrow
trading range until February 4, 1994. The Federal Reserve Board then effected
the first of several rate hikes which reignited inflation fears, sending yields
soaring. The yield for thirty-year U.S. Treasury bonds closed at 7.45% on August
31, 1994.
The Fund was established in September, 1993 to provide investors the ability to
invest in a non-diversified portfolio of investment-grade, long-term Virginia
municipal issues. The investment objective of the Fund is the provision of
current income which is exempt from federal regular income tax and the personal
income taxes imposed by the Commonwealth of Virginia and Virginia
municipalities.*
When ascertaining the credit quality of issues for potential investment by the
Fund, the investment adviser focuses upon a variety of economic and financial
parameters. For general obligation issues, analysis is directed towards
demographic constitution, income distribution, property value levels and growth,
provision of governmental services, and debt authorization. For revenue issues,
examination is made of issuer cash flow generation, sensitivity to product or
service pricing, competition and industry/sector make-up, debt structure, debt
service coverage, financial flexibility, and contingent liabilities, if any.
Issues purchased by the Fund since inception consisted largely of single-family
mortgage revenue obligations, hospital revenue obligations, pollution control
revenue obligations, and water system revenue obligations.
From inception to August 31, 1994, an investor in the Fund experienced a "total
return" of (5.26%).** This performance was comprised of 5.14% income and
reinvestment return (net of fund expenses) and of (10.40%) depreciation in the
net asset value per share of the Fund.
* Income may be subject to the federal alternative minimum tax.
** Based on net asset value, which does not reflect sales load or contingent
deferred sales charge, if applicable. Performance quoted represents past
performance. Investment return and principal value will fluctuate, so that an
investor's shares, when redeemed, may be worth more or less than their
original cost.
VIRGINIA MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN VIRGINIA MUNICIPAL INCOME FUND
The graph below illustrates the hypothetical investment of $10,000 in the
Virginia Municipal Income Fund (the "Fund") from September 2, 1993 (start of
performance) to August 31, 1994, compared to the Lehman Brothers Revenue Bond
Index (LBRB).+
Graphic representation "A11" omitted. See Appendix.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN FOR THE
PERIOD ENDED AUGUST 31, 1994
<S> <C> <C> <C>
Start of Performance 9/2/93 (cumulative)........................... (8.10%)
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
* Represents a hypothetical investment of $10,000 in the Fund. The ending value
of the Fund reflects a 3.00% contingent deferred sales charge on any
redemption less than one year from the purchase date. The Fund's performance
assumes the reinvestment of all dividends and distributions. LBRB has been
adjusted to reflect reinvestment of dividends on securities in the index.
+ The LBRB is not adjusted to reflect sales loads, expenses, or other fees that
the Securities and Exchange Commission requires to be reflected in the Fund's
performance. This index is unmanaged.
VIRGINIA MUNICIPAL INCOME FUND
PORTFOLIO OF INVESTMENTS
AUGUST 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- --------- ----------------------------------------------------------- -------- ----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--96.9%
- ------------------------------------------------------------------------
DISTRICT OF COLUMBIA--4.2%
-----------------------------------------------------------
$200,000 Metropolitan Washington Airport Authority, 5.75% Airport
System Revenue Bonds (Series 1994A)/(Original Issue Yield:
6.205%)/(MBIA Insured)/(Subject to AMT), 10/1/2020 AAA $ 185,748
----------------------------------------------------------- ----------
PUERTO RICO--3.5%
-----------------------------------------------------------
150,000 Puerto Rico Electric Power Authority, 6.375% Revenue Bonds
(Series T)/(Original Issue Yield: 6.58%), 7/1/2024 A- 151,560
----------------------------------------------------------- ----------
VIRGINIA--89.2%
-----------------------------------------------------------
100,000 Alexandria, VA, 5.375% PCR Industrial Development Authority
Refunding Revenue Bonds (Potomac Electric Power Co.)/
(Original Issue Yield: 5.45%), 2/15/2024 A+ 87,917
-----------------------------------------------------------
100,000 Arlington, VA, 5.00% IDA Hospital Refunding Revenue Bonds
(Series 1993)/(Arlington Hospital)/(Original Issue Yield:
5.53%), 9/1/2021 A1 78,701
-----------------------------------------------------------
100,000 Augusta, VA, 5.00% Service Authority and Water Sewer
System Revenue Bonds (Series 1994)/(MBIA Insured)/
(Original Issue Yield: 5.42%), 11/1/2024 AAA 83,115
-----------------------------------------------------------
100,000 Augusta, VA, 5.125% IDA Hospital Revenue Bonds
(Augusta Hospital Corp.)/(Original Issue Yield: 5.60%)/
(AMBAC Insured), 9/1/2021 AAA 84,957
-----------------------------------------------------------
100,000 Fairfax, VA, 5.25% IDA Refunding Revenue Bonds
(Inova Health System)/(Original Issue Yield: 5.35%),
8/15/2019 AA- 86,035
-----------------------------------------------------------
500,000 Giles County, VA, 6.625% IDA Solid Waste Disposal Revenue
Bonds (Hoechst Celanese Corp.)/(Original Issue Yield:
6.703%)/ (Subject to AMT), 12/1/2022 AA- 506,045
-----------------------------------------------------------
100,000 Hampton Roads, VA, 5.00% Sanitation District Refunding
and Capital Improvement Revenue Bonds (Series 1993)/
(Original Issue Yield: 5.48%), 10/1/2023 AA 83,566
-----------------------------------------------------------
</TABLE>
VIRGINIA MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- --------- ----------------------------------------------------------- -------- ----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- ------------------------------------------------------------------------
VIRGINIA--CONTINUED
-----------------------------------------------------------
$200,000 Hampton, VA, 5.125% IDA Hospital Refunding Revenue Bonds
(Series 1994A)/(Sentara Hampton General Hospital)/(Original
Issue Yield: 5.55%), 11/1/2016 AA $ 170,418
-----------------------------------------------------------
100,000 Harrisonburg, VA, 5.25% IDA Hospital Revenue Bonds
(Rockingham Memorial Hospital)/(MBIA Insured)/
(Original Issue Yield: 5.85%), 12/1/2022 AAA 86,447
-----------------------------------------------------------
200,000 Isle of Wight, VA, 6.55%, IDA Solid Waste Disposal Revenue
Bonds (Union Camp Corp.)/(Original Issue Yield: 6.627%)/
(Subject to AMT), 4/1/2024 A1 199,466
-----------------------------------------------------------
100,000 Louisa, VA, 5.45% Industrial Development Authority PCR
Bonds (Series 1994)/(Virginia Electric & Power Co.
Project), 1/1/2024 A 87,130
-----------------------------------------------------------
200,000 Lynchburg, VA, 5.70% Redevelopment Housing Refunding
Revenue Bonds (Series A)/(Waldon II)/(GNMA Guaranty),
7/20/2023 AAA 180,504
-----------------------------------------------------------
200,000 Norfolk, VA, 6.75% Redevelopment and Housing Authority
Revenue Bonds (Oakmont Associates), 6/1/2013 AAA 202,288
-----------------------------------------------------------
200,000 Peninsula, VA, 7.00% Port Authority Healthcare Facility
Revenue Bonds (Mary Immaculate Project)/(Original Issue
Yield: 7.125%), 8/1/2017 BBB+ 198,702
-----------------------------------------------------------
100,000 Pittsylvania, VA, 6.00% Public Improvement GO Bonds
(Original Issue Yield: 6.15%), 7/1/2014 A 99,875
-----------------------------------------------------------
100,000 Prince William, VA, 5.00% Service Authority Water and
Sewer System Refunding Revenue Bonds (FGIC Insured)/
(Original Issue Yield: 5.25%), 7/1/2021 AAA 83,827
-----------------------------------------------------------
100,000 Richmond, VA, 5.50% GO Bonds (Series B)/(Original Issue
Yield: 5.720%), 7/15/2023 AA 90,391
-----------------------------------------------------------
100,000 Roanoke, VA, 5.00% Water System Refunding Revenue Bonds
(FGIC Insured)/(Original Issue Yield: 5.267%), 7/1/2021 AAA 83,940
-----------------------------------------------------------
</TABLE>
VIRGINIA MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- --------- ----------------------------------------------------------- -------- ----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- ------------------------------------------------------------------------
VIRGINIA--CONTINUED
-----------------------------------------------------------
$100,000 Upper Occoquan, VA, 5.00% Sewage Authority Refunding
Revenue Bonds (Series 1993)/(FGIC Insured)/(Original Issue
Yield: 5.41%), 7/1/2021 AAA $ 84,054
-----------------------------------------------------------
100,000 Virginia State, 5.30% HDA Single Family Mortgage Revenue
Bonds (Series C), 1/1/2015 Aa 86,861
-----------------------------------------------------------
200,000 Virginia State, 5.95% HDA Mortgage Revenue Bonds (Subser
B-8)/(Subject to AMT), 1/1/2027 AA+ 181,464
-----------------------------------------------------------
200,000 Virginia State, 6.20% HDA Multi Family Mortgage Revenue
Bonds (Series C), 5/1/2012 AA 199,128
-----------------------------------------------------------
800,000 West Point, VA, 6.375% IDA Solid Waste Revenue Bonds
(Series A)/(Chesapeake Corp. Project)/(Original Issue
Yield: 6.435%)/(Subject to AMT), 3/1/2019 BBB- 764,336
-----------------------------------------------------------
100,000 Winchester, VA, 5.50% GO UT Refunding Revenue Bonds
(Original Issue Yield: 5.80%), 1/15/2014 AA 94,201
----------------------------------------------------------- ----------
Total 3,903,368
----------------------------------------------------------- ----------
TOTAL LONG-TERM MUNICIPAL SECURITIES
(IDENTIFIED COST, $4,464,045) $4,240,676+
----------------------------------------------------------- ----------
</TABLE>
* Please refer to the Appendix of the Statement of Additional Information for an
explanation of the credit ratings. Current credit ratings are unaudited.
+ The cost of investments for federal tax purposes amounts to $4,464,045. The
net unrealized depreciation on a federal tax basis amounts to $223,369, which
is comprised of $13,775 appreciation and $237,144 depreciation at August 31,
1994.
Note: The categories of investments are shown as a percentage of net assets
($4,375,390) at
August 31, 1994.
VIRGINIA MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
The following abbreviations are used in this portfolio:
<TABLE>
<S> <C>
AMBAC -- American Municipal Bond Assurance Corporation
AMT -- Alternative Minimum Tax
FGIC -- Financial Guaranty Insurance Company
GNMA -- Government National Mortgage Association
GO -- General Obligation
HDA -- Hospital Development Authority
IDA -- Industrial Development Authority
MBIA -- Municipal Bond Investors Assurance
PCR -- Pollution Control Revenue
UT -- Unlimited Tax
</TABLE>
(See Notes which are an integral part of the Financial Statements)
VIRGINIA MUNICIPAL INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- ---------------------------------------------------------------------------------
Investments in securities, at value (identified and tax cost; $4,464,045) $4,240,676
- ---------------------------------------------------------------------------------
Cash 6,689
- ---------------------------------------------------------------------------------
Interest receivable 79,801
- ---------------------------------------------------------------------------------
Receivable for Fund shares sold 72,366
- ---------------------------------------------------------------------------------
Deferred expenses 5,781
- --------------------------------------------------------------------------------- ----------
Total assets 4,405,313
- ---------------------------------------------------------------------------------
LIABILITIES:
- -----------------------------------------------------------------------
Dividends payable $ 6,280
- -----------------------------------------------------------------------
Accrued expenses 23,643
- ----------------------------------------------------------------------- -------
Total liabilities 29,923
- --------------------------------------------------------------------------------- ----------
NET ASSETS for 488,341 shares of beneficial interest outstanding $4,375,390
- --------------------------------------------------------------------------------- ----------
NET ASSETS CONSIST OF:
- ---------------------------------------------------------------------------------
Paid-in capital $4,699,156
- ---------------------------------------------------------------------------------
Accumulated net realized gain (loss) on investments (100,397)
- ---------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments (223,369)
- --------------------------------------------------------------------------------- ----------
Total Net Assets $4,375,390
- --------------------------------------------------------------------------------- ----------
NET ASSET VALUE and Offering Price per Share:
($4,375,390 / 488,341 shares of beneficial interest outstanding) $8.96
- --------------------------------------------------------------------------------- ----------
REDEMPTION PROCEEDS per Share: (97/100 of $8.96)* $8.69
- --------------------------------------------------------------------------------- ----------
</TABLE>
* See "Contingent Deferred Sales Charge" in the prospectus.
(See Notes which are an integral part of the Financial Statements)
VIRGINIA MUNICIPAL INCOME FUND
STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 1994*
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ------------------------------------------------------------------------------------
Interest income $ 155,393
- ------------------------------------------------------------------------------------
EXPENSES:
- ------------------------------------------------------------------------
Investment advisory fee $ 10,471
- ------------------------------------------------------------------------
Administrative personnel and services 56,198
- ------------------------------------------------------------------------
Custodian and portfolio accounting fees 52,790
- ------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 12,774
- ------------------------------------------------------------------------
Fund share registration costs 1,118
- ------------------------------------------------------------------------
Printing and postage 5,622
- ------------------------------------------------------------------------
Legal fees 1,336
- ------------------------------------------------------------------------
Shareholder services fee 3,631
- ------------------------------------------------------------------------
Distribution services fee 19,633
- ------------------------------------------------------------------------
Miscellaneous 1,356
- ------------------------------------------------------------------------ --------
Total expenses 164,929
- ------------------------------------------------------------------------
Deduct--
- -------------------------------------------------------------
Waiver of investment advisory fee $ 10,471
- -------------------------------------------------------------
Reimbursement of other operating expenses by Adviser 134,825 145,296
- ------------------------------------------------------------- -------- --------
Net expenses 19,633
- ------------------------------------------------------------------------------------ ---------
Net investment income 135,760
- ------------------------------------------------------------------------------------ ---------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ------------------------------------------------------------------------------------
Net realized gain (loss) on investments (identified cost basis) (100,397)
- ------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments (223,369)
- ------------------------------------------------------------------------------------ ---------
Net realized and unrealized gain (loss) on investments (323,766)
- ------------------------------------------------------------------------------------ ---------
Change in net assets resulting from operations $(188,006)
- ------------------------------------------------------------------------------------ ---------
</TABLE>
* For the period from September 2, 1993 (date of initial public investment) to
August 31, 1994.
(See Notes which are an integral part of the Financial Statements)
VIRGINIA MUNICIPAL INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
AUGUST 31, 1994*
-----------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS:
- -------------------------------------------------------------------------
OPERATIONS--
- -------------------------------------------------------------------------
Net investment income $ 135,760
- -------------------------------------------------------------------------
Net realized gain (loss) on investments ($0, as computed
for federal tax purposes) (100,397)
- -------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments (223,369)
- ------------------------------------------------------------------------- ---------------
Change in net assets resulting from operations (188,006)
- ------------------------------------------------------------------------- ---------------
DISTRIBUTIONS TO SHAREHOLDERS--
- -------------------------------------------------------------------------
Dividends to shareholders from net investment income (135,760)
- -------------------------------------------------------------------------
Distributions in excess of net investment income (19,633)
- ------------------------------------------------------------------------- ---------------
Change in net assets resulting from distributions to shareholders (155,393)
- ------------------------------------------------------------------------- ---------------
FUND SHARE (PRINCIPAL) TRANSACTIONS--
- -------------------------------------------------------------------------
Proceeds from sale of shares 9,272,649
- -------------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment
of dividends declared 81,449
- -------------------------------------------------------------------------
Cost of shares redeemed (4,635,309)
- ------------------------------------------------------------------------- ---------------
Change in net assets resulting from Fund share transactions 4,718,789
- ------------------------------------------------------------------------- ---------------
Change in net assets 4,375,390
- -------------------------------------------------------------------------
NET ASSETS:
- -------------------------------------------------------------------------
Beginning of period --
- ------------------------------------------------------------------------- ---------------
End of period $ 4,375,390
- ------------------------------------------------------------------------- ---------------
</TABLE>
* For the period from September 2, 1993 (date of initial public investment) to
August 31, 1994.
(See Notes which are an integral part of the Financial Statements)
VIRGINIA MUNICIPAL INCOME FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED
AUGUST 31, 1994*
-----------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
- --------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- --------------------------------------------------------------------------------
Net investment income 0.49
- --------------------------------------------------------------------------------
Net realized and unrealized gain (loss) 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%
- --------------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from September 2, 1993 (date of initial
public investment) to
August 31, 1994.
** 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) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
VIRGINIA MUNICIPAL INCOME FUND
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1994
- --------------------------------------------------------------------------------
(1) ORGANIZATION
Municipal Securities Income Trust (the "Trust") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as an open-end
management investment company. The Trust consists of ten non-diversified
portfolios. The financial statements included herein present only those of
Virginia Municipal Income Fund (the "Fund"). The financial statements of the
other portfolios are presented separately. The assets of each portfolio are
segregated and a shareholder's interest is limited to the portfolio in which
shares are held.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
<TABLE>
<S> <C>
A. INVESTMENT VALUATIONS--Municipal bonds are valued by an independent pricing service
taking into consideration yield, liquidity, risk, credit, quality, coupon, maturity, type
of issue, and any other factors or market data it deems relevant in determining
valuations for normal institutional size trading units of debt securities. The
independent pricing service does not rely exclusively on quoted prices. Short-term
securities with remaining maturities of sixty days or less may be stated at amortized
cost, which approximates value.
B. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and expenses are accrued
daily. Bond premium and discount, if applicable, are amortized as required by the
Internal Revenue Code, as amended (the "Code"). Distributions to shareholders are
recorded on the ex-dividend date. Distributions are determined in accordance with income
tax regulations which may differ from generally accepted accounting principles. The
excess distributions are a result of the capitalization of the 12b-1 fees for federal
income tax purposes and do not represent a return of capital for federal income tax
purposes.
C. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the Code
applicable to regulated investment companies and to distribute to shareholders each year
substantially all of its tax-exempt income. Accordingly, no provisions for federal tax
are necessary. Additionally, net capital losses of $100,397 attributable to security
transactions incurred after October 31, 1993 are treated as arising on September 1, 1994,
the first day of the Fund's next taxable year.
D. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in when-issued or
delayed delivery transactions. The Fund records when-issued securities on the trade date
and maintains security positions such that sufficient liquid assets will be available to
make payment for the securities purchased. Securities purchased on a when-issued or
delayed delivery basis are marked to market daily and begin earning interest on the
settlement date.
</TABLE>
VIRGINIA MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
E. CONCENTRATION OF RISK--Since the Fund invests a substantial portion of its assets in
issuers located in one state, it will be more susceptible to factors adversely affecting
issuers of that state than would be a comparable general tax-exempt mutual fund. In order
to reduce the credit risk associated with such factors, at August 31, 1994, 19.9% of the
securities in the portfolio of investments are backed by letters of credit or bond
insurance of various financial institutions and financial guaranty assurance agencies.
The value of investments insured by or supported (backed) by a letter of credit for any
one institution or agency did not exceed 8.1% of total investments.
F. DEFERRED EXPENSES--The costs incurred by the Fund with respect to registration of its
shares in its first fiscal year, excluding the initial expense of registering its shares,
have been deferred and are being amortized using the straight-line method not to exceed a
period of five years from the Fund's commencement date.
G. OTHER--Investment transactions are accounted for on the trade date.
</TABLE>
(3) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
AUGUST 31, 1994*
- ------------------------------------------------------------------------- -----------------
<S> <C>
Shares sold 968,824
- -------------------------------------------------------------------------
Shares issued to shareholders in payment of dividends declared 8,930
- -------------------------------------------------------------------------
Shares redeemed (489,413)
--------
- -------------------------------------------------------------------------
Net change resulting from Fund share transactions 488,341
--------
- -------------------------------------------------------------------------
</TABLE>
* For the period from September 2, 1993 (date of initial public investment) to
August 31, 1994.
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
ADVISORY FEE--Federated Advisers, the Fund's investment adviser (the "Adviser"),
receives for its services 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 and reimburse certain operating expenses of the Fund.
The Adviser can modify or terminate this voluntary waiver and reimbursement at
any time at its sole discretion.
VIRGINIA MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS") provides the Fund
with administrative personnel and services. Prior to March 1, 1994, these
services were provided at approximate cost. Effective March 1, 1994, the FAS fee
is based on the level of average aggregate daily net assets of all funds advised
by subsidiaries of Federated Investors for the period. The administrative fee
received during the period of the Administrative Services Agreement, on an
annualized basis, shall be at least $125,000 per portfolio and $30,000 per each
additional class of shares.
DISTRIBUTION AND SHAREHOLDER SERVICES FEE--The Fund has adopted a Distribution
Plan (the "Plan") pursuant to Rule 12b-1 under the Act. Under the terms of the
Plan, the Fund will compensate Federated Securities Corp. ("FSC"), the principal
distributor, from the net assets of the Fund to finance activities intended to
result in the sale of the Fund's shares. The Plan provides that the Fund may
incur distribution expenses up to .75 of 1% of the Fund's average daily net
assets, annually, to compensate FSC.
Under the terms of a Shareholder Services Agreement with Federated Shareholder
Services ("FSS"), the Fund will pay FSS up to .25 of 1% of average net assets of
the Fund for the period. This fee is to obtain certain personal services for
shareholders and to maintain shareholder accounts.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES--Federated Services Company
("FServ") serves as transfer agent and dividend disbursing agent for the Fund.
The FServ fee is based on the size, type and number of accounts and transactions
made by shareholders.
ORGANIZATIONAL EXPENSES--Organizational expenses of $17,358 and start-up
administrative services expenses of $57,000 were borne initially by the Adviser.
The Fund has agreed to reimburse the Adviser for the organizational expenses and
start-up administrative expenses during the five year period following August
31, 1993 (date the Fund first became effective). For the year ended August 31,
1994, the Fund paid $2,314 and $7,600, respectively, pursuant to this agreement.
INTERFUND TRANSACTIONS--During the year ended August 31, 1994, the Fund engaged
in purchase and sale transactions with other affiliated funds at current value
on the date of the transaction pursuant to Rule 17a-7 under the Act amounting to
$1,300,000 and $950,000 respectively.
Certain Officers and Trustees of the Fund are Officers and Directors or Trustees
of the above companies.
VIRGINIA MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
fiscal year ended
August 31, 1994 were as follows:
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------
PURCHASES $5,917,695
- -------------------------------------------------------------------------------- ----------
SALES $1,354,023
- -------------------------------------------------------------------------------- ----------
</TABLE>
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
To the Board of Trustees of MUNICIPAL SECURITIES INCOME TRUST
and Shareholders of VIRGINIA MUNICIPAL INCOME FUND:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Virginia Municipal Income Fund (a portfolio of
Municipal Securities Income Trust) as of August 31, 1994, and the related
statement of operations, the statement of changes in net assets and the
financial highlights for the period from September 2, 1993 (date of initial
public investment) to August 31, 1994. These financial statements and financial
highlights are the responsibility of the Trust's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of the securities owned as of August 31, 1994
by correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Virginia Municipal
Income Fund as of August 31, 1994, and the results of its operations, the
changes in its net assets and its financial highlights for the period from
September 2, 1993 (date of initial public investment) to August 31, 1994 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
October 7, 1994
<TABLE>
<S> <C>
TRUSTEES OFFICERS
- ---------------------------------------------------------------------------------------------
John F. Donahue John F. Donahue
John T. Conroy, Jr. Chairman
William J. Copeland Richard B. Fisher
J. Christopher Donahue President
James E. Dowd J. Christopher Donahue
Lawrence D. Ellis, M.D. Vice President
Edward L. Flaherty, Jr. Edward C. Gonzales
Peter E. Madden Vice President and Treasurer
Gregor F. Meyer John W. McGonigle
Wesley W. Posvar Vice President and Secretary
Marjorie P. Smuts David M. Taylor
Assistant Treasurer
J. Crilley Kelly
Assistant Secretary
</TABLE>
Mutual funds are not bank deposits or obligations, are not guaranteed by any
bank, and are not insured or guaranteed by the FDIC, the Federal Reserve Board,
or any other government agency. Investment in mutual funds involves risk,
including possible loss of principal.
This report is authorized for distribution to prospective investors only when
preceded or accompanied by the Fund's prospectus which contains facts concerning
its objective and policies, management fees, expenses and other information.
APPENDIX
A1. The graphic presentation here displayed consists of a line graph
entitled "Growth of $10,000 Invested in Pennsylvania Municipal Income
Fund (Class A Shares)." The Pennsylvania Municipal Income Fund (the
"Fund") is represented by a solid line. The Lehman Brothers Revenue
Bond Index is represented by a dotted line. The line graph is a visual
representation of a comparison of change in value of a hypothetical
$10,000 purchase in the Fund and the Lehman Brothers Revenue Bond Index.
The "x" axis reflects computation periods from the start of performance,
October 11, 1990, through August 31, 1994. The "y" axis reflects the
cost of the investment, ranging from $9,000 to $15,000. The right
margin reflects the ending value of the hypothetical investment in the
Fund as compared to the Lehman Brothers Revenue Bond Index; the ending
values are $13,248 and $14,135, respectively.
A2. The graphic presentation here displayed consists of a line graph
entitled "Growth of $10,000 Invested in Pennsylvania Municipal Income
Fund (Income Shares)." The Pennsylvania Municipal Income Fund (the
"Fund") is represented by a solid line. The Lehman Brothers Revenue
Bond Index is represented by a dotted line. The line graph is a visual
representation of a comparison of change in value of a hypothetical
$10,000 purchase in the Fund and the Lehman Brothers Revenue Bond Index.
The "x" axis reflects computation periods from the start of performance,
July 16, 1993, through August 31, 1994. The "y" axis reflects the cost
of the investment, ranging from $8,000 to $13,000. The right margin
reflects the ending value of the hypothetical investment in the Fund as
compared to the Lehman Brothers Revenue Bond Index; the ending values
are $9,704 and $10,219, respectively.
A3. The graphic presentation here displayed consists of a line graph
entitled "Growth of $10,000 Invested in Ohio Municipal Income Fund
(Fortress Shares)." The Ohio Municipal Income Fund (the "Fund") is
represented by a solid line. The Lehman Brothers Revenue Bond Index is
represented by a dotted line. The line graph is a visual representation
of a comparison of change in value of a hypothetical $10,000 purchase in
the Fund and the Lehman Brothers Revenue Bond Index. The "x" axis
reflects computation periods from the start of performance, October 12,
1990, through August 31, 1994. The "y" axis reflects the cost of the
investment, ranging from $9,000 to $15,000. The right margin reflects
the ending value of the hypothetical investment in the Fund as compared
to the Lehman Brothers Revenue Bond Index; the ending values are $13,392
and $14,204, respectively.
A4. The graphic presentation here displayed consists of a line graph
titled "Growth of $10,000 Invested in Michigan Intermediate Municipal
Trust (the "Fund"). The corresponding components of the line graph are
listed underneath. The Fund is represented by a broken line. The Lehman
Brothers 7 year State General Obligation Bond Index ("LB7YRGOMBI") is
represented by a solid line. The line graph is a visual representation
of a comparison of change in value of a hypothetical $10,000 purchase in
the Fund and the LB7YRGOMBI. The "y" axis reflects the cost of the
investment. The "x" axis reflects computation periods from the Fund's
start of business, 9/18/91, through 8/31/94. The right margin reflects
the ending value of the hypothetical investment in the Fund as compared
to the LB7YRGOMBI; the ending values are $11,984 and $12,237,
respectively. The Average Annual Total Return for the period ended
August 31, 1994; beginning with the start of performance date of the
Fund (9/18/91), and the one-year period was 6.32% and (2.14%),
respectively.
A5. The graphic presentation here displayed consists of a line graph
titled "Growth of $10,000 Invested in California Municipal Income Fund-
Fortress Shares (the "Fund"). The corresponding components of the line
graph are listed underneath. The Fund is represented by a broken line.
The Lehman Brothers Revenue Bond Index ("LBRB") is represented by a
solid line. The line graph is a visual representation of a comparison
of change in value of a hypothetical $10,000 purchase in the Fund and
the LBRB. The "y" axis reflects the cost of the investment. The "x"
axis reflects computation periods from the Fund's start of business,
12/2/92, through 8/31/94. The right margin reflects the ending value
of the hypothetical investment in the Fund as compared to the LBRB; the
ending values are $11,110 and $10,821, respectively. The Average Annual
Total Return for the period ended August 31, 1994; beginning with the
start of performance date of the Fund (12/2/92), and the one-year period
was 4.63% and (4.96%), respectively.
A6. The graphic presentation here displayed consists of a line graph
titled "Growth of $10,000 Invested in New York Municipal Income Fund-
Fortress Shares (the "Fund") The corresponding components of the line
graph are listed underneath. The Fund is represented by a broken line.
The Lehman Brothers Revenue Bond Index ("LBRB") is represented by a
solid line. The line graph is a visual representation of a comparison
of change in value of a hypothetical $10,000 purchase in the Fund and
the LBRB. The "y" axis reflects the cost of the investment. The "x"
axis reflects computation periods from the Fund's start of business,
12/2/92, through 8/31/94. The right margin reflects the ending value
of the hypothetical investment in the Fund as compared to the LBRB; the
ending values are $10,902 and $11,101, respectively. The Average Annual
Total Return for the period ended August 31, 1994; beginning with the
start of performance date of the Fund (12/2/92), and the one-year period
was 9.03% and (4.23%), respectively.
A7. The graphic presentation here displayed consists of a line graph
titled "Growth of $10,000 Invested in New Jersey Municipal Income Fund."
The corresponding components of the line graph are listed underneath.
The New Jersey Municipal Income Fund is represented by a dotted line.
The Lehman Brothers Revenue Bond Index is represented by a solid line.
The line graph is a visual representation of a comparison of change in
value of a hypothetical $10,000 investment in the Fund and the Lehman
Brothers Revenue Bond Index. The "x" axis reflects computation periods
from the start of performance (June 2, 1993) to August 31, 1994. The
"y" axis reflects the cost of the investment, ranging from $9,700 to
$10,500. The right margin reflects the ending value of the hypothetical
investment in the Fund as compared to the Lehman Brothers Revenue Bond
Index. The ending values are $9,952 and $10,384, respectively.
A8. The graphic presentation here displayed consists of a line graph
titled "Growth of $10,000 Invested in Maryland Municipal Income Fund."
The corresponding components of the line graph are listed underneath.
The Maryland Municipal Income Fund is represented by a dotted line. The
Lehman Brothers Revenue Bond Index is represented by a solid line. The
line graph is a visual representation of a comparison of change in value
of a hypothetical $10,000 investment in the Fund and the Lehman Brothers
Revenue Bond Index. The "x" axis reflects computation periods from the
start of performance (September 2, 1993) to August 31, 1994. The "y"
axis reflects the cost of the investment, ranging from $8,600 to
$10,200. The right margin reflects the ending value of the hypothetical
investment in the Fund as compared to the Lehman Brothers Revenue Bond
Index. The ending values are $9,056 and $9,984, respectively.
A9. The graphic presentation here displayed consists of a line graph
titled "Growth of $10,000 Invested in Florida Municipal Income Fund."
The corresponding components of the line graph are listed underneath.
The Florida Municipal Income Fund is represented by a solid line. The
Lehman Brothers Revenue Bond Index is represented by a dotted line. The
line graph is a visual representation of a comparison of change in value
of a hypothetical $10,000 investment in the Fund and the Lehman Brothers
Revenue Bond Index. The "x" axis reflects computation periods from the
start of performance (June 2, 1993) to August 31, 1994. The "y" axis
reflects the cost of the investment, ranging from $9,000 to $12,000.
The right margin reflects the ending value of the hypothetical
investment in the Fund as compared to the Lehman Brothers Revenue Bond
Index. The ending values are $9,846 and $10,384, respectively.
A10. The graphic presentation here displayed consists of a line graph
entitled "Growth of $10,000 Invested in Texas Municipal Income Fund."
The Texas Municipal Income Fund (the "Fund") is represented by a solid
line. The Lehman Brothers Revenue Bond Index is represented by a dotted
line. The line graph is a visual representation of a comparison of
change in value of a hypothetical $10,000 purchase in the Fund and the
Lehman Brothers Revenue Bond Index. The "x" axis reflects computation
periods from the start of performance, June 2, 1993, through August 31,
1994. The "y" axis reflects the cost of the investment, ranging from
$9,500 to $11,500. The right margin reflects the ending value of the
hypothetical investment in the Fund as compared to the Lehman Brothers
Revenue Bond Index; the ending values are $9,945 and $10,384,
respectively.
A11. The graphic presentation here displayed consists of a line graph
titled "Growth of $10,000 Invested in Virginia Municipal Income Fund."
The corresponding components of the line graph are listed underneath.
The Virginia Municipal Income Fund is represented by a solid line. The
Lehman Brothers Revenue Bond Index is represented by a dotted line. The
line graph is a visual representation of a comparison of change in value
of a hypothetical $10,000 investment in the Fund and the Lehman Brothers
Revenue Bond Index. The "x" axis reflects computation periods from the
start of performance (September 2, 1993) to August 31, 1994. The "y"
axis reflects the cost of the investment, ranging from $8,500 to
$11,000. The right margin reflects the ending value of the hypothetical
investment in the Fund as compared to the Lehman Brothers Revenue Bond
Index. The ending values are $9,190 and $9,984, respectively.
