1933 Act File No. 33-36729
1940 Act File No. 811-6165
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No.
Post-Effective Amendment No. 16 X
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 17 X
MUNICIPAL SECURITIES INCOME TRUST
(Exact Name of Registrant as Specified in Charter)
Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779
(Address of Principal Executive Offices)
(412) 288-1900
(Registrant's Telephone Number)
John W. McGonigle, Esquire,
Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779
(Name and Address of Agent for Service)
It is proposed that this filing will become effective:
immediately upon filing pursuant to paragraph (b)
X on October 31, 1994 pursuant to paragraph (b)
60 days after filing pursuant to paragraph (a)
on pursuant to paragraph (a) of Rule 485.
Registrant has filed with the Securities and Exchange Commission a
declaration pursuant to Rule 24f-2 under the Investment Company Act of
1940, and:
X filed the Notice required by that Rule on October 14, 1994; or
intends to file the Notice required by that Rule on or about
_______________; or
during the most recent fiscal year did not sell any securities pursuant
to Rule 24f-2 under the Investment Company Act of 1940, and, pursuant to
Rule 24f-2(b)(2), need not file the Notice.
Copies to:
Thomas J. Donnelly, Esquire Charles H. Morin, Esquire
Houston, Houston & Donnelly Dickstein, Shapiro & Morin, L.L.P.
2510 Centre City Tower 2101 L Street, N.W.
650 Smithfield Street Washington, D.C. 20037
Pittsburgh, Pennsylvania 15222
CROSS-REFERENCE SHEET
This amendment to the Registration Statement of Municipal Securities
Income Trust , which is comprised of ten portfolios: (1) Pennsylvania
Municipal Income Fund (Class A Shares), (2) Ohio Municipal Income Fund
(Fortress Shares) (3) Michigan Intermediate Municipal Trust, (4) California
Municipal Income Fund (Fortress Shares), (5) New York Municipal Income Fund
(Fortress Shares), (6) Florida Municipal Income Fund, (7) New Jersey
Municipal Income Fund, (8) Texas Municipal Income Fund, (9) Maryland
Municipal Income Fund, and (10) Virginia Municipal Income Fund, relates
only to portfolios (1), (2), (3), (4), and (5) and is comprised of the
following:
PART A. INFORMATION REQUIRED IN A PROSPECTUS.
Prospectus Heading
(Rule 404(c) Cross Reference)
Item 1. Cover Page (1-5) Cover Page.
Item 2. Synopsis (1-5) Summary of Fund Expenses; (1-5)
Financial Highlights.
Item 3. Condensed Financial
Information (1-5) Performance Information.
Item 4. General Description of
Information; (1-5) General Information; (1) Liberty
Family of Funds; (2) Fortress
Investment Program; (1-5) Investment
Information; Investment Objective,
Investment Policies, Investment
Limitations; Investment Risks; (1)
Pennsylvania Municipal Securities; (2)
Ohio Municipal Securities; (3)
Michigan Municipal Securities; (4)
California Municipal Securities; (5)
New York Municipal Securities;(1-5)
Non-Diversification.
Item 5. Management of the Fund (1-5) Municipal Securities Income
Trust Information; (1-5) Management of
Municipal Securities Income Trust; (1)
Distribution of Class A Shares; (3)
Distribution of Fund Shares; (2, 4, 5)
Distribution of Fortress Shares; (1-5)
Administration of the Fund.
Item 6. Capital Stock and Other
Securities (1-5) Dividends and Distributions;
Shareholder Information; Voting
Rights; Massachusetts Partnership Law;
Tax Information; Federal Income Tax;
Other State and Local Taxes;
(1) Pennsylvania Taxes; (2) State of
Ohio Income Taxes; (3) Michigan Tax
Considerations; (4) California Income
Taxes; (5) New York Taxes.
Item 7. Purchase of Securities
Being Offered (1-5) Net Asset Value; (1) Investing
in Class A Shares; (2, 4, 5) Investing
in Fortress Shares; (3) Investing in
the Fund; (1-5) Share Purchases;
Minimum Investment Required; What
Shares Cost; Certificates and
Confirmations; (1-5)
Eliminating/Reducing the Sales Charge;
(1-5) Systematic Investment Program.
Item 8. Redemption or Repurchase (1) Redeeming Class A Shares; (2, 4,
5) Redeeming Fortress Shares; (3)
Redeeming Shares; (1-5) Through a
Financial Institution; (1-3) Directly
from the Fund; (4,5) Directly by Mail;
(2, 4, 5) Exchanges for Shares of
Other Funds; (1-5) Contingent Deferred
Sales Charge; (1-5) Elimination of
Contingent Deferred Sales Charge; (1-
5) Accounts with Low Balances; (1-5)
Systematic Withdrawal Program; (1-5)
Exchange Privilege; (3) Making an
Exchange; (1) Receiving Payment.
Item 9. Pending Legal Proceedings None.
PART B. INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION.
Item 10. Cover Page (1-5) Cover Page.
Item 11. Table of Contents (1-5) Table of Contents.
Item 12. General Information and
History (1-5) General Information About the
Fund.
Item 13. Investment Objectives
and Policies (1-5) Investment Objectives and
Policies.
Item 14. Management of the Fund (1-5) Municipal Securities Income
Trust Management; (1-5) Transfer Agent
and Dividend Disbursing Agent.
Item 15. Control Persons and Principal
Holders of Securities Not Applicable.
Item 16. Investment Advisory and Other
Services (1-5) Investment Advisory Services,
Administrative Services.
Item 17. Brokerage Allocation (1-5) Brokerage Transactions.
Item 18. Capital Stock and Other
Securities Not Applicable.
Item 19. Purchase, Redemption and
Pricing of Securities
Being Offered (1, 2, 3) Purchasing Shares; (4, 5)
Purchasing Fortress Shares; (4, 5)
Distribution Plan; (1-5) Determining
Net Asset Value; (1, 2, 3) Redeeming
Shares; (4, 5) Redeeming Fortress
Shares; (2a, 4, 5) Exchange Privilege.
Item 20. Tax Status (1-5) Tax Status.
Item 21. Underwriters (1,2) Administrative Arrangements.
Item 22. Calculation of Performance
Data (1-5) Total Return; Yield; Tax-
Equivalent Yield; Performance
Comparisons.
Item 23. Financial Statements (1-5) Filed in Part A.
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>
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PURCHASES $14,321,702
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SALES $ 9,443,141
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</TABLE>
INDEPENDENT AUDITORS' REPORT
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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>
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California Municipal Income Fund Federated Investors Tower
Fortress Shares Pittsburgh, Pennsylvania 15222-3779
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Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
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Investment Adviser
Federated Advisers Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
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Custodian
State Street Bank and P.O. Box 8604
Trust Company Boston, Massachusetts 02266-8604
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Transfer Agent and Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
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Legal Counsel
Houston, Houston & Donnelly 2510 Centre City Tower
Pittsburgh, Pennsylvania 15222
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Legal Counsel
Dickstein, Shapiro & Morin, L.L.P. 2101 L Street, N.W.
Washington, D.C. 20037
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Independent Auditors
Deloitte & Touche LLP 125 Summer Street
Boston, Massachusetts 02110-1617
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</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
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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
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Adviser to the Fund 9
Advisory Fees 9
ADMINISTRATIVE SERVICES 9
- ---------------------------------------------------------------
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT 9
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BROKERAGE TRANSACTIONS 9
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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 10
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 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
- ---------------------------------------------------------------
YIELD 12
- ---------------------------------------------------------------
TAX-EQUIVALENT YIELD 13
- ---------------------------------------------------------------
Tax-Equivalency Table 13
PERFORMANCE COMPARISONS 14
- ---------------------------------------------------------------
APPENDIX 15
- ---------------------------------------------------------------
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
- --------------------------------------------------------------------------------
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)
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
<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
- ---------------------------------------------------
New York Investment Risks 5
MUNICIPAL SECURITIES INCOME TRUST MANAGEMENT 5
- ---------------------------------------------------
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 10
- ---------------------------------------------------
PURCHASING FORTRESS SHARES 10
- ---------------------------------------------------
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
- ---------------------------------------------------
Valuing Municipal Bonds 11
Use of Amortized Cost 11
REDEEMING FORTRESS SHARES 11
- ---------------------------------------------------
Redemption in Kind 11
EXCHANGE PRIVILEGE 11
- ---------------------------------------------------
Reduced Sales Load 12
Requirements for Exchange 12
Tax Consequences 12
Making An Exchange 12
TAX STATUS 12
- ---------------------------------------------------
The Fund's Tax Status 12
TOTAL RETURN 13
- ---------------------------------------------------
YIELD 13
- ---------------------------------------------------
TAX-EQUIVALENT YIELD 13
- ---------------------------------------------------
Tax-Equivalency Table 14
PERFORMANCE COMPARISONS 14
- ---------------------------------------------------
APPENDIX 16
- ---------------------------------------------------
</TABLE>
I
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
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
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
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
- --------------------------------------------------------------------------------
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
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<TABLE>
<S> <C> <C>
Ohio Municipal Income Fund Federated Investors Tower
Fortress Shares Pittsburgh, Pennsylvania 15222-3779
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Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
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Investment Adviser
Federated Advisers Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
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Custodian
State Street Bank and P.O. Box 8602
Trust Company Boston, Massachusetts 02266-8602
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Transfer Agent and Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
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Legal Counsel
Houston, Houston & Donnelly 2510 Centre City Tower
Pittsburgh, Pennsylvania 15222
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Legal Counsel
Dickstein, Shapiro & Morin, L.L.P. 2101 L Street, N.W.
Washington, D.C. 20037
- ------------------------------------------------------------------------------------------------
Independent Auditors
Deloitte & Touche LLP 125 Summer Street
Boston, Massachusetts 02110-1617
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</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
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
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)
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
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES 1
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS-CLASS A SHARES 2
- ------------------------------------------------------
GENERAL INFORMATION 3
- ------------------------------------------------------
LIBERTY FAMILY OF FUNDS 3
- ------------------------------------------------------
INVESTMENT INFORMATION 4
- ------------------------------------------------------
Investment Objective 4
Investment Policies 4
Pennsylvania Municipal Securities 7
Investment Risks 7
Non-Diversification 7
Investment Limitations 8
NET ASSET VALUE 8
- ------------------------------------------------------
INVESTING IN CLASS A SHARES 9
- ------------------------------------------------------
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
- ------------------------------------------------------
Requirements for Exchange 12
Tax Consequences 13
Making an Exchange 13
REDEEMING CLASS A SHARES 13
- ------------------------------------------------------
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
- ------------------------------------------------------
Management of Municipal Securities
Income Trust 16
Distribution of Class A Shares 17
Administration of the Fund 18
SHAREHOLDER INFORMATION 19
- ------------------------------------------------------
Voting Rights 19
Massachusetts Partnership Law 19
TAX INFORMATION 19
- ------------------------------------------------------
Federal Income Tax 19
Pennsylvania Taxes 20
Other State and Local Taxes 21
PERFORMANCE INFORMATION 21
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS-INCOME SHARES 22
- ------------------------------------------------------
FINANCIAL STATEMENTS 23
- ------------------------------------------------------
INDEPENDENT AUDITORS' REPORT 39
- ------------------------------------------------------
ADDRESSES Inside Back Cover
- ------------------------------------------------------
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<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
- ------------------------------------------------------------- ------ ------- ------- --------
<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
- --------------------------------------------------------------------------------
(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 1991*
------ ------ ------- -------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.68 $10.93 $ 10.44 $ 10.00
- -----------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------------------
Net investment income 0.60 0.60 0.627 0.588
- -----------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.75) 0.75 0.493 0.456
- ----------------------------------------------------------- ------ ------ ------- -------
Total from investment operations (0.15) 1.35 1.120 1.044
- ----------------------------------------------------------- ------ ------ ------- -------
LESS DISTRIBUTIONS
- -----------------------------------------------------------
Dividends to shareholders from net investment income (0.59) (0.60) (0.627) (0.588)
- -----------------------------------------------------------
Distributions in excess of net investment income -- -- (0.003)(a) (0.016)(a)
- ----------------------------------------------------------- ------ ------ ------- -------
Total distributions (0.59) (0.60) (0.630) (0.604)
- ----------------------------------------------------------- ------ ------ ------- -------
NET ASSET VALUE, END OF PERIOD $10.94 $11.68 $ 10.93 $ 10.44
- ----------------------------------------------------------- ------ ------ ------- -------
TOTAL RETURN** (1.34%) 12.71% 11.06% 10.60%
- -----------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------------
Expenses 0.75% 0.83% 0.73% 0.26%(c)
- -----------------------------------------------------------
Net investment income 5.27% 5.33% 5.88% 6.45%(c)
- -----------------------------------------------------------
Expense waiver/reimbursement (b) 0.45% 0.70% 0.97% 1.24%
- -----------------------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------------------
Net assets, end of period (000 omitted) $85,860 $69,947 $48,261 $31,067
- -----------------------------------------------------------
Portfolio turnover rate 17% 0% 0% 10%
- -----------------------------------------------------------
</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
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
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
- ----------------------------------------------- ---------------------- -------------------
<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)
PART C. OTHER INFORMATION.
Item 24. Financial Statements and Exhibits:
(a) Financial Statements: Filed in Part A.
(b) Exhibits:
(1) (i) Paper Copy of Declaration of Trust of the
Registrant (1);
(ii) Paper Copy of Amendment No. 1 (dated August 26, 1991)
to Declaration of Trust (5);
(iii) Conformed Copy of Amendment No. 2 (dated August 6,
1990) to the Declaration of Trust (6);
(iv) Conformed Copy of Amendment No. 3 (dated August 31,
1992) to the Declaration of Trust (8);
(v) Conformed Copy of Amendment No. 4 (dated
September 17, 1992) to the Declaration of
Trust (8);
(vi) Conformed Copy of Amendment No. 5 (dated February 4,
1993) to the Declaration of Trust (10);
(vii) Conformed Copy of Amendment No. 6 (dated May 24, 1993)
to the Declaration of Trust; (13)
(2) Copy of By-Laws of the Registrant (1);
(3) Not applicable;
(4) Copy of Specimen Certificate for Shares of Beneficial
Interest for:
(i) Pennsylvania Municipal Income Fund-Class A
Shares;+
(ii) Ohio Municipal Income Fund-Trust Shares (6);
(iii) California Municipal Income Fund (10);
(iv) New York Municipal Income Fund (10);
(v) Florida Municipal Income Fund (10);
(vi) New Jersey Municipal Income Fund (10);
(vii) Texas Municipal Income Fund (10);
(viii) Michigan Intermediate Municipal Trust;+
(ix) Maryland Municipal Income Fund (15);
(x) Virginia Municipal Income Fund (15);
+ All exhibits are filed electronically.
1. Response is incorporated by reference to Registrant's Initial
Registration Statement on Form N-1A filed August 31, 1990. (File Nos.
33-36729 and 811-6165)
5. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 4 on Form N-1A filed on October 28, 1991. (File Nos. 33-
36729 and 811-6165)
6. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 5 on Form N-1A filed on January 24, 1992. (File Nos. 33-
36729 and 811-6165)
8. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 7 on Form N-1A filed on September 25, 1992. (File Nos. 33-
36729 and 811-6165)
10. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 10 on Form N-1A filed on March 24, 1993. (File Nos. 33-
36729 and 811-6165)
11. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 11 on Form N-1A filed on April 28, 1993. (File Nos. 33-
36729 and 811-6165)
13. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 13 on Form N-1A filed on July 2, 1993, (File Nos. 33-
36729 and 811-6165)
15. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 15 on Form N-1A filed on February 24, 1994. (File Nos. 33-
36729 and 811-6165)
(5) Copy of new Investment Advisory Contract of the
Registrant (8);
(i) Copy of Amendment to Investment Advisory
Contract (12)
(ii) Conformed Copies of Amendments to Investment
Advisory Contract (14);
(iii) Conformed Copies of Amendments to Investment
Advisory Contract (14);
(6) Copy of Distributor's Contract of the Registrant (8);
(i) Copy of Amendment to Distributor's Contract
(12);
(ii) Conformed copy of Amendment to Distributor's
Contract (14);
(7) Not applicable;
(8) Conformed Copy of Custodian Contract of the Registrant;+
(9) (i) Conformed Copy of Agreement for Fund Accounting,
Shareholder Recordkeeping, and Custody Services
Procurement;+
(ii) Conformed Copy of Shareholder Services Agreement;+
(iii) Conformed Copy of Shareholder Services Plan;+
(iv) Copy of Shareholder Services Sub-Contract;+
(v) Conformed Copy of Administrative Services Agreement;+
(10) Conformed Copy of Opinion and Consent of Counsel as to
the legality of shares being registered (1);
(11) Conformed Copy of Consent of Independent Auditors;+
(12) Not applicable;
(13) Conformed Copy of Initial Capital Understanding (1);
(14) Not applicable;
(15) (i) Copy of Distribution Plan (12);
(ii) Conformed copy of Distribution Plan for Florida
Municipal Income Fund, New Jersey Municipal Income
Fund, Texas Municipal Income Fund, Pennsylvania
Municipal Income Fund (Income Shares), Maryland
Municipal Income Fund, and Virginia Municipal Income
Fund (15);
(iii) Copy of 12b-1 Agreement (8);
(16) Copy of Schedule for Computation of Fund Performance
Data for:
(i) Ohio Municipal Income Fund (3);
(ii) Pennsylvania Municipal Income Fund (3);
+ All exhibits are filed electronically.
1. Response is incorporated by reference to Registrant's Initial
Registration Statement on Form N-1A filed August 31, 1990. (File Nos.
33-36729 and 811-6165)
3. Response is incorporated by reference to Registrant's Post-Effective
Amendment No.1 on Form N-1A filed on October 9, 1990. (File Nos. 33-
36729 and 811-6165)
8. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 7 on Form N-1A filed on September 25, 1992. (File Nos. 33-
36729 and 811-6165)
12. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 12 on Form N-1A filed on May 17, 1993. (File Nos. 33-
36729 and 811-6165)
14. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 14 on Form N-1A filed on October 28, 1993. (File Nos. 33-
36729 and 811-6165)
15. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 15 on Form N-1A filed on February 24, 1994. (File Nos. 33-
36729 and 811-6165)
(iii) California Municipal Income Fund (11);
(iv) New York Municipal Income Fund (11);
(v) Michigan Municipal Income Fund (11);
(vi) Florida Municipal Income Fund (14);
(vii) Texas Municipal Income Fund (14);
(viii) New Jersey Municipal Income Fund (14);
(ix) Maryland Municipal Income Fund (15);
(x) Virginia Municipal Income Fund (15);
(17) Copy of Financial Data Schedules;+
(18) Conformed Copy of Opinion and Consent of Counsel as to
availability of Rule 485(b);+
(19) Conformed Copy of Power of Attorney (11);
Item 25. Persons Controlled by or Under Common Control with Registrant
None
Item 26. Number of Holders of Securities:
Number of Record Holders
Title of Class as of October 5, 1994
Shares of
beneficial interest
Pennsylvania Municipal Income Fund
Class A Shares 1,576
Ohio Municipal Income Fund
Fortress Shares 1,403
Michigan Intermediate Municipal Trust 369
California Municipal Income Fund
Fortress Shares 267
New York Municipal Income Fund
Fortress Shares 291
Item 27. Indemnification: (1)
+ All exhibits are filed electronically.
1. Response is incorporated by reference to Registrant's Initial
Registration Statement on Form N-1A filed August 31, 1990. (File Nos.
33-36729 and 811-6165)
11. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 11 on Form N-1A filed on April 28, 1993. (File Nos. 33-
36729 and 811-6165)
14. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 14 on Form N-1A filed on October 28, 1993. (File Nos. 33-
36729 and 811-6165)
15. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 15 on Form N-1A filed on February 24, 1994. (File Nos. 33-
36729 and 811-6165)
Item 28. Business and Other Connections of Investment Adviser:
(a) For a description of the other business of the investment
adviser, see the section entitled "Trust Information -
Management of the Trust" in Part A. The affiliations with
the Registrant of four of the Trustees and one of the
Officers of the investment adviser are included in Part B of
this Registration Statement under "Trust Management -
Officers and Trustees." The remaining Trustee of the
investment adviser, his position with the investment adviser,
and, in parentheses, his principal occupation is: Mark D.
Olson, (Partner, Wilson, Halbrook & Bayard), 107 W. Market
Street, Georgetown, Delaware, 19947.
The remaining Officers of the investment adviser are: William
P. Dawson, III, J. Thomas Madden, and Mark L. Mallon,
Executive Vice Presidents; Henry J. Gailliot, Senior Vice
President-Economist; Peter R. Anderson, Gary J. Madich, and
J. Alan Minteer, Senior Vice Presidents; Randall A. Bauer,
Jonathan C. Conley, Deborah A. Cunningham, Mark E. Durbiano,
Kathleen Foody-Malus, Thomas M. Franks, Edward C. Gonzales,
Jeff A. Kozemchak, Marian R. Marinack, John W. McGonigle,
Gregory M. Melvin, Susan M. Nason, Mary Jo Ochson, Robert J.
Ostrowski, Charles A. Ritter, and Christopher H. Wiles, Vice
Presidents; Edward C. Gonzales, Treasurer; and John W.
McGonigle, Secretary. The business address of each of the
Officers of the investment adviser is Federated Investors
Tower, Pittsburgh, PA 15222-3779. These individuals are also
officers of a majority of the investment advisers to the
Funds listed in Part B of this Registration Statement under
"The Funds."
Item 29. Principal Underwriters:
(a) Federated Securities Corp., the Distributor for shares of the
Registrant, also acts as principal underwriter for the
following open-end investment companies: Alexander Hamilton
Funds; American Leaders Fund, Inc.; Annuity Management
Series; Arrow Funds; Automated Cash Management Trust;
Automated Government Money Trust; BayFunds; The Biltmore
Funds; The Biltmore Municipal Funds; California Municipal
Cash Trust; Cash Trust Series, Inc.; Cash Trust Series II; DG
Investor Series; Edward D. Jones & Co. Daily Passport Cash
Trust; Federated ARMs Fund; Federated Exchange Fund, Ltd.;
Federated GNMA Trust; Federated Government Trust; Federated
Growth Trust; Federated High Yield Trust; Federated Income
Securities Trust; Federated Income Trust; Federated Index
Trust; Federated Institutional Trust; Federated Intermediate
Government Trust; Federated Master Trust; Federated Municipal
Trust; Federated Short-Intermediate Government Trust;
Federated Short-Term U.S. Government Trust; Federated Stock
Trust; Federated Tax-Free Trust; Federated U.S. Government
Bond Fund; First Priority Funds; First Union Funds; Fixed
Income Securities, Inc.; Fortress Adjustable Rate U.S.
Government Fund, Inc.; Fortress Municipal Income Fund, Inc.;
Fortress Utility Fund, Inc.; Fountain Square Funds; Fund for
U.S. Government Securities, Inc.; Government Income
Securities, Inc.; High Yield Cash Trust; Independence One
Mutual Funds; Insight Institutional Series, Inc.; Insurance
Management Series; Intermediate Municipal Trust;
International Series Inc.; Investment Series Funds, Inc.;
Investment Series Trust; Liberty Equity Income Fund, Inc.;
Liberty High Income Bond Fund, Inc.; Liberty Municipal
Securities Fund, Inc.; Liberty U.S. Government Money Market
Trust; Liberty Utility Fund, Inc.; Liquid Cash Trust; Managed
Series Trust; Marshall Funds, Inc.; Money Market Management,
Inc.; The Medalist Funds; Money Market Obligations Trust;
Money Market Trust; The Monitor Funds; New York Municipal
Cash Trust; 111 Corcoran Funds; Peachtree Funds; The Planters
Funds; Portage Funds; RIMCO Monument Funds; The Shawmut
Funds; Short-Term Municipal Trust; SouthTrust Vulcan Funds;
Star Funds; The Starburst Funds; The Starburst Funds II;
Stock and Bond Fund, Inc.; Sunburst Funds; Targeted Duration
Trust; Tax-Free Instruments Trust; Tower Mutual Funds;
Trademark Funds; Trust for Financial Institutions; Trust for
Government Cash Reserves; Trust for Short-Term U.S.
Government Securities; Trust for U.S. Treasury Obligations;
Vision Fiduciary Funds, Inc.; Vision Group of Funds, Inc.;
and World Investment Series, Inc.
Federated Securities Corp. also acts as principal underwriter
for the following closed-end investment company: Liberty
Term Trust, Inc.- 1999.
(b)
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
Richard B. Fisher Director, Chairman, Chief President
Federated Investors Tower Executive Officer, Chief
Pittsburgh, PA 15222-3779 Operating Officer, and
Asst. Treasurer, Federated
Securities Corp.
Edward C. Gonzales Director, Executive Vice Vice President and
Federated Investors Tower President, and Treasurer, Treasurer
Pittsburgh, PA 15222-3779 Federated Securities
Corp.
John W. McGonigle Director, Executive Vice Vice President and
Federated Investors Tower President, and Assistant Secretary
Pittsburgh, PA 15222-3779 Secretary, Federated
Securities Corp.
John B. Fisher President-Institutional Sales, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
James F. Getz President-Broker/Dealer, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mark R. Gensheimer Executive Vice President of --
Federated Investors Tower Bank/Trust
Pittsburgh, PA 15222-3779 Federated Securities Corp.
Mark W. Bloss Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Theodore Fadool, Jr. Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
Bryant R. Fisher Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Christopher T. Fives Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
James S. Hamilton Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
James M. Heaton Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
H. Joseph Kennedy Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Keith Nixon Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Timothy C. Pillion Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard W. Boyd Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Jane E. Broeren-Lambesis Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mary J. Combs Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
R. Edmond Connell, Jr. Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Laura M. Deger Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Jill Ehrenfeld Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mark D. Fisher Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
Michael D. Fitzgerald Vice President,
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Joseph D. Gibbons Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
David C. Glabicki Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard C. Gonzales Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Scott A. Hutton Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
William J. Kerns Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
William E. Kugler Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Dennis M. Laffey Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Francis J. Matten, Jr. Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mark J. Miehl Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard C. Mihm Vice President,
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
J. Michael Miller Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
R. Jeffrey Niss Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Michael P. O'Brien Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
Robert D. Oehlschlager Vice President,
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Solon A. Person, IV Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Robert F. Phillips Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Eugene B. Reed Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Paul V. Riordan Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Charles A. Robison Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
David W. Spears Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Jeffrey A. Stewart Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Thomas E. Territ Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Jamie M. Teschner Vice President,
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
William C. Tustin Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard B. Watts Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Philip C. Hetzel Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Ernest L. Linane Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
S. Elliott Cohan Secretary, Federated Assistant
Federated Investors Tower Securities Corp. Secretary
Pittsburgh, PA 15222-3779
(c) Not applicable.
Item 30. Location of Accounts and Records:
All accounts and records required to be maintained by Section 31(a) of the
Investment Company Act of 1940 and Rules 31a-1 through 31a-3 promulgated
thereunder are maintained at one of the following locations:
Registrant Federated Investors Tower
Pittsburgh, PA 15222-3779
Federated Services Company Federated Investors Tower
("Transfer Agent and Dividend Pittsburgh, PA 15222-3779
Disbursing Agent")
Federated Adminstrative Services Federated Investors Tower
("Administrator") Pittsburgh, PA 15222-3779
Federated Advisers Federated Investors Tower
("Adviser") Pittsburgh, PA 15222-3779
State Street Bank and Trust Company P.O. Box 8604
("Custodian") Boston, MA 02266-8604
Item 31. Management Services:
Not applicable.
Item 32. Undertakings:
Registrant hereby undertakes to comply with the provisions of
Section 16(c) of the 1940 Act with respect to the removal of
Trustees and the calling of special shareholder meetings by
shareholders.
Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's latest
annual report to shareholders upon request and without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, MUNICIPAL SECURITIES
INCOME TRUST, and has duly caused this Amendment to its Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, all in the City of Pittsburgh and Commonwealth of
Pennsylvania, on the 27th day of October, 1994.
MUNICIPAL SECURITIES INCOME TRUST
BY: /s/J. Crilley Kelly
J. Crilley Kelly, Assistant Secretary
Attorney in Fact for John F. Donahue
October 27, 1994
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to its Registration Statement has been signed below by the
following person in the capacity and on the date indicated:
NAME TITLE DATE
By: /s/J. Crilley Kelly
J. Crilley Kelly Attorney In Fact October 27, 1994
ASSISTANT SECRETARY For the Persons
Listed Below
NAME TITLE
John F. Donahue* Chairman and Trustee
(Chief Executive Officer)
Richard B. Fisher* President
Edward C. Gonzales* Vice President and Treasurer
(Principal Financial and
Accounting Officer)
John T. Conroy, Jr.* Trustee
William J. Copeland* Trustee
J. Christopher Donahue Trustee
James E. Dowd* Trustee
Lawrence D. Ellis, M.D.* Trustee
Edward L. Flaherty, Jr.* Trustee
Peter E. Madden* Trustee
Gregor F. Meyer* Trustee
Wesley W. Posvar* Trustee
Marjorie P. Smuts* Trustee
* By Power of Attorney
Exhibit (11) under N-1A
Exhibit 23 under 601/Reg SK
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post-Effective Amendment No. 16 to the
Registration Statement (No. 33-36729) of Municipal Securities Income Trust
of our reports dated October 7, 1994, appearing in the Prospectuses of Ohio
Municipal Income Fund, Pennsylvania Municipal Income Fund, California
Municipal Income Fund, New York Municipal Income Fund, and Michigan
Intermediate Municipal Trust, which are a part of such Registration
Statement, and to the references to us under the heading "Financial
Highlights" in such Prospectuses.
By: DELOITTE & TOUCHE LLP
Boston, Massachusetts
October 21, 1994
Exhibit No. 18 under Form N-1A
HOUSTON, HOUSTON & DONNELLY
ATTORNEYS AT LAW
2510 CENTRE CITY TOWER
WILLIAM McC. HOUSTON PITTSBURGH, PA. 15222
FRED CHALMERS HOUSTON, JR. __________
THOMAS J. DONNELLY
JOHN F. MECK (412) 471-5828 FRED CHALMERS HOUSTON
FAX (412) 471-0736 (1914 - 1971)
MARIO SANTILLI, JR.
THEODORE M. HAMMER
October 20, 1994
Municipal Securities Income Trust
Federated Investors Tower
Pittsburgh, PA 15222-3779
Gentlemen:
As counsel to Municipal Securities Income Trust ("Trust") we have
reviewed Post-effective Amendment No. 16 to the Trust's Registration Statement
to be filed with the Securities and Exchange Commission under the Securities
Act of 1933 (File No. 33-36729). The subject Post-effective Amendment will be
filed pursuant to Paragraph (b) of Rule 485 and become effective pursuant to
said Rule on October 31, 1994.
Our review also included an examination of other relevant portions of
the amended 1933 Act Registration Statement of the Trust and such other
documents and records deemed appropriate. On the basis of this review we are
of the opinion that Post-effective Amendment No. 16 does not contain
disclosures which would render it ineligible to become effective pursuant to
Paragraph (b) of Rule 485.
We hereby consent to the filing of this representation letter as a part
of the Trust's Registration Statement filed with the Securities and Exchange
Commission under the Securities Act of 1933 and as part of any application or
registration statement filed under the Securities Laws of the States of the
United States.
Very truly yours,
Houston, Houston & Donnelly
By: /s/ Thomas J. Donnelly
TJD:heh
Exhibit 4(vi) under Form N-1A
Exhibit 4 under Item 601/Reg. S-K
MUNICIPAL SECURITIES
INCOME TRUST
PENNSYLVANIA MUNICIPAL
INCOME FUND (CLASS A SHARES)
Number Shares
_____ _____
Account No. Alpha Code See Reverse Side For
Certain Definitions
THIS IS TO CERTIFY THAT is the owner of
CUSIP 625922 50 5
Fully Paid and Non-Assessable Shares of Beneficial Interest of the
PENNSYLVANIA MUNICIPAL INCOME FUND (CLASS A SHARES) Portfolio of MUNICIPAL
SECURITIES INCOME TRUST hereafter called the Trust, transferable on the books
of the Trust by the owner in person or by duly authorized attorney upon
surrender of this certificate properly endorsed.
The shares represented hereby are issued and shall be held subject to
the provisions of the Declaration of Trust and By-Laws of the Trust and all
amendments thereto, all of which the holder by acceptance hereof assents.
This Certificate is not valid unless countersigned by the Transfer
Agent.
IN WITNESS WHEREOF, the Trust has caused this Certificate to be signed
in its name by its proper officers and to be sealed with its seal.
Dated: MUNICIPAL SECURITIES INCOME TRUST
Corporate Seal
1992
Massachusetts
/s/ Edward C. Gonzales /s/ John F. Donahue
Treasurer Chairman
Countersigned: Federated Services
Company (Pittsburgh)
Transfer Agent
By:
Authorized Signature
The following abbreviations, when used in the inscription on the face of this
Certificate, shall be construed as though they were written out in full
according to applicable laws or regulations;
TEN COM - as tenants in common UNIF GIFT MIN ACT-...Custodian...
TEN ENT - as tenants by the entireties (Cust) (Minors)
JT TEN - as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act.............................
in common (State)
Additional abbreviations may also be used though not in the above list.
For value received__________ hereby sell, assign, and transfer unto
Please insert social security or other
identifying number of assignee
______________________________________
_____________________________________________________________________________
(Please print or typewrite name and address, including zip code, of assignee)
_____________________________________________________________________________
_____________________________________________________________________________
______________________________________________________________________ shares
of beneficial interest represented by the within Certificate, and do hereby
irrevocably constitute and appoint __________________________________________
_____________________________________________________________________________
to transfer the said shares on the books of the within named Trust with full
power of substitution in the premises.
Dated______________________
NOTICE:______________________________
The signature to this assignment must
correspond with the name as written upon
the face of the certificate in every
particular, without alteration or
enlargement or any change whatever.
All persons dealing with , a Massachusetts business
trust, must look solely to the Trust property for the enforcement of any
claim against the Trust, as the Trustees, officers, agents or shareholders of
the Trust assume no personal liability whatsoever for obligations entered
into on behalf of the Trust.
THIS SPACE MUST NOT BE COVERED IN ANY WAY
DOCUMENT DESCRIPTION - SPECIMEN STOCK CERTIFICATE
Page One
A. The Certificate is outlined by a blue one-half inch border.
B. The number in the upper left-hand corner and the number of shares in
the upper right-hand corner are outlined by octagonal boxes.
C. The cusip number in the middle right-hand area of the page is boxed.
D. The Massachusetts corporate seal appears in the bottom middle of the
page.
Page Two
The social security or other identifying number of the assignee
appears in a box in the top-third upper-left area of the page.
Exhibit 4(viii) under Form N-1A
Exhibit 4 under Item 601/Reg. S-K
MUNICIPAL SECURITIES
INCOME TRUST
MICHIGAN INTERMEDIATE
MUNICIPAL TRUST
Number Shares
_____ _____
Account No. Alpha Code See Reverse Side For
Certain Definitions
THIS IS TO CERTIFY THAT is the owner of
CUSIP 625922 70 3
Fully Paid and Non-Assessable Shares of Beneficial Interest of the MICHIGAN
INTERMEDIATE MUNICIPAL TRUST Portfolio of MUNICIPAL SECURITIES INCOME TRUST
hereafter called the Trust, transferable on the books of the Trust by the
owner in person or by duly authorized attorney upon surrender of this
certificate properly endorsed.
The shares represented hereby are issued and shall be held subject to
the provisions of the Declaration of Trust and By-Laws of the Trust and all
amendments thereto, all of which the holder by acceptance hereof assents.
This Certificate is not valid unless countersigned by the Transfer
Agent.
IN WITNESS WHEREOF, the Trust has caused this Certificate to be signed
in its name by its proper officers and to be sealed with its seal.
Dated: MUNICIPAL SECURITIES INCOME TRUST
Corporate Seal
1992
Massachusetts
/s/ Edward C. Gonzales /s/ John F. Donahue
Treasurer Chairman
Countersigned: [State Street Bank
and Trust Company/Federated Services
Company/Other] (Boston)
Transfer Agent
By:
Authorized Signature
The following abbreviations, when used in the inscription on the face of this
Certificate, shall be construed as though they were written out in full
according to applicable laws or regulations;
TEN COM - as tenants in common UNIF GIFT MIN ACT-...Custodian...
TEN ENT - as tenants by the entireties (Cust) (Minors)
JT TEN - as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act.............................
in common (State)
Additional abbreviations may also be used though not in the above list.
For value received__________ hereby sell, assign, and transfer unto
Please insert social security or other
identifying number of assignee
______________________________________
_____________________________________________________________________________
(Please print or typewrite name and address, including zip code, of assignee)
_____________________________________________________________________________
_____________________________________________________________________________
______________________________________________________________________ shares
of beneficial interest represented by the within Certificate, and do hereby
irrevocably constitute and appoint __________________________________________
_____________________________________________________________________________
to transfer the said shares on the books of the within named Trust with full
power of substitution in the premises.
Dated______________________
NOTICE:______________________________
The signature to this assignment must
correspond with the name as written upon
the face of the certificate in every
particular, without alteration or
enlargement or any change whatever.
All persons dealing with , a Massachusetts business
trust, must look solely to the Trust property for the enforcement of any
claim against the Trust, as the Trustees, officers, agents or shareholders of
the Trust assume no personal liability whatsoever for obligations entered
into on behalf of the Trust.
THIS SPACE MUST NOT BE COVERED IN ANY WAY
DOCUMENT DESCRIPTION - SPECIMEN STOCK CERTIFICATE
Page One
A. The Certificate is outlined by a blue one-half inch border.
B. The number in the upper left-hand corner and the number of shares in
the upper right-hand corner are outlined by octagonal boxes.
C. The cusip number in the middle right-hand area of the page is boxed.
D. The Massachusetts corporate seal appears in the bottom middle of the
page.
Page Two
The social security or other identifying number of the assignee
appears in a box in the top-third upper-left area of the page.
Exhibit 8 under Form N-1A
Exhibit 10 under Item 601/Reg. S-K
CUSTODIAN CONTRACT
Between
FEDERATED INVESTMENT COMPANIES
and
STATE STREET BANK AND TRUST COMPANY
and
FEDERATED SERVICES COMPANY
TABLE OF CONTENTS
Page
1. Employment of Custodian and Property to be Held by It 1
2. Duties of the Custodian With Respect to Property
of the Funds Held by the Custodian 2
2.1 Holding Securities
2
2.2 Delivery of Securities
2
2.3 Registration of Securities
5
2.4 Bank Accounts
6
2.5 Payments for Shares
7
2.6 Availability of Federal Funds
7
2.7 Collection of Income
7
2.8 Payment of Fund Moneys
8
2.9 Liability for Payment in Advance of
Receipt of Securities Purchased. 9
2.10 Payments for Repurchases or Redemptions
of Shares of a Fund 9
2.11 Appointment of Agents
10
2.12 Deposit of Fund Assets in Securities System
10
2.13 Segregated Account
12
2.14 Joint Repurchase Agreements
13
2.15 Ownership Certificates for Tax Purposes
13
2.16 Proxies
13
2.17 Communications Relating to Fund Portfolio Securities
13
2.18 Proper Instructions
14
2.19 Actions Permitted Without Express Authority
14
2.20 Evidence of Authority
15
2.21 Notice to Trust by Custodian Regarding Cash Movement.
15
3. Duties of Custodian With Respect to the Books of Account and
Calculation of Net Asset Value and Net Income 15
4. Records 16
5. Opinion of Funds' Independent Public Accountants/Auditors 16
6. Reports to Trust by Independent Public Accountants/Auditors 17
7. Compensation of Custodian 17
8. Responsibility of Custodian 17
9. Effective Period, Termination and Amendment 19
10. Successor Custodian 20
11. Interpretive and Additional Provisions 21
12. Massachusetts Law to Apply 22
13. Notices 22
14. Counterparts 22
15. Limitations of Liability 22
CUSTODIAN CONTRACT
This Contract between those INVESTMENT COMPANIES listed on Exhibit 1, as
it may be amended from time to time, (the "Trust"), which may be
Massachusetts business trusts or Maryland corporations or have such other
form of organization as may be indicated, on behalf of the portfolios
(hereinafter collectively called the "Funds" and individually referred to
as a "Fund") of the Trust, having its principal place of business at
Federated Investors Tower, Pittsburgh, Pennsylvania, 15222-3779, and
STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust company,
having its principal place of business at 225 Franklin Street, Boston,
Massachusetts, 02110, hereinafter called the "Custodian", and FEDERATED
SERVICES COMPANY, a Delaware Fusiness trust company, having its principal
place of business at Federated Investors Tower, Pittsburgh, Pennsylvania,
15222-3779, hereinafter called ("Company").
WITNESSETH: That in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
The Trust hereby employs the Custodian as the custodian of the assets
of each of the Funds of the Trust. Except as otherwise expressly
provided herein, the securities and other assets of each of the
Funds shall be segregated from the assets of each of the other Funds
and from all other persons and entities. The Trust will deliver to
the Custodian all securities and cash owned by the Funds and all
payments of income, payments of principal or capital distributions
received by them with respect to all securities owned by the Funds
from time to time, and the cash consideration received by them for
shares ("Shares") of beneficial interest/capital stock of the Funds
as may be issued or sold from time to time. The Custodian shall not
be responsible for any property of the Funds held or received by the
Funds and not delivered to the Custodian.
Upon receipt of "Proper Instructions" (within the meaning of Section
2.18), the Custodian shall from time to time employ one or more sub-
custodians upon the terms specified in the Proper Instructions,
provided that the Custodian shall have no more or less
responsibility or liability to the Trust or any of the Funds on
account of any actions or omissions of any sub-custodian so employed
than any such sub-custodian has to the Custodian.
2.Duties of the Custodian With Respect to Property of the Funds Held by
the Custodian
2.1Holding Securities. The Custodian shall hold and physically segr
egate for the account of each Fund all non-cash property,
including all securities owned by each Fund, other than
securities which are maintained pursuant to Section 2.12 in a
clearing agency which acts as a securities depository or in a
book-entry system authorized by the U.S. Department of the
Treasury, collectively referred to herein as "Securities
System", or securities which are subject to a joint repurchase
agreement with affiliated funds pursuant to Section 2.14. The
Custodian shall maintain records of all receipts, deliveries and
locations of such securities, together with a current inventory
thereof, and shall conduct periodic physical inspections of
certificates representing stocks, bonds and other securities
held by it under this Contract in such manner as the Custodian
shall determine from time to time to be advisable in order to
verify the accuracy of such inventory. With respect to
securities held by any agent appointed pursuant to Section 2.11
hereof, and with respect to securities held by any sub-custodian
appointed pursuant to Section 1 hereof, the Custodian may rely
upon certificates from such agent as to the holdings of such
agent and from such sub-custodian as to the holdings of such sub-
custodian, it being understood that such reliance in no way
relieves the Custodian of its responsibilities under this
Contract. The Custodian will promptly report to the Trust the
results of such inspections, indicating any shortages or
discrepancies uncovered thereby, and take appropriate action to
remedy any such shortages or discrepancies.
2.2Delivery of Securities. The Custodian shall release and deliver
securities owned by a Fund held by the Custodian or in a
Securities System account of the Custodian only upon receipt of
Proper Instructions, which may be continuing instructions when
deemed appropriate by the parties, and only in the following
cases:
(1)Upon sale of such securities for the account of a Fund and r
eceipt of payment therefor;
(2)Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the
Trust;
(3)In the case of a sale effected through a Securities System,
in accordance with the provisions of Section 2.12 hereof;
(4)To the depository agent in connection with tender or other s
imilar offers for portfolio securities of a Fund, in
accordance with the provisions of Section 2.17 hereof;
(5)To the issuer thereof or its agent when such securities are
called, redeemed, retired or otherwise become payable;
provided that, in any such case, the cash or other
consideration is to be delivered to the Custodian;
(6)To the issuer thereof, or its agent, for transfer into the n
ame of a Fund or into the name of any nominee or nominees
of the Custodian or into the name or nominee name of any
agent appointed pursuant to Section 2.11 or into the name
or nominee name of any sub-custodian appointed pursuant to
Section 1; or for exchange for a different number of bonds,
certificates or other evidence representing the same
aggregate face amount or number of units; provided that, in
any such case, the new securities are to be delivered to
the Custodian;
(7)Upon the sale of such securities for the account of a Fund,
to the broker or its clearing agent, against a receipt, for
examination in accordance with "street delivery custom";
provided that in any such case, the Custodian shall have no
responsibility or liability for any loss arising from the
delivery of such securities prior to receiving payment for
such securities except as may arise from the Custodian's
own failure to act in accordance with the standard of
reasonable care or any higher standard of care imposed upon
the Custodian by any applicable law or regulation if such
above-stated standard of reasonable care were not part of
this Contract;
(8)For exchange or conversion pursuant to any plan of merger, c
onsolidation, recapitalization, reorganization or
readjustment of the securities of the issuer of such
securities, or pursuant to provisions for conversion
contained in such securities, or pursuant to any deposit
agreement; provided that, in any such case, the new
securities and cash, if any, are to be delivered to the
Custodian;
(9)In the case of warrants, rights or similar securities, the s
urrender thereof in the exercise of such warrants, rights
or similar securities or the surrender of interim receipts
or temporary securities for definitive securities; provided
that, in any such case, the new securities and cash, if
any, are to be delivered to the Custodian;
(10)For delivery in connection with any loans of portfolio secu
rities of a Fund, but only against receipt of adequate
collateral in the form of (a) cash, in an amount specified
by the Trust, (b) certificated securities of a description
specified by the Trust, registered in the name of the Fund
or in the name of a nominee of the Custodian referred to in
Section 2.3 hereof or in proper form for transfer, or (c)
securities of a description specified by the Trust,
transferred through a Securities System in accordance with
Section 2.12 hereof;
(11)For delivery as security in connection with any borrowings
requiring a pledge of assets by a Fund, but only against
receipt of amounts borrowed, except that in cases where
additional collateral is required to secure a borrowing
already made, further securities may be released for the
purpose;
(12)For delivery in accordance with the provisions of any agree
ment among the Trust or a Fund, the Custodian and a broker-
dealer registered under the Securities Exchange Act of
1934, as amended, (the "Exchange Act") and a member of The
National Association of Securities Dealers, Inc. ("NASD"),
relating to compliance with the rules of The Options
Clearing Corporation and of any registered national
securities exchange, or of any similar organization or
organizations, regarding escrow or other arrangements in
connection with transactions for a Fund;
(13)For delivery in accordance with the provisions of any agree
ment among the Trust or a Fund, the Custodian, and a
Futures Commission Merchant registered under the Commodity
Exchange Act, relating to compliance with the rules of the
Commodity Futures Trading Commission and/or any Contract
Market, or any similar organization or organizations,
regarding account deposits in connection with transaction
for a Fund;
(14)Upon receipt of instructions from the transfer agent ("Tran
sfer Agent") for a Fund, for delivery to such Transfer
Agent or to the holders of shares in connection with
distributions in kind, in satisfaction of requests by
holders of Shares for repurchase or redemption; and
(15)For any other proper corporate purpose, but only upon recei
pt of, in addition to Proper Instructions, a certified copy
of a resolution of the Executive Committee of the Trust on
behalf of a Fund signed by an officer of the Trust and
certified by its Secretary or an Assistant Secretary,
specifying the securities to be delivered, setting forth
the purpose for which such delivery is to be made,
declaring such purpose to be a proper corporate purpose,
and naming the person or persons to whom delivery of such
securities shall be made.
2.3 Registration of Securities. Securities held by the Custodian (o
ther than bearer securities) shall be registered in the name of
a particular Fund or in the name of any nominee of the Fund or
of any nominee of the Custodian which nominee shall be assigned
exclusively to the Fund, unless the Trust has authorized in
writing the appointment of a nominee to be used in common with
other registered investment companies affiliated with the Fund,
or in the name or nominee name of any agent appointed pursuant
to Section 2.11 or in the name or nominee name of any sub-
custodian appointed pursuant to Section 1. All securities
accepted by the Custodian on behalf of a Fund under the terms of
this Contract shall be in "street name" or other good delivery
form.
2.4 Bank Accounts. The Custodian shall open and maintain a separate
bank account or accounts in the name of each Fund, subject only
to draft or order by the Custodian acting pursuant to the terms
of this Contract, and shall hold in such account or accounts,
subject to the provisions hereof, all cash received by it from
or for the account of each Fund, other than cash maintained in a
joint repurchase account with other affiliated funds pursuant to
Section 2.14 of this Contract or by a particular Fund in a bank
account established and used in accordance with Rule 17f-3 under
the Investment Company Act of 1940, as amended, (the "1940
Act"). Funds held by the Custodian for a Fund may be deposited
by it to its credit as Custodian in the Banking Department of
the Custodian or in such other banks or trust companies as it
may in its discretion deem necessary or desirable; provided,
however, that every such bank or trust company shall be
qualified to act as a custodian under the 1940 Act and that each
such bank or trust company and the funds to be deposited with
each such bank or trust company shall be approved by vote of a
majority of the Board of Trustees/Directors ("Board") of the
Trust. Such funds shall be deposited by the Custodian in its
capacity as Custodian for the Fund and shall be withdrawable by
the Custodian only in that capacity. If requested by the Trust,
the Custodian shall furnish the Trust, not later than twenty
(20) days after the last business day of each month, an internal
reconciliation of the closing balance as of that day in all
accounts described in this section to the balance shown on the
daily cash report for that day rendered to the Trust.
2.5Payments for Shares. The Custodian shall make such arrangements
with the Transfer Agent of each Fund, as will enable the
Custodian to receive the cash consideration due to each Fund and
will deposit into each Fund's account such payments as are
received from the Transfer Agent. The Custodian will provide
timely notification to the Trust and the Transfer Agent of any
receipt by it of payments for Shares of the respective Fund.
2.6Availability of Federal Funds. Upon mutual agreement between the
Trust and the Custodian, the Custodian shall make federal funds
available to the Funds as of specified times agreed upon from
time to time by the Trust and the Custodian in the amount of
checks, clearing house funds, and other non-federal funds
received in payment for Shares of the Funds which are deposited
into the Funds' accounts.
2.7 Collection of Income.
(1)The Custodian shall collect on a timely basis all income and
other payments with respect to registered securities held
hereunder to which each Fund shall be entitled either by
law or pursuant to custom in the securities business, and
shall collect on a timely basis all income and other
payments with respect to bearer securities if, on the date
of payment by the issuer, such securities are held by the
Custodian or its agent thereof and shall credit such
income, as collected, to each Fund's custodian account.
Without limiting the generality of the foregoing, the
Custodian shall detach and present for payment all coupons
and other income items requiring presentation as and when
they become due and shall collect interest when due on
securities held hereunder. The collection of income due
the Funds on securities loaned pursuant to the provisions
of Section 2.2 (10) shall be the responsibility of the
Trust. The Custodian will have no duty or responsibility
in connection therewith, other than to provide the Trust
with such information or data as may be necessary to assist
the Trust in arranging for the timely delivery to the
Custodian of the income to which each Fund is properly
entitled.
(2)The Custodian shall promptly notify the Trust whenever income
due on securities is not collected in due course and will
provide the Trust with monthly reports of the status of
past due income unless the parties otherwise agree.
2.8Payment of Fund Moneys. Upon receipt of Proper Instructions, whi
ch may be continuing instructions when deemed appropriate by the
parties, the Custodian shall pay out moneys of each Fund in the
following cases only:
(1)Upon the purchase of securities, futures contracts or options
on futures contracts for the account of a Fund but only (a)
against the delivery of such securities, or evidence of
title to futures contracts, to the Custodian (or any bank,
banking firm or trust company doing business in the United
States or abroad which is qualified under the 1940 Act to
act as a custodian and has been designated by the Custodian
as its agent for this purpose) registered in the name of
the Fund or in the name of a nominee of the Custodian
referred to in Section 2.3 hereof or in proper form for
transfer, (b) in the case of a purchase effected through a
Securities System, in accordance with the conditions set
forth in Section 2.12 hereof or (c) in the case of
repurchase agreements entered into between the Trust and
any other party, (i) against delivery of the securities
either in certificate form or through an entry crediting
the Custodian's account at the Federal Reserve Bank with
such securities or (ii) against delivery of the receipt
evidencing purchase for the account of the Fund of
securities owned by the Custodian along with written
evidence of the agreement by the Custodian to repurchase
such securities from the Fund;
(2)In connection with conversion, exchange or surrender of secu
rities owned by a Fund as set forth in Section 2.2 hereof;
(3)For the redemption or repurchase of Shares of a Fund issued
by the Trust as set forth in Section 2.10 hereof;
(4)For the payment of any expense or liability incurred by a Fu
nd, including but not limited to the following payments for
the account of the Fund: interest; taxes; management,
accounting, transfer agent and legal fees; and operating
expenses of the Fund, whether or not such expenses are to
be in whole or part capitalized or treated as deferred
expenses;
(5)For the payment of any dividends on Shares of a Fund declared
pursuant to the governing documents of the Trust;
(6)For payment of the amount of dividends received in respect of
securities sold short;
(7)For any other proper purpose, but only upon receipt of, in a
ddition to Proper Instructions, a certified copy of a
resolution of the Executive Committee of the Trust on
behalf of a Fund signed by an officer of the Trust and
certified by its Secretary or an Assistant Secretary,
specifying the amount of such payment, setting forth the
purpose for which such payment is to be made, declaring
such purpose to be a proper purpose, and naming the person
or persons to whom such payment is to be made.
2.9Liability for Payment in Advance of Receipt of Securities Purchas
ed. In any and every case where payment for purchase of
securities for the account of a Fund is made by the Custodian in
advance of receipt of the securities purchased, in the absence
of specific written instructions from the Trust to so pay in
advance, the Custodian shall be absolutely liable to the Fund
for such securities to the same extent as if the securities had
been received by the Custodian.
2.10Payments for Repurchases or Redemptions of Shares of a Fund. Fr
om such funds as may be available for the purpose of
repurchasing or redeeming Shares of a Fund, but subject to the
limitations of the Declaration of Trust/Articles of
Incorporation and any applicable votes of the Board of the Trust
pursuant thereto, the Custodian shall, upon receipt of
instructions from the Transfer Agent, make funds available for
payment to holders of shares of such Fund who have delivered to
the Transfer Agent a request for redemption or repurchase of
their shares including without limitation through bank drafts,
automated clearinghouse facilities, or by other means. In
connection with the redemption or repurchase of Shares of the
Funds, the Custodian is authorized upon receipt of instructions
from the Transfer Agent to wire funds to or through a commercial
bank designated by the redeeming shareholders.
2.11Appointment of Agents. The Custodian may at any time or times in
its discretion appoint (and may at any time remove) any other
bank or trust company which is itself qualified under the 1940
Act and any applicable state law or regulation, to act as a
custodian, as its agent to carry out such of the provisions of
this Section 2 as the Custodian may from time to time direct;
provided, however, that the appointment of any agent shall not
relieve the Custodian of its responsibilities or liabilities
hereunder.
2.12Deposit of Fund Assets in Securities System. The Custodian may
deposit and/or maintain securities owned by the Funds in a
clearing agency registered with the Securities and Exchange
Commission ("SEC") under Section 17A of the Exchange Act, which
acts as a securities depository, or in the book-entry system
authorized by the U.S. Department of the Treasury and certain
federal agencies, collectively referred to herein as "Securities
System" in accordance with applicable Federal Reserve Board and
SEC rules and regulations, if any, and subject to the following
provisions:
(1)The Custodian may keep securities of each Fund in a Securities System
provided that such
securities are represented in an account ("Account") of the Custodian in the
Securities System which shall not include any assets of the Custodian
other than assets held as a fiduciary, custodian or otherwise for customers;
(2)The records of the Custodian with respect to securities of the Funds which
are maintained in a Securities System shall identify by book-entry those
securities belonging to each Fund;
(3)The Custodian shall pay for securities purchased for the account of each
Fund upon (i) receipt of advice from the Securities System that such
securities have been
transferred to the Account, and (ii) the making of an entry on the records
of the
Custodian to reflect such payment and transfer for the account of the
Fund. The
Custodian shall transfer securities sold for the account of a Fund upon
(i) receipt of
advice from the Securities System that payment for such securities has been
transferred to the Account, and (ii) the making of an entry on the records
of the
Custodian to reflect such transfer and payment for the account of the
Fund. Copies of
all advices from the Securities System of transfers of securities for the
account of a
Fund shall identify the Fund, be maintained for the Fund by the Custodian
and be
provided to the Trust at its request. Upon request, the Custodian shall
furnish the
Trust confirmation of each transfer to or from the account of a Fund in
the form of a
written advice or notice and shall furnish to the Trust copies of daily
transaction
sheets reflecting each day's transactions in the Securities System for
the account of a Fund.
(4)The Custodian shall provide the Trust with any report obtained by the
Custodian on the
Securities System's accounting system, internal accounting control and
procedures for
safeguarding securities deposited in the Securities System;
(5)The Custodian shall have received the initial certificate, required by
Section 9 hereof;
(6)Anything to the contrary in this Contract notwithstanding, the Custodian
shall be liable
to the Trust for any loss or damage to a Fund resulting from use of the
Securities
System by reason of any negligence, misfeasance or misconduct of the
Custodian or any
of its agents or of any of its or their employees or from failure of the
Custodian or
any such agent to enforce effectively such rights as it may have against the
Securities System; at the election of the Trust, it shall be entitled to
be subrogated
to the rights of the Custodian with respect to any claim against the
Securities System
or any other person which the Custodian may have as a consequence of any
such loss or
damage if and to the extent that a Fund has not been made whole for any
such loss or
damage.
(7)The authorization contained in this Section 2.12 shall not relieve the
Custodian from
using reasonable care and diligence in making use of any Securities System.
2.13Segregated Account. The Custodian shall upon receipt of Proper
Instructions establish and maintain a segregated account or
accounts for and on behalf of each Fund, into which account or
accounts may be transferred cash and/or securities, including
securities maintained in an account by the Custodian pursuant to
Section 2.12 hereof, (i) in accordance with the provisions of
any agreement among the Trust, the Custodian and a broker-dealer
registered under the Exchange Act and a member of the NASD (or
any futures commission merchant registered under the Commodity
Exchange Act), relating to compliance with the rules of The
Options Clearing Corporation and of any registered national
securities exchange (or the Commodity Futures Trading Commission
or any registered contract market), or of any similar
organization or organizations, regarding escrow or other
arrangements in connection with transactions for a Fund, (ii)
for purpose of segregating cash or government securities in
connection with options purchased, sold or written for a Fund or
commodity futures contracts or options thereon purchased or sold
for a Fund, (iii) for the purpose of compliance by the Trust or
a Fund with the procedures required by any release or releases
of the SEC relating to the maintenance of segregated accounts by
registered investment companies and (iv) for other proper
corporate purposes, but only, in the case of clause (iv), upon
receipt of, in addition to Proper Instructions, a certified copy
of a resolution of the Board or of the Executive Committee
signed by an officer of the Trust and certified by the Secretary
or an Assistant Secretary, setting forth the purpose or purposes
of such segregated account and declaring such purposes to be
proper corporate purposes.
2.14Joint Repurchase Agreements. Upon the receipt of Proper Instruc
tions, the Custodian shall deposit and/or maintain any assets of
a Fund and any affiliated funds which are subject to joint
repurchase transactions in an account established solely for
such transactions for the Fund and its affiliated funds. For
purposes of this Section 2.14, "affiliated funds" shall include
all investment companies and their portfolios for which
subsidiaries or affiliates of Federated Investors serve as
investment advisers, distributors or administrators in
accordance with applicable exemptive orders from the SEC. The
requirements of segregation set forth in Section 2.1 shall be
deemed to be waived with respect to such assets.
2.15Ownership Certificates for Tax Purposes. The Custodian shall ex
ecute ownership and other certificates and affidavits for all
federal and state tax purposes in connection with receipt of
income or other payments with respect to securities of a Fund
held by it and in connection with transfers of securities.
2.16Proxies. The Custodian shall, with respect to the securities he
ld hereunder, cause to be promptly executed by the registered
holder of such securities, if the securities are registered
otherwise than in the name of a Fund or a nominee of a Fund, all
proxies, without indication of the manner in which such proxies
are to be voted, and shall promptly deliver to the Trust such
proxies, all proxy soliciting materials and all notices relating
to such securities.
2.17Communications Relating to Fund Portfolio Securities. The Custo
dian shall transmit promptly to the Trust all written
information (including, without limitation, pendency of calls
and maturities of securities and expirations of rights in
connection therewith and notices of exercise of call and put
options written by the Fund and the maturity of futures
contracts purchased or sold by the Fund) received by the
Custodian from issuers of the securities being held for the
Fund. With respect to tender or exchange offers, the Custodian
shall transmit promptly to the Trust all written information
received by the Custodian from issuers of the securities whose
tender or exchange is sought and from the party (or his agents)
making the tender or exchange offer. If the Trust desires to
take action with respect to any tender offer, exchange offer or
any other similar transaction, the Trust shall notify the
Custodian in writing at least three business days prior to the
date on which the Custodian is to take such action. However,
the Custodian shall nevertheless exercise its best efforts to
take such action in the event that notification is received
three business days or less prior to the date on which action is
required.
2.18Proper Instructions. Proper Instructions as used throughout this
Section 2 means a writing signed or initialed by one or more
person or persons as the Board shall have from time to time
authorized. Each such writing shall set forth the specific
transaction or type of transaction involved. Oral instructions
will be deemed to be Proper Instructions if (a) the Custodian
reasonably believes them to have been given by a person
previously authorized in Proper Instructions to give such
instructions with respect to the transaction involved, and (b)
the Trust promptly causes such oral instructions to be confirmed
in writing. Upon receipt of a certificate of the Secretary or
an Assistant Secretary as to the authorization by the Board of
the Trust accompanied by a detailed description of procedures
approved by the Board, Proper Instructions may include
communications effected directly between electro-mechanical or
electronic devices provided that the Board and the Custodian are
satisfied that such procedures afford adequate safeguards for a
Fund's assets.
2.19Actions Permitted Without Express Authority. The Custodian may
in its discretion, without express authority from the Trust:
(1)make payments to itself or others for minor expenses of hand
ling securities or other similar items relating to its
duties under this Contract, provided that all such payments
shall be accounted for to the Trust in such form that it
may be allocated to the affected Fund;
(2)surrender securities in temporary form for securities in def
initive form;
(3)endorse for collection, in the name of a Fund, checks, drafts
and other negotiable instruments; and
(4)in general, attend to all non-discretionary details in conne
ction with the sale, exchange, substitution, purchase,
transfer and other dealings with the securities and
property of each Fund except as otherwise directed by the
Trust.
2.20Evidence of Authority. The Custodian shall be protected in acti
ng upon any instructions, notice, request, consent, certificate
or other instrument or paper reasonably believed by it to be
genuine and to have been properly executed on behalf of a Fund.
The Custodian may receive and accept a certified copy of a vote
of the Board of the Trust as conclusive evidence (a) of the
authority of any person to act in accordance with such vote or
(b) of any determination of or any action by the Board pursuant
to the Declaration of Trust/Articles of Incorporation as
described in such vote, and such vote may be considered as in
full force and effect until receipt by the Custodian of written
notice to the contrary.
2.21Notice to Trust by Custodian Regarding Cash Movement. The Custo
dian will provide timely notification to the Trust of any
receipt of cash, income or payments to the Trust and the release
of cash or payment by the Trust.
3.Duties of Custodian With Respect to the Books of Account and Calculati
on of Net Asset Value and Net Income.
The Custodian shall cooperate with and supply necessary information to t
he entity or entities appointed by the Board of the Trust to keep
the books of account of each Fund and/or compute the net asset value
per share of the outstanding Shares of each Fund or, if directed in
writing to do so by the Trust, shall itself keep such books of
account and/or compute such net asset value per share. If so
directed, the Custodian shall also calculate daily the net income of
a Fund as described in the Fund's currently effective prospectus and
Statement of Additional Information ("Prospectus") and shall advise
the Trust and the Transfer Agent daily of the total amounts of such
net income and, if instructed in writing by an officer of the Trust
to do so, shall advise the Transfer Agent periodically of the
division of such net income among its various components. The
calculations of the net asset value per share and the daily income
of a Fund shall be made at the time or times described from time to
time in the Fund's currently effective Prospectus.
4. Records.
The Custodian shall create and maintain all records relating to its
activities and obligations under this Contract in such manner as
will meet the obligations of the Trust and the Funds under the 1940
Act, with particular attention to Section 31 thereof and Rules 31a-1
and 31a-2 thereunder, and specifically including identified cost
records used for tax purposes. All such records shall be the
property of the Trust and shall at all times during the regular
business hours of the Custodian be open for inspection by duly
authorized officers, employees or agents of the Trust and employees
and agents of the SEC. In the event of termination of this
Contract, the Custodian will deliver all such records to the Trust,
to a successor Custodian, or to such other person as the Trust may
direct. The Custodian shall supply daily to the Trust a tabulation
of securities owned by a Fund and held by the Custodian and shall,
when requested to do so by the Trust and for such compensation as
shall be agreed upon between the Trust and the Custodian, include
certificate numbers in such tabulations.
5. Opinion of Funds' Independent Public Accountants/Auditors.
The Custodian shall take all reasonable action, as the Trust may from
time to time request, to obtain from year to year favorable opinions
from each Fund's independent public accountants/auditors with
respect to its activities hereunder in connection with the
preparation of the Fund's registration statement, periodic reports,
or any other reports to the SEC and with respect to any other
requirements of such Commission.
6. Reports to Trust by Independent Public Accountants/Auditors.
The Custodian shall provide the Trust, at such times as the Trust may
reasonably require, with reports by independent public
accountants/auditors for each Fund on the accounting system,
internal accounting control and procedures for safeguarding
securities, futures contracts and options on futures contracts,
including securities deposited and/or maintained in a Securities
System, relating to the services provided by the Custodian for the
Fund under this Contract; such reports shall be of sufficient scope
and in sufficient detail, as may reasonably be required by the
Trust, to provide reasonable assurance that any material
inadequacies would be disclosed by such examination and, if there
are no such inadequacies, the reports shall so state.
7. Compensation of Custodian.
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian, as agreed upon from time to time
between Company and the Custodian.
8. Responsibility of Custodian.
The Custodian shall be held to a standard of reasonable care in
carrying out the provisions of this Contract; provided, however,
that the Custodian shall be held to any higher standard of care
which would be imposed upon the Custodian by any applicable law or
regulation if such above stated standard of reasonable care was not
part of this Contract. The Custodian shall be entitled to rely on
and may act upon advice of counsel (who may be counsel for the
Trust) on all matters, and shall be without liability for any action
reasonably taken or omitted pursuant to such advice, provided that
such action is not in violation of applicable federal or state laws
or regulations, and is in good faith and without negligence.
Subject to the limitations set forth in Section 15 hereof, the
Custodian shall be kept indemnified by the Trust but only from the
assets of the Fund involved in the issue at hand and be without
liability for any action taken or thing done by it in carrying out
the terms and provisions of this Contract in accordance with the
above standards.
In order that the indemnification provisions contained in this
Section 8 shall apply, however, it is understood that if in any case
the Trust may be asked to indemnify or save the Custodian harmless,
the Trust shall be fully and promptly advised of all pertinent facts
concerning the situation in question, and it is further understood
that the Custodian will use all reasonable care to identify and
notify the Trust promptly concerning any situation which presents or
appears likely to present the probability of such a claim for
indemnification. The Trust shall have the option to defend the
Custodian against any claim which may be the subject of this
indemnification, and in the event that the Trust so elects it will
so notify the Custodian and thereupon the Trust shall take over
complete defense of the claim, and the Custodian shall in such
situation initiate no further legal or other expenses for which it
shall seek indemnification under this Section. The Custodian shall
in no case confess any claim or make any compromise in any case in
which the Trust will be asked to indemnify the Custodian except with
the Trust's prior written consent.
Notwithstanding the foregoing, the responsibility of the Custodian
with respect to redemptions effected by check shall be in accordance
with a separate Agreement entered into between the Custodian and the
Trust.
If the Trust requires the Custodian to take any action with respect
to securities, which action involves the payment of money or which
action may, in the reasonable opinion of the Custodian, result in
the Custodian or its nominee assigned to a Fund being liable for the
payment of money or incurring liability of some other form, the
Custodian may request the Trust, as a prerequisite to requiring the
Custodian to take such action, to provide indemnity to the Custodian
in an amount and form satisfactory to the Custodian.
Subject to the limitations set forth in Section 15 hereof, the Trust
agrees to indemnify and hold harmless the Custodian and its nominee
from and against all taxes, charges, expenses, assessments, claims
and liabilities (including counsel fees) (referred to herein as
authorized charges) incurred or assessed against it or its nominee
in connection with the performance of this Contract, except such as
may arise from it or its nominee's own failure to act in accordance
with the standard of reasonable care or any higher standard of care
which would be imposed upon the Custodian by any applicable law or
regulation if such above-stated standard of reasonable care were not
part of this Contract. To secure any authorized charges and any
advances of cash or securities made by the Custodian to or for the
benefit of a Fund for any purpose which results in the Fund
incurring an overdraft at the end of any business day or for
extraordinary or emergency purposes during any business day, the
Trust hereby grants to the Custodian a security interest in and
pledges to the Custodian securities held for the Fund by the
Custodian, in an amount not to exceed 10 percent of the Fund's gross
assets, the specific securities to be designated in writing from
time to time by the Trust or the Fund's investment adviser. Should
the Trust fail to make such designation, or should it instruct the
Custodian to make advances exceeding the percentage amount set forth
above and should the Custodian do so, the Trust hereby agrees that
the Custodian shall have a security interest in all securities or
other property purchased for a Fund with the advances by the
Custodian, which securities or property shall be deemed to be
pledged to the Custodian, and the written instructions of the Trust
instructing their purchase shall be considered the requisite
description and designation of the property so pledged for purposes
of the requirements of the Uniform Commercial Code. Should the
Trust fail to cause a Fund to repay promptly any authorized charges
or advances of cash or securities, subject to the provision of the
second paragraph of this Section 8 regarding indemnification, the
Custodian shall be entitled to use available cash and to dispose of
pledged securities and property as is necessary to repay any such
advances.
9. Effective Period, Termination and Amendment.
This Contract shall become effective as of its execution, shall
continue in full force and effect until terminated as hereinafter
provided, may be amended at any time by mutual agreement of the
parties hereto and may be terminated by either party by an
instrument in writing delivered or mailed, postage prepaid to the
other party, such termination to take effect not sooner than sixty
(60) days after the date of such delivery or mailing; provided,
however that the Custodian shall not act under Section 2.12 hereof
in the absence of receipt of an initial certificate of the Secretary
or an Assistant Secretary that the Board of the Trust has approved
the initial use of a particular Securities System as required in
each case by Rule 17f-4 under the 1940 Act; provided further,
however, that the Trust shall not amend or terminate this Contract
in contravention of any applicable federal or state regulations, or
any provision of the Declaration of Trust/Articles of Incorporation,
and further provided, that the Trust may at any time by action of
its Board (i) substitute another bank or trust company for the
Custodian by giving notice as described above to the Custodian, or
(ii) immediately terminate this Contract in the event of the
appointment of a conservator or receiver for the Custodian by the
appropriate banking regulatory agency or upon the happening of a
like event at the direction of an appropriate regulatory agency or
court of competent jurisdiction.
Upon termination of the Contract, the Trust shall pay to the
Custodian such compensation as may be due as of the date of such
termination and shall likewise reimburse the Custodian for its
costs, expenses and disbursements.
10. Successor Custodian.
If a successor custodian shall be appointed by the Board of the
Trust, the Custodian shall, upon termination, deliver to such
successor custodian at the office of the Custodian, duly endorsed
and in the form for transfer, all securities then held by it
hereunder for each Fund and shall transfer to separate accounts of
the successor custodian all of each Fund's securities held in a
Securities System.
If no such successor custodian shall be appointed, the Custodian
shall, in like manner, upon receipt of a certified copy of a vote of
the Board of the Trust, deliver at the office of the Custodian and
transfer such securities, funds and other properties in accordance
with such vote.
In the event that no written order designating a successor custodian
or certified copy of a vote of the Board shall have been delivered
to the Custodian on or before the date when such termination shall
become effective, then the Custodian shall have the right to deliver
to a bank or trust company, which is a "bank" as defined in the 1940
Act, (delete "doing business ... Massachusetts" unless SSBT is the
Custodian) doing business in Boston, Massachusetts, of its own
selection, having an aggregate capital, surplus, and undivided
profits, as shown by its last published report, of not less than
$100,000,000, all securities, funds and other properties held by the
Custodian and all instruments held by the Custodian relative thereto
and all other property held by it under this Contract for each Fund
and to transfer to separate accounts of such successor custodian
all of each Fund's securities held in any Securities System.
Thereafter, such bank or trust company shall be the successor of the
Custodian under this Contract.
In the event that securities, funds and other properties remain in
the possession of the Custodian after the date of termination hereof
owing to failure of the Trust to procure the certified copy of the
vote referred to or of the Board to appoint a successor custodian,
the Custodian shall be entitled to fair compensation for its
services during such period as the Custodian retains possession of
such securities, funds and other properties and the provisions of
this Contract relating to the duties and obligations of the
Custodian shall remain in full force and effect.
11. Interpretive and Additional Provisions.
In connection with the operation of this Contract, the Custodian and
the Trust may from time to time agree on such provisions
interpretive of or in addition to the provisions of this Contract as
may in their joint opinion be consistent with the general tenor of
this Contract. Any such interpretive or additional provisions shall
be in a writing signed by both parties and shall be annexed hereto,
provided that no such interpretive or additional provisions shall
contravene any applicable federal or state regulations or any
provision of the Declaration of Trust/Articles of Incorporation. No
interpretive or additional provisions made as provided in the
preceding sentence shall be deemed to be an amendment of this
Contract.
12. Massachusetts Law to Apply.
This Contract shall be construed and the provisions thereof
interpreted under and in accordance with laws of The Commonwealth of
Massachusetts.
13. Notices.
Except as otherwise specifically provided herein, Notices and other
writings delivered or mailed postage prepaid to the Trust at
Federated Investors Tower, Pittsburgh, Pennsylvania, 15222-3779, or
to the Custodian at address for SSBT only: 225 Franklin Street,
Boston, Massachusetts, 02110, or to such other address as the Trust
or the Custodian may hereafter specify, shall be deemed to have been
properly delivered or given hereunder to the respective address.
14. Counterparts.
This Contract may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original.
15. Limitations of Liability.
The Custodian is expressly put on notice of the limitation of
liability as set forth in Article XI of the Declaration of Trust of
those Trusts which are business trusts and agrees that the
obligations and liabilities assumed by the Trust and any Fund
pursuant to this Contract, including, without limitation, any
obligation or liability to indemnify the Custodian pursuant to
Section 8 hereof, shall be limited in any case to the relevant Fund
and its assets and that the Custodian shall not seek satisfaction of
any such obligation from the shareholders of the relevant Fund, from
any other Fund or its shareholders or from the Trustees, Officers,
employees or agents of the Trust, or any of them. In addition, in
connection with the discharge and satisfaction of any claim made by
the Custodian against the Trust, for whatever reasons, involving
more than one Fund, the Trust shall have the exclusive right to
determine the appropriate allocations of liability for any such
claim between or among the Funds.
IN WITNESS WHEREOF, each of the parties has caused this instrument to
be executed in its name and behalf by its duly authorized representative
and its seal to be hereunder affixed effective as of the 1st day of
December, 1993.
ATTEST: INVESTMENT COMPANIES (Except those
listed below)
/s/John G. McGonigle_________ By /s/John G. Donahue_____________
John G. McGonigle John F. Donahue
Secretary Chairman
ATTEST: STATE STREET BANK AND TRUST
COMPANY
/s/ Ed McKenzie______________ By /s/ F. J. Sidoti, Jr.____________
(Assistant) Secretary Typed Name: Frank J. Sidoti, Jr.
Typed Name: Ed McKenzie Title: Vice President
ATTEST: FEDERATED SERVICES COMPANIY
/s/ Jeannette Fisher-Garber______ By /s/ James J. Dolan________________
Jeannette Fisher-Garber James J. Dolan
Secretary President
Exhibit 1
Municipal Securities Income Trust
Pennsylvania Municipal Income Fund
Class A Shares
Ohio Municipal Income Fund
Fortress Shares
Michigan Intermediate Municipal Trust
California Municipal Income Fund
Fortress Shares
New York Municipal Income Fund
Fortress Shares
Exhibit 9 (i) under Form N-1A
Exhibit 10 under Item 601/Reg. S-K
AGREEMENT
for
FUND ACCOUNTING,
SHAREHOLDER RECORDKEEPING,
and
CUSTODY SERVICES PROCUREMENT
AGREEMENT made as of the 1st day of December, 1993, by and between those
investment companies listed on Exhibit 1 as may be amended from time to time,
having their principal office and place of business at Federated Investors
Tower, Pittsburgh, PA 15222-3779 (the "Trust"), on behalf of the portfolios
(individually referred to herein as a "Fund" and collectively as "Funds") of
the Trust, and FEDERATED SERVICES COMPANY, a Delaware business trust, having
its principal office and place of business at Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779 (the "Company").
WHEREAS, the Trust is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act"),
with authorized and issued shares of capital stock or beneficial interest
("Shares"); and
WHEREAS, the Trust wishes to retain the Company to provide certain pricing,
accounting and recordkeeping services for each of the Funds, including any
classes of shares issued by any Fund ("Classes"), and the Company is willing
to furnish such services; and
WHEREAS, the Trust desires to appoint the Company as its transfer agent,
dividend disbursing agent, and agent in connection with certain other
activities, and the Company desires to accept such appointment; and
WHEREAS, the Trust desires to appoint the Company as its agent to select,
negotiate and subcontract for custodian services from an approved list of
qualified banks and the Company desires to accept such appointment; and
WHEREAS, from time to time the Trust may desire and may instruct the
Company to subcontract for the performance of certain of its duties and
responsibilities hereunder to State Street Bank and Trust Company or another
agent (the "Agent"); and
WHEREAS, the words Trust and Fund may be used interchangeably for those
investment companies consisting of only one portfolio;
NOW THEREFORE, in consideration of the premises and mutual covenants herein
contained, and intending to be legally bound hereby, the parties hereto agree
as follows:
SECTION ONE: Fund Accounting.
Article 1. Appointment.
The Trust hereby appoints the Company to provide certain pricing and
accounting services to the Funds, and/or the Classes, for the period and on
the terms set forth in this Agreement. The Company accepts such appointment
and agrees to furnish the services herein set forth in return for the
compensation as provided in Article 3 of this Section.
Article 2. The Company and Duties.
Subject to the supervision and control of the Trust's Board of Trustees or
Directors ("Board"), the Company will assist the Trust with regard to fund
accounting for the Trust, and/or the Funds, and/or the Classes, and in
connection therewith undertakes to perform the following specific services;
A. Value the assets of the Funds and determine the net asset value per
share of each Fund and/or Class, at the time and in the manner from
time to time determined by the Board and as set forth in the
Prospectus and Statement of Additional Information ("Prospectus") of
each Fund;
B. Calculate the net income of each of the Funds, if any;
C. Calculate capital gains or losses of each of the Funds resulting from
sale or disposition of assets, if any;
D. Maintain the general ledger and other accounts, books and financial
records of the Trust, including for each Fund, and/or Class, as
required under Section 31(a) of the 1940 Act and the Rules thereunder
in connection with the services provided by the Company;
E. Preserve for the periods prescribed by Rule 31a-2 under the 1940 Act
the records to be maintained by Rule 31a-1 under the 1940 Act in
connection with the services provided by the Company. The Company
further agrees that all such records it maintains for the Trust are
the property of the Trust and further agrees to surrender promptly to
the Trust such records upon the Trust's request;
F. At the request of the Trust, prepare various reports or other financial
documents required by federal, state and other applicable laws and
regulations; and
G. Such other similar services as may be reasonably requested by the
Trust.
Article 3. Compensation and Allocation of Expenses.
A. The Funds will compensate the Company for its services rendered
pursuant to Section One of this Agreement in accordance with the fees
set forth on Fee Schedules A ("A1, A2, A3 etc..."), annexed hereto and
incorporated herein, as may be added or amended from time to time.
Such fees do not include out-of-pocket disbursements of the Company
for which the Funds shall reimburse the Company upon receipt of a
separate invoice. Out-of-pocket disbursements shall include, but
shall not be limited to, the items specified in Schedules B ("B1, B2,
B3, etc..."), annexed hereto and incorporated herein, as may be added
or amended from time to time. Schedules B may be modified by the
Company upon not less than thirty days' prior written notice to the
Trust.
B. The Fund and/or the Class, and not the Company, shall bear the cost of:
custodial expenses; membership dues in the Investment Company
Institute or any similar organization; transfer agency expenses;
investment advisory expenses; costs of printing and mailing stock
certificates, Prospectuses, reports and notices; administrative
expenses; interest on borrowed money; brokerage commissions; taxes and
fees payable to federal, state and other governmental agencies; fees
of Trustees or Directors of the Trust; independent auditors expenses;
Federated Administrative Services and/or Federated Administrative
Services, Inc. legal and audit department expenses billed to Federated
Services Company for work performed related to the Trust, the Funds,
or the Classes; law firm expenses; or other expenses not specified in
this Article 3 which may be properly payable by the Funds and/or
classes.
C. The Company will send an invoice to each of the Funds as soon as
practicable after the end of each month. Each invoice will provide
detailed information about the compensation and out-of-pocket expenses
in accordance with Schedules A and Schedules B. The Funds and or the
Classes will pay to the Company the amount of such invoice within 30
days of receipt of the invoices.
D. Any compensation agreed to hereunder may be adjusted from time to time
by attaching to Schedules A revised Schedules dated and signed by a
duly authorized officer of the Trust and/or the Funds and a duly
authorized officer of the Company.
E. The fee for the period from the effective date of this Agreement with
respect to a Fund or a Class to the end of the initial month shall be
prorated according to the proportion that such period bears to the
full month period. Upon any termination of this Agreement before the
end of any month, the fee for such period shall be prorated according
to the proportion which such period bears to the full month period.
For purposes of determining fees payable to the Company, the value of
the Fund's net assets shall be computed at the time and in the manner
specified in the Fund's Prospectus.
F. The Company, in its sole discretion, may from time to time subcontract
to, employ or associate with itself such person or persons as the
Company may believe to be particularly suited to assist it in
performing services under this Section One. Such person or persons
may be third-party service providers, or they may be officers and
employees who are employed by both the Company and the Funds. The
compensation of such person or persons shall be paid by the Company
and no obligation shall be incurred on behalf of the Trust, the Funds,
or the Classes in such respect.
SECTION TWO: Shareholder Recordkeeping.
Article 4. Terms of Appointment.
Subject to the terms and conditions set forth in this Agreement, the Trust
hereby appoints the Company to act as, and the Company agrees to act as,
transfer agent and dividend disbursing agent for each Fund's Shares, and agent
in connection with any accumulation, open-account or similar plans provided to
the shareholders of any Fund ("Shareholder(s)"), including without limitation
any periodic investment plan or periodic withdrawal program.
As used throughout this Agreement, a "Proper Instruction" means a writing
signed or initialed by one or more person or persons as the Board shall have
from time to time authorized. Each such writing shall set forth the specific
transaction or type of transaction involved. Oral instructions will be deemed
to be Proper Instructions if (a) the Company reasonably believes them to have
been given by a person previously authorized in Proper Instructions to give
such instructions with respect to the transaction involved, and (b) the Trust,
or the Fund, and the Company promptly cause such oral instructions to be
confirmed in writing. Proper Instructions may include communications effected
directly between electro-mechanical or electronic devices provided that the
Trust, or the Fund, and the Company are satisfied that such procedures afford
adequate safeguards for the Fund's assets. Proper Instructions may only be
amended in writing.
Article 5. Duties of the Company.
The Company shall perform the following services in accordance with Proper
Instructions as may be provided from time to time by the Trust as to any Fund:
A. Purchases
(1) The Company shall receive orders and payment for the purchase of
shares and promptly deliver payment and appropriate
documentation therefore to the custodian of the relevant Fund,
(the "Custodian"). The Company shall notify the Fund and the
Custodian on a daily basis of the total amount of orders and
payments so delivered.
(2) Pursuant to purchase orders and in accordance with the Fund's
current Prospectus, the Company shall compute and issue the
appropriate number of Shares of each Fund and/or Class and hold
such Shares in the appropriate Shareholder accounts.
(3) For certificated Funds and/or Classes, if a Shareholder or its
agent requests a certificate, the Company, as Transfer Agent,
shall countersign and mail by first class mail, a certificate to
the Shareholder at its address as set forth on the transfer
books of the Funds, and/or Classes, subject to any Proper
Instructions regarding the delivery of certificates.
(4) In the event that any check or other order for the purchase of
Shares of the Fund and/or Class is returned unpaid for any
reason, the Company shall debit the Share account of the
Shareholder by the number of Shares that had been credited to
its account upon receipt of the check or other order, promptly
mail a debit advice to the Shareholder, and notify the Fund
and/or Class of its action. In the event that the amount paid
for such Shares exceeds proceeds of the redemption of such
Shares plus the amount of any dividends paid with respect to
such Shares, the Fund and/the Class or its distributor will
reimburse the Company on the amount of such excess.
B. Distribution
(1) Upon notification by the Funds of the declaration of any
distribution to Shareholders, the Company shall act as Dividend
Disbursing Agent for the Funds in accordance with the provisions
of its governing document and the then-current Prospectus of the
Fund. The Company shall prepare and mail or credit income,
capital gain, or any other payments to Shareholders. As the
Dividend Disbursing Agent, the Company shall, on or before the
payment date of any such distribution, notify the Custodian of
the estimated amount required to pay any portion of said
distribution which is payable in cash and request the Custodian
to make available sufficient funds for the cash amount to be
paid out. The Company shall reconcile the amounts so requested
and the amounts actually received with the Custodian on a daily
basis. If a Shareholder is entitled to receive additional
Shares by virtue of any such distribution or dividend,
appropriate credits shall be made to the Shareholder's account,
for certificated Funds and/or Classes, delivered where
requested; and
(2) The Company shall maintain records of account for each Fund and
Class and advise the Trust, each Fund and Class and its
Shareholders as to the foregoing.
C. Redemptions and Transfers
(1) The Company shall receive redemption requests and redemption
directions and, if such redemption requests comply with the
procedures as may be described in the Fund Prospectus or set
forth in Proper Instructions, deliver the appropriate
instructions therefor to the Custodian. The Company shall
notify the Funds on a daily basis of the total amount of
redemption requests processed and monies paid to the Company by
the Custodian for redemptions.
(2) At the appropriate time upon receiving redemption proceeds from
the Custodian with respect to any redemption, the Company shall
pay or cause to be paid the redemption proceeds in the manner
instructed by the redeeming Shareholders, pursuant to procedures
described in the then-current Prospectus of the Fund.
(3) If any certificate returned for redemption or other request for
redemption does not comply with the procedures for redemption
approved by the Fund, the Company shall promptly notify the
Shareholder of such fact, together with the reason therefor, and
shall effect such redemption at the price applicable to the date
and time of receipt of documents complying with said procedures.
(4) The Company shall effect transfers of Shares by the registered
owners thereof.
(5) The Company shall identify and process abandoned accounts and
uncashed checks for state escheat requirements on an annual
basis and report such actions to the Fund.
D. Recordkeeping
(1) The Company shall record the issuance of Shares of each Fund,
and/or Class, and maintain pursuant to applicable rules of the
Securities and Exchange Commission ("SEC") a record of the total
number of Shares of the Fund and/or Class which are authorized,
based upon data provided to it by the Fund, and issued and
outstanding. The Company shall also provide the Fund on a
regular basis or upon reasonable request with the total number
of Shares which are authorized and issued and outstanding, but
shall have no obligation when recording the issuance of Shares,
except as otherwise set forth herein, to monitor the issuance of
such Shares or to take cognizance of any laws relating to the
issue or sale of such Shares, which functions shall be the sole
responsibility of the Funds.
(2) The Company shall establish and maintain records pursuant to
applicable rules of the SEC relating to the services to be
performed hereunder in the form and manner as agreed to by the
Trust or the Fund to include a record for each Shareholder's
account of the following:
(a) Name, address and tax identification number (and whether
such number has been certified);
(b) Number of Shares held;
(c) Historical information regarding the account, including
dividends paid and date and price for all transactions;
(d) Any stop or restraining order placed against the account;
(e) Information with respect to withholding in the case of a
foreign account or an account for which withholding is
required by the Internal Revenue Code;
(f) Any dividend reinvestment order, plan application, dividend
address and correspondence relating to the current
maintenance of the account;
(g) Certificate numbers and denominations for any Shareholder
holding certificates;
(h) Any information required in order for the Company to
perform the calculations contemplated or required by this
Agreement.
(3) The Company shall preserve any such records required to be
maintained pursuant to the rules of the SEC for the periods
prescribed in said rules as specifically noted below. Such
record retention shall be at the expense of the Company, and
such records may be inspected by the Fund at reasonable times.
The Company may, at its option at any time, and shall forthwith
upon the Fund's demand, turn over to the Fund and cease to
retain in the Company's files, records and documents created and
maintained by the Company pursuant to this Agreement, which are
no longer needed by the Company in performance of its services
or for its protection. If not so turned over to the Fund, such
records and documents will be retained by the Company for six
years from the year of creation, during the first two of which
such documents will be in readily accessible form. At the end
of the six year period, such records and documents will either
be turned over to the Fund or destroyed in accordance with
Proper Instructions.
E. Confirmations/Reports
(1) The Company shall furnish to the Fund periodically the following
information:
(a) A copy of the transaction register;
(b) Dividend and reinvestment blotters;
(c) The total number of Shares issued and outstanding in each
state for "blue sky" purposes as determined according to
Proper Instructions delivered from time to time by the
Fund to the Company;
(d) Shareholder lists and statistical information;
(e) Payments to third parties relating to distribution
agreements, allocations of sales loads, redemption fees,
or other transaction- or sales-related payments;
(f) Such other information as may be agreed upon from time to
time.
(2) The Company shall prepare in the appropriate form, file with the
Internal Revenue Service and appropriate state agencies, and, if
required, mail to Shareholders, such notices for reporting
dividends and distributions paid as are required to be so filed
and mailed and shall withhold such sums as are required to be
withheld under applicable federal and state income tax laws,
rules and regulations.
(3) In addition to and not in lieu of the services set forth above,
the Company shall:
(a) Perform all of the customary services of a transfer agent,
dividend disbursing agent and, as relevant, agent in
connection with accumulation, open-account or similar
plans (including without limitation any periodic
investment plan or periodic withdrawal program), including
but not limited to: maintaining all Shareholder accounts,
mailing Shareholder reports and Prospectuses to current
Shareholders, withholding taxes on accounts subject to
back-up or other withholding (including non-resident alien
accounts), preparing and filing reports on U.S. Treasury
Department Form 1099 and other appropriate forms required
with respect to dividends and distributions by federal
authorities for all Shareholders, preparing and mailing
confirmation forms and statements of account to
Shareholders for all purchases and redemptions of Shares
and other confirmable transactions in Shareholder
accounts, preparing and mailing activity statements for
Shareholders, and providing Shareholder account
information; and
(b) provide a system which will enable the Fund to monitor the
total number of Shares of each Fund and/or Class sold in
each state ("blue sky reporting"). The Fund shall by
Proper Instructions (i) identify to the Company those
transactions and assets to be treated as exempt from the
blue sky reporting for each state and (ii) verify the
classification of transactions for each state on the
system prior to activation and thereafter monitor the
daily activity for each state. The responsibility of the
Company for each Fund's and/or Class's state blue sky
registration status is limited solely to the recording of
the initial classification of transactions or accounts
with regard to blue sky compliance and the reporting of
such transactions and accounts to the Fund as provided
above.
F. Other Duties
(1) The Company shall answer correspondence from Shareholders
relating to their Share accounts and such other correspondence
as may from time to time be addressed to the Company;
(2) The Company shall prepare Shareholder meeting lists, mail proxy
cards and other material supplied to it by the Fund in
connection with Shareholder Meetings of each Fund; receive,
examine and tabulate returned proxies, and certify the vote of
the Shareholders;
(3) The Company shall establish and maintain facilities and
procedures for safekeeping of stock certificates, check forms
and facsimile signature imprinting devices, if any; and for the
preparation or use, and for keeping account of, such
certificates, forms and devices.
Article 6. Duties of the Trust.
A. Compliance
The Trust or Fund assume full responsibility for the preparation,
contents and distribution of their own and/or their classes'
Prospectus and for complying with all applicable requirements of the
Securities Act of 1933, as amended (the "1933 Act"), the 1940 Act and
any laws, rules and regulations of government authorities having
jurisdiction.
B. Share Certificates
The Trust shall supply the Company with a sufficient supply of blank
Share certificates and from time to time shall renew such supply upon
request of the Company. Such blank Share certificates shall be
properly signed, manually or by facsimile, if authorized by the Trust
and shall bear the seal of the Trust or facsimile thereof; and
notwithstanding the death, resignation or removal of any officer of
the Trust authorized to sign certificates, the Company may continue to
countersign certificates which bear the manual or facsimile signature
of such officer until otherwise directed by the Trust.
C. Distributions
The Fund shall promptly inform the Company of the declaration of any
dividend or distribution on account of any Fund's shares.
Article 7. Compensation and Expenses.
A. Annual Fee
For performance by the Company pursuant to Section Two of this
Agreement, the Trust and/or the Fund agree to pay the Company an
annual maintenance fee for each Shareholder account as set out in
Schedules C ("C1, C2, C3 etc..."), attached hereto, as may be added or
amended from time to time. Such fees may be changed from time to time
subject to written agreement between the Trust and the Company.
Pursuant to information in the Fund Prospectus or other information or
instructions from the Fund, the Company may sub-divide any Fund into
Classes or other sub-components for recordkeeping purposes. The
Company will charge the Fund the fees set forth on Schedule C for each
such Class or sub-component the same as if each were a Fund.
B. Reimbursements
In addition to the fee paid under Article 7A above, the Trust and/or
Fund agree to reimburse the Company for out-of-pocket expenses or
advances incurred by the Company for the items set out in Schedules D
("D1, D2, D3 etc..."), attached hereto, as may be added or amended
from time to time. In addition, any other expenses incurred by the
Company at the request or with the consent of the Trust and/or the
Fund, will be reimbursed by the appropriate Fund.
C. Payment
The Company shall send an invoice with respect to fees and
reimbursable expenses to the Trust or each of the Funds as soon as
practicable at the end of each month. Each invoice will provide
detailed information about the Compensation and out-of-pocket expenses
in accordance with Schedules C and Schedules D. The Trust or the
Funds will pay to the Company the amount of such invoice within 30
days following the receipt of the invoices.
Article 8. Assignment of Shareholder Recordkeeping.
Except as provided below, no right or obligation under this Section
Two may be assigned by either party without the written consent of the
other party.
(1) This Agreement shall inure to the benefit of and be binding upon
the parties and their respective permitted successors and
assigns.
(2) The Company may without further consent on the part of the Trust
subcontract for the performance hereof with (A) State Street
Bank and its subsidiary, Boston Financial Data Services, Inc., a
Massachusetts Trust ("BFDS"), which is duly registered as a
transfer agent pursuant to Section 17A(c)(1) of the Securities
Exchange Act of 1934, as amended, or any succeeding statute
("Section 17A(c)(1)"), or (B) a BFDS subsidiary duly registered
as a transfer agent pursuant to Section 17A(c)(1), or (C) a BFDS
affiliate, or (D) such other provider of services duly
registered as a transfer agent under Section 17A(c)(1) as
Company shall select; provided, however, that the Company shall
be as fully responsible to the Trust for the acts and omissions
of any subcontractor as it is for its own acts and omissions; or
(3) The Company shall upon instruction from the Trust subcontract for
the performance hereof with an Agent selected by the Trust,
other than BFDS or a provider of services selected by Company,
as described in (2) above; provided, however, that the Company
shall in no way be responsible to the Trust for the acts and
omissions of the Agent.
SECTION THREE: Custody Services Procurement
Article 9. Appointment.
The Trust hereby appoints Company as its agent to evaluate and obtain
custody services from a financial institution that (i) meets the
criteria established in Section 17(f) of the 1940 Act and (ii) has
been approved by the Board as eligible for selection by the Company as
a custodian (the "Eligible Custodian"). The Company accepts such
appointment.
Article 10. The Company and Its Duties.
Subject to the review, supervision and control of the Board, the
Company shall:
(1) evaluate the nature and the quality of the custodial services
provided by the Eligible Custodian;
(2) employ the Eligible Custodian to serve on behalf of the Trust as
Custodian of the Trust's assets substantially on the terms set
forth as the form of agreement in Exhibit 2;
(3) negotiate and enter into agreements with the Custodians for the
benefit of the Trust, with the Trust as a party to each such
agreement. The Company shall not be a party to any agreement
with any such Custodian;
(4) establish procedures to monitor the nature and the quality of the
services provided by the Custodians;
(5) continuously monitor the nature and the quality of services
provided by the Custodians; and
(6) periodically provide to the Trust (i) written reports on the
activities and services of the Custodians; (ii) the nature and
amount of disbursement made on account of the Trust with respect
to each custodial agreement; and (iii) such other information as
the Board shall reasonably request to enable it to fulfill its
duties and obligations under Sections 17(f) and 36(b) of the
1940 Act and other duties and obligations thereof.
Article 11. Fees and Expenses.
A. Annual Fee
For the performance by the Company pursuant to Section Three of this
Agreement, the Trust and/or the Fund agree to pay the Company an
annual fee as set forth in Schedule E, attached hereto.
B. Payment
The Company shall send an invoice with respect to fees and
reimbursable expenses to each of the Trust/or Fund as soon as
practicable at the end of each month. Each invoice will provide
detailed information about the Compensation and out-of-pocket expenses
in occurrence with Schedule E. The Trust and/or Fund will pay to the
Company the amount of such invoice within 30 days following the
receipt of the invoice.
Article 12. Representations.
The Company represents and warrants that it has obtained all required
approvals from all government or regulatory authorities necessary to
enter into this arrangement and to provide the services contemplated
in Section Three of this Agreement.
SECTION FOUR: General Provisions.
Article 13. Documents.
A. In connection with the appointment of the Company under this Agreement,
the Trust shall file with the Company the following documents:
(1) A copy of the Charter and By-Laws of the Trust and all amendments
thereto;
(2) A copy of the resolution of the Board of the Trust authorizing
this Agreement;
(3) Specimens of all forms of outstanding Share certificates of the
Trust or the Funds in the forms approved by the Board of the
Trust with a certificate of the Secretary of the Trust as to
such approval;
(4) All account application forms and other documents relating to
Shareholders accounts; and
(5) A copy of the current Prospectus for each Fund.
B. The Fund will also furnish from time to time the following documents:
(1) Each resolution of the Board of the Trust authorizing the
original issuance of each Fund's, and/or Class's Shares;
(2) Each Registration Statement filed with the SEC and amendments
thereof and orders relating thereto in effect with respect to
the sale of Shares of any Fund, and/or Class;
(3) A certified copy of each amendment to the governing document and
the By-Laws of the Trust;
(4) Certified copies of each vote of the Board authorizing officers
to give Proper Instructions to the Custodian and agents for fund
accountant, custody services procurement, and shareholder
recordkeeping or transfer agency services;
(5) Specimens of all new Share certificates representing Shares of
any Fund, accompanied by Board resolutions approving such forms;
(6) Such other certificates, documents or opinions which the Company
may, in its discretion, deem necessary or appropriate in the
proper performance of its duties; and
(7) Revisions to the Prospectus of each Fund.
Article 14. Representations and Warranties.
A. Representations and Warranties of the Company
The Company represents and warrants to the Trust that:
(1) It is a business trust duly organized and existing and in good
standing under the laws of the State of Delaware.
(2) It is duly qualified to carry on its business in the State of
Delaware.
(3) It is empowered under applicable laws and by its charter and by-
laws to enter into and perform this Agreement.
(4) All requisite corporate proceedings have been taken to authorize
it to enter into and perform its obligations under this
Agreement.
(5) It has and will continue to have access to the necessary
facilities, equipment and personnel to perform its duties and
obligations under this Agreement.
(6) It is in compliance with federal securities law requirements and
in good standing as a transfer agent.
B. Representations and Warranties of the Trust
The Trust represents and warrants to the Company that:
(1) It is an investment company duly organized and existing and in
good standing under the laws of its state of organization;
(2) It is empowered under applicable laws and by its Charter and By-
Laws to enter into and perform its obligations under this
Agreement;
(3) All corporate proceedings required by said Charter and By-Laws
have been taken to authorize it to enter into and perform its
obligations under this Agreement;
(4) The Trust is an open-end investment company registered under the
1940 Act; and
(5) A registration statement under the 1933 Act will be effective,
and appropriate state securities law filings have been made and
will continue to be made, with respect to all Shares of each
Fund being offered for sale.
Article 15. Indemnification.
A. Indemnification by Trust
The Company shall not be responsible for and the Trust or Fund shall
indemnify and hold the Company, including its officers, directors,
shareholders and their agents employees and affiliates, harmless
against any and all losses, damages, costs, charges, counsel fees,
payments, expenses and liabilities arising out of or attributable to:
(1) The acts or omissions of any Custodian,
(2) The Trust's or Fund's refusal or failure to comply with the terms
of this Agreement, or which arise out of the Trust's or The
Fund's lack of good faith, negligence or willful misconduct or
which arise out of the breach of any representation or warranty
of the Trust or Fund hereunder or otherwise.
(3) The reliance on or use by the Company or its agents or
subcontractors of information, records and documents in proper
form which
(a) are received by the Company or its agents or subcontractors
and furnished to it by or on behalf of the Fund, its
Shareholders or investors regarding the purchase,
redemption or transfer of Shares and Shareholder account
information; or
(b) have been prepared and/or maintained by the Fund or its
affiliates or any other person or firm on behalf of the
Trust.
(4) The reliance on, or the carrying out by the Company or its agents
or subcontractors of Proper Instructions of the Trust or the
Fund.
(5) The offer or sale of Shares in violation of any requirement under
the federal securities laws or regulations or the securities
laws or regulations of any state that such Shares be registered
in such state or in violation of any stop order or other
determination or ruling by any federal agency or any state with
respect to the offer or sale of such Shares in such state.
Provided, however, that the Company shall not be protected by
this Article 15.A. from liability for any act or omission
resulting from the Company's willful misfeasance, bad faith,
gross negligence or reckless disregard of its duties.
B. Indemnification by the Company
The Company shall indemnify and hold the Trust or each Fund harmless
from and against any and all losses, damages, costs, charges, counsel
fees, payments, expenses and liabilities arising out of or
attributable to any action or failure or omission to act by the
Company as a result of the Company's willful misfeasance, bad faith,
gross negligence or reckless disregard of its duties.
C. Reliance
At any time the Company may apply to any officer of the Trust or Fund
for instructions, and may consult with legal counsel with respect to
any matter arising in connection with the services to be performed by
the Company under this Agreement, and the Company and its agents or
subcontractors shall not be liable and shall be indemnified by the
Trust or the appropriate Fund for any action reasonably taken or
omitted by it in reliance upon such instructions or upon the opinion
of such counsel provided such action is not in violation of applicable
federal or state laws or regulations. The Company, its agents and
subcontractors shall be protected and indemnified in recognizing stock
certificates which are reasonably believed to bear the proper manual
or facsimile signatures of the officers of the Trust or the Fund, and
the proper countersignature of any former transfer agent or registrar,
or of a co-transfer agent or co-registrar.
D. Notification
In order that the indemnification provisions contained in this
Article 15 shall apply, upon the assertion of a claim for which either
party may be required to indemnify the other, the party seeking
indemnification shall promptly notify the other party of such
assertion, and shall keep the other party advised with respect to all
developments concerning such claim. The party who may be required to
indemnify shall have the option to participate with the party seeking
indemnification in the defense of such claim. The party seeking
indemnification shall in no case confess any claim or make any
compromise in any case in which the other party may be required to
indemnify it except with the other party's prior written consent.
Article 16. Termination of Agreement.
This Agreement may be terminated by either party upon one hundred
twenty (120) days written notice to the other. Should the Trust
exercise its rights to terminate, all out-of-pocket expenses
associated with the movement of records and materials will be borne by
the Trust or the appropriate Fund. Additionally, the Company reserves
the right to charge for any other reasonable expenses associated with
such termination. The provisions of Article 15 shall survive the
termination of this Agreement.
Article 17. Amendment.
This Agreement may be amended or modified by a written agreement
executed by both parties.
Article 18. Interpretive and Additional Provisions.
In connection with the operation of this Agreement, the Company and
the Trust may from time to time agree on such provisions interpretive
of or in addition to the provisions of this Agreement as may in their
joint opinion be consistent with the general tenor of this Agreement.
Any such interpretive or additional provisions shall be in a writing
signed by both parties and shall be annexed hereto, provided that no
such interpretive or additional provisions shall contravene any
applicable federal or state regulations or any provision of the
Charter. No interpretive or additional provisions made as provided in
the preceding sentence shall be deemed to be an amendment of this
Agreement.
Article 19. Governing Law.
This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the Commonwealth
of Massachusetts
Article 20. Notices.
Except as otherwise specifically provided herein, Notices and other
writings delivered or mailed postage prepaid to the Trust at Federated
Investors Tower, Pittsburgh, Pennsylvania, 15222-3779, or to the
Company at Federated Investors Tower, Pittsburgh, Pennsylvania, 15222-
3779, or to such other address as the Trust or the Company may
hereafter specify, shall be deemed to have been properly delivered or
given hereunder to the respective address.
Article 21. Counterparts.
This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original.
Article 22. Limitations of Liability of Trustees and Shareholders of
the Trust.
The execution and delivery of this Agreement have been authorized by
the Trustees of the Trust and signed by an authorized officer of the
Trust, acting as such, and neither such authorization by such Trustees
nor such execution and delivery by such officer shall be deemed to
have been made by any of them individually or to impose any liability
on any of them personally, and the obligations of this Agreement are
not binding upon any of the Trustees or Shareholders of the Trust, but
bind only the appropriate property of the Fund, or Class, as provided
in the Declaration of Trust.
Article 23. Limitations of Liability of Trustees and Shareholders of
the Company.
The execution and delivery of this Agreement have been authorized by
the Trustees of the Company and signed by an authorized officer of the
Company, acting as such, and neither such authorization by such
Trustees nor such execution and delivery by such officer shall be
deemed to have been made by any of them individually or to impose any
liability on any of them personally, and the obligations of this
Agreement are not binding upon any of the Trustees or Shareholders of
the Company, but bind only the property of the Company as provided in
the Declaration of Trust.
Article 24. Assignment.
This Agreement and the rights and duties hereunder shall not be
assignable with respect to the Trust or the Funds by either of the
parties hereto except by the specific written consent of the other
party.
Article 25. Merger of Agreement.
This Agreement constitutes the entire agreement between the parties
hereto and supersedes any prior agreement with respect to the subject
hereof whether oral or written.
Article 26. Successor Agent.
If a successor agent for the Trust shall be appointed by the Trust,
the Company shall upon termination of this Agreement deliver to such
successor agent at the office of the Company all properties of the
Trust held by it hereunder. If no such successor agent shall be
appointed, the Company shall at its office upon receipt of Proper
Instructions deliver such properties in accordance with such
instructions.
In the event that no written order designating a successor agent or
Proper Instructions shall have been delivered to the Company on or
before the date when such termination shall become effective, then the
Company shall have the right to deliver to a bank or trust company,
which is a "bank" as defined in the 1940 Act, of its own selection,
having an aggregate capital, surplus, and undivided profits, as shown
by its last published report, of not less than $2,000,000, all
properties held by the Company under this Agreement. Thereafter, such
bank or trust company shall be the successor of the Company under this
Agreement.
Article 27. Force Majeure.
The Company shall have no liability for cessation of services
hereunder or any damages resulting therefrom to the Fund as a result
of work stoppage, power or other mechanical failure, natural disaster,
governmental action, communication disruption or other impossibility
of performance.
Article 28. Assignment; Successors.
This Agreement shall not be assigned by either party without the prior
written consent of the other party, except that either party may
assign to a successor all of or a substantial portion of its business,
or to a party controlling, controlled by, or under common control with
such party. Nothing in this Article 28 shall prevent the Company from
delegating its responsibilities to another entity to the extent
provided herein.
Article 29. Severability.
In the event any provision of this Agreement is held illegal, void or
unenforceable, the balance shall remain in effect.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in their names and on their behalf under their seals by and through
their duly authorized officers, as of the day and year first above written.
ATTEST: INVESTMENT COMPANIES (listed on Exhibit 1)
/s/ John W. McGonigle_______ By:__/s/ John F. Donahue___
John W. McGonigle John F. Donahue
Secretary Chairman
ATTEST: FEDERATED SERVICES COMPANY
/s/ Jeannette Fisher-Garber By:_/s/ James J. Dolan_____
Jeannette Fisher-Garber James J. Dolan
Secretary President
Exhibit 1
Municipal Securities Income Trust
Pennsylvania Municipal Income Fund
Class A Shares
Ohio Municipal Income Fund
Fortress Shares
Michigan Intermediate Municipal Trust
California Municipal Income Fund
Fortress Shares
New York Municipal Income Fund
Fortress Shares
Exhibit No. 9(ii) under Form N-1A
Exhibit No. 10 under Item 601/Reg. S-K
SHAREHOLDER SERVICES AGREEMENT
AGREEMENT made as of the first day of March, 1994, by and between
those investment companies listed on Exhibit 1, as may be amended from
time to time, having their principal office and place of business at
Federated Investors Tower, Pittsburgh, PA 15222-3779 and who have
approved a Shareholder Services Plan (the "Plan") and this form of
Agreement (individually referred to herein as a "Fund" and collectively
as "Funds") and Federated Shareholder Services, a Delaware business
trust, having its principal office and place of business at Federated
Investors Tower, Pittsburgh, Pennsylvania 15222-3779 ("FSS").
1. The Funds hereby appoint FSS to render or cause to be
rendered personal services to shareholders of the Funds and/or the
maintenance of accounts of shareholders of the Funds ("Services"). In
addition to providing Services directly to shareholders of the Funds,
FSS is hereby appointed the Funds' agent to select, negotiate and
subcontract for the performance of Services. FSS hereby accepts such
appointments. FSS agrees to provide or cause to be provided Services
which, in its best judgment (subject to supervision and control of the
Funds' Boards of Trustees or Directors, as applicable), are necessary or
desirable for shareholders of the Funds. FSS further agrees to provide
the Funds, upon request, a written description of the Services which FSS
is providing hereunder.
2. During the term of this Agreement, each Fund will pay FSS
and FSS agrees to accept as full compensation for its services rendered
hereunder a fee at an annual rate, calculated daily and payable monthly,
up to 0.25% of 1% of average net assets of each Fund.
For the payment period in which this Agreement becomes effective
or terminates with respect to any Fund, there shall be an appropriate
proration of the monthly fee on the basis of the number of days that
this Agreement is in effect with respect to such Fund during the month.
To enable the Funds to comply with an applicable exemptive order, FSS
represents that the fees received pursuant to this Agreement will be
disclosed to and authorized by any person or entity receiving Services,
and will not result in an excessive fee to FSS.
3. This Agreement shall continue in effect for one year from
the date of its execution, and thereafter for successive periods of one
year only if the form of this Agreement is approved at least annually by
the Board of each Fund, including a majority of the members of the Board
of the Fund who are not interested persons of the Fund and have no
direct or indirect financial interest in the operation of the Funds'
Plan or in any related documents to the Plan ("Independent Board
Members") cast in person at a meeting called for that purpose.
4. Notwithstanding paragraph 3, this Agreement may be
terminated as follows:
(a) at any time, without the payment of any penalty, by
the vote of a majority of the Independent Board Members of any
Fund or by a vote of a majority of the outstanding voting
securities of any Fund as defined in the Investment Company Act
of 1940 on sixty (60) days' written notice to the parties to
this Agreement;
(b) automatically in the event of the Agreement's
assignment as defined in the Investment Company Act of 1940; and
(c) by any party to the Agreement without cause by
giving the other party at least sixty (60) days' written notice
of its intention to terminate.
5. FSS agrees to obtain any taxpayer identification number
certification from each shareholder of the Funds to which it provides
Services that is required under Section 3406 of the Internal Revenue
Code, and any applicable Treasury regulations, and to provide each Fund
or its designee with timely written notice of any failure to obtain such
taxpayer identification number certification in order to enable the
implementation of any required backup withholding.
6. FSS shall not be liable for any error of judgment or mistake
of law or for any loss suffered by any Fund in connection with the
matters to which this Agreement relates, except a loss resulting from
willful misfeasance, bad faith or gross negligence on its part in the
performance of its duties or from reckless disregard by it of its
obligations and duties under this Agreement. FSS shall be entitled to
rely on and may act upon advice of counsel (who may be counsel for such
Fund) on all matters, and shall be without liability for any action
reasonably taken or omitted pursuant to such advice. Any person, even
though also an officer, trustee, partner, employee or agent of FSS, who
may be or become a member of such Fund's Board, officer, employee or
agent of any Fund, shall be deemed, when rendering services to such Fund
or acting on any business of such Fund (other than services or business
in connection with the duties of FSS hereunder) to be rendering such
services to or acting solely for such Fund and not as an officer,
trustee, partner, employee or agent or one under the control or
direction of FSS even though paid by FSS.
This Section 6 shall survive termination of this Agreement.
7. No provision of this Agreement may be changed, waived,
discharged or terminated orally, but only by an instrument in writing
signed by the party against which an enforcement of the change, waiver,
discharge or termination is sought.
8. FSS is expressly put on notice of the limitation of
liability as set forth in the Declaration of Trust of each Fund that is
a Massachusetts business trust and agrees that the obligations assumed
by each such Fund pursuant to this Agreement shall be limited in any
case to such Fund and its assets and that FSS shall not seek
satisfaction of any such obligations from the shareholders of such Fund,
the Trustees, Officers, Employees or Agents of such Fund, or any of
them.
9. The execution and delivery of this Agreement have been
authorized by the Trustees of FSS and signed by an authorized officer of
FSS, acting as such, and neither such authorization by such Trustees nor
such execution and delivery by such officer shall be deemed to have been
made by any of them individually or to impose any liability on any of
them personally, and the obligations of this Agreement are not binding
upon any of the Trustees or shareholders of FSS, but bind only the trust
property of FSS as provided in the Declaration of Trust of FSS.
10. Notices of any kind to be given hereunder shall be in
writing (including facsimile communication) and shall be duly given if
delivered to any Fund and to such Fund at the following address:
Federated Investors Tower, Pittsburgh, PA 15222-3779, Attention:
President and if delivered to FSS at Federated Investors Tower,
Pittsburgh, PA 15222-3779, Attention: President.
11. This Agreement constitutes the entire agreement between the
parties hereto and supersedes any prior agreement with respect to the
subject hereof whether oral or written. If any provision of this
Agreement shall be held or made invalid by a court or regulatory agency
decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby. Subject to the provisions of Sections 3
and 4, hereof, this Agreement shall be binding upon and shall inure to
the benefit of the parties hereto and their respective successors and
shall be governed by Pennsylvania law; provided, however, that nothing
herein shall be construed in a manner inconsistent with the Investment
Company Act of 1940 or any rule or regulation promulgated by the
Securities and Exchange Commission thereunder.
12. This Agreement may be executed by different parties on
separate counterparts, each of which, when so executed and delivered,
shall be an original, and all such counterparts shall together
constitute one and the same instrument.
13. This Agreement shall not be assigned by any party without
the prior written consent of FSS in the case of assignment by any Fund,
or of the Funds in the case of assignment by FSS, except that any party
may assign to a successor all of or a substantial portion of its
business to a party controlling, controlled by, or under common control
with such party. Nothing in this Section 14 shall prevent FSS from
delegating its responsibilities to another entity to the extent provided
herein.
IN WITNESS WHEREOF, the parties hereto have caused this instrument
to be executed by their officers designated below as of the day and year
first above written.
Investment Companies (listed
on Exhibit 1)
By: /s/ John F. Donahue
John F. Donahue
Chairman
Attest: /s/ John W. McGonigle
John W. McGonigle
Federated Shareholder Services
By: /s/ James J. Dolan
Title: President
Attest: /s/ John W. McGonigle
John W. McGonigle
Exhibit 1
Municipal Securities Income Trust
Pennsylvania Municipal Income Fund
Class A Shares
Ohio Municipal Income Fund
Fortress Shares
Michigan Intermediate Municipal Trust
California Municipal Income Fund
Fortress Shares
New York Municipal Income Fund
Fortress Shares
Exhibit No. 9(iii) under Form N-1A
Exhibit No. 10 under Item 601/Reg. S-K
SHAREHOLDER SERVICES PLAN
This Shareholder Services Plan ("Plan") is adopted as of this 1st
day of March, 1994, by the Boards of Directors or Trustees, as
applicable (the "Boards"), of those investment companies listed on
Exhibit 1 hereto as may be amended from time to time, having their
principal office and place of business at Federated Investors Tower,
Pittsburgh, PA 15222-3779 (individually referred to herein as a "Fund"
and collectively as "Funds").
1. This Plan is adopted to allow the Funds to make payments as
contemplated herein to obtain certain personal services for shareholders
and/or the maintenance of shareholder accounts ("Services").
2. This Plan is designed to compensate Federated Shareholder
Services ("FSS") for providing personal services and/or the maintenance
of shareholder accounts to the Funds and their shareholders. In
compensation for the services provided pursuant to this Plan, FSS may be
paid a monthly fee computed at the annual rate not to exceed .25 of 1%
of the average aggregate net asset value of the shares of each Fund held
during the month.
3. Any payments made by the Funds to FSS pursuant to this Plan
will be made pursuant to a "Shareholder Services Agreement" between FSS
and each of the Funds.
4. Quarterly in each year that this Plan remains in effect, FSS
shall prepare and furnish to the Boards of the Funds, and the Boards
shall review, a written report of the amounts expended under the Plan.
5. This Plan shall become effective with regard to each Fund
(i) after approval by majority votes of: (a) such Fund's Board; and (b)
the members of the Board of such Fund who are not interested persons of
such Fund and have no direct or indirect financial interest in the
operation of such Fund's Plan or in any related documents to the Plan
("Independent Trustees or Directors"), cast in person at a meeting
called for the purpose of voting on the Plan.
6. This Plan shall remain in effect with respect to each Fund
presently set forth on an exhibit and any subsequent Fund added pursuant
to an exhibit during the initial year of this Plan for the period of one
year from the date set forth above and may be continued thereafter if
this Plan is approved with respect to each Fund at least annually by a
majority of the relevant Fund's Board and a majority of the Independent
Trustees or
Directors, of such Fund as applicable, cast in person at a meeting
called for the purpose of voting on the renewal of such Plan. If this
Plan is adopted with respect to a fund after the first annual approval
by the Trustees or Directors as described above, this Plan will be
effective as to that Fund at such time as Exhibit 1 hereto is amended to
add such Fund and will continue in effect until the next annual approval
of this Plan by the Funds' Boards and thereafter for successive periods
of one year subject to approval as described above.
7. All material amendments to this Plan must be approved by a
vote of the Board of each Fund and of the Independent Directors or
Trustees of such Fund, cast in person at a meeting called for such
purpose.
8. This Plan may be terminated as follows:
(a) at any time, without the payment of any penalty, by
the vote of a majority of the Independent Board Members of any
Fund or by a vote of a majority of the outstanding voting
securities of any Fund as defined in the Investment Company Act
of 1940 on sixty (60) days' written notice to the parties to
this Agreement; or
(b) by any party to the Agreement without cause by
giving the other party at least sixty (60) days' written notice
of its intention to terminate.
9. While this Plan shall be in effect, the selection and
nomination of Independent Directors or Trustees of each Fund shall be
committed to the discretion of the Independent Directors or Trustees
then in office.
10. All agreements with any person relating to the
implementation of this Plan shall be in writing and any agreement
related to this Plan shall be subject to termination, without penalty,
pursuant to the provisions of Paragraph 8 herein.
11. This Plan shall be construed in accordance with and governed
by the laws of the Commonwealth of Pennsylvania.
Witness the due execution hereof this as of the date set forth
above.
Investment Companies (listed
on Exhibit 1)
By: /s/ John F. Donahue
John F. Donahue
Chairman
Attest: /s/ John W. McGonigle
John W. McGonigle
Federated Shareholder Services
By: /s/ James J. Dolan
Title: President
Attest: /s/ John W. McGonigle
John W. McGonigle
Exhibit 1
Municipal Securities Income Trust
Pennsylvania Municipal Income Fund
Class A Shares
Ohio Municipal Income Fund
Fortress Shares
Michigan Intermediate Municipal Trust
California Municipal Income Fund
Fortress Shares
New York Municipal Income Fund
Fortress Shares
Exhibit No. 9(iv) under Form N-1A
Exhibit No. 10 under Item 601/Reg. S-K
SHAREHOLDER SERVICES SUB-CONTRACT
This Agreement is made between the Financial Institution executing
this Agreement ("Provider") and Federated Shareholder Services ("FSS")
on behalf of the investment companies listed in Exhibit A hereto (the
"Funds"), for whom FSS administers the Shareholder Services Plan
("Plan") and who have approved this form of Agreement. In consideration
of the mutual covenants hereinafter contained, it is hereby agreed by
and between the parties hereto as follows:
1. FSS hereby appoints Provider to render or cause to be
rendered personal services to shareholders of the Funds and/or the
maintenance of accounts of shareholders of the Funds ("Services").
Provider agrees to provide Services which, in its best judgment, are
necessary or desirable for its customers who are investors in the Funds.
Provider further agrees to provide FSS, upon request, a written
description of the Services which Provider is providing hereunder.
2. During the term of this Agreement, the Funds will pay the
Provider fees as set forth in a written schedule delivered to the
Provider pursuant to this Agreement. The fee schedule for Provider may
be changed by FSS sending a new fee schedule to Provider pursuant to
Paragraph 9 of this Agreement. For the payment period in which this
Agreement becomes effective or terminates, there shall be an appropriate
proration of the fee on the basis of the number of days that this
Agreement is in effect during the quarter. To enable the Funds to
comply with an applicable exemptive order, Provider represents that the
fees received pursuant to this Agreement will be disclosed to its
customers, will be authorized by its customers, and will not result in
an excessive fee to the Provider.
3. The Provider understands that the Department of Labor views
ERISA as prohibiting fiduciaries of discretionary ERISA assets from
receiving shareholder service fees or other compensation from funds in
which the fiduciary's discretionary ERISA assets are invested. To date,
the Department of Labor has not issued any exemptive order or advisory
opinion that would exempt fiduciaries from this interpretation. Without
specific authorization from the Department of Labor, fiduciaries should
carefully avoid investing discretionary assets in any fund pursuant to
an arrangement where the fiduciary is to be compensated by the fund for
such investment. Receipt of such compensation could violate ERISA
provisions against fiduciary self-dealing and conflict of interest and
could subject the fiduciary to substantial penalties.
4. The Provider agrees not to solicit or cause to be solicited
directly, or indirectly at any time in the future, any proxies from the
shareholders of a Fund in opposition to proxies solicited by management
of the Fund, unless a court of competent jurisdiction shall have
determined that the conduct of a majority of the Board of Trustees or
Directors of the Fund constitutes willful misfeasance, bad faith, gross
negligence or reckless disregard of their duties. This paragraph 4 will
survive the term of this Agreement.
5. This Agreement shall continue in effect for one year from
the date of its execution, and thereafter for successive periods of one
year if the form of this Agreement is approved at least annually by the
Board of each Fund, including a majority of the members of the Board of
the Fund who are not interested persons of the Fund and have no direct
or indirect financial interest in the operation of the Fund's Plan or in
any related documents to the Plan ("Disinterested Board Members") cast
in person at a meeting called for that purpose.
6. Notwithstanding paragraph 5, this Agreement may be
terminated as follows:
(a) at any time, without the payment of any penalty, by
the vote of a majority of the Disinterested Board Members of the
Fund or by a vote of a majority of the outstanding voting
securities of the Fund as defined in the Investment Company Act
of 1940 on not more than sixty (60) days' written notice to the
parties to this Agreement;
(b) automatically in the event of the Agreement's
assignment as defined in the Investment Company Act of 1940; and
(c) by either party to the Agreement without cause by
giving the other party at least sixty (60) days' written notice
of its intention to terminate.
7. The Provider agrees to obtain any taxpayer identification
number certification from its customers required under Section 3406 of
the Internal Revenue Code, and any applicable Treasury regulations, and
to provide the Fund or its designee with timely written notice of any
failure to obtain such taxpayer identification number certification in
order to enable the implementation of any required backup withholding.
8. The execution and delivery of this Agreement have been
authorized by the Trustees of FSS and signed by an authorized officer of
FSS, acting as such, and neither such authorization by such Trustees nor
such execution and delivery by such officer shall be deemed to have been
made by any of them individually or to impose any liability on any of
them personally, and the obligations of this Agreement are not binding
upon any of the Trustees or shareholders of FSS, but bind only the trust
property of FSS as provided in the Declaration of Trust of FSS.
9. Notices of any kind to be given hereunder shall be in
writing (including facsimile communication) and shall be duly given if
delivered to Provider at the address set forth below and if delivered to
FSS at Federated Investors Tower, Pittsburgh, PA 15222-3779, Attention:
President.
10. This Agreement constitutes the entire agreement between the
parties hereto and supersedes any prior agreement with respect to the
subject hereof whether oral or written. If any provision of this
Agreement shall be held or made invalid by a court or regulatory agency
decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby. Subject to the provisions of Sections 5
and 6, hereof, this Agreement shall be binding upon and shall inure to
the benefit of the parties hereto and their respective successors and
shall be governed by Pennsylvania law; provided, however, that nothing
herein shall be construed in a manner inconsistent with the Investment
Company Act of 1940 or any rule or regulation promulgated by the
Securities and Exchange Commission thereunder.
11. This Agreement may be executed by different parties on
separate counterparts, each of which, when so executed and delivered,
shall be an original, and all such counterparts shall together
constitute one and the same instrument.
12. This Agreement shall not be assigned by any party without
the prior written consent of FSS in the case of assignment by Provider,
or of Provider in the case of assignment by FSS, except that any party
may assign to a successor all of or a substantial portion of its
business to a party controlling, controlled by, or under common control
with such party.
13. This Agreement may be amended by FSS from time to time by
the following procedure. FSS will mail a copy of the amendment to the
Provider's address, as shown below. If the Provider does not object to
the amendment within thirty (30) days after its receipt, the amendment
will become part of the Agreement. The Provider's objection must be in
writing and be received by FSS within such thirty days.
14. This Agreement may be terminated with regard to a
particular Fund or Class at any time, without the payment of any
penalty, by FSS or by the vote of a majority of the Disinterested
Trustees or Directors, as applicable, or by a majority of the
outstanding voting securities of the particular Fund or Class on not
more than sixty (60) days' written notice to the Provider. This
Agreement may be terminated by Provider on sixty (60) days' written
notice to FSS.
15. The Provider acknowledges and agrees that FSS has entered
into this Agreement solely in the capacity of agent for the Funds and
administrator of the Plan. The Provider agrees not to claim that FSS is
liable for any responsibilities or amounts due by the Funds hereunder.
[Provider]
Address
City State Zip Code
Dated: By:
Authoried Signature
Title
Print Name of Authorized Signature
FEDERATED SHAREHOLDER SERVICES
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
By:
Vice President
EXHIBIT A to Shareholder Services Sub-Contract with
Funds covered by this Agreement:
Shareholder Service Fees
1. During the term of this Agreement, FSS will pay Provider a
quarterly fee. This fee will be computed at the annual rate of ______
of the average net asset value of shares of the Funds held during the
quarter in accounts for which the Provider provides Services under this
Agreement, so long as the average net asset value of Shares in the Funds
during the quarter equals or exceeds such minimum amount as FSS shall
from time to time determine and communicate in writing to the Provider.
2. For the quarterly period in which the Agreement becomes
effective or terminates, there shall be an appropriate proration of any
fee payable on the basis of the number of days that the Agreement is in
effect during the quarter.
Exhibit No. 9(v) under Form N-1A
Exhibit No. 10 under Item 601/Reg. S-K
ADMINISTRATIVE SERVICES AGREEMENT
This Administrative Services Agreement is made as of this first day of
March, 1994, between those investment companies listed on Exhibit 1, as may
be amended from time to time, having their principal office and place of
business at Federated Investors Tower, Pittsburgh PA 15222-3779
(individually referred to herein as "Fund" and collectively referred to as
"Funds), on behalf of the portfolios of the Funds, and Federated
Administrative Services, a Delaware business trust (herein called "FAS").
WHEREAS, the Funds desire to retain FAS as their Administrator to
provide them with Administrative Services (as herein defined), and FAS is
willing to render such services;
WHEREAS, the Funds are registered as open-end management investment
companies under the Investment Company Act of 1940, as amended (the "1940
Act"), with authorized and issued shares of capital stock or beneficial
interest ("Shares"); and
NOW, THEREFORE, in consideration of the premises and mutual covenants
set forth herein, the parties hereto agree as follows:
1. Appointment of Administrator. The Funds hereby appoint FAS as
Administrator of the Funds on the terms and conditions set forth in this
Agreement; and FAS hereby accepts such appointment and agrees to perform the
services and duties set forth in Section 2 of this Agreement in consideration
of the compensation provided for in Section 4 hereof.
2. Services and Duties. As Administrator, and subject to the
supervision and control of the Funds' Boards of Trustees or Directors, as
applicable (the "Boards"), FAS will provide facilities, equipment, and
personnel to carry out the following administrative services for operation of
the business and affairs of the Funds and each of their portfolios:
(a) prepare, file, and maintain the Funds'
governing documents and any amendments thereto, including the
Declaration of Trust or Articles of Incorporation, as
appropriate,(which has already been prepared and filed), the By-
laws and minutes of meetings of their Boards, Committees, and
shareholders;
(b) prepare and file with the Securities
and Exchange Commission and the appropriate state securities
authorities the registration statements for the Funds and the
Funds' shares and all amendments thereto, reports to regulatory
authorities and shareholders, prospectuses, proxy statements,
and such other documents all as may be necessary to enable the
Funds to make continuous offerings of their shares, as
applicable;
(c) prepare, negotiate, and administer
contracts on behalf of the Funds with, among others, each Fund's
investment adviser, distributor, custodian, and transfer agent,
subject to any applicable restrictions of the Boards or the 1940
Act;
(d) supervise the Funds' custodians in the
maintenance of the Funds' general ledgers and in the preparation
of the Funds' financial statements, including oversight of
expense accruals and payments, the determination of the net
asset value of the Funds and the declaration and payment of
dividends and other distributions to shareholders;
(e) calculate performance data of the
Funds for dissemination to information services covering the
investment company industry;
(f) prepare and file the Funds' tax
returns;
(g) examine and review the operations of
the Funds' custodians and transfer agents;
(h) coordinate the layout and printing of
publicly disseminated prospectuses and reports;
(i) perform internal audit examinations in
accordance with a charter to be adopted by FAS and the Funds;
(j) assist with the design, development,
and operation of the Funds;
(k) provide individuals reasonably
acceptable to the Funds' Boards for nomination, appointment, or
election as officers of the Funds, who will be responsible for
the management of certain of the Funds' affairs as determined by
the Funds' Boards; and
(l) consult with the Funds and their
Boards of Trustees or Directors, as appropriate, on matters
concerning the Funds and their affairs.
The foregoing, along with any additional services that FAS shall agree
in writing to perform for the Funds hereunder, shall hereafter be referred to
as "Administrative Services." Administrative Services shall not include any
duties, functions, or services to be performed for any Fund by such Fund's
investment adviser, distributor, custodian, transfer agent, or shareholder
service agent, pursuant to their respective agreements with such Fund.
3. Expenses. FAS shall be responsible for expenses incurred in
providing office space, equipment, and personnel as may be necessary or
convenient to provide the Administrative Services to the Fund, including the
compensation of FAS employees who serve on the Funds' Boards, or as officers
of the Funds. Each Fund shall be responsible for all other expenses incurred
by FAS on behalf of such Fund, including without limitation postage and
courier expenses, printing expenses, travel expenses, registration fees,
filing fees, fees of outside counsel and independent auditors, insurance
premiums, fees payable to members of such Fund's Board who are not FAS
employees, and trade association dues.
4. Compensation. For the Administrative Services provided, each
Fund hereby agrees to pay and FAS hereby agrees to accept as full
compensation for its services rendered hereunder an administrative fee at an
annual rate, payable daily, as specified below, based upon the total assets
of all of the Funds:
Maximum Administrative Average Daily Net Assets
Fee of the Funds
.150% on the first $250 million
.125% on the next $250 million
.100% on the next $250 million
.075% on assets in excess of
$750 million
However, in no event shall the administrative fee received during any
year of this Agreement be less than, or be paid at a rate less than would
aggregate, $125,000, per individual Fund, with an additional $30,000 for each
class of shares added to any such Fund after the date hereof.
5. Standard of Care.
(a) FAS shall not be liable for any error
of judgment or mistake of law or for any loss suffered by any
Fund in connection with the matters to which this Agreement
relates, except a loss resulting from willful misfeasance, bad
faith or gross negligence on its part in the performance of its
duties or from reckless disregard by it of its obligations and
duties under this Agreement. FAS shall be entitled to rely on
and may act upon advice of counsel (who may be counsel for such
Fund) on all matters, and shall be without liability for any
action reasonably taken or omitted pursuant to such advice. Any
person, even though also an officer, trustee, partner, employee
or agent of FAS, who may be or become a member of such Fund's
Board, officer, employee or agent of any Fund, shall be deemed,
when rendering services to such Fund or acting on any business
of such Fund (other than services or business in connection with
the duties of FAS hereunder) to be rendering such services to or
acting solely for such Fund and not as an officer, trustee,
partner, employee or agent or one under the control or direction
of FAS even though paid by FAS.
(b) This Section 5 shall survive
termination of this Agreement.
6. Duration and Termination. The initial term of this Agreement
with respect to each Fund shall commence on the date hereof, and extend for a
period of one year, renewable annually by the approval of the Board of
Directors/Trustees of each Fund.
7. Amendment. No provision of this Agreement may be changed,
waived, discharged or terminated orally, but only by an instrument in writing
signed by the party against which an enforcement of the change, waiver,
discharge or termination is sought.
8. Limitations of Liability of Trustees or Officers, Employees,
Agents and Shareholders of the Funds. FAS is expressly put on notice of the
limitation of liability as set forth in the Declaration of Trust of each Fund
that is a Massachusetts business trust and agrees that the obligations
assumed by each such Fund pursuant to this Agreement shall be limited in any
case to such Fund and its assets and that FAS shall not seek satisfaction of
any such obligations from the shareholders of such Fund, the Trustees,
Officers, Employees or Agents of such Fund, or any of them.
9. Limitations of Liability of Trustees and Shareholders of FAS.
The execution and delivery of this Agreement have been authorized by the
Trustees of FAS and signed by an authorized officer of FAS, acting as such,
and neither such authorization by such Trustees nor such execution and
delivery by such officer shall be deemed to have been made by any of them
individually or to impose any liability on any of them personally, and the
obligations of this Agreement are not binding upon any of the Trustees or
shareholders of FAS, but bind only the trust property of FAS as provided in
the Declaration of Trust of FAS.
10. Notices. Notices of any kind to be given hereunder shall be
in writing (including facsimile communication) and shall be duly given if
delivered to any Fund at the following address: Federated Investors Tower,
Pittsburgh, PA 15222-3779, Attention: President and if delivered to FAS at
Federated Investors Tower, Pittsburgh, PA 15222-3779, Attention: President.
11. Miscellaneous. This Agreement constitutes the entire agreement
between the parties hereto and supersedes any prior agreement with respect to
the subject hereof whether oral or written. The captions in this Agreement
are included for convenience of reference only and in no way define or
delimit any of the provisions hereof or otherwise affect their construction
or effect. If any provision of this Agreement shall be held or made invalid
by a court or regulatory agency decision, statute, rule or otherwise, the
remainder of this Agreement shall not be affected thereby. Subject to the
provisions of Section 5, hereof, this Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective
successors and shall be governed by Pennsylvania law; provided, however, that
nothing herein shall be construed in a manner inconsistent with the
Investment Company Act of 1940 or any rule or regulation promulgated by the
Securities and Exchange Commission thereunder.
12. Counterparts. This Agreement may be executed by different
parties on separate counterparts, each of which, when so executed and
delivered, shall be an original, and all such counterparts shall together
constitute one and the same instrument.
13. Assignment; Successors. This Agreement shall not be assigned by
any party without the prior written consent of FAS, in the case of assignment
by any Fund, or of the Funds, in the case of assignment by FAS, except that
any party may assign to a successor all of or a substantial portion of its
business to a party controlling, controlled by, or under common control with
such party. Nothing in this Section 14 shall prevent FAS from delegating its
responsibilities to another entity to the extent provided herein.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
Investment Companies (listed
on Exhibit 1)
By: /s/ John F. Donahue
John F. Donahue
Chairman
Attest: /s/ John W. McGonigle
John W. McGonigle
Federated Administrative Services
By: /s/ Edward C. Gonzales
Edward C. Gonzales
Chairman
Attest: /s/ John W. McGonigle
John W. McGonigle
Exhibit 1
Municipal Securities Income Trust
Pennsylvania Municipal Income Fund
Class A Shares
Ohio Municipal Income Fund
Fortress Shares
Michigan Intermediate Municipal Trust
California Municipal Income Fund
Fortress Shares
New York Municipal Income Fund
Fortress Shares
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> CALIFORNIA MUNICIPAL INCOME FUND
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1994
<PERIOD-END> AUG-31-1994
<INVESTMENTS-AT-COST> 15,004,252
<INVESTMENTS-AT-VALUE> 14,713,636
<RECEIVABLES> 912,945
<ASSETS-OTHER> 138,012
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 15,764,593
<PAYABLE-FOR-SECURITIES> 599,850
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 106,217
<TOTAL-LIABILITIES> 706,067
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<SHARES-COMMON-PRIOR> 1,053,878
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<ACCUMULATED-NET-GAINS> (545,843)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (290,616)
<NET-ASSETS> 15,058,526
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 886,548
<OTHER-INCOME> 0
<EXPENSES-NET> 37,825
<NET-INVESTMENT-INCOME> 848,723
<REALIZED-GAINS-CURRENT> (545,843)
<APPREC-INCREASE-CURRENT> (926,760)
<NET-CHANGE-FROM-OPS> (623,880)
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<DISTRIBUTIONS-OF-INCOME> 848,723
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<NUMBER-OF-SHARES-SOLD> 848,498
<NUMBER-OF-SHARES-REDEEMED> 424,266
<SHARES-REINVESTED> 26,342
<NET-CHANGE-IN-ASSETS> 3,545,100
<ACCUMULATED-NII-PRIOR> 0
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<PER-SHARE-NAV-BEGIN> 10.92
<PER-SHARE-NII> .590
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<AVG-DEBT-PER-SHARE> .000
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<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> MICHIGAN INTERMEDIATE MUNICIPAL TRUST
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1994
<PERIOD-END> AUG-31-1994
<INVESTMENTS-AT-COST> 56,566,206
<INVESTMENTS-AT-VALUE> 57,289,013
<RECEIVABLES> 1,032,642
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<TOTAL-ASSETS> 58,835,786
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<OTHER-ITEMS-LIABILITIES> 355,566
<TOTAL-LIABILITIES> 355,566
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 58,023,203
<SHARES-COMMON-STOCK> 5,522,526
<SHARES-COMMON-PRIOR> 4,594,049
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<ACCUMULATED-NET-GAINS> (265,790)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 722,807
<NET-ASSETS> 58,480,220
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,077,571
<OTHER-INCOME> 0
<EXPENSES-NET> 286,768
<NET-INVESTMENT-INCOME> 2,790,803
<REALIZED-GAINS-CURRENT> (249,785)
<APPREC-INCREASE-CURRENT> (2,310,979)
<NET-CHANGE-FROM-OPS> 230,039
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2,790,803
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,416,275
<NUMBER-OF-SHARES-REDEEMED> 1,508,248
<SHARES-REINVESTED> 20,450
<NET-CHANGE-IN-ASSETS> 7,855,360
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (16,005)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 229,413
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 611,016
<AVERAGE-NET-ASSETS> 57,198,185
<PER-SHARE-NAV-BEGIN> 11.020
<PER-SHARE-NII> .530
<PER-SHARE-GAIN-APPREC> (.430)
<PER-SHARE-DIVIDEND> .530
<PER-SHARE-DISTRIBUTIONS> .000
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<PER-SHARE-NAV-END> 10.590
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<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> NEW YORK MUNICIPAL INCOME FUND
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1994
<PERIOD-END> AUG-31-1994
<INVESTMENTS-AT-COST> 23,196,825
<INVESTMENTS-AT-VALUE> 22,558,073
<RECEIVABLES> 408,068
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</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> OHIO MUNICIPAL INCOME FUND
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</TABLE>
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<S> <C>
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