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
Pre-Effective Amendment No. ..............
Post-Effective Amendment No. 19 ............. X
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 19 ............................ X
MUNICIPAL SECURITIES INCOME TRUST
(Exact Name of Registrant as Specified in Charter)
Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779
(Address of Principal Executive Offices)
(412) 288-1900
(Registrant's Telephone Number)
John W. McGonigle, Esquire,
Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779
(Name and Address of Agent for Service)
It is proposed that this filing will become effective:
X immediately upon filing pursuant to paragraph (b)
on pursuant to paragraph (b)
-----------------
60 days after filing pursuant to paragraph (a) (i)
on pursuant to paragraph (a) (i).
75 days after filing pursuant to paragraph (a)(ii)
on pursuant to paragraph (a)(ii) of Rule 485.
-----------------
If appropriate, check the following box:
This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Registrant has filed with the Securities and Exchange Commission a declaration
pursuant to Rule 24f-2 under the Investment Company Act of 1940, and:
X filed the Notice required by that Rule on October 16, 1995; 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:
Matthew G. Maloney, Esquire
Dickstein, Shapiro & Morin, L.L.P.
2101 L Street, N.W.
Washington, DC 20037
CROSS-REFERENCE SHEET
This amendment to the Registration Statement of Municipal Securities Income
Trust, which is comprised of five 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), and (5) New York Municipal Income Fund (Fortress Shares) 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; (1,3) Liberty
Family of Funds; (2,4,5) Fortress
Investment Program; (1-5) Investment
Information; (1-5) Investment Objective,
(1-5) Investment Policies, (1-5)
Investment Limitations; (1-5) Investment
Risks; (1-5) Non-Diversification; (1)
Pennsylvania Municipal Securities; (2)
Ohio Municipal Securities; (3) Michigan
Municipal Securities; (4) California
Municipal Securities; (5) New York
Municipal Securities.
Item 5. Management of the Fund...(1-5) Municipal Securities Income Trust
Information; (1-5) Management of
Municipal Securities Income Trust; (1,3)
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; (1-5)
Shareholder Information; (1-5) Voting
Rights; (1-5) Massachusetts Partnership
Law; (1-5) Tax Information; (1-5)
Federal Income Tax; (1) Pennsylvania
Taxes; (2) State of Ohio Income Taxes;
(3) Michigan Taxes; (4) California
Income Taxes; (5) New York Taxes; (1-5)
Other State and Local Taxes.
Item 7. Purchase of Securities
Being Offered...........(1-5) Net Asset Value; (1) Investing in
Class A Shares; (3) Investing in the
Fund; (2,4,5) Investing in Fortress
Shares; (1-5) Share Purchases; (1-5)
Minimum Investment Required; (1-5) What
Shares Cost; (1-5) Eliminating/Reducing
the Sales Load; (1-5) Systematic
Investment Program; (1-5) Certificates
and Confirmations.
Item 8. Redemption or Repurchase.(1) Redeeming Class A Shares; (3)
Redeeming Shares; (2,4,5) Redeeming
Fortress Shares; (1-5) Through a
Financial Institution; (1,3) Directly
from the Fund; (2,4,5) Directly By Mail;
(1-5) Receiving Payment; (1-5)
Contingent Deferred Sales Charge; (1-5)
Systematic Withdrawal Program; (1-5)
Accounts with Low Balances; (1-5)
Exchange Privilege; (1,3) Requirements
for Exchange; (1,3) Tax Consequences;
(1,3) Making an Exchange.
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; (1-5) About Federated Investors.
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, (1-
5) 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...........(2,4,5) Purchasing Fortress Shares;
(1,3) Purchasing Shares; (1-5)
Determining Net Asset Value; (2,4,5)
Redeeming Fortress Shares; (1,3)
Redeeming Shares; (1-5) Exchange
Privilege.
Item 20. Tax Status............. .(1-5) Tax Status.
Item 21. Underwriters.............Not Applicable.
Item 22. Calculation of Performance
Data....................(1-5) Total Return; (1-5) Yield;
(1-5) Tax-Equivalent Yield; (1-5)
Performance Comparisons.
Item 23.Financial Statements (1-5) Filed in Part A.
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, 1995, with the Securities and Exchange Commission. The
information contained in the Statement of Additional Information is incorporated
by reference into this prospectus. You may request a copy of the Statement of
Additional Information, which is in paper form only, or a paper copy of this
prospectus, if you have received your prospectus electronically, 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, 1995
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 5
Pennsylvania Municipal Securities 7
Investment Risks 7
Non-Diversification 8
Investment Limitations 8
NET ASSET VALUE 9
- ------------------------------------------------------
INVESTING IN CLASS A SHARES 9
- ------------------------------------------------------
Share Purchases 9
Minimum Investment Required 9
What Shares Cost 10
Eliminating/Reducing the Sales Charge 11
Systematic Investment Program 12
Certificates and Confirmations 12
Dividends and Distributions 12
EXCHANGE PRIVILEGE 13
- ------------------------------------------------------
Requirements for Exchange 13
Tax Consequences 13
Making an Exchange 13
REDEEMING CLASS A SHARES 14
- ------------------------------------------------------
Through a Financial Institution 14
Directly from the Fund 14
Receiving Payment 15
Contingent Deferred Sales Charge 15
Systematic Withdrawal Program 16
Accounts with Low Balances 16
MUNICIPAL SECURITIES INCOME TRUST
INFORMATION 16
- ------------------------------------------------------
Management of Municipal Securities
Income Trust 16
Distribution of Class A Shares 18
Administration of the Fund 19
SHAREHOLDER INFORMATION 20
- ------------------------------------------------------
Voting Rights 20
Massachusetts Partnership Law 20
TAX INFORMATION 20
- ------------------------------------------------------
Federal Income Tax 20
Pennsylvania Taxes 21
Other State and Local Taxes 22
PERFORMANCE INFORMATION 22
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS--INCOME SHARES 23
- ------------------------------------------------------
FINANCIAL STATEMENTS 24
- ------------------------------------------------------
INDEPENDENT AUDITORS' REPORT 36
- ------------------------------------------------------
ADDRESSES Inside Back Cover
- ------------------------------------------------------
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
CLASS A SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price).................................................................. 3.00%
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of offering price)............... None
Contingent Deferred Sales Charge (as a percentage of original purchase price or
redemption proceeds, as applicable) (1).............................................................. 0.00%
Redemption Fee (as a percentage of amount redeemed, if applicable)..................................... None
Exchange Fee........................................................................................... None
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver) (2)...................................................................... 0.14%
12b-1 Fee (3).......................................................................................... 0.00%
Total Other Expenses................................................................................... 0.61%
Shareholder Services Fee (after waiver) (4)................................................ 0.23%
Total Operating Expenses (5).................................................................. 0.75%
</TABLE>
- ------------
(1) Shareholders who purchased shares with the proceeds of a redemption of
shares of an unaffiliated investment company purchased or redeemed with a
sales charge and not distributed by Federated Securities Corp. may be
charged a contingent deferred sales charge of 0.50 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 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 class has no present intention of paying or accruing the 12b-1 fee
during the fiscal year ending August 31, 1996. If the class were paying or
accruing the 12b-1 fee, the class would be able to pay up to 0.40% of its
average daily net assets for the 12b-1 fee. See "Municipal Securities Income
Trust Information."
(4) The maximum shareholder services fee is 0.25%.
(5) The total operating expenses would have been 1.03% absent the voluntary
waivers of a portion of the management fee and the shareholder services fee.
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 "Investing in Class A Shares" 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........................ $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 36.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
<S> <C> <C> <C> <C> <C>
1995 1994 1993 1992 1991(A)
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.94 $ 11.68 $ 10.93 $ 10.44 $ 10.00
- ------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ------------------------------------------------------------------
Net investment income 0.65 0.60 0.60 0.627 0.588
- ------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 0.27 (0.75) 0.75 0.493 0.456
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
Total from investment operations 0.92 (0.15) 1.35 1.120 1.044
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
LESS DISTRIBUTIONS
- ------------------------------------------------------------------
Distributions from net investment income (0.63) (0.59) (0.60) (0.627) (0.588)
- ------------------------------------------------------------------
Distributions in excess of net investment income -- -- -- (0.003)(c) (0.016)(c)
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
Total distributions (0.63) (0.59) (0.60) (0.630) (0.604)
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
NET ASSET VALUE, END OF PERIOD $ 11.23 $ 10.94 $ 11.68 $ 10.93 $ 10.44
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
TOTAL RETURN (B) 8.76% (1.34%) 12.71% 11.06% 10.60%
- ------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------------------------
Expenses 0.75% 0.75% 0.83% 0.73% 0.26%(e)
- ------------------------------------------------------------------
Net investment income 5.92% 5.27% 5.33% 5.88% 6.45%(e)
- ------------------------------------------------------------------
Expense waiver/reimbursement (d) 0.28% 0.45% 0.70% 0.97% 1.24%(e)
- ------------------------------------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------------------------------------
Net assets, end of period (000 omitted)
$83,722 $85,860 $69,947 $48,261 $31,067
- ------------------------------------------------------------------
Portfolio turnover 59% 17% 0% 0% 10%
- ------------------------------------------------------------------
</TABLE>
(a) Reflects operations for the period from October 11, 1990 (date of initial
public investment) to August 31, 1991.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(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.
(d) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(e) 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 dated August 31, 1995, 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").
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 charge 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 value 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 the 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
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 tax (federal regular income tax does not
include the federal alternative minimum 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.
The Fund invests its assets so at least 80% of its annual interest income is
exempt from federal regular income tax and the Commonwealth of Pennsylvania
personal income taxes. 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 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.
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 8600, Boston, MA
02266-8600.
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: Federated Services Company, c/o 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 charge, next
determined after an order is received:
<TABLE>
<CAPTION>
SALES CHARGE AS A SALES CHARGE 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>
The net asset value is determined as of the close of trading (normally 4:00
p.m., Eastern time) on the New York Stock Exchange, Monday through Friday,
except on: (i) days on which there are not sufficient changes in the value of
the Fund's portfolio securities that its net asset value might be materially
affected; (ii) days during which no Shares are tendered for redemption and no
orders to purchase Shares are received; or (iii) the following holidays: New
Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day, and Christmas Day.
No sales charge is imposed for Shares purchased through bank trust departments,
investment advisers registered under the Investment Advisers Act of 1940, as
amended, or to shareholders designated as Liberty Life Members. However,
investors who purchase Shares through a trust department, or investment adviser,
may be charged an additional service fee by the institution. Additionally, no
sales charge is imposed for Shares purchased through "wrap accounts" or similar
programs, under which clients pay a fee or fees for services.
Under certain circumstances described under "Redeeming Class A 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 charge retained by it. On purchases of $1
million or more, the investor pays no sales charge; 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 charge 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 CHARGE
The sales charge 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 investment
companies.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES. As shown in the table on the
previous page, larger purchases reduce the sales charge 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 charge.
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 charge on
the additional purchase according to the schedule now in effect would be 2.50%,
not 3.00%.
To receive the sales charge 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 charge 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 charge 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 charge 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 charge.
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 charge
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 charge. 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 charge. If the
shareholder redeems his Shares, there may be tax consequences.
CONCURRENT PURCHASES. For purposes of qualifying for a sales charge
elimination, a shareholder has the privilege of combining concurrent purchases
of two or more funds in the Liberty Funds, the purchase prices of which include
a sales charge. For example, if a shareholder concurrently invested $400,000 in
one of the other Liberty Funds and $600,000 in Shares, the sales charge would be
eliminated. To receive this sales charge elimination, Federated Securities Corp.
must be notified by the shareholder in writing or by his financial institution
at the time the concurrent purchases are made. The Fund will eliminate the sales
charge after it confirms the purchases.
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. From time to time,
the Fund may offer dealers a payment of .50 of 1% for Shares purchased under
this program. If Shares are purchased in this manner, Fund purchases will be
subject to a contingent deferred sales charge for one year from the date of
purchase.
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 charge. 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 charge, 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 may be subject to a contingent deferred
sales charge ("CDSC") and possibly a sales charge.
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 8600, Boston,
Massachusetts 02266-8600, 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 should be
sent by insured mail with the written request to: Federated Services Company,
500 Victory Road--2nd Floor, North Quincy, MA 02171. Shareholders should call
the Fund for assistance in redeeming by mail.
SIGNATURES. Shareholders requesting a redemption of any amount to be sent to an
address other than that on record with the Fund, or a redemption payable other
than to the shareholder of record must have signatures on written redemption
requests guaranteed by:
. a trust company or commercial bank whose deposits are insured by the Bank
Insurance Fund, which is administered by the Federal Deposit Insurance
Corporation ("FDIC");
. a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchanges;
. a savings bank or savings and loan association whose deposits are insured
by the Savings Association Insurance Fund, 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
Class A Shares purchased under a periodic special offering with the proceeds of
a redemption of shares of an unaffiliated investment company purchased or
redeemed with a sales charge and not distributed by Federated Securities Corp.
may be charged a contingent deferred sales charge of .50 of 1.00% for
redemptions made within one full year of purchase. Any applicable contingent
deferred sales charge will be imposed on the lesser of the net asset value of
the redeemed Shares at the time of purchase or the net asset value of the
redeemed Shares at the time of the redemption.
The contingent deferred sales charge will be deducted from the redemption
proceeds otherwise payable to the shareholders and will be retained by the
distributor. The contingent deferred sales charge will not be imposed with
respect to: (1) Shares acquired through the reinvestment of dividends or
distributions of long-term capital gains; and (2) Shares held for more than one
full year from the date of purchase with respect to applicable Class A Shares.
Redemptions will be processed in a manner intended to maximize the amount of
redemption which will not be subject to a contingent deferred sales charge. In
computing the amount of the applicable contingent deferred sales charge,
redepmtions are deemed to have occurred in the following order: (1) Shares
acquired through the reinvestment of dividends and long-term capital gains; (2)
Shares held for more than one full year from the date of purchase with respect
to applicable Class A Shares; and (3) Shares held for less than one full year
from the date of purchase with respect to applicable Class A Shares on a
first-in, first-out basis. A contingent deferred sales charge is not assessed
in connection with an exchange of Fund Shares for shares of other funds in the
Liberty Family of Fund in the same class (see "Exchange Privilege"). Any
contingent deferred sales charge imposed at the time the exchanged-for shares
are redeemed is calculated as if the shareholder had held the shares from the
date on which he became a shareholder of the exchanged-from shares.
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 charge, 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.
Both the Trust and the Adviser have adopted strict codes of ethics governing the
conduct of all employees who manage the Fund and its portfolio securities. These
codes recognize that such persons owe a fiduciary duty to the Fund's
shareholders and must place the interests of shareholders ahead of the
employees' own interest. Among other things, the codes: require preclearance and
periodic reporting of personal securities transactions; prohibit personal
transactions in securities being purchased or sold, or being considered for
purchase or sale, by the Fund; prohibit purchasing securities in initial public
offerings; and prohibit taking profits on securities held for less than sixty
days. Violation of the codes are subject to review by the Board of Trustees, and
could result in severe penalties.
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. With over $72 billion invested across
more than 260 funds under management and/or administration by its
subsidiaries, as of December 31, 1994, Federated Investors is one of the
largest mutual fund investment managers in the United States. With more
than 1,750 employees, Federated continues to be led by the management who
founded the company in 1955. Federated funds are presently at work in and
through 4,000 financial institutions nationwide. More than 100,000
investment professionals have selected Federated funds for their clients.
J. Scott Albrecht has been the Fund's portfolio manager since March, 1995.
Mr. Albrecht joined Federated Investors in 1989 and has been a Vice
President of the Fund's investment adviser since October, 1994. Prior to
this, Mr. Albrecht served as an Assistant Vice President of the Fund's
investment adviser. 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.
Jonathan C. Conley has been the Fund's portfolio manager since its
inception. Mr. Conley joined Federated Investors in 1979 and has been a
Vice President of the Fund's investment adviser since 1982. Mr. Conley is a
Chartered Financial Analyst and received his M.B.A. in Finance from the
University of Virginia.
DISTRIBUTION OF 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 PLAN AND SHAREHOLDER SERVICES. 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 services or distribution-related 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 Fund has adopted a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, under which
the Fund may make payments up to 0.25 of 1% of the average daily net asset value
of Shares to obtain certain personal services for shareholders and for the
maintenance of shareholder accounts. Under the Shareholder Services Agreement,
Federated Shareholder Services will either perform shareholder services directly
or will select financial institutions to perform shareholder services. Financial
institutions will receive fees based upon Shares owned by their clients or
customers. The schedules of such fees and the basis upon which such fees will be
paid will be determined from time to time by the Fund and Federated Shareholder
Services.
SUPPLEMENTAL PAYMENTS TO FINANCIAL INSTITUTIONS. The distributor may also pay
a fee from its own assets to financial institutions as financial assistance for
providing certain services to shareholders or substantial marketing and sales
support. The support may include participating in sales, educational and
training seminars for employees of the financial institution at recreational-
type facilities, providing sales literature, and engineering computer software
programs that emphasize the attributes of the Fund. Such financial 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 in
addition to the amounts paid under the Distribution Plan and the Shareholder
Services Agreement may be reimbursed by the Fund's Adviser or its affiliates,
and not the Fund.
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
<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 8600, Boston,
Massachusetts, 02266-8600, is custodian for the securities and cash of the Fund.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company, P.O.
Box 8600, Boston, MA 02266-8600, is transfer agent for the shares of the Fund,
and dividend disbursing agent for the Fund.
INDEPENDENT AUDITORS. The independent auditors for the Fund are Deloitte &
Touche LLP, Pittsburgh, Pennsylvania.
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 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 charge 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, advertisements for the Fund may refer to ratings, rankings
and other information in certain financial publications and/or compare the
Fund's performance to certain indices.
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 36.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1995(A) 1994 1993(B)
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.85 $ 11.68 $ 11.43
- -------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------------------------------------------------------
Net investment income 0.19 0.51 0.09
- -------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (1.00) (0.75) 0.21
- ------------------------------------------------------------------------------------- ----------- --------- -----------
Total from investment operations (0.81) (0.24) 0.30
- ------------------------------------------------------------------------------------- ----------- --------- -----------
LESS DISTRIBUTIONS
- -------------------------------------------------------------------------------------
Distributions from net investment income (0.15) (0.51) (0.05)
- -------------------------------------------------------------------------------------
Distributions in excess of net investment income -- (0.08)(e) --
- ------------------------------------------------------------------------------------- ----------- --------- -----------
Total distributions (0.15) (0.59) (0.05)
- ------------------------------------------------------------------------------------- ----------- --------- -----------
NET ASSET VALUE, END OF PERIOD $ 9.89 $ 10.85 $ 11.68
- ------------------------------------------------------------------------------------- ----------- --------- -----------
TOTAL RETURN (C) (8.00%) (2.13%) 1.20%
- -------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------------------------------------------------------------
Expenses 1.18%(f) 1.50% 1.48%(f)
- -------------------------------------------------------------------------------------
Net investment income 5.38%(f) 4.62% 6.13%(f)
- -------------------------------------------------------------------------------------
Expense waiver/reimbursement (d) 0.26%(f) 0.45% 0.60%(f)
- -------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) -- $8,982 $2,419
- -------------------------------------------------------------------------------------
Portfolio turnover 59% 17% 0%
- -------------------------------------------------------------------------------------
</TABLE>
(a) Reflects operations for the period from September 1, 1994 to November 18,
1994 (date Income Shares ceased operations).
(b) Reflects operations for the period from July 29, 1993 (date of initial
public investment) to August 31, 1993.
(c) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(d) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(e) 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.
(f) Computed on an annualized basis.
Further information about the Fund's performance is contained in the Fund's
annual report dated August 31, 1995, which can be obtained free of charge.
(See Notes which are an integral part of the Financial Statements)
PENNSYLVANIA MUNICIPAL INCOME FUND
PORTFOLIO OF INVESTMENTS
AUGUST 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
<C> <S> <C> <C>
- ------------ ---------------------------------------------------------------------- ----------- --------------
LONG-TERM MUNICIPAL SECURITIES--98.0%
- ------------------------------------------------------------------------------------
PENNSYLVANIA--94.3%
----------------------------------------------------------------------
$ 2,000,000 Allegheny County, PA Hospital Development Authority, Health &
Education Revenue Bonds, 7.00% (Rehabilitation Institute of
Pittsburgh)/(Original Issue Yield: 7.132%),
6/1/2022 BBB $ 2,007,460
----------------------------------------------------------------------
4,700,000 Allegheny County, PA Hospital Development Authority, Health Facilities
Revenue Refunding Bonds, 6.00% (South Hills Health System)/(Original
Issue Yield: 6.40%), 5/1/2020 A 4,495,879
----------------------------------------------------------------------
2,525,000 Allegheny County, PA Hospital Development Authority, Revenue Refunding
Bonds, 6.875% (Children's Hospital of Pittsburgh)/(MBIA INS)/(Original
Issue Yield: 7.061%),
7/1/2014 Aaa 2,667,056
----------------------------------------------------------------------
500,000 Allegheny County, PA Residential Finance Agency, SFM Revenue Bonds
(Series K), 7.75% (GNMA COL), 12/1/2022 Aaa 537,285
----------------------------------------------------------------------
775,000 Allegheny County, PA Residential Finance Agency, SFM Revenue Bonds
(Series Q), 7.40% (GNMA COL), 12/1/2022 Aaa 825,941
----------------------------------------------------------------------
7,000,000 Bradford County, PA IDA, Solid Waste Disposal Revenue Bonds (Series
A), 6.60% (International Paper Co.), 3/1/2019 A- 7,198,800
----------------------------------------------------------------------
750,000 Butler County, PA Hospital Authority, Hospital Revenue Bonds (Series
A), 7.00% (North Hills Passavant Hospital)/ (CGIC INS), 6/1/2022 AAA 817,260
----------------------------------------------------------------------
1,000,000 Central Bucks, PA School District, UT GO Bonds, 6.90%,
2/1/2008 A1 1,072,480
----------------------------------------------------------------------
750,000 Derry Township, PA School District, GO Bonds, 7.00%,
9/15/2009 A1 773,197
----------------------------------------------------------------------
1,600,000 Dormont Borough PA, Allegheny County, UT GO Bonds (Series 1995), 7.00%
(Original Issue Yield: 7.125%), 3/1/2010 BBB 1,756,528
----------------------------------------------------------------------
1,000,000 Geisinger Authority, PA Health System, Revenue Bonds, 7.625% (United
States Treasury PRF)/(Original Issue Yield: 7.697%), 7/1/2009 (@102) AAA 1,133,260
----------------------------------------------------------------------
$ 455,000 Hanover, PA Area School District, UT GO Bonds, 7.00% (FGIC INS),
6/1/2008 Aaa $ 487,719
----------------------------------------------------------------------
1,000,000 Lackawanna Trail School District, PA, UT GO Refunding Bonds, 6.90%
(AMBAC INS), 3/15/2010 Aaa 1,084,950
----------------------------------------------------------------------
1,380,000 Latrobe, PA Industrial Development Authority, College Revenue Bonds,
6.75% (St. Vincent College, PA)/(Original Issue Yield: 7.00%),
5/1/2024 Baa1 1,401,832
----------------------------------------------------------------------
1,875,000 Lebanon County, PA Hospital Authority, Hospital Revenue Bonds, 6.00%
(Good Samaritan Hospital)/(Original Issue Yield: 6.10%), 11/15/2018 BBB+ 1,684,838
----------------------------------------------------------------------
2,500,000 Luzerne County, PA IDA, Revenue Refunding Bonds (Series A), 7.00%
(Pennsylvania Gas & Water Company), 12/1/2017 Aaa 2,730,275
----------------------------------------------------------------------
4,000,000 Lycoming County PA Authority, Hospital Lease Revenue Bonds (Series B),
6.50% (Divine Providence Hospital, PA)/ (Original Issue Yield: 6.70%),
7/1/2022 A- 3,969,400
----------------------------------------------------------------------
4,000,000 Pennsylvania Economic Development Finance Authority, Series 1993-C,
Revenue Bonds, 7.60% (Macmillan Bloedel LTD Partnership)/(Original
Issue Yield: 7.65%), 12/1/2020 Baa2 4,331,880
----------------------------------------------------------------------
8,000,000 Pennsylvania Economic Development Finance Authority, Series 1993-C,
Wastewater Treatment Revenue Bonds (Series A), 7.60% (Sun Co.,
Inc.)/(Original Issue Yield: 7.653%), 12/1/2024 Baa1 8,727,040
----------------------------------------------------------------------
2,290,000 Pennsylvania Housing Finance Authority, SFM Revenue Bond Bonds (Series
39B), 6.875%, 10/1/2024 AA 2,374,295
----------------------------------------------------------------------
750,000 Pennsylvania Housing Finance Authority, SFM Revenue Bonds (Series 33),
6.90%, 4/1/2017 AA 791,625
----------------------------------------------------------------------
1,000,000 Pennsylvania Housing Finance Authority, SFM Revenue Bonds (Series
34-B), 7.00% (FHA and VA GTDs), 4/1/2024 AA 1,041,750
----------------------------------------------------------------------
500,000 Pennsylvania Housing Finance Authority, SFM Revenue Bonds (Series 38),
6.125%, 10/1/2024 AA 499,630
----------------------------------------------------------------------
$ 4,540,000 Pennsylvania Housing Finance Authority, SFM Revenue Bonds (Series 28),
7.65% (FHA GTD), 10/1/2023 AA $ 4,853,578
----------------------------------------------------------------------
2,500,000 Pennsylvania Intergovernmental Coop Authority, Special Tax Revenue
Bond, Philadelphia Funding Program, 6.75% (FGIC INS)/(Original Issue
Yield: 7.13%), 6/15/2021 Aaa 2,669,425
----------------------------------------------------------------------
1,600,000 Pennsylvania State Higher Education Facilities Authority, College &
University Revenue Bonds (Series A), 6.625% (University of
Pennsylvania)/(Original Issue Yield: 6.742%), 1/1/2017 Aa 1,628,016
----------------------------------------------------------------------
1,000,000 Pennsylvania State Higher Education Facilities Authority, Hospital
Revenue Bonds (Series A), 7.25% (Allegheny
General Hospital)/(Original Issue Yield: 7.40%), 9/1/2017 AA- 1,068,920
----------------------------------------------------------------------
4,000,000 Pennsylvania State Higher Education Facilities Authority, Revenue
Bonds (Series A), 7.375% (Medical College of Pennsylvania)/(Original
Issue Yield: 7.45%), 3/1/2021 Baa1 4,065,400
----------------------------------------------------------------------
2,000,000 Pennsylvania State Higher Education Facilities Authority, Revenue
Bonds, 6.375% (Drexel University)/(Original Issue Yield: 6.415%),
5/1/2017 BBB+ 2,004,780
----------------------------------------------------------------------
4,000,000 Philadelphia, PA, (Series 1995A) Airport Revenue Bonds, 6.10%
(Philadelphia Airport System)/(AMBAC INS)/
(Original Issue Yield: 6.40%), 6/15/2025 Aaa 3,983,200
----------------------------------------------------------------------
600,000 Pittsburgh, PA Water & Sewer Authority, Water & Sewer System Revenue
Refunding Bonds, 7.25% (United States Treasury PRF)/(Original Issue
Yield: 7.766%), 9/1/2014 Aaa 702,444
----------------------------------------------------------------------
2,500,000 Scranton-Lackawanna, PA Health & Welfare Authority, Revenue Bonds
(Series 1994-A), 7.60% (Allied Services Rehabilitation Hospitals, PA),
7/15/2020 N RTD 2,559,050
----------------------------------------------------------------------
1,000,000 Sewickley Valley, PA Hospital Authority, Revenue Refunding Bonds
(Series A), 5.75% (Original Issue Yield: 5.875%), 10/15/2016 A 915,480
----------------------------------------------------------------------
$ 1,000,000 Swarthmore Boro Authority PA, College Revenue Bonds, 7.375%
(Swarthmore College)/(Original Issue Yield: 7.416%), 9/15/2000 (@102) AA $ 1,135,330
----------------------------------------------------------------------
1,000,000 Warren County, PA Hospital Authority, Revenue Bonds (Series A), 7.00%
(Warren General Hospital, PA)/(Original Issue Yield: 7.101%), 4/1/2019 BBB+ 991,930
---------------------------------------------------------------------- --------------
Total 78,987,933
---------------------------------------------------------------------- --------------
PUERTO RICO--3.7%
----------------------------------------------------------------------
3,000,000 Puerto Rico Electric Power Authority, Revenue Bonds (Series T), 6.375%
(Original Issue Yield: 6.58%), 7/1/2024 A- 3,085,950
---------------------------------------------------------------------- --------------
TOTAL LONG-TERM MUNICIPAL SECURITIES
(IDENTIFIED COST $77,815,496)(A) $ 82,073,883
---------------------------------------------------------------------- --------------
</TABLE>
(a) The cost of investments for federal tax purposes amounts to $77,815,496. The
unrealized appreciation/depreciation of investments on a federal tax basis
amounts to $4,258,387 which is comprised of $4,499,908 appreciation and
$241,521 depreciation at August 31, 1995.
*Please refer to the Appendix of the Statement of Additional Information for an
explanation of the credit ratings. Current credit ratings are unaudited.
Note: The categories of investments are shown as a percentage of net assets
($83,722,069) at August 31, 1995.
The following acronym(s) are used throughout this portfolio:
AMBAC -- American Municipal Bond Assurance Corporation
CGIC -- Capital Guaranty Insurance
Corporation
COL -- Collateralized
FGIC -- Financial Guaranty Insurance
Company
FHA -- Federal Housing Administration
GNMA -- Government National Mortgage
Association
GO -- General Obligation
GTD -- Guaranteed
IDA -- Industrial Development Authority
INS -- Insurance
LTD -- Limited
MBIA -- Municipal Bond Investors Assurance
PRF -- Prerefunded
SFM -- Single Family Mortgage
UT -- Unlimited Tax
VA -- Veterans Administration
(See Notes which are an integral part of the Financial Statements)
PENNSYLVANIA MUNICIPAL INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- ---------------------------------------------------------------------------------------------------
Total investments in securities, at value (identified and tax cost $77,815,496) $ 82,073,883
- ---------------------------------------------------------------------------------------------------
Cash 85,145
- ---------------------------------------------------------------------------------------------------
Income receivable 1,716,333
- ---------------------------------------------------------------------------------------------------
Receivable for shares sold 30,622
- ---------------------------------------------------------------------------------------------------
Deferred expenses 489
- --------------------------------------------------------------------------------------------------- -------------
Total assets 83,906,472
- ---------------------------------------------------------------------------------------------------
LIABILITIES:
- ---------------------------------------------------------------------------------------------------
Payable for shares redeemed $ 5,806
- ---------------------------------------------------------------------------------------
Income distribution payable 148,163
- ---------------------------------------------------------------------------------------
Accrued expenses 30,434
- --------------------------------------------------------------------------------------- ----------
Total liabilities 184,403
- --------------------------------------------------------------------------------------------------- -------------
NET ASSETS for 7,458,342 shares outstanding $ 83,722,069
- --------------------------------------------------------------------------------------------------- -------------
NET ASSETS CONSIST OF:
- ---------------------------------------------------------------------------------------------------
Paid in capital $ 81,787,157
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 4,258,387
- ---------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (2,486,544)
- ---------------------------------------------------------------------------------------------------
Undistributed net investment income 163,069
- --------------------------------------------------------------------------------------------------- -------------
Total Net Assets $ 83,722,069
- --------------------------------------------------------------------------------------------------- -------------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
- ---------------------------------------------------------------------------------------------------
Net Asset Value Per Share ($83,722,069 / 7,458,342 shares outstanding) $11.23
- --------------------------------------------------------------------------------------------------- -------------
Offering Price Per Share (100/97.00 of $11.23)* $11.58
- --------------------------------------------------------------------------------------------------- -------------
</TABLE>
* See "What Shares Cost."
(See Notes which are an integral part of the Financial Statements)
PENNSYLVANIA MUNICIPAL INCOME FUND
STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ----------------------------------------------------------------------------------------------------
Interest $ 5,693,026
- ----------------------------------------------------------------------------------------------------
EXPENSES:
- ----------------------------------------------------------------------------------------------------
Investment advisory fee $ 341,354
- ----------------------------------------------------------------------------------------
Administrative personnel and services fee 134,042
- ----------------------------------------------------------------------------------------
Custodian fees 42,491
- ----------------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 34,268
- ----------------------------------------------------------------------------------------
Directors'/Trustees' fees 1,670
- ----------------------------------------------------------------------------------------
Auditing fees 13,971
- ----------------------------------------------------------------------------------------
Legal fees 11,788
- ----------------------------------------------------------------------------------------
Portfolio accounting fees 25,581
- ----------------------------------------------------------------------------------------
Distribution services fee--Income Shares 8,482
- ----------------------------------------------------------------------------------------
Shareholder services fee--Class A Shares 208,330
- ----------------------------------------------------------------------------------------
Shareholder services fee--Income Shares 4,910
- ----------------------------------------------------------------------------------------
Share registration costs 16,469
- ----------------------------------------------------------------------------------------
Printing and postage 22,166
- ----------------------------------------------------------------------------------------
Insurance premiums 6,969
- ----------------------------------------------------------------------------------------
Taxes 91
- ----------------------------------------------------------------------------------------
Miscellaneous 14,533
- ---------------------------------------------------------------------------------------- ----------
Total expenses 887,115
- ----------------------------------------------------------------------------------------
Waivers--
- ----------------------------------------------------------------------------------------
Waiver of investment advisory fee $ (222,052)
- ----------------------------------------------------------------------------
Waiver of shareholder services fee--Class A Shares (15,491)
- ---------------------------------------------------------------------------- ----------
Total waivers (237,543)
- ---------------------------------------------------------------------------------------- ----------
Net expenses 649,572
- ---------------------------------------------------------------------------------------------------- -----------
Net investment income 5,043,454
- ---------------------------------------------------------------------------------------------------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ----------------------------------------------------------------------------------------------------
Net realized loss on investments (1,957,166)
- ----------------------------------------------------------------------------------------------------
Net change in unrealized appreciation of investments 3,480,605
- ---------------------------------------------------------------------------------------------------- -----------
Net realized and unrealized gain on investments 1,523,439
- ---------------------------------------------------------------------------------------------------- -----------
Change in net assets resulting from operations $ 6,566,893
- ---------------------------------------------------------------------------------------------------- -----------
</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,
1995 1994
<S> <C> <C>
- -------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS:
- -------------------------------------------------------------------------------------
OPERATIONS--
- -------------------------------------------------------------------------------------
Net investment income $ 5,043,454 $ 5,202,577
- -------------------------------------------------------------------------------------
Net realized gain (loss) on investments ($1,036,056 and $4,200 net losses,
respectively, as computed for federal tax purposes) (1,957,166) (512,278)
- -------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) 3,480,605 (6,424,038)
- ------------------------------------------------------------------------------------- ------------ ------------
Change in net assets resulting from operations 6,566,893 (1,733,739)
- ------------------------------------------------------------------------------------- ------------ ------------
NET EQUALIZATION CREDITS (DEBITS)-- (4,832) (3,542)
- ------------------------------------------------------------------------------------- ------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS--
- -------------------------------------------------------------------------------------
Distributions from net investment income
- -------------------------------------------------------------------------------------
Class A Shares (4,814,395) (3,799,070)
- -------------------------------------------------------------------------------------
Trust Shares -- (1,017,184)
- -------------------------------------------------------------------------------------
Income Shares (83,724) (322,340)
- -------------------------------------------------------------------------------------
Distributions in excess of net investment income
- -------------------------------------------------------------------------------------
Income Shares -- (33,585)
- ------------------------------------------------------------------------------------- ------------ ------------
Change in net assets resulting from distributions to shareholders (4,898,119) (5,172,179)
- ------------------------------------------------------------------------------------- ------------ ------------
SHARE TRANSACTIONS--
- -------------------------------------------------------------------------------------
Proceeds from sale of shares 18,979,060 45,919,717
- -------------------------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of distributions declared 2,687,386 2,723,609
- -------------------------------------------------------------------------------------
Cost of shares redeemed (34,449,869) (34,783,265)
- ------------------------------------------------------------------------------------- ------------ ------------
Change in net assets resulting from share transactions (12,783,423) 13,860,061
- ------------------------------------------------------------------------------------- ------------ ------------
Change in net assets (11,119,481) 6,950,601
- -------------------------------------------------------------------------------------
NET ASSETS:
- -------------------------------------------------------------------------------------
Beginning of period 94,841,550 87,890,949
- ------------------------------------------------------------------------------------- ------------ ------------
End of period (including undistributed net investment income of $163,069 and $14,084,
respectively) $ 83,722,069 $ 94,841,550
- ------------------------------------------------------------------------------------- ------------ ------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
PENNSYLVANIA MUNICIPAL INCOME FUND
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1995
- --------------------------------------------------------------------------------
(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 five, non-diversified
portfolios. The financial statements included herein are 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. Previously, the Fund provided two classes of shares; Class A
Shares and Income Shares. As of November 18, 1994, the Income 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.
INVESTMENT VALUATIONS--Short-term securities with remaining maturities of
sixty days or less at the time of purchases may be valued at amortized
cost, which approximates fair market value. All other securities are valued
at prices provided by an independent pricing service.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and expenses
are accrued daily. Bond premium and discount, if applicable, are amortized
as required by the Internal Revenue Code, as amended (the "Code").
Distributions to shareholders are recorded on the ex-dividend date.
FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its income. Accordingly, no
provisions for federal tax are necessary.
At August 31, 1995, the Fund, for federal tax purposes, had a capital loss
carryforward of $1,048,956, 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 as follows:
<TABLE>
<CAPTION>
EXPIRATION YEAR EXPIRATION AMOUNT
<S> <C>
2000 $12,837
2001 $63
2003 $1,036,056
</TABLE>
Additionally, net capital losses of $1,437,588 attributable to security
transactions incurred after October 31, 1994 are treated as arising on the
first day of the Fund's next taxable year.
EQUALIZATION--The Fund follows the accounting practice known as
equalization. With equalization, a portion of the proceeds from sales and
costs of redemptions of fund shares (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.
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.
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 in one state than would be a comparable
tax-exempt mutual fund that invests nationally. In order to reduce the
credit risk associated with such factors, at August 31, 1995, 25% 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 do not
exceed 6.2% of total investments.
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.
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 shares were as follows:
PENNSYLVANIA MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1995 1994
CLASS A SHARES SHARES DOLLARS SHARES DOLLARS
<S> <C> <C> <C> <C>
- -------------------------------------------------------- ----------- -------------- ---------- -------------
Shares sold 4,627,974 $ 18,593,886 2,480,778 $ 27,675,360
- --------------------------------------------------------
Shares issued to shareholders in payment of
distributions declared 242,874 2,621,531 211,676 2,388,967
- --------------------------------------------------------
Shares redeemed (5,262,476) (25,822,912) (829,711) (9,244,692)
- -------------------------------------------------------- ----------- -------------- ---------- -------------
Net change resulting from share
transactions (391,628) $ (4,607,495) 1,862,743 $ 20,819,635
- -------------------------------------------------------- ----------- -------------- ---------- -------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1995* 1994
INCOME SHARES SHARES DOLLARS SHARES DOLLARS
<S> <C> <C> <C> <C>
- -------------------------------------------------------------- --------- ------------- --------- ------------
Shares sold 39,353 $ 385,174 615,174 $ 7,054,054
- --------------------------------------------------------------
Shares issued to shareholders in payment of
distributions declared 6,434 65,855 11,755 129,481
- --------------------------------------------------------------
Shares redeemed (873,482) (8,626,957) (6,383) (71,646)
- -------------------------------------------------------------- --------- ------------- --------- ------------
Net change resulting from share transactions (827,695) $ (8,175,928) 620,546 $ 7,111,889
- -------------------------------------------------------------- --------- ------------- --------- ------------
</TABLE>
*Reflect operations for the period from September 1, 1993 to November 18, 1994
(date Income Shares ceased operations).
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1995 1994
TRUST SHARES SHARES DOLLARS SHARES DOLLARS
<S> <C> <C> <C> <C>
- ------------------------------------------------------ ----------- -------------- ----------- --------------
Shares sold -- -- 967,106 $ 11,190,303
- ------------------------------------------------------
Shares issued to shareholders in payment of
distributions declared -- -- 18,160 205,161
- ------------------------------------------------------
Shares redeemed -- -- (2,314,190) (25,466,927)
- ------------------------------------------------------ ----------- -------------- ----------- --------------
Net change resulting from share
transactions -- -- (1,328,924) $ (14,071,463)
- ------------------------------------------------------ ----------- -------------- ----------- --------------
Net change resulting from Fund share
transactions (1,219,323) $ (12,783,423) 1,154,365 $ 13,860,061
- ------------------------------------------------------ ----------- -------------- ----------- --------------
</TABLE>
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT 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. The Adviser can modify or terminate this
voluntary waiver at any time at its sole discretion.
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS"), under the
Administrative Services Agreement, provides the Fund with administrative
personnel and services. This 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, the Fund will pay Federated Shareholder
Services up to .25 of 1% of average daily net assets of the Fund for the period.
This fee is to obtain certain services for shareholders and to maintain
shareholder accounts.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES--Federated Services
Company ("FServ") serves as transfer and dividend disbursing agent for the Fund.
This fee is based on the size, type, and number of accounts and transactions
made by shareholders.
PORTFOLIO ACCOUNTING FEES--FServ maintains the Fund's accounting records for
which it receives a fee. The fee is based on the level of the Fund's average
daily net assets for the period, plus out-of-pocket expenses.
ORGANIZATIONAL EXPENSES--Organizational and start-up administrative service
expenses of $128,779 were borne initially by Federated Advisers. The Fund has
agreed to reimburse Federated Advisers for the organizational and start-up
administrative expenses during the five year period following effective date.
For the period ended August 31, 1995, the Fund paid $2,132 pursuant to this
agreement.
INTERFUND TRANSACTIONS--During the period ended August 31, 1995, the fund
engaged in purchase and sale transactions with funds that have a common
investment adviser, common Directors/ Trustees, and/or common Officers. These
transactions were made at current market value pursuant to Rule 17a-7 under the
Act amounting to $11,300,000 and $11,900,000, respectively.
GENERAL--Certain of the Officers and Trustees of the Trust are Officers and
Directors or Trustees of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended August 31, 1995, were as follows:
<TABLE>
<S> <C>
- ---------------------------------------------------------------------------------------------------
PURCHASES $ 50,175,881
- --------------------------------------------------------------------------------------------------- -------------
SALES $ 64,846,981
- --------------------------------------------------------------------------------------------------- -------------
</TABLE>
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
To the Board Trustees of Municipal Securities Income Trust
and Shareholders of Pennsylvania Municipal Income Fund:
We have audited the accompanying statement of assets and liabilities of
Pennsylvania Municipal Income Fund (one of the portfolios comprising Municipal
Securities Income Trust), including the portfolio of investments, as of August
31, 1995, the related statement of operations for the year then ended, the
statement of changes in net assets for the years ended August 31, 1995 and 1994,
and the financial highlights for each of the years in the five-year period ended
August 31, 1995. These financial statements and financial highlights are the
responsibility of the Fund'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, 1995, by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procdures. 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, 1995, 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
Pittsburgh, Pennsylvania
October 13, 1995
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Pennsylvania Municipal Income Fund
Class A 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 8600
Boston, Massachusetts 02266-8600
- ---------------------------------------------------------------------------------------------------------------------
Transfer Agent and Dividend Disbursing Agent
Federated Services Company P.O. Box 8600
Boston, Massachusetts 02266-8600
- ---------------------------------------------------------------------------------------------------------------------
Independent Auditors
Deloitte & Touche LLP 2500 One PPG Place
Pittsburgh, Pennsylvania 15222-5401
- ---------------------------------------------------------------------------------------------------------------------
</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, 1995
[LOGO] FEDERATED SECURITIES CORP.
---------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Cusip 625922505
0090701A-A (10/95)
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, 1995. 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, 1995
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED INVESTORS
GENERAL INFORMATION ABOUT THE FUND1 Purchases by Sales Representatives,
Fund
INVESTMENT OBJECTIVE AND POLICIES1
Trustees, and Employees 14
Acceptable Investments 1 DETERMINING NET ASSET VALUE 14
When-Issued and Delayed
Valuing Municipal Bonds 14
Delivery Transactions 2
Use of Amortized Cost 14
Temporary Investments 2
REDEEMING SHARES 14
Portfolio Turnover 3
Investment Limitations 3 Redemption in Kind 14
Pennsylvania Investment Risks 5 TAX STATUS 15
MUNICIPAL SECURITIES INCOME TRUST
The Fund's Tax Status 15
MANAGEMENT 6
Shareholders' Tax Status 15
Fund Ownership 11 TOTAL RETURN 15
Trustees Compensation 11
YIELD 15
Trustee Liability 12
INVESTMENT ADVISORY SERVICES 12 TAX-EQUIVALENT YIELD 16
Adviser to the Fund 12 Tax-Equivalency Table 16
Advisory Fees 12 PERFORMANCE COMPARISONS 17
ADMINISTRATIVE SERVICES 12
ABOUT FEDERATED INVESTORS 17
TRANSFER AGENT AND DIVIDEND
APPENDIX 19
DISBURSING AGENT 12
BROKERAGE TRANSACTIONS 13
PURCHASING SHARES 13
Distribution Plan and Shareholder
Services Agreement 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").
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'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:
omunicipal notes and municipal commercial paper;
oserial bonds sold with differing maturity dates;
otax anticipation notes sold to finance working capital needs of
municipalities;
obond anticipation notes sold prior to the issuance of longer-term bonds;
opre-refunded municipal bonds; and
ogeneral 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:
owhether the lease can be terminated by the lessee:
othe potential recovery, if any, from a sale of the leased property upon
termination of the lease;
othe lessee's general credit strength (e.g., its debt, administrative,
economic and financial characteristics and prospects);
othe likelihood that the lessee will discontinue appropriating funding for
the leased property because the property is no longer deemed essential to
its operations (e.g., the potential for an "event of non-appropriation");
oany credit enhancement or legal recourse provided upon an event of non-
appropriation or other termination of the lease.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an advantageous
price or yield for the Fund. No fees or other expenses, other than normal
transaction costs, are incurred. However, liquid assets of the Fund sufficient
to make payment for the securities to be purchased are segregated on the Fund's
records at the trade date. These assets are marked to market daily and are
maintained until the transaction has been settled. The Fund does not intend to
engage in when-issued and delayed delivery transactions to an extent that would
cause the segregation of more than 20% of the total value of its assets.
TEMPORARY INVESTMENTS
The Fund may also invest in temporary investments 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, 1995 and 1994, the
portfolio turnover rates were 59% and 17%, 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, such as 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 economic base is mature but substantial. In spite of efficiency
gains owed to modernization and restructuring, the Commonwealth's dependence
upon manufacturing and mining continue to leave it vulnerable to long term
national economic trends. The cyclicality of the economy results in wide swings
in employment and state social services spending. Recent data shows improvement
in economic diversification, however, employment growth still lags the nation.
Other challenges for the Commonwealth and its municipalities include slow
population growth and an aging population with will pressure health care
services expenditures. The Commonwealth plans to address these problems with
business tax cuts, controlled social services spending and increased reserves in
the event of an economic downturn. Fiscal 1996 will bring a corporate net income
tax cut. The rate will fall from 11.99% to 9.99%. In addition, the Governor's
budget hopes to build up Pennsylvania's "rainy day" fund to as much as 3% of
expenditures in coming years. 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. The Commonwealth
is currently rated A1, AA-, and AA- by Moody's, Standard & Poor's and Fitch,
respectively.
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
Birthdate: July 28, 1924
Chairman and Trustee
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated Research
Corp. and Federated Global Research Corp.; Chairman, Passport Research, Ltd.;
Chief Executive Officer and Director, Trustee, or Managing General Partner of
the Funds. Mr. Donahue is the father of J. Christopher Donahue, Executive Vice
President and Trustee of the Trust.
Thomas G. Bigley
28th Floor, One Oxford Centre
Pittsburgh, PA
Birthdate: February 3, 1934
Trustee
Director, Oberg Manufacturing Co.; Chairman of the Board, Children's Hospital of
Pittsburgh; Director, Trustee, or Managing General Partner of the Funds;
formerly, Senior Partner, Ernst & Young LLP.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
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
Birthdate: July 4, 1918
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
Birthdate: April 11, 1949
Executive Vice President and Trustee
President and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated Research
Corp. and Federated Global Research Corp.; President, Passport Research, Ltd.;
Trustee, Federated Administrative Services, Federated Services Company, and
Federated Shareholder Services; President or Vice President of the Funds;
Director, Trustee, or Managing General Partner of some of the Funds. Mr. Donahue
is the son of John F. Donahue, Chairman and Trustee of the Trust.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Trustee
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director, Trustee,
or Managing General Partner of the Funds.
Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Trustee
Professor of Medicine and Member, Board of Trustees, University of Pittsburgh;
Medical Director, University of Pittsburgh Medical Center - Downtown; Member,
Board of Directors, University of Pittsburgh Medical Center; formerly,
Hematologist, Oncologist, and Internist, Presbyterian and Montefiore Hospitals;
Director, Trustee, or Managing General Partner of the Funds.
Edward L. Flaherty, Jr.@
Henny, Kochuba, Meyer and Flaherty
Two Gateway Center - Suite 674
Pittsburgh, PA
Birthdate: June 18, 1924
Trustee
Attorney-at-law; Shareholder, Henny, Kochuba, Meyer and Flaherty; Director,
Eat'N Park Restaurants, Inc., and Statewide Settlement Agency, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Counsel, Horizon
Financial, F.A., Western Region.
Peter E. Madden
70 Westcliff Road
Westin, MA
Birthdate: March 16, 1942
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.
Gregor F. Meyer
Henny, Kochuba, Meyer and Flaherty
Two Gateway Center - Suite 674
Pittsburgh, PA
Birthdate: October 6, 1926
Trustee
Attorney-at-law; Shareholder, Henny, Kochuba, Meyer and Flaherty; Chairman,
Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.; Director, Trustee, or
Managing General Partner of the Funds.
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Trustee
President, Law Professor, Duquesne University; Consulting Partner, Mollica,
Murray and Hogue; Director, Trustee or Managing General Partner of the Funds.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Trustee
Professor, International Politics and Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer Library
Center, Inc., and U.S. Space Foundation; Chairman, Czecho Management Center;
Director, Trustee, or Managing General Partner of the Funds; President Emeritus,
University of Pittsburgh; founding Chairman, National Advisory Council for
Environmental Policy and Technology and Federal Emergency Management Advisory
Board.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Trustee
Public relations/marketing consultant; Conference Coordinator, Non-profit
entities; Director, Trustee, or Managing General Partner of the Funds.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
President
Executive Vice President and Trustee, Federated Investors; Chairman and
Director, Federated Securities Corp.; President or Vice President of some of the
Funds; Director or Trustee of some of the Funds.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
Vice President and Treasurer
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated Research
Corp., Federated Global Research Corp. and Passport Research, Ltd.; Executive
Vice President and Director, Federated Securities Corp.; Trustee, Federated
Services Company; Chairman, Treasurer, and Trustee, Federated Administrative
Services; Trustee or Director of some of the Funds; Vice President and Treasurer
of the Funds.
David M. Taylor
Federated Investors Tower
Pittsburgh, PA
Birthdate: January 13, 1947
Treasurer
Senior Vice President, Controller, and Trustee, Federated Investors; Controller,
Federated Advisers, Federated Management, Federated Research, Federated Research
Corp., and Passport Research, Ltd.; Vice President, Federated Shareholder
Services; Senior Vice President, Federated Administrative Services; Treasurer of
the Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Executive Vice President and Secretary
Executive Vice President, Secretary, General Counsel, and Trustee, Federated
Investors; Trustee, Federated Advisers, Federated Management, and Federated
Research; Director, Federated Research Corp. and Federated Global Research Corp.
; Trustee, Federated Services Company; Executive Vice President, Secretary, and
Trustee, Federated Administrative Services; President and Trustee, Federated
Shareholder Services; Director, Federated Securities Corp.; 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.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: American Leaders Fund, Inc.; Annuity Management Series;
Arrow Funds; Automated Government Money Trust; Blanchard Funds; Blanchard
Precious Metals, Inc.; Cash Trust Series II; Cash Trust Series, Inc.; DG
Investor Series; Edward D. Jones & Co. Daily Passport Cash Trust; Federated ARMs
Fund; Federated Equity Funds; Federated Exchange Fund, Ltd.; Federated GNMA
Trust; Federated Government Trust; Federated High Yield Trust; Federated Income
Securities Trust; Federated Income Trust; Federated Index Trust; Federated
Institutional Trust; Federated Master Trust; Federated Municipal Trust;
Federated Short-Term Municipal Trust; Federated Short-Term U.S. Government
Trust; Federated Stock Trust; Federated Tax-Free Trust; Federated Total Return
Series, Inc.; Federated U.S. Government Bond Fund; Federated U.S. Government
Securities Fund: 1-3 Years; Federated U.S. Government Securities Fund: 3-5
Years; First Priority Funds; Fixed Income Securities, Inc.; Fortress Adjustable
Rate U.S. Government Fund, Inc.; Fortress Municipal Income Fund, Inc.; Fortress
Utility Fund, Inc.; Fund for U.S. Government Securities, Inc.; Government Income
Securities, Inc.; High Yield Cash Trust;; Insurance Management Series;
Intermediate Municipal Trust; International Series, Inc.; Investment Series
Funds, Inc.; Investment Series Trust; Liberty Equity Income Fund, Inc.; Liberty
High Income Bond Fund, Inc.; Liberty Municipal Securities Fund, Inc.; Liberty
U.S. Government Money Market Trust; Liberty Term Trust, Inc. - 1999; Liberty
Utility Fund, Inc.; Liquid Cash Trust; Managed Series Trust; Money Market
Management, Inc.; Money Market Obligations Trust; Money Market Trust; Newpoint
Funds; 111 Corcoran Funds; Peachtree Funds; The Planters Funds; RIMCO Monument
Funds; The Shawmut Funds; Star Funds; The Starburst Funds; The Starburst Funds
II; Stock and Bond Fund, Inc.; Sunburst Funds; Targeted Duration Trust; Tax-Free
Instruments Trust; Trust for Financial Institutions; Trust For Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S.
Treasury Obligations; The Virtus Funds; World Investment Series, Inc.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the outstanding Shares.
As of October 9, 1995, the following shareholder of record owned 5% or more of
the outstanding Shares of the Fund: Merrill Lynch, Pierce, Fenner & Smith,
Jacksonville, FL, owned approximately 907,387 Shares (12.20%); Selma Wiener
Berkman, Pittsburgh, PA, owned approximately 534,535 Shares (7.19%).
TRUSTEES COMPENSATION
AGGREGATE
NAME , COMPENSATION
POSITION WITH FROM TOTAL COMPENSATION PAID
TRUST TRUST*# FROM FUND COMPLEX +
John F. Donahue $ -0- $ -0- for the Trust and
Trustee and Chairman 68 other investment companies in the Fund Complex
Thomas G. Bigley $214 $20,688 for the Trust and
Trustee 49 other investment companies in the Fund Complex
John T. Conroy $233 $117,202 for the Trust and
Trustee 64 other investment companies in the Fund Complex
William J. Copeland $233 $117,202 for the Trust and
Trustee 64 other investment companies in the Fund Complex
J. Christopher Donahue $ -0- $ -0- for the Trust and
Trustee and Exec. Vice Pres. 14 other investment companies in the Fund
Complex
James E. Dowd $233 $117,202 for the Trust and
Trustee 64 other investment companies in the Fund Complex
Lawrence D. Ellis, M.D. $214 $106,460 for the Trust and
Trustee 64 other investment companies in the Fund Complex
Edward L. Flaherty, Jr. $233 $117,202 for the Trust and
Trustee 64 other investment companies in the Fund Complex
Peter E. Madden $185 $90,563 for the Trust and
Trustee 64 other investment companies in the Fund Complex
Gregor F. Meyer $214 $106,460 for the Trust and
Trustee 64 other investment companies in the Fund Complex
John E. Murray, Jr. $165 $ -0- for the Trust and
Trustee 64 other investment companies in the Fund Complex
Wesley W. Posvar $214 $106,460 for the Trust and
Trustee 64 other investment companies in the Fund Complex
Marjorie P. Smuts$214 $106,460 for the Trust and
Trustee 64 other investment companies in the Fund Complex
*Information is furnished for the fiscal year ended August 31, 1995.
#The aggregate compensation is provided for the Trust which is comprised of five
portfolios.
+The information is provided for the last calendar year.
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, 1995, 1994, and 1993, the Adviser earned $341,354, $394,564, and $267,549,
respectively, of which $222,052, $394,564, and $267,549, respectively, 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 years ended August 31, 1995 and 1994, the Administrators collectively
earned $134,042 and $247,255, respectively, none of which was waived. For the
fiscal year ended August 31, 1993, Federated Administrative Services, Inc.
earned $280,332, 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 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:
o advice as to the advisability of investing in securities;
o security analysis and reports;
o economic studies;
o industry studies;
o receipt of quotations for portfolio evaluations; and
o similar services.
The Adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions charged
by such persons are reasonable in relationship to the value of the brokerage and
research services provided.
Research services provided by brokers may be used by the Adviser or by
affiliates of Federated Investors in advising 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.
During the fiscal years ended August 31, 1995, 1994, and 1993, the Fund paid no
brokerage commissions.
PURCHASING SHARES
Except under certain circumstances described in the respective prospectuses,
Shares are sold at their net asset value plus a sales charge on days the New
York Stock Exchange is open for business. The procedure for purchasing Shares is
explained in the prospectus under "Investing in Class A Shares."
DISTRIBUTION PLAN AND SHAREHOLDER SERVICES AGREEMENT
These arrangements permit the payment of fees to financial institutions, the
distributor, and Federated Shareholder Services, to stimulate distribution
activities and to cause services to be provided to shareholders by a
representative who has knowledge of the shareholder's particular circumstances
and goals. These activities and services may include, but are not limited to,
marketing efforts; providing office space, equipment, telephone facilities, and
various clerical, supervisory, computer, and other personnel as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries; and assisting
clients in changing dividend options, account designations, and addresses.
By adopting the Distribution Plan, the 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, 1995, 1994, and 1993, payments in the
amount of $8,482, $49,274 and $208,401, respectively, were made pursuant to the
Distribution Plan. In addition, for the fiscal year ended August 31, 1995,
payments in the amount of $197,749 were made pursuant to the Shareholder
Services Agreement.
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 charge.
Shares may also be sold without a sales charge to trusts or pension or profit-
sharing plans for these persons. These sales are made with the purchaser's
written assurance that the purchase is for investment purposes and that the
securities will not be resold except through redemption by the Fund.
DETERMINING NET ASSET VALUE
Net asset value generally changes each day. The days on which net asset value is
calculated by the Fund are described in the prospectus.
VALUING MUNICIPAL BONDS
The 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:
o derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;
o derive less than 30% of its gross income from the sale of securities held
less than three months;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income earned during
the year.
SHAREHOLDERS' TAX STATUS
CAPITAL GAINS
Capital gains or losses may be realized by the Fund on the sale of
portfolio securities and as a result of discounts from par value on
securities held to maturity. Sales would generally be made because of:
othe availability of higher relative yields;
odifferentials in market values;
onew investment opportunities;
ochanges in creditworthiness of an issuer; or
oan attempt to preserve gains or limit losses.
Distributions of long-term capital gains are taxed as such, whether they
are taken in cash or reinvested, and regardless of the length of time 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 fiscal year ended August 31,
1995, and for the period from October 11, 1990 (date of initial public
investment) to August 31, 1995, were 5.48% and 7.78%, respectively.
The average annual total return for 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 charge, 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 the thirty-day period ended August 31, 1995 was 5.56%.
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 for the thirty-day period ended August 31,
1995 was 8.83%.
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.
TAXABLE YIELD EQUIVALENT FOR 1995
State of Pennsylvania
COMBINED FEDERAL AND STATE INCOME TAX BRACKET:
17.80% 30.80% 33.80% 38.80% 42.40%
JOINT $1- $39,001- $94,251- $143,601- OVER
RETURN 39,000 94,250 143,600 256,500 256,500
SINGLE $1- $23,351- $56,551- $117,951- OVER
RETURN 23,350 56,550 117,950 256,500 256,500
Tax-Exempt Yield Taxable Yield Equivalent
1.50% 1.82% 2.17% 2.27% 2.45% 2.60%
2.00% 2.43% 2.89% 3.02% 3.27% 3.47%
2.50% 3.04% 3.61% 3.78% 4.08% 4.34%
3.00% 3.65% 4.34% 4.53% 4.90% 5.21%
3.50% 4.26% 5.06% 5.29% 5.72% 6.08%
4.00% 4.87% 5.78% 6.04% 6.54% 6.94%
4.50% 5.47% 6.50% 6.80% 7.35% 7.81%
5.00% 6.08% 7.23% 7.55% 8.17% 8.68%
5.50% 6.69% 7.95% 8.31% 8.99% 9.55%
6.00% 7.30% 8.67% 9.06% 9.80% 10.42%
Note: The maximum marginal tax rate for each bracket was used in
calculating the taxable yield equivalent. Furthermore, additional state and
local taxes paid on comparable taxable investments were not used to
increase federal deductions.
The chart above is for illustrative purposes only. It is not an indicator
of past or future performance of Fund shares.
* Some portion of the Fund's income may be subject to the federal
alternative minimum tax and state and local income taxes.
PERFORMANCE COMPARISONS
The performance of Shares depends upon such variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio securities;
o changes in the Fund's class expenses; and
o various other factors.
The Fund's performance fluctuates on a daily basis largely because net earnings
and offering price per share fluctuate daily. Both net earnings and offering
price per share are factors in the computation of yield and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute offering price. The financial
publications and/or indices which the Fund uses in advertising may include:
o LEHMAN BROTHERS REVENUE BOND INDEX is a total return performance benchmark
for the long-term, investment grade, revenue bond market. Returns and
attributes for the index are calculated semi-monthly.
o 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.
o MORNINGSTAR, INC., an independent rating service, is the publisher of the
bi-weekly MUTUAL FUND VALUES. MUTUAL FUND VALUES rates more than 1,000
NASDAQ-listed mutual funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and ratings are effective for
two weeks.
Advertisements and other sales literature for the Fund may quote total returns
which are calculated on non-standardized base periods. 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 charge.
ABOUT FEDERATED INVESTORS
Federated is dedicated to meeting investor needs which is reflected in its
investment decision making -- structured, straightforward, and consistent. This
has resulted in a history of competitive performance with a range of competitive
investment products that have gained the confidence of thousands of clients and
their customers.
The company's disciplined security selection process is firmly rooted in sound
methodologies backed by fundamental and technical research. Investment
decisions are made and executed by teams of portfolio managers, analysts, and
traders dedicated to specific market sectors.
In the municipal sector, as of December 31, 1994, Federated managed 18 bond
funds with approximately $1.9 billion in assets and 18 money market funds with
approximately $6.6 billion in total assets. In 1976, Federated introduced one
of the first municipal bond mutual funds in the industry and is now one of the
largest institutional buyers of municipal securities.
J. Thomas Madden, Executive Vice President, oversees Federated's equity and high
yield corporate bond management while William D. Dawson, Executive Vice
President, oversees Federated's domestic fixed income management. Henry A.
Frantzen, Executive Vice President, oversees the management of Federated's
international portfolios.
MUTUAL FUND MARKET
Twenty-seven percent of American households are pursuing their financial goals
through mutual funds. These investors, as well as businesses and institutions,
have entrusted over $2 trillion to the more than 5,500 funds available.*
Federated Investors, through it subsidiaries, distributes mutual funds for a
variety of investment applications. Specific markets include:
INSTITUTIONAL
Federated meets the needs of more than 4,000 institutional clients nationwide by
managing and servicing separate accounts and mutual funds for a variety of
applications, including defined benefit and defined contribution programs, cash
management, and asset/liability management. Institutional clients include
corporations, pension funds, tax-exempt entities, foundations/endowments,
insurance companies, and investment and financial advisors. The marketing
effort to theses institutional clients is headed by John B. Fisher, President,
Institutional Sales Division.
TRUST ORGANIZATIONS
Other institutional clients include close relationships with more than 1,500
banks and trust organizations. Virtually all of the trust divisions of the top
100 bank holding companies use Federated funds in their clients' portfolios.
The marketing effort to trust clients is headed by Mark R. Gensheimer, Executive
Vice President, Bank Marketing & Sales.
BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES
Federated mutual funds are available to consumers through major brokerage firms
nationwide -- including 200 New York Stock Exchange firms -- supported by more
wholesalers than any other mutual fund distributor. The marketing effort to
these firms is headed by James F. Getz, President, Broker/Dealer Division.
*source: Investment Company Institute
APPENDIX
STANDARD & 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 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 & 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 & 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.
Cusip #625922505
0090701B (10/95)
- --------------------------------------------------------------------------------
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, 1995, 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, which is in paper form only, or a paper copy of this
prospectus, if you have received your prospectus electronically, 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, 1995
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 5
Ohio Municipal Securities 7
Investment Risks 7
Non-Diversification 8
Investment Limitations 8
NET ASSET VALUE 8
- --------------------------------------------------
INVESTING IN FORTRESS SHARES 9
- --------------------------------------------------
Share Purchases 9
Minimum Investment Required 9
What Shares Cost 10
Eliminating/Reducing the Sales Charge 10
Systematic Investment Program 12
Exchange Privilege 12
Certificates and Confirmations 12
Dividends and Distributions 13
REDEEMING FORTRESS SHARES 13
- --------------------------------------------------
Through a Financial Institution 13
Directly by Mail 14
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 20
- --------------------------------------------------
Federal Income Tax 20
State of Ohio Income Taxes 21
Other State and Local Taxes 21
PERFORMANCE INFORMATION 22
- --------------------------------------------------
FINANCIAL STATEMENTS 23
- --------------------------------------------------
INDEPENDENT AUDITORS' REPORT 36
- --------------------------------------------------
ADDRESSES Inside Back Cover
- --------------------------------------------------
</TABLE>
I
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FORTRESS SHARES
SHAREHOLDER TRANSACTION EXPENSES
<S> <C> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price).................... 1.00%
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of offering price)......... None
Contingent Deferred Sales Charge (as a percentage of original purchase price or redemption
proceeds, as applicable) (1)................................................................... 1.00%
Redemption Fee (as a percentage of amount redeemed, if applicable)............................... None
Exchange Fee..................................................................................... None
<CAPTION>
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
<S> <C> <C>
Management Fee (after waiver) (2)................................................................ 0.05%
12b-1 Fee (after waiver) (3)..................................................................... 0.15%
Total Other Expenses............................................................................. 0.70%
Shareholder Services Fee............................................................ 0.25%
Total Operating Expenses (4)............................................................. 0.90%
</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 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 operating expenses in the table above are based on expenses
expected during the fiscal year ending August 31, 1996. The total operating
expenses were 0.90% for the fiscal year ended August 31, 1995 and would have
been 1.50% absent a portion of the voluntary waivers of the management fee,
the 12b-1 fee and the shareholder services fee.
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 Fortress Shares" and"Municipal Securites 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 equivalant 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.
1
OHIO MUNICIPAL INCOME FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 36.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-------------------------------------------------------
1995 1994 1993 1992 1991(a)
- ------------------------------------------------------------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.01 $11.65 $10.89 $10.40 $10.00
- ------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ------------------------------------------------------------
Net investment income 0.60 0.56 0.57 0.61 0.57
- ------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 0.20 (0.64) 0.77 0.49 0.41
- ------------------------------------------------------------ ------- ------- ------- ------- -------
Total from investment operations 0.80 (0.08) 1.34 1.10 0.98
- ------------------------------------------------------------ ------- ------- ------- ------- -------
LESS DISTRIBUTIONS
- ------------------------------------------------------------
Distributions from net investment income (0.59) (0.56) (0.57) (0.61) (0.57)
- ------------------------------------------------------------
Distributions in excess of net investment income 0.00 0.00 (0.01)(b) 0.00 (0.01)(b)
- ------------------------------------------------------------ ------- ------- ------- ------- -------
Total distributions (0.59) (0.56) (0.58) (0.61) (0.58)
- ------------------------------------------------------------ ------- ------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $11.22 $11.01 $11.65 $10.89 $10.40
- ------------------------------------------------------------ ------- ------- ------- ------- -------
------- ------- ------- ------- -------
TOTAL RETURN (c) 7.65% (0.72%) 12.69% 10.91% 10.01%
- ------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------------------
Expenses 0.90% 0.90% 0.87% 0.73% 0.28%(d)
- ------------------------------------------------------------
Net investment income 5.53% 5.02% 5.13% 5.79% 6.35%(d)
- ------------------------------------------------------------
Expense waiver/reimbursement (e) 0.60% 0.55% 0.83% 1.35% 1.66%(d)
- ------------------------------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------------------------------
Net assets, end of period (000 omitted) $70,532 $81,566 $73,973 $28,924 $19,840
- ------------------------------------------------------------
Portfolio turnover 33% 20% 0% 0% 11%
- ------------------------------------------------------------
</TABLE>
(a) Reflects operations for the period from October 12, 1990 (date of initial
public investment) to August 31, 1991.
(b) 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.
(c) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(d) Computed on an annualized basis.
(e) 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, dated August 31, 1995, 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 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 charge 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 one to 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., providing growth of capital and income
-
through high-quality stocks;
- California Municipal Income Fund, providing current income exempt from
-
federal regular income tax and California personal income taxes;
- Fortress Adjustable Rate U.S. Government Fund, Inc., providing current
-
income consistent with lower volatility of principal through a
diversified portfolio of adjustable and floating rate mortgage securities
which are issued or guaranteed by the U.S. government, its agencies or
instrumentalities;
- Fortress Bond Fund, providing current income primarily through
-
high-quality corporate debt;
- Fortress 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;
3
- Fortress Utility Fund, Inc., providing high current income and moderate
-
capital appreciation primarily through equity and debt securities of
utility companies;
- Government Income Securities, Inc., providing current income through
-
long-term U.S. government securities;
- Liberty Equity Income Fund, Inc., providing above average income and
-
capital appreciation through income producing equity securities;
- Limited Term Fund, providing a high level of current income consistent
-
with minimum fluctuation in principal value;
- Limited Term Municipal Fund, providing a high level of current income
-
which is exempt from federal regular income tax consistent with the
preservation of capital;
- Money Market Management, Inc., providing current income consistent with
-
stability of principal through high-quality money market instruments;
- New York Municipal Income Fund, providing current income exempt from
-
federal regular income tax, New York personal income taxes, and New York
municipalities income taxes;
- 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 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.
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. 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.
4
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 & 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
5
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 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).
6
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.
7
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.
8
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 "Supplemental 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, P.O. Box
-
8600, Boston, MA 02266-8600.
Purchases by mail are considered received after payment by check is converted by
the transfer agent's bank, State Street Bank 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.
9
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received, plus a sales charge of 1% of the offering price (which is 1.01% of the
net amount invested). Further, there is no sales charge for purchases of $1
million or more. In addition, no sales charge is imposed for Shares purchased
through bank trust departments or investment advisers registered under the
Investment Advisers Act of 1940 purchasing on behalf of their clients, 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 as of the close of trading (normally 4:00
p.m., Eastern time) on the New York Stock Exchange, Monday through Friday,
except on: (i) days on which there are not sufficient changes in the value of
the Fund's portfolio securities that its net asset value might be materially
affected; (ii) days during which no Shares are tendered for redemption and no
orders to purchase Shares are received; 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 charge retained by it. Any portion of the
sales charge 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 charge for Shares sold other than through registered broker/dealers
will be retained by Federated Securities Corp. Federated Securities Corp. may
pay fees to banks out of the sales charge in exchange for sales and/or
administrative services performed on behalf of the bank's customers in
connection with the initiation of customer accounts and purchases of Shares.
ELIMINATING/REDUCING THE SALES CHARGE
The sales charge 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; or
- concurrent purchases.
10
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES. There is no sales charge for
purchases of $1 million or more. The Fund will combine purchases made on the
same day by the investor, his spouse, and his children under age 21 when it
calculates the sales charge.
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 charge 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 charge 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
charge 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 charge may be eliminated by signing a
letter of intent to that effect. This letter of intent includes a provision for
a sales charge elimination depending on the amount actually purchased within the
13-month period and a provision for the Fund's custodian to hold 1.00% 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 charge.
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 charge. Federated Securities
Corp. must be notified by the shareholder in writing or by his financial
institution of the reinvestment in order to receive this elimination of the
sales charge. If the shareholder redeems his Shares, there may be tax
consequences.
CONCURRENT PURCHASES. For purposes of qualifying for a sales charge
elimination, a shareholder has the privilege of combining concurrent purchases
of two or more funds in the Fortress Investment
11
Program, the purchase prices of which include a sales charge. For example, if a
shareholder concurrently invested $400,000 in one of the other Fortress Funds
and $600,000 in Shares, the sales charge would be eliminated. To receive this
sales charge elimination, Federated Securities Corp. must be notified by the
shareholder in writing or by his financial institution at the time the
concurrent purchases are made. The Fund will eliminate the sales charge after it
confirms the purchases.
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their investment on
a regular basis 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 1.00% sales charge 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 charge (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
may be subject to a CDSC and possibly a sales charge.
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.
12
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 charge, 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 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 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.
13
DIRECTLY BY MAIL
Shareholders may also redeem Shares by sending a written request to Federated
Services Company, P.O. Box 8600, Boston, MA 02266-8600. 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 should be sent by insured mail with
the written request to: Federated Services Company, 500 Victory Road - 2nd
Floor, North Quincy, MA 02171.
SIGNATURES. Shareholders requesting a redemption of any amount to be sent to an
address other than that on record with the Fund, or a redemption payable other
than to the shareholder of record must have signatures on written redemption
requests guaranteed by:
- a trust company or commercial bank whose deposits are insured by the Bank
Insurance Fund, which is administered by the Federal Deposit Insurance
Corporation ("FDIC");
- a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchanges;
- a savings bank or savings and loan association whose deposits are insured
by the Savings Association Insurance Fund, 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.................. 4 years or less 1%
$2,000,000 to $4,999,999.......... 2 years or less .50%
$5,000,000 or more................ 1 year or less .25%
</TABLE>
In instances in which Shares have been acquired in exchange for shares in other
Fortress Funds, (i) the purchase price is the price of the shares when
originally purchased and (ii) the time period during which the shares are held
will run from the date of the original purchase. The CDSC will not
14
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 to the extent that no payment was advanced for purchases
made by or through such entities.
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 charge, it is
not advisable for shareholders to be purchasing Shares while participating in
this program.
15
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.
Both the Trust and the Adviser have adopted strict codes of ethics governing the
conduct of all employees who manage the Fund and its portfolio securities. These
codes recognize that such persons owe a fiduciary duty to the Fund's
shareholders and must place the interests of shareholders ahead of the
employees' own interest. Among other things, the codes: require preclearance and
periodic reporting of personal securities transactions; prohibit personal
transactions in securities being purchased or sold, or being considered for
purchase or sale, by the Fund; prohibit purchasing securities in initial public
offerings; and prohibit taking profits on securities held for less than sixty
days. Violation of the codes are subject to review by the Board of Trustees, and
could result in severe penalties.
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.
16
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. With over $72 billion invested across more
than 260 funds under management and/or administration by its subsidiaries,
as of December 31, 1994, Federated Investors is one of the largest mutual
fund investment managers in the United States. With more than 1,750
employees, Federated continues to be led by the management who founded the
company in 1955. Federated funds are presently at work in and through 4,000
financial institutions nationwide. More than 100,000 investment
professionals have selected Federated funds for their clients.
J. Scott Albrecht has been the Fund's portfolio manager since March, 1995.
Mr. Albrecht joined Federated Investors in 1989 and has been a Vice
President of the Fund's investment adviser since October, 1994. Prior to
this, Mr. Albrecht served as an Assistant Vice President of the Fund's
investment adviser. 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.
Jonathan C. Conley has been the Fund's portfolio manager since its
inception. Mr. Conley joined Federated Investors in 1979 and has been a Vice
President of the Fund's investment adviser since 1982. Mr. Conley is a
Chartered Financial Analyst and received his M.B.A. in Finance from the
University of Virginia.
DISTRIBUTION OF 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 PLAN AND SHAREHOLDER SERVICES. 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 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 services or distribution related 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
17
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 Fund has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, under which
the Fund may make payments up to 0.25 of 1% of the average daily net asset value
of Shares, computed at an annual rate, to obtain certain personal services for
shareholders and for the maintenance of shareholder accounts. Under the
Shareholder Services Agreement, Federated Shareholder will either perform
shareholder services directly or will select financial institutions to perform
shareholder services. Financial institutions will receive fees based upon Shares
owned by their clients or customers. The schedules of such fees and the basis
upon which such fees will be paid will be determined from time to time by the
Fund and Federated Shareholder Services.
SUPPLEMENTAL PAYMENTS TO FINANCIAL INSTITUTIONS. Federated Securities Corp.
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, in addition to payments made pursuant to the Distribution Plan and
Shareholder Services Agreement, Federated Securities Corp. and Federated
Shareholder Services, from their own assets, may pay financial institutions
supplemental fees for the performance of substantial sales services,
distribution-related support services, or shareholder services. The support may
include sponsoring sales, educational and training seminars for their employees
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 Adviser or its affiliates, and
not the Fund.
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
18
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
-------------------- ------------------------------------
<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 8600, Boston,
Massachusetts 02266-8600, is custodian for the securities and cash of the Fund.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company, P.O.
Box 8600, Boston, Massachusetts 02266-8600, is transfer agent for the Shares of
the Fund and dividend disbursing agent for the Fund.
INDEPENDENT AUDITORS. The independent auditors for the Fund are Deloitte &
Touche LLP, Pittsburgh, Pennsylvania.
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 October 9,
1995, Merrill Lynch Pierce Fenner & Smith, Jacksonville, FL, owned 37.45% 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
19
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
20
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.
21
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 charge 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, advertisements for the Fund may refer to ratings, rankings
and other information in certain financial publications and/or compare the
Fund's performance to certain indices.
22
OHIO MUNICIPAL INCOME FUND
PORTFOLIO OF INVESTMENTS
AUGUST 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
- ----------- ------------------------------------------------------------ ------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--98.0%
- -------------------------------------------------------------------------
OHIO--92.0%
------------------------------------------------------------
$ 400,000 Akron, Bath & Copley, OH Joint Township, Revenue Bonds,
7.45% (Children's Hospital Medical Center, Akron)/(United
States Treasury PRF)/(Original Issue Yield: 7.698%),
11/15/2000 (@102) Aaa $ 461,736
------------------------------------------------------------
200,000 Akron, Bath & Copley, OH Joint Township, Revenue Bonds,
7.45% (Children's Hospital Medical Center, Akron)/(United
States Treasury PRF)/(Original Issue Yield: 7.698%),
11/15/2000 (@102) Aaa 230,868
------------------------------------------------------------
750,000 Ashland County, OH, LT GO Bonds, 7.00%, 12/1/2011 A 812,363
------------------------------------------------------------
300,000 Bellefontaine, OH, Storm Water Utility LT GO Bonds, 7.05%,
6/1/2011 A 322,365
------------------------------------------------------------
750,000 Bowling Green State University, OH, Revenue Bonds, 6.35%
(Original Issue Yield: 6.45%), 6/1/2008 A 788,857
------------------------------------------------------------
900,000 Brunswick, OH, UT GO Bonds, 7.35% (Original Issue Yield:
7.446%), 12/1/2010 A 995,418
------------------------------------------------------------
2,500,000 Cleveland, OH Airport System, Revenue Bonds (Series A),
6.00% (FGIC INS)/(Original Issue Yield: 6.378%), 1/1/2024 Aaa 2,492,975
------------------------------------------------------------
2,000,000 Cleveland, OH Public Power System, Revenue Bonds, First
Mortgage (Series A), 7.00% (MBIA INS)/(Original Issue Yield:
7.15%), 11/15/2024 Aaa 2,269,640
------------------------------------------------------------
2,600,000 Columbus, OH Municipal Airport Authority, Improvement
Revenue Bonds, 6.25% (Port Columbus Intl Airport)/(MBIA
INS)/(Original Issue Yield: 6.35%), 1/1/2024 Aaa 2,659,280
------------------------------------------------------------
1,000,000 Cuyahoga County, OH Hospital Authority, Revenue Bonds, 6.25%
(Fairview General Hospital)/(Original Issue Yield: 6.321%),
8/15/2010 A1 1,014,920
------------------------------------------------------------
</TABLE>
23
OHIO MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
- ----------- ------------------------------------------------------------ ------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- -------------------------------------------------------------------------
OHIO--CONTINUED
------------------------------------------------------------
$ 1,500,000 Cuyahoga County, OH Hospital Authority, Revenue Bonds, 6.25%
(Meridia Health System)/(Original Issue Yield: 6.80%),
8/15/2024 A1 $ 1,507,455
------------------------------------------------------------
800,000 Cuyahoga County, OH Hospital Authority, Revenue Bonds, 6.50%
(University Hospital of Cleveland)/ (Original Issue Yield:
6.68%), 1/15/2019 AA 819,080
------------------------------------------------------------
780,000 Cuyahoga County, OH Hospital Authority, Revenue Refunding
Bonds, 6.875% (University Hospital of Cleveland)/(AMBAC
INS)/(Original Issue Yield: 6.954%), 1/15/2019 Aaa 844,342
------------------------------------------------------------
500,000 Cuyahoga County, OH Hospital Authority, Revenue Refunding
Bonds, 8.00% (Cleveland Clinic)/(Original Issue Yield:
8.068%), 12/1/2015 Aa 540,980
------------------------------------------------------------
800,000 Cuyahoga County, OH, UT GO Jail Facilities Bonds, 7.00%
(Original Issue Yield: 7.065%), 10/1/2013 Aa 914,344
------------------------------------------------------------
1,000,000 Eaton, OH IDA, Revenue Refunding Bonds, 6.50% (Baxter
International, Inc.), 12/1/2012 A- 1,020,750
------------------------------------------------------------
500,000 Franklin County, OH Hospital Facility Authority, Hospital
Revenue Refunding & Improvement Bonds, 7.25% (Riverside
United Methodist Hospital)/(MBIA INS)/(Original Issue Yield:
7.29%), 5/15/2020 Aaa 556,755
------------------------------------------------------------
260,000 Franklin County, OH Hospital Facility Authority, Revenue
Refunding & Improvement Bonds (Series B), 7.50% (Riverside
United Methodist Hospital)/(Original Issue Yield: 7.60%),
5/15/2008 Aa 297,656
------------------------------------------------------------
2,500,000 Franklin County, OH Hospital Facility Authority, Revenue
Refunding Bonds (Series A), 5.75% (Riverside United
Methodist Hospital)/(Original Issue Yield: 6.10%), 5/15/2020 Aa 2,404,200
------------------------------------------------------------
</TABLE>
24
OHIO MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
- ----------- ------------------------------------------------------------ ------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- -------------------------------------------------------------------------
OHIO--CONTINUED
------------------------------------------------------------
$ 1,300,000 Hamilton County, OH Health System, Revenue Refunding Bonds,
Providence Hospital, 6.875% (Franciscan Sisters)/(Original
Issue Yield: 7.05%), 7/1/2015 BBB- $ 1,302,808
------------------------------------------------------------
700,000 Hamilton County, OH Hospital Facilities Authority, Revenue
Refunding & Improvement Bonds, 7.00% (Deaconess
Hospital)/(Original Issue Yield: 7.046%), 1/1/2012 A 744,387
------------------------------------------------------------
2,500,000 Hamilton County, OH Hospital Facilities Authority, Revenue
Refunding Bonds (Series A), 6.25% (Bethesda Hospital,
OH)/(Original Issue Yield: 6.55%), 1/1/2012 A1 2,542,125
------------------------------------------------------------
440,000 Lakewood, OH Hospital Improvement Authority, Revenue
Refunding Bonds (Series One), 6.00% (Lakewood Hospital,
OH)/(MBIA INS)/(Original Issue Yield: 6.90%), 2/15/2010 Aaa 447,652
------------------------------------------------------------
500,000 Lebanon, OH Waterworks System, Revenue Improvement and
Refunding Bonds, 7.10%, 3/1/2008 A 546,705
------------------------------------------------------------
420,000 Marysville, OH, LT Sewer System GO Bonds, 7.15%, 12/1/2011 A 456,624
------------------------------------------------------------
1,000,000 Middleburg Heights, OH, LT GO Bonds, 7.20%, 12/1/2011 Aa 1,111,350
------------------------------------------------------------
1,000,000 Montgomery County, OH Health Facilities Authority, Revenue
Bonds (Series A), 6.625% (Sisters of Charity Health Care
System)/(MBIA INS)/(Original Issue Yield: 6.80%), 5/15/2021 Aaa 1,057,560
------------------------------------------------------------
3,000,000 Moraine, OH Solid Waste Disposal Authority, Revenue Bonds,
6.75% (General Motors Corp.)/(Original Issue Yield: 6.80%),
7/1/2014 BBB+ 3,342,030
------------------------------------------------------------
1,750,000 Northeast OH Regional Sewer District, Wastewater Revenue
Bonds, 6.50% (AMBAC INS)/(Original Issue Yield: 6.85%),
11/15/2016 Aaa 1,830,727
------------------------------------------------------------
</TABLE>
25
OHIO MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
- ----------- ------------------------------------------------------------ ------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- -------------------------------------------------------------------------
OHIO--CONTINUED
------------------------------------------------------------
$10,515,000 Ohio HFA, Residential Mortgage Revenue Bonds (Series B-2),
6.70% (GNMA COL), 3/1/2025 AAA $10,819,935
------------------------------------------------------------
2,445,000 Ohio HFA, SFM Revenue Bonds (Series A), 7.65% (GNMA
COL)/(Original Issue Yield: 7.669%), 3/1/2029 AAA 2,552,091
------------------------------------------------------------
315,000 Ohio HFA, SFM Revenue Bonds (Series A), 7.80% (GNMA COL),
3/1/2030 Aaa 334,719
------------------------------------------------------------
2,500,000 Ohio State Air Quality Development Authority, PCR Refunding
Bonds (Series A), 5.95% (Ohio Edison Co.), 5/15/2029 BBB- 2,241,075
------------------------------------------------------------
1,250,000 Ohio State Air Quality Development Authority, PCR Refunding
Bonds (Series A), 7.45% (Ohio Edison Co.)/ (FGIC INS),
3/1/2016 Aaa 1,380,875
------------------------------------------------------------
4,800,000 Ohio State Air Quality Development Authority, Revenue
Refunding Bonds, 6.375% (JMG Funding Limited
Partnership)/(AMBAC INS)/(Original Issue Yield: 6.493%),
1/1/2029 Aaa 4,963,488
------------------------------------------------------------
1,700,000 Ohio State Water Development Authority, PCR Refunding Bonds,
5.95% (Ohio Edison Co.), 5/15/2029 Baa2 1,538,483
------------------------------------------------------------
650,000 Ohio State Water Development Authority, Pure Water Revenue
Bonds, 7.00% (Original Issue Yield: 7.65%), 6/1/1998 (@100) A 698,841
------------------------------------------------------------
350,000 Rocky River, OH City School District, UT GO Bonds (Series
A), 6.90% (Original Issue Yield: 6.98%), 12/1/2011 Aa 377,972
------------------------------------------------------------
500,000 South Euclid, OH, UT GO Refunding Bonds, 7.00%, 12/1/2011 A1 545,170
------------------------------------------------------------
500,000 Tiffin, OH, LT GO Bonds, 7.10%, 12/1/2011 A 542,295
------------------------------------------------------------
3,500,000 Toledo-Lucas County, OH Port Authority, Port Facilities
Revenue Refunding Bonds, 5.90% (Cargill, Inc.)/ (Original
Issue Yield: 5.981%), 12/1/2015 Aa3 3,504,760
------------------------------------------------------------
</TABLE>
26
OHIO MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
- ----------- ------------------------------------------------------------ ------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- -------------------------------------------------------------------------
OHIO--CONTINUED
------------------------------------------------------------
$ 500,000 University of Cincinnati, OH, General Receipts Revenue Bonds
(Series B), 7.00% (Original Issue Yield: 7.05%), 6/1/2011 AA- $ 542,770
------------------------------------------------------------
500,000 University of Cincinnati, OH, Revenue Bonds (Series 12),
6.50% (Original Issue Yield: 6.613%), 6/1/2011 AA- 525,040
------------------------------------------------------------ -----------
Total 64,903,466
------------------------------------------------------------ -----------
PUERTO RICO--3.5%
------------------------------------------------------------
2,400,000 Puerto Rico Electric Power Authority, Revenue Bonds (Series
T), 6.375% (Original Issue Yield: 6.58%), 7/1/2024 A- 2,468,760
------------------------------------------------------------ -----------
VIRGIN ISLANDS--2.5%
------------------------------------------------------------
1,750,000 Virgin Islands HFA, SFM Revenue Refunding Bonds (Series A),
6.50% (GNMA COL)/(Original Issue Yield: 6.522%), 3/1/2025 AAA 1,765,505
------------------------------------------------------------ -----------
TOTAL LONG-TERM MUNICIPAL SECURITIES
(IDENTIFIED COST $65,998,148) 69,137,731
------------------------------------------------------------ -----------
SHORT-TERM MUNICIPAL SECURITIES--0.4%
- -------------------------------------------------------------------------
PUERTO RICO--0.4%
------------------------------------------------------------
300,000 Puerto Rico Government Development Bank Weekly VRDNs (Credit
Suisse, Zurich LOC) A-1+ 300,000
------------------------------------------------------------ -----------
TOTAL SHORT-TERM MUNICIPAL SECURITIES (AT AMORTIZED COST) 300,000
------------------------------------------------------------ -----------
TOTAL INVESTMENTS (IDENTIFIED COST $66,298,148)(A) $69,437,731
------------------------------------------------------------ -----------
-----------
</TABLE>
(a) The cost of investments for federal tax purposes amounts to $66,298,148. The
unrealized appreciation of investments on a federal tax basis amounts to
$3,139,583 which is comprised of $3,503,847 appreciation and $364,264
depreciation at August 31, 1995.
* Please refer to the Appendix of the Statement of Additional Information for
an explanation of the credit ratings. Current credit ratings are unaudited.
Note: The categories of investments are shown as a percentage of net assets
($70,531,523) at August 31, 1995.
27
OHIO MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
The following acronyms are used throughout this portfolio:
AMBAC --American Municipal Bond Assurance Corporation
COL --Collateralized
FGIC --Financial Guaranty Insurance Company
GNMA --Government National Mortgage Association
GO --General Obligation
HFA --Housing Finance Authority
IDA --Industrial Development Authority
INS --Insurance
LOC --Letter of Credit
LT --Limited Tax
MBIA --Municipal Bond Investors Assurance
PCR --Pollution Control Revenue
PRF --Prerefunded
SFM --Single Family Mortgage
UT --Unlimited Tax
VRDNs --Variable Rate Demand Notes
</TABLE>
(See Notes which are an integral part of the Financial Statements)
28
OHIO MUNICIPAL INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- -------------------------------------------------------------------
Total investments in securities, at value (identified and
tax cost $66,298,148) $69,437,731
- -------------------------------------------------------------------
Cash 74,335
- -------------------------------------------------------------------
Income receivable 1,278,356
- -------------------------------------------------------------------
Receivable for shares sold 35,581
- -------------------------------------------------------------------
Deferred expenses 436
- ------------------------------------------------------------------- -----------
Total assets 70,826,439
- -------------------------------------------------------------------
LIABILITIES:
- -------------------------------------------------------------------
Payable for shares redeemed $128,855
- ---------------------------------------------------------
Income distribution payable 122,321
- ---------------------------------------------------------
Accrued expenses 43,740
- --------------------------------------------------------- --------
Total liabilities 294,916
- ------------------------------------------------------------------- -----------
NET ASSETS for 6,284,930 shares outstanding $70,531,523
- ------------------------------------------------------------------- -----------
-----------
NET ASSETS CONSIST OF:
- -------------------------------------------------------------------
Paid in capital $68,304,646
- -------------------------------------------------------------------
Net unrealized appreciation of investments 3,139,583
- -------------------------------------------------------------------
Accumulated net realized loss on investments (977,929)
- -------------------------------------------------------------------
Undistributed net investment income 65,223
- ------------------------------------------------------------------- -----------
Total Net Assets $70,531,523
- ------------------------------------------------------------------- -----------
-----------
NET ASSET VALUE, Offering Price and Redemption Proceeds
Per Share:
- -------------------------------------------------------------------
Net Asset Value Per Share
($70,531,523 DIVIDED BY 6,284,930 shares outstanding) $ 11.22
- ------------------------------------------------------------------- -----------
-----------
Offering Price Per Share (100 DIVIDED BY 99.00 of
$11.22)* $ 11.33
- ------------------------------------------------------------------- -----------
-----------
REDEMPTION PROCEEDS Per Share (99.00 DIVIDED BY 100 of
$11.22)** $ 11.11
- ------------------------------------------------------------------- -----------
-----------
</TABLE>
* See "What Shares Cost."
** See "Contingent Deferred Sales Charge."
(See Notes which are an integral part of the Financial Statements)
29
OHIO MUNICIPAL INCOME FUND
STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- --------------------------------------------------------------------
Interest $4,683,841
- --------------------------------------------------------------------
EXPENSES:
- --------------------------------------------------------------------
Investment advisory fee $ 291,144
- --------------------------------------------------------
Administrative personnel and services fee 125,000
- --------------------------------------------------------
Custodian fees 54,875
- --------------------------------------------------------
Transfer and dividend disbursing agent fees
and expenses 49,748
- --------------------------------------------------------
Directors'/Trustees' fees 937
- --------------------------------------------------------
Auditing fees 13,971
- --------------------------------------------------------
Legal fees 3,662
- --------------------------------------------------------
Portfolio accounting fees 24,834
- --------------------------------------------------------
Distribution services fee 291,139
- --------------------------------------------------------
Shareholder services fee 181,962
- --------------------------------------------------------
Share registration costs 20,890
- --------------------------------------------------------
Printing and postage 14,659
- --------------------------------------------------------
Insurance premiums 6,010
- --------------------------------------------------------
Taxes 1,247
- --------------------------------------------------------
Miscellaneous 13,754
- -------------------------------------------------------- ----------
Total expenses 1,093,832
- --------------------------------------------------------
Waivers and reimbursements--
- ---------------------------------------------
Waiver of investment advisory fee $(256,279)
- ---------------------------------------------
Waiver of distribution services fee (180,166)
- ---------------------------------------------
Waiver of shareholder services fee (1,796)
- --------------------------------------------- ---------
Total waivers (438,241)
- -------------------------------------------------------- ----------
Net expenses 655,591
- -------------------------------------------------------------------- ----------
Net investment income 4,028,250
- -------------------------------------------------------------------- ----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
- --------------------------------------------------------------------
Net realized loss on investments (712,819)
- --------------------------------------------------------------------
Net change in unrealized appreciation of
investments 1,576,901
- -------------------------------------------------------------------- ----------
Net realized and unrealized gain on
investments 864,082
- -------------------------------------------------------------------- ----------
Change in net assets resulting from
operations $4,892,332
- -------------------------------------------------------------------- ----------
----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
30
OHIO MUNICIPAL INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
---------------------------------
1995 1994
--------------- ---------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ----------------------------------------------
OPERATIONS--
- ----------------------------------------------
Net investment income $ 4,028,250 $ 4,196,252
- ----------------------------------------------
Net realized gain (loss) on investments
($782,520 and $595 net losses, respectively,
as computed for federal tax purposes) (712,819) (255,186)
- ----------------------------------------------
Net change in unrealized appreciation
(depreciation) 1,576,901 (4,648,123)
- ---------------------------------------------- --------------- ---------------
Change in net assets resulting from
operations 4,892,332 (707,057)
- ---------------------------------------------- --------------- ---------------
NET EQUALIZATION CREDITS (DEBITS)-- (39,884) (11,943)
- ---------------------------------------------- --------------- ---------------
DISTRIBUTIONS TO SHAREHOLDERS--
- ----------------------------------------------
Distributions from net investment income
- ----------------------------------------------
Trust Shares 0 (330,980)
- ----------------------------------------------
Fortress Shares (3,954,127) (3,779,954)
- ---------------------------------------------- --------------- ---------------
Change in net assets resulting from
distributions to shareholders (3,954,127) (4,110,934)
- ---------------------------------------------- --------------- ---------------
SHARE TRANSACTIONS--
- ----------------------------------------------
Proceeds from sale of shares 6,748,209 28,336,326
- ----------------------------------------------
Net asset value of shares issued to
shareholders in payment of distributions
declared 1,562,674 1,388,664
- ----------------------------------------------
Cost of shares redeemed (20,243,640) (23,607,643)
- ---------------------------------------------- --------------- ---------------
Change in net assets resulting from share
transactions (11,932,757) 6,117,347
- ---------------------------------------------- --------------- ---------------
Change in net assets (11,034,436) 1,287,413
- ----------------------------------------------
NET ASSETS:
- ----------------------------------------------
Beginning of period 81,565,959 80,278,546
- ---------------------------------------------- --------------- ---------------
End of period (including undistributed net
investment income of $65,223 and $30,984,
respectively) $ 70,531,523 $ 81,565,959
- ---------------------------------------------- --------------- ---------------
--------------- ---------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
31
OHIO MUNICIPAL INCOME FUND
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1995
- --------------------------------------------------------------------------------
(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 five, non-diversified
portfolios. The financial statements included herein are 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 shareholders interest is limited to the portfolio in which shares are
held.
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.
INVESTMENT VALUATIONS--Short-term securities with remaining maturities of
sixty days or less at the time of purchase may be valued at amortized cost,
which approximates fair market value. All other securities are valued at
prices provided by an independent pricing service.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and expenses
are accrued daily Bond premium and discount, if applicable, are amortized as
required by the Internal Revenue Code, as amended (the "Code").
Distributions to shareholders are recorded on the ex-dividend date.
FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its income. Accordingly, no
provisions for federal tax are necessary.
At August 31, 1995, the Fund, for federal tax purposes, had a capital loss
carryforward of $792,780, 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
32
OHIO MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
liability for federal tax. Pursuant to the Code, such capital loss
carryforward will expire as follows:
<TABLE>
<CAPTION>
EXPIRATION YEAR EXPIRATION AMOUNT
--------------- -----------------
<S> <C>
2000 $ 9,665
2002 $ 595
2003 $782,520
</TABLE>
Additionally, net capital losses of $185,150 attributable to security
transactions incurred after October 31, 1994 are treated as arising on the
first day of the Fund's next taxable year.
EQUALIZATION--The Fund follows the accounting practice known as
equalization. With equalization, a portion of the proceeds from sales and
costs of redemptions of fund shares (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 income per share is unaffected by sales or
redemptions of fund shares.
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.
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 in one state than would be a comparable
tax-exempt mutual fund that invests nationally. In order to reduce the
credit risk associated with such factors, at August 31, 1995, 49.4% of the
securities in the portfolio of investments are backed by letters of credit
or bond insurance of various financial institutions and financial guaranty
assurance agencies. The value of investments insured by or supported
(backed) by a letter of credit for any one institution or agency do not
exceed 22.3% of total investments.
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.
OTHER--Investment transactions are accounted for on the trade date.
33
OHIO 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,
--------------------------------------------------
1995 1994
------------------------ ------------------------
FORTRESS SHARES SHARES DOLLARS SHARES DOLLARS
- -------------------------------------------------- ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Shares sold 626,737 $ 6,748,209 2,071,672 $ 23,380,919
- --------------------------------------------------
Shares issued to shareholders in payment of
distributions declared 144,421 1,562,674 117,979 1,333,119
- --------------------------------------------------
Shares redeemed (1,896,511) (20,243,640) (1,127,610) (12,701,562)
- -------------------------------------------------- ---------- ------------ ---------- ------------
Net change resulting from share transactions (1,125,353) $(11,932,757) 1,062,041 $ 12,012,476
- -------------------------------------------------- ---------- ------------ ---------- ------------
---------- ------------ ---------- ------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
AUGUST 31, 1994,
--------------------------
TRUST SHARES SHARES DOLLARS
- -------------------------------------------------- ----------- ------------
<S> <C> <C>
Shares sold 429,857 $ 4,955,407
- --------------------------------------------------
Shares issued to shareholders in payment of
distributions declared 4,891 55,545
- --------------------------------------------------
Shares redeemed (975,921) (10,906,081)
- -------------------------------------------------- ----------- ------------
Net change resulting from share transactions (541,173) $ (5,895,129)
- -------------------------------------------------- ----------- ------------
----------- ------------
</TABLE>
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT 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 any portion of its fee. The Adviser can modify or terminate this
voluntary at any time at its sole discretion.
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS"), under the
Administrative Services Agreement, provides the Fund with administrative
personnel and services. This 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 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 Trust
will compensate Federated Securities
34
OHIO MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
Corp. ("FSC"), the principle distributor, from the net assets of the Fund to
finance activities intended to result in the sale of the Fund's shares. The Plan
provides that the Fund may incur distribution expenses up to .40 of 1% of the
average daily net assets of the Fund, annually, to compensate FSC. The
distributor may voluntarily choose to waive any portion of its fee. The
distributor can modify or terminate this voluntary waiver at any time at its
sole discretion.
SHAREHOLDER SERVICES FEE--Under the terms of a Shareholder Services Agreement
with Federated Shareholder Services ("FSS"), the Fund will pay FSS up to .25. of
1% of average daily net assets of the Fund shares for the period. This fee is to
obtain certain services for shareholders and to maintain shareholder accounts.
FSS may voluntarily choose to waive a portion of this fee. FSS can modify or
terminate this voluntary waiver at any time at its sole discretion.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES--Federated
Services Company ("FServ") serves as transfer and dividend disbursing agent for
the Fund. This fee is based on the size, type, and number of accounts and
transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES--FServ maintains the Fund's accounting records for
which it receives a fee. The fee is based on the level of the Fund's average
daily net assets for the period, plus out-of-pocket expenses.
ORGANIZATION 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 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,
1995, the Fund paid $3,688 and $7,376, respectively, pursuant to this agreement.
INTERFUND TRANSACTIONS--During the year ended August 31, 1995, the Fund engaged
in purchase and sale transactions with funds that have a common investment
adviser (or affiliated investment advisers), common Directors/Trustees, and/or
common Officers. These transactions were made at current market value pursuant
to Rule 17a-7 under the Act amounting to $12,250,000 and $11,850,000,
respectively.
GENERAL--Certain of the Officers and Trustees of the Trust are Officers and
Directors or Trustees of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended August 31, 1995, were as follows:
<TABLE>
<S> <C>
- -------------------------------------------------------------------
PURCHASES $23,606,654
- ------------------------------------------------------------------- -----------
SALES $34,982,160
- ------------------------------------------------------------------- -----------
</TABLE>
35
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
To the Board Trustees of Municipal Securities Income Trust
and Shareholders of OHIO MUNICIPAL INCOME FUND:
We have audited the accompanying statement of assets and liabilities of Ohio
Municipal Income Fund (one of the portfolios comprising Municipal Securities
Income Trust), including the portfolio of investments, as of August 31, 1995,
the related statement of operations for the year then ended, the statement of
changes in net assets for the years ended August 31, 1995 and 1994, and the
financial highlights for each of the years in the five-year period ended August
31, 1995. These financial statements and financial highlights are the
responsibility of the Fund'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, 1995, 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 Ohio Municipal
Income Fund as of August 31, 1995, 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.
Pittsburgh, Pennsylvania
October 13, 1995
36
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Ohio 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 8600
Boston, Massachusetts 02266-8600
- -------------------------------------------------------------------------------------------
Transfer Agent and Dividend Disbursing Agent
Federated Services Company P.O. Box 8600
Boston, Massachusetts 02266-8600
- -------------------------------------------------------------------------------------------
Independent Auditors
Deloitte & Touche LLP 2500 One PPG Place
Pittsburgh, Pennsylvania 15222-5401
- -------------------------------------------------------------------------------------------
</TABLE>
37
- --------------------------------------------------------------------------------
OHIO MUNICIPAL INCOME
FUND
FORTRESS SHARES
PROSPECTUS
A Non-Diversified Portfolio of
Municipal Securities Income
Trust,
An Open-End, Management
Investment Company
October 31, 1995
[LOGO] FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
Cusip #625922307
0090702A-FS (10/95) [RECYCLED PAPER LOGO]
OHIO MUNICIPAL INCOME FUND
FORTRESS SHARES
(A PORTFOLIO OF MUNICIPAL SECURITIES INCOME TRUST)
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the prospectus
of Fortress Shares of Ohio Municipal Income Fund (the "Fund") dated October
31, 1995. 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, 1995
FEDERATED SECURITIES
CORP.
Distributor
A subsidiary of FEDERATED
INVESTORS
GENERAL INFORMATION ABOUT THE FUND1 Conversion to Federal Funds 14
Purchases by Sales Representatives,
INVESTMENT OBJECTIVE AND POLICIES1
Fund
Acceptable Investments 1 Trustees, and Employees 14
When-Issued and Delayed DETERMINING NET ASSET VALUE 14
Delivery Transactions 2
Valuing Municipal Bonds 14
Temporary Investments 2
Use of Amortized Cost 14
Portfolio Turnover 3
REDEEMING FORTRESS SHARES 14
Investment Limitations 3
Ohio Investment Risks 5 Redemption in Kind 14
MUNICIPAL SECURITIES INCOME TRUST EXCHANGE PRIVILEGE 15
MANAGEMENT 6
Reduced Sales Charge 15
Fund Ownership 10 Requirements for Exchange 15
Trustees Compensation 11 Tax Consequences 15
Trustee Liability 11 Making An Exchange 15
INVESTMENT ADVISORY SERVICES 12 TAX STATUS 15
Adviser to the Fund 12 The Fund's Tax Status 15
Advisory Fees 12 Shareholders' Tax Status 15
ADMINISTRATIVE SERVICES 12 TOTAL RETURN 16
TRANSFER AGENT AND DIVIDEND YIELD 16
DISBURSING AGENT 12
TAX-EQUIVALENT YIELD 16
BROKERAGE TRANSACTIONS 13
Tax-Equivalency Table 16
PURCHASING FORTRESS SHARES 13 PERFORMANCE COMPARISONS 17
Distribution Plan and Shareholder ABOUT FEDERATED INVESTORS 18
Services Agreement 13
APPENDIX 20
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 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").
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide current income exempt from federal
regular income and the 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'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:
ogovernmental lease certificates of participation issued by state or
municipal authorities where payment is secured by installment payments
for equipment, buildings, or other facilities being leased by the state
or municipality. Government lease certificates purchased by the Fund will
not contain non-appropriation clauses;
omunicipal notes and tax-exempt commercial paper;
oserial bonds;
otax anticipation notes sold to finance working capital needs of
municipalities;
obond anticipation notes sold in anticipation of the issuance of long-term
bonds;
opre-refunded municipal bonds whose timely payment of interest and
principal is ensured by an escrow of U.S. government obligations; and
ogeneral obligation bonds.
PARTICIPATION INTERESTS
The financial institutions from which the Fund purchases participation
interests frequently provide or secure from another financial institution
irrevocable letters of credit or guarantees and give the Fund the right to
demand payment of the principal amounts of the participation interests plus
accrued interest on short notice (usually within seven days).
VARIABLE RATE MUNICIPAL SECURITIES
Variable interest rates generally reduce changes in the market value of
municipal securities from their original purchase prices. Accordingly, as
interest rates decrease or increase, the potential for capital appreciation
or depreciation is less for variable rate municipal securities than for
fixed income obligations. Many municipal securities with variable interest
rates purchased by the Fund are subject to repayment of principal (usually
within seven days) on the Fund's demand. The terms of these variable rate
demand instruments require payment of principal and accrued interest from
the issuer of the municipal obligations, the issuer of the participation
interests, or a guarantor of either issuer.
MUNICIPAL LEASES
The Fund may purchase municipal securities in the form of participation
interests which represent undivided proportional interests in lease
payments by a governmental or non-profit entity. The lease payments and
other rights under the lease provide for and secure the payments on the
certificates. Lease obligations may be limited by municipal charter or the
nature of the appropriation for the lease. In particular, lease obligations
may be subject to periodic appropriation. If the entity does not
appropriate funds for future lease payments, the entity cannot be compelled
to make such payments. Furthermore, a lease may provide that the
certificate trustee cannot accelerate lease obligations upon default. The
trustee would only be able to enforce lease payments as they became due. In
the event of a default or failure of appropriation, it is unlikely that the
trustee would be able to obtain an acceptable substitute source of payment.
In determining the liquidity of municipal lease securities, the investment
adviser, under the authority delegated by the Trustees, will base its
determination on the following factors:
owhether the lease can be terminated by the lessee:
othe potential recovery, if any, from a sale of the leased property upon
termination of the lease;
othe lessee's general credit strength (e.g., its debt, administrative,
economic and financial characteristics and prospects);
othe likelihood that the lessee will discontinue appropriating funding for
the leased property because the property is no longer deemed essential to
its operations (e.g., the potential for an "event of non-appropriation");
and
oany credit enhancement or legal recourse provided upon an event of non-
appropriation or other termination of the lease.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an advantageous
price or yield for the Fund. No fees or other expenses, other than normal
transaction costs, are incurred. However, liquid assets of the Fund sufficient
to make payment for the securities to be purchased are segregated on the Fund's
records at the trade date. These assets are marked to market daily and are
maintained until the transaction has been settled. The Fund does not intend to
engage in when-issued and delayed delivery transactions to an extent that would
cause the segregation of more than 20% of the total value of its assets.
TEMPORARY INVESTMENTS
The Fund may also invest in temporary investments 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, 1995 and 1994, the
portfolio turnover rates were 33% and 20%, 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, such as 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 are listed with their addresses, present positions with
Municipal Securities Income Trust, and principal occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924
Chairman and Trustee
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated Research
Corp. and Federated Global Research Corp.; Chairman, Passport Research, Ltd.;
Chief Executive Officer and Director, Trustee, or Managing General Partner of
the Funds. Mr. Donahue is the father of J. Christopher Donahue, Executive Vice
President and Trustee of the Trust.
Thomas G. Bigley
28th Floor, One Oxford Centre
Pittsburgh, PA
Birthdate: February 3, 1934
Trustee
Director, Oberg Manufacturing Co.; Chairman of the Board, Children's Hospital of
Pittsburgh; Director, Trustee, or Managing General Partner of the Funds;
formerly, Senior Partner, Ernst & Young LLP.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
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
Birthdate: July 4, 1918
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
Birthdate: April 11, 1949
Executive Vice President and Trustee
President and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated Research
Corp. and Federated Global Research Corp.; President, Passport Research, Ltd.;
Trustee, Federated Administrative Services, Federated Services Company, and
Federated Shareholder Services; President or Vice President of the Funds;
Director, Trustee, or Managing General Partner of some of the Funds. Mr. Donahue
is the son of John F. Donahue, Chairman and Trustee of the Trust.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Trustee
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director, Trustee,
or Managing General Partner of the Funds.
Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Trustee
Professor of Medicine and Member, Board of Trustees, University of Pittsburgh;
Medical Director, University of Pittsburgh Medical Center - Downtown; Member,
Board of Directors, University of Pittsburgh Medical Center; formerly,
Hematologist, Oncologist, and Internist, Presbyterian and Montefiore Hospitals;
Director, Trustee, or Managing General Partner of the Funds.
Edward L. Flaherty, Jr.@
Henny, Kochuba, Meyer and Flaherty
Two Gateway Center - Suite 674
Pittsburgh, PA
Birthdate: June 18, 1924
Trustee
Attorney-at-law; Shareholder, Henny, Kochuba, Meyer and Flaherty; Director,
Eat'N Park Restaurants, Inc., and Statewide Settlement Agency, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Counsel, Horizon
Financial, F.A., Western Region.
Peter E. Madden
70 Westcliff Road
Westin, MA
Birthdate: March 16, 1942
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.
Gregor F. Meyer
Henny, Kochuba, Meyer and Flaherty
Two Gateway Center - Suite 674
Pittsburgh, PA
Birthdate: October 6, 1926
Trustee
Attorney-at-law; Shareholder, Henny, Kochuba, Meyer and Flaherty; Chairman,
Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.; Director, Trustee, or
Managing General Partner of the Funds.
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Trustee
President, Law Professor, Duquesne University; Consulting Partner, Mollica,
Murray and Hogue; Director, Trustee or Managing General Partner of the Funds.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Trustee
Professor, International Politics and Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer Library
Center, Inc., and U.S. Space Foundation; Chairman, Czecho Management Center;
Director, Trustee, or Managing General Partner of the Funds; President Emeritus,
University of Pittsburgh; founding Chairman, National Advisory Council for
Environmental Policy and Technology and Federal Emergency Management Advisory
Board.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Trustee
Public relations/marketing consultant; Conference Coordinator, Non-profit
entities; Director, Trustee, or Managing General Partner of the Funds.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
President
Executive Vice President and Trustee, Federated Investors; Chairman and
Director, Federated Securities Corp.; President or Vice President of some of the
Funds; Director or Trustee of some of the Funds.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
Vice President and Treasurer
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated Research
Corp., Federated Global Research Corp. and Passport Research, Ltd.; Executive
Vice President and Director, Federated Securities Corp.; Trustee, Federated
Services Company; Chairman, Treasurer, and Trustee, Federated Administrative
Services; Trustee or Director of some of the Funds; Vice President and Treasurer
of the Funds.
David M. Taylor
Federated Investors Tower
Pittsburgh, PA
Birthdate: January 13, 1947
Treasurer
Senior Vice President, Controller, and Trustee, Federated Investors; Controller,
Federated Advisers, Federated Management, Federated Research, Federated Research
Corp., and Passport Research, Ltd.; Vice President, Federated Shareholder
Services; Senior Vice President, Federated Administrative Services; Treasurer of
the Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Executive Vice President and Secretary
Executive Vice President, Secretary, General Counsel, and Trustee, Federated
Investors; Trustee, Federated Advisers, Federated Management, and Federated
Research; Director, Federated Research Corp. and Federated Global Research Corp.
; Trustee, Federated Services Company; Executive Vice President, Secretary, and
Trustee, Federated Administrative Services; President and Trustee, Federated
Shareholder Services; Director, Federated Securities Corp.; 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.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: American Leaders Fund, Inc.; Annuity Management Series;
Arrow Funds; Automated Government Money Trust; Blanchard Funds; Blanchard
Precious Metals, Inc.; Cash Trust Series II; Cash Trust Series, Inc.; DG
Investor Series; Edward D. Jones & Co. Daily Passport Cash Trust; Federated ARMs
Fund; Federated Equity Funds; Federated Exchange Fund, Ltd.; Federated GNMA
Trust; Federated Government Trust; Federated High Yield Trust; Federated Income
Securities Trust; Federated Income Trust; Federated Index Trust; Federated
Institutional Trust; Federated Master Trust; Federated Municipal Trust;
Federated Short-Term Municipal Trust; Federated Short-Term U.S. Government
Trust; Federated Stock Trust; Federated Tax-Free Trust; Federated Total Return
Series, Inc.; Federated U.S. Government Bond Fund; Federated U.S. Government
Securities Fund: 1-3 Years; Federated U.S. Government Securities Fund: 3-5
Years; First Priority Funds; Fixed Income Securities, Inc.; Fortress Adjustable
Rate U.S. Government Fund, Inc.; Fortress Municipal Income Fund, Inc.; Fortress
Utility Fund, Inc.; Fund for U.S. Government Securities, Inc.; Government Income
Securities, Inc.; High Yield Cash Trust;; Insurance Management Series;
Intermediate Municipal Trust; International Series, Inc.; Investment Series
Funds, Inc.; Investment Series Trust; Liberty Equity Income Fund, Inc.; Liberty
High Income Bond Fund, Inc.; Liberty Municipal Securities Fund, Inc.; Liberty
U.S. Government Money Market Trust; Liberty Term Trust, Inc. - 1999; Liberty
Utility Fund, Inc.; Liquid Cash Trust; Managed Series Trust; Money Market
Management, Inc.; Money Market Obligations Trust; Money Market Trust; Newpoint
Funds; 111 Corcoran Funds; Peachtree Funds; The Planters Funds; RIMCO Monument
Funds; The Shawmut Funds; Star Funds; The Starburst Funds; The Starburst Funds
II; Stock and Bond Fund, Inc.; Sunburst Funds; Targeted Duration Trust; Tax-Free
Instruments Trust; Trust for Financial Institutions; Trust For Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S.
Treasury Obligations; The Virtus Funds; World Investment Series, Inc.
FUND OWNERSHIP -
Officers and Trustees own less than 1% of the outstanding Shares.
As of October 9, 1995, the following shareholder of record owned 5% or more of
the outstanding Shares of the Fund: Merrill Lynch, Pierce, Fenner & Smith,
Jacksonville, FL, own approximately 2,343,622 Shares (37.45%).
TRUSTEES COMPENSATION
AGGREGATE
NAME , COMPENSATION
POSITION WITH FROM TOTAL COMPENSATION PAID
TRUST TRUST*# FROM FUND COMPLEX +
John F. Donahue $ -0- $ -0- for the Trust and
Trustee and Chairman 68 other investment companies in the Fund Complex
Thomas G. Bigley $203 $20,688 for the Trust and
Trustee 49 other investment companies in the Fund Complex
John T. Conroy $222 $117,202 for the Trust and
Trustee 64 other investment companies in the Fund Complex
William J. Copeland $222 $117,202 for the Trust and
Trustee 64 other investment companies in the Fund Complex
J. Christopher Donahue $ -0- $ -0- for the Trust and
Trustee and Exec. Vice Pres. 14 other investment companies in the Fund
Complex
James E. Dowd $222 $117,202 for the Trust and
Trustee 64 other investment companies in the Fund Complex
Lawrence D. Ellis, M.D. $203 $106,460 for the Trust and
Trustee 64 other investment companies in the Fund Complex
Edward L. Flaherty, Jr. $222 $117,202 for the Trust and
Trustee 64 other investment companies in the Fund Complex
Peter E. Madden $175 $90,563 for the Trust and
Trustee 64 other investment companies in the Fund Complex
Gregor F. Meyer $203 $106,460 for the Trust and
Trustee 64 other investment companies in the Fund Complex
John E. Murray, Jr. $157 $ -0- for the Trust and
Trustee 64 other investment companies in the Fund Complex
Wesley W. Posvar $203 $106,460 for the Trust and
Trustee 64 other investment companies in the Fund Complex
Marjorie P. Smuts$203 $106,460 for the Trust and
Trustee 64 other investment companies in the Fund Complex
*Information is furnished for the fiscal year ended August 31, 1995.
#The aggregate compensation is provided for the Trust which is comprised of five
portfolios.
+The information is provided for the last calendar year.
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, 1995, 1994, and 1993, the Adviser earned $291,144, $332,570, and $267,549,
respectively, of which $256,279, $332,570, and $267,549, respectively, 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 years ended August 31, 1995 and 1994, the Administrators collectively
earned $125,000 and$224,287, respectively, none of which was waived. For the
fiscal year ended August 31, 1993, Federated Administrative Services, Inc.
earned $283,923. 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:
o advice as to the advisability of investing in securities;
o security analysis and reports;
o economic studies;
o industry studies;
o receipt of quotations for portfolio evaluations; and
o similar services.
The Adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions charged
by such persons are reasonable in relationship to the value of the brokerage and
research services provided.
Research services provided by brokers may be used by the Adviser or by
affiliates of Federated Investors in advising 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.
During the fiscal years ended August 31, 1995, 1994, and 1993, the Fund paid no
brokerage commissions.
PURCHASING FORTRESS SHARES
Except under certain circumstances described in the prospectus, Shares are sold
at their net asset value plus a sales charge on days the New York Stock Exchange
is open for business. The procedure for purchasing Shares is explained in the
prospectus under "Investing in Fortress Shares."
DISTRIBUTION PLAN AND SHAREHOLDER SERVICES AGREEMENT
These arrangements permit the payment of fees to financial institutions, the
distributor, and Federated Shareholder Services, to stimulate distribution
activities and to cause services to be provided to shareholders by a
representative who has knowledge of the shareholder's particular circumstances
and goals. These activities and services may include, but are not limited to,
marketing efforts; providing office space, equipment, telephone facilities, and
various clerical, supervisory, computer, and other personnel as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries; and assisting
clients in changing dividend options, account designations, and addresses.
By adopting the Distribution Plan, the 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, 1995, 1994, and 1993, payments in the
amount of $291,139, $307,350, and $209,201, respectively, were made pursuant to
the Distribution Plan. In addition, for the fiscal year ended August 31, 1995,
payments in the amount of $181,962 were made pursuant to the Shareholder
Services Agreement, of which $1,796 was waived.
CONVERSION TO FEDERAL FUNDS
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be in
federal funds or be converted into federal funds before shareholders begin to
earn dividends. 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 charge.
Shares may also be sold without a sales charge to trusts or pension or profit-
sharing plans for these persons. These sales are made with the purchaser's
written assurance that the purchase is for investment purposes and that the
securities will not be resold except through redemption by the Fund.
DETERMINING NET ASSET VALUE
Net asset value generally changes each day. The days on which net asset value is
calculated by the Fund are described in the prospectus.
VALUING MUNICIPAL BONDS
The 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 charge different from that of the Fund's or
with no sales charge and which are advised by subsidiaries or affiliates of
Federated Investors. These exchanges are made at net asset value plus the
difference between the Fund's sales charge already paid and any sales charge of
the fund into which the Shares are to be exchanged, if higher.
REDUCED SALES CHARGE
If a shareholder making such an exchange qualifies for a reduction or an
elimination of the sales charge, 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:
o derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;
o derive less than 30% of its gross income from the sale of securities held
less than three months;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income earned during
the year.
SHAREHOLDERS' TAX STATUS
CAPITAL GAINS
Capital gains or losses may be realized by the Fund on the sale of
portfolio securities and as a result of discounts from par value on
securities held to maturity. Sales would generally be made because of:
o the availability of higher relative yields;
odifferentials in market values;
onew investment opportunities;
ochanges in creditworthiness of an issuer; or
oan attempt to preserve gains or limit losses.
Distributions of long-term capital gains are taxed as such, whether they are
taken in cash or reinvested, and regardless of the length of time 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 returns for the fiscal year ended August 31,
1995, and for the period from October 12, 1990 (date of initial public
investment) to August 31, 1995, were 5.54% and 7.97%, 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
charge, 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 the 30-day period ended August 31, 1995 was 5.17%.
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 Fund's tax-equivalent yield for the 30-day period ended August 31, 1995 was
7.74%.
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.
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 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.
TAXABLE YIELD EQUIVALENT FOR 1995
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 $1- $23,351- $56,551- $117,951- OVER
RETURN 23,350 56,550 117,950 256,500 256,500
Tax-Exempt Yield Taxable Yield Equivalent
1.50% 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%
Note: The maximum marginal tax rate for each bracket was used in
calculating the taxable yield equivalent. Furthermore, additional state and
local taxes paid on comparable taxable investments were not used to
increase federal deductions.
The chart above is for illustrative purposes only. It is not an indicator
of past or future performance of Fund shares.
* Some portion of the Fund's income may be subject to the federal
alternative minimum tax and state and local income taxes.
PERFORMANCE COMPARISONS
The performance of Shares depends upon such variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio securities;
o changes in the Fund's expenses; and
o various other factors.
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:
o LEHMAN BROTHERS REVENUE BOND INDEX is a total return performance benchmark
for the long-term, investment grade, revenue bond market. Returns and
attributes for the index are calculated semi-monthly.
o 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.
o MORNINGSTAR, INC., an independent rating service, is the publisher of the
bi-weekly MUTUAL FUND VALUES. MUTUAL FUND VALUES rates more than 1,000
NASDAQ-listed mutual funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and ratings are effective for
two weeks.
Advertisements and other sales literature for the Fund may quote total returns
which are calculated on non-standardized base periods. 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 charge.
ABOUT FEDERATED INVESTORS
Federated is dedicated to meeting investor needs which is reflected in its
investment decision making -- structured, straightforward, and consistent. This
has resulted in a history of competitive performance with a range of competitive
investment products that have gained the confidence of thousands of clients and
their customers.
The company's disciplined security selection process is firmly rooted in sound
methodologies backed by fundamental and technical research. Investment
decisions are made and executed by teams of portfolio managers, analysts, and
traders dedicated to specific market sectors.
In the municipal sector, as of December 31, 1994, Federated managed 18 bond
funds with approximately $1.9 billion in assets and 18 money market funds with
approximately $6.6 billion in total assets. In 1976, Federated introduced one
of the first municipal bond mutual funds in the industry and is now one of the
largest institutional buyers of municipal securities.
J. Thomas Madden, Executive Vice President, oversees Federated's equity and high
yield corporate bond management while William D. Dawson, Executive Vice
President, oversees Federated's domestic fixed income management. Henry A.
Frantzen, Executive Vice President, oversees the management of Federated's
international portfolios.
MUTUAL FUND MARKET
Twenty-seven percent of American households are pursuing their financial goals
through mutual funds. These investors, as well as businesses and institutions,
have entrusted over $2 trillion to the more than 5,500 funds available.*
*source: Investment Company Institute
Federated Investors, through it subsidiaries, distributes mutual funds for a
variety of investment applications. Specific markets include:
INSTITUTIONAL
Federated meets the needs of more than 4,000 institutional clients nationwide by
managing and servicing separate accounts and mutual funds for a variety of
applications, including defined benefit and defined contribution programs, cash
management, and asset/liability management. Institutional clients include
corporations, pension funds, tax-exempt entities, foundations/endowments,
insurance companies, and investment and financial advisors. The marketing
effort to theses institutional clients is headed by John B. Fisher, President,
Institutional Sales Division.
TRUST ORGANIZATIONS
Other institutional clients include close relationships with more than 1,500
banks and trust organizations. Virtually all of the trust divisions of the top
100 bank holding companies use Federated funds in their clients' portfolios.
The marketing effort to trust clients is headed by Mark R. Gensheimer, Executive
Vice President, Bank Marketing & Sales.
BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES
Federated mutual funds are available to consumers through major brokerage firms
nationwide -- including 200 New York Stock Exchange firms -- supported by more
wholesalers than any other mutual fund distributor. The marketing effort to
these firms is headed by James F. Getz, President, Broker/Dealer Division.
APPENDIX
STANDARD & 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 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. ("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 & 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 & 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.
- --------------------------------------------------------------------------------
MICHIGAN INTERMEDIATE MUNICIPAL TRUST
Cusip #625922307
0090702B (10/95)
(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,
1995, 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,
which is in paper form only, or a paper copy of this prospectus, if you have
received your prospectus electronically, 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, 1995
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
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 Charge 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 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 Fund Shares 17
Administration of the Fund 17
SHAREHOLDER INFORMATION 19
- ------------------------------------------------------
Voting Rights 19
Massachusetts Partnership Law 19
TAX INFORMATION 19
- ------------------------------------------------------
Federal Income Tax 19
Michigan Taxes 20
Other State and Local Taxes 21
PERFORMANCE INFORMATION 21
- ------------------------------------------------------
FINANCIAL STATEMENTS 22
- ------------------------------------------------------
INDEPENDENT AUDITORS' REPORT 37
- ------------------------------------------------------
ADDRESSES 38
- ------------------------------------------------------
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)........................................ 3.00%
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price)........................................ None
Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable)(1)................... 0.00%
Redemption Fee (as a percentage of amount redeemed, if applicable)........... None
Exchange Fee................................................................. None
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver)(2)............................................. 0.00%
12b-1 Fee.................................................................... None
Total Other Expenses (after expense reimbursement)........................... 0.50%
Shareholder Services Fee (after waiver)(3).............................. 0.07%
Total Operating Expenses(4)............................................. 0.50%
</TABLE>
(1) Shareholders who purchased shares with the proceeds of a redemption of
shares of an unaffiliated investment company purchased or redeemed with a sales
charge and not distributed by Federated Securities Corp. may be charged a
contingent deferred sales charge of 0.50 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 0.40%.
(3) The maximum shareholder services fee is 0.25%.
(4) The total operating expenses in the table above are based on expenses
expected during the fiscal year ending August 31, 1996. The total operating
expenses were 0.50% for the fiscal year ended August 31, 1995 and would have
been 1.15% absent the voluntary waivers of the management fee and the
shareholder services fee and the voluntary reimbursement of certain other
operating expenses.
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF THE FUND WILL BEAR, EITHER
DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE VARIOUS COSTS AND
EXPENSES, SEE "INVESTING IN THE FUND" AND "MUNICIPAL SECURITIES INCOME TRUST
INFORMATION." WIRE-TRANSFERRED REDEMPTIONS OF LESS THAN $5,000 MAY BE SUBJECT TO
ADDITIONAL FEES.
<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.
MICHIGAN INTERMEDIATE MUNICIPAL TRUST
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,
---------------------------------------
1995 1994 1993 1992(A)
------ ------ ------ ------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.59 $11.02 $10.38 $10.00
- -------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------------------------
Net investment income 0.54 0.53 0.55 0.56
- -------------------------------------------------------
Net realized and unrealized gain (loss) on
investments 0.21 (0.43) 0.64 0.38
- ------------------------------------------------------- ------ ------ ------ ------
Total from investment operations 0.75 0.10 1.19 0.94
- ------------------------------------------------------- ------ ------ ------ ------
LESS DISTRIBUTIONS
- -------------------------------------------------------
Distributions from net investment income (0.54) (0.53) (0.55) (0.56)
- ------------------------------------------------------- ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $10.80 $10.59 $11.02 $10.38
- ------------------------------------------------------- ------ ------ ------ ------
TOTAL RETURN (B) 7.39% 0.88% 11.73% 9.60%
- -------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------------------------------
Expenses 0.50% 0.50% 0.37% 0.07%(c)
- -------------------------------------------------------
Net investment income 5.19% 4.87% 5.11% 5.66%(c)
- -------------------------------------------------------
Expense waiver/reimbursement (d) 0.65% 0.57% 1.06% 1.26%(c)
- -------------------------------------------------------
SUPPLEMENTAL DATA
- -------------------------------------------------------
Net assets, end of period (000 omitted) $60,621 $58,480 $50,625 $26,998
- -------------------------------------------------------
Portfolio turnover 23% 13% 3% 26%
- -------------------------------------------------------
</TABLE>
(a) Reflects operations for the period from September 18, 1991 (date of initial
public investment) to August 31, 1992.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) Computed on an annualized basis.
(d) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
Further information about the Fund's performance is contained in the Fund's
annual report dated August 31, 1995, 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. 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 charge 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;
- 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 value 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
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 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 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.
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
state of Michigan and Michigan municipalities personal income taxes. 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.
INVESTMENT POLICIES
The Fund pursues its investment objective by investing primarily in a portfolio
of Michigan municipal securities. Under normal market conditions, the
dollar-weighted average portfolio maturity of the Fund will be between three and
ten years, and the Funds' average-weight duration will be between three and
seven years. 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.
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.
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 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) 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.
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 8600, Boston, MA 02266-8600.
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: Federated Services Company, c/o State Street Bank and Trust
Company, Boston, Massachusetts 02266-8600; 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 charge,
next determined after an order is received:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS
A 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>
The net asset value is determined as of the close of trading (normally 4:00
p.m., Eastern time) on the New York Stock Exchange, Monday through Friday,
except on: (i) days on which there are not sufficient changes in the value of
the Fund's portfolio securities that its net asset value might be materially
affected; (ii) days during which no shares are tendered for redemption and no
orders to purchase shares are received; and (iii) the following holidays: New
Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day, and Christmas Day.
No sales charge is imposed for shares purchased through bank trust departments,
investment advisers registered under the Investment Advisers Act of 1940, as
amended, or to shareholders designated as Liberty Life Members. However,
investors who purchase shares through a trust department, or investment adviser,
may be charged an additional service fee by the institution. Additionally, no
sales charge is imposed for shares purchased through "wrap accounts" or similar
programs, under which clients pay a fee or fees for services.
DEALER CONCESSION. For sales of shares, the distributor will normally offer to
pay dealers up to 100% of the sales charge retained by it. On purchases of $1
million or more, the investor pays no sales charge; 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 charge 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 CHARGE
The sales charge 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 investment
companies.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES.' As shown in the table on the
previous page, larger purchases reduce the sales charge 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 charge.
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 charge on the additional purchase according to the schedule now in effect
would be 2.50%, not 3.00%.
To receive the sales charge 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 charge 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 charge may be reduced
by signing 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 charge 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 charge.
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 charge
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 charge.
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
charge. If the shareholder redeems his shares in the Fund, there may be tax
consequences.
CONCURRENT PURCHASES. For purposes of qualifying for a sales charge
elimination, a shareholder has the privilege of combining concurrent purchases
of two or more funds in the Liberty Funds, the purchase prices of which include
a sales charge. 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
charge would be eliminated.
To receive this sales charge elimination, Federated Securities Corp. must be
notified by the shareholder in writing or by his financial institution at the
time the concurrent purchases are made. The Fund will eliminate the sales charge
after it confirms the purchases.
PURCHASES WITH PROCEEDS FROM REDEMPTION OF UNAFFILIATED INVESTMENT COMPANIES.
Investors may purchase shares of the fund at net asset value, without a sales
charge, with the proceeds from the redemption of shares of a mutual fund 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. From time to time, the
Fund may offer dealers a payment of .50 of 1% for shares purchased under this
program. If shares are purchased in this manner, Fund purchases will be subject
to a contingent deferred sales charge for one year from the date of purchase.
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 charge. 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 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 charge, 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 may be subject to a
contingent deferred sales charge ("CDSC") and possibly a sales charge.
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,
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 8600, Boston, Massachusetts
02266-8600, 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
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 should be sent by
insured mail with the written request to: Federated Services Company, 500
Victory Road-2nd Floor, North Quincy, MA 02171. Shareholders should call the
Fund for assistance in redeeming by mail.
SIGNATURES. Shareholders requesting a redemption of any amount to be sent to an
address other than that on record with the Fund, or a redemption payable other
than to the shareholder of record must have signatures on written redemption
requests guaranteed by:
- a trust company or commercial bank whose deposits are insured by the Bank
Insurance Fund, which is administered by the Federal Deposit Insurance
Corporation ("FDIC");
- a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchanges;
- a savings bank or savings and loan association whose deposits are insured
by the Savings Association Insurance Fund, 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
Shares purchased under a periodic special offering with the proceeds of a
redemption of shares of an unaffiliated investment company purchased or redeemed
with a sales charge and not distributed by Federated Securities Corp. may be
charged a contingent deferred sales charge of .50 of 1.00% for redemptions made
within one full year of purchase. Any applicable contingent deferred sales
charge will be imposed on the lesser of the net asset value of the redeemed
shares at the time of purchase or the net asset value of the redeemed shares at
the time of redemption.
The contingent deferred sales charge will be deducted from the redemption
proceeds otherwise payable to the shareholder and will be retained by the
distributor. The contingent deferred sales charge will not be imposed with
respect to: (1) shares acquired through the reinvestment of dividends or
distributions of long-term capital gains; and (2) shares held for more than one
full year from the date of purchase with respect to applicable shares.
Redemptions will be processed in a manner intended to maximize the amount of
redemption which will not be subject to a contingent deferred sales charge. In
computing the amount of the applicable contingent deferred sales charge,
redemptions are deemed to have occurred in the following order: (1) shares
acquired through the reinvestment of dividends and long-term capital gains; (2)
shares held for more than one full year from the date of purchase with respect
to applicable shares; and (3) shares held for less than one full year from the
date of purchase with respect to applicable shares on a first-in, first-out
basis. A contingent deferred sales charge is not assessed in connection with an
exchange of Fund shares for shares of other funds in the Liberty Family of Funds
in the same class (see "Exchange Privilege"). Any contingent deferred sales
charge imposed at the time the exchanged-for shares are redeemed is calculated
as if the shareholder had held the shares from the date on which he became a
shareholder of the exchanged-from shares.
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 charge, 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. 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.
Both the Trust and the Adviser have adopted strict codes of ethics governing the
conduct of all employees who manage the Fund and its portfolio securities. These
codes recognize that such persons owe a fiduciary duty to the Fund's
shareholders and must place the interests of shareholders ahead of the
employees' own interest. Among other things, the codes: require preclearance and
periodic reporting of personal securities transactions; prohibit personal
transactions in securities being purchased or sold, or being considered for
purchase or sale, by the Fund; prohibit purchasing securities in initial public
offerings; and prohibit taking profits on securities held for less than sixty
days. Violation of the codes are subject to review by the Board of Trustees, and
could result in severe penalties.
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. With over $72 billion invested across
more than 260 funds under management and/or administration by its
subsidiaries, as of December 31, 1994, Federated Investors is one of the
largest mutual fund investment managers in the United States. With more
than 1,750 employees, Federated continues to be led by the management who
founded the company in 1955. Federated funds are presently at work in and
through 4,000 financial institutions nationwide. More than 100,000
investment professionals have selected Federated funds for their clients.
J. Scott Albrecht has been the Fund's portfolio manager since April, 1994.
Mr. Albrecht joined Federated Investors in 1989 and has been a Vice
President of the Fund's investment adviser since October, 1994. Prior to
this, Mr. Albrecht served as an Assistant Vice President of the Fund's
investment adviser. 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.
Jonathan C. Conley has been the Fund's portfolio manager since its
inception. Mr. Conley joined Federated Investors in 1979 and has been a
Vice President of the Fund's investment adviser since 1982. Mr. Conley is a
Chartered Financial Analyst and received his M.B.A. in Finance from the
University of Virginia.
DISTRIBUTION OF FUND SHARES
Federated Securities Corp. is the principal distributor 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
ADMINISTRATIVE FEE NET 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.
SHAREHOLDER SERVICES. The Fund has entered into a Shareholder Services
Agreement with Federated Shareholder Services, a subsidiary of Federated
Investors, under which the Fund may make payments up to 0.25 of 1% of the
average daily net asset value of the shares, computed at an annual rate, to
obtain certain personal services for shareholders and provide the maintenance of
shareholder accounts. From time to time and for such periods as deemed
appropriate, the amount stated above may be reduced voluntarily under the
Shareholder Services Agreement. Federated Shareholder Services will either
perform shareholder services directly or will select financial institutions to
perform shareholder services. Financial institutions will receive fees based
upon shares owned by their clients or customers. The schedules of such fees and
the basis upon which such fees will be paid will be determined from time to time
by the Fund and Federated Shareholder Services.
SUPPLEMENTAL PAYMENTS TO FINANCIAL INSTITUTIONS. In addition to periodic
payments to financial institutions under the Shareholder Services Agreement, the
distributor may also pay a fee from its own assets to financial institutions as
financial assistance for providing certain services to shareholders or
substantial marketing and sales support. The support may include participating
in sales, educational and training seminars for employees of the financial
institution at recreational-type facilities, providing sales literature, and
engineering computer software programs that emphasize the attributes of the
Fund. Such financial assistance will be predicated upon the amount of Shares the
financial institution sells or may sell and/or upon the type and nature of sales
or marketing support furnished by the financial institution. Any payments made
by the distributor may be reimbursed by the Fund's Adviser or its affiliates,
and not the Fund.
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 8600, Boston,
Massachusetts 02266-8600, is custodian for the securities and cash of the Fund.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company, P.O.
Box 8600, Boston, Massachusetts 02266-8600, is transfer agent for the shares of
the Fund and dividend disbursing agent for the Fund.
INDEPENDENT AUDITORS. The independent auditors for the Fund are Deloitte &
Touche LLP, Pittsburgh, Pennsylvania.
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 of October 9, 1995,
ENBANCO, Traverse City, MI, owned 37.68% 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 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 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 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, distributions 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 from obligations of Michigan or any of its political
subdivisions; or (ii) income from obligations of the United States government
which are exempted from state income taxation by a law of the United States.
That portion of a shareholder's shares in the Fund representing (i) bonds or
other similar obligations of Michigan or its political subdivision, or (ii)
obligations of the United States which are exempt from taxation by a law of the
United States, and dividends paid by the Fund representing interest payments on
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 adjusted to reflect the taxable yield that the Fund would have had to earn to
equal its actual yield, assuming a specific tax rate. The yield and the
tax-equivalent yield do not necessarily reflect income actually earned by the
Fund and, therefore, may not correlate to the dividends or other distributions
paid to shareholders.
The performance information reflects the effect of the maximum sales charge and
other similar non-recurring charges, such as the CDSC, which, if excluded, would
increase the total return, yield, and tax-equivalent yield.
From time to time, advertisements for the Fund may refer to ratings, rankings
and other information in certain financial publications and/or compare the
Fund's performance to certain indices.
MICHIGAN INTERMEDIATE MUNICIPAL TRUST
PORTFOLIO OF INVESTMENTS
AUGUST 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
- ---------- ----------------------------------------------------------- -------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--97.9%
- -------------------------------------------------------------------------
MICHIGAN--97.9%
-----------------------------------------------------------
$ 100,000 Ann Arbor, MI Public School District, UT GO Bonds, 6.50%
(Michigan State GTD)/(Original Issue Yield: 6.70%),
5/1/1999 Aa $ 105,473
-----------------------------------------------------------
500,000 Ann Arbor, MI, UT GO Bonds, 5.20% (Original Issue Yield:
5.25%), 9/1/2004 A1 510,080
-----------------------------------------------------------
230,000 Ann Arbor, MI, UT GO Bonds, 6.00%, 9/1/2000 A1 244,552
-----------------------------------------------------------
215,000 Ann Arbor, MI, UT GO Bonds, 6.00%, 9/1/2001 A1 229,813
-----------------------------------------------------------
100,000 Auburn Hills, MI, LT GO Bonds, 6.50%, 5/1/1997 A 103,935
-----------------------------------------------------------
600,000 Avondale, MI School District, UT GO Refunding Bonds, 5.40%
(Michigan State GTD)/(Original Issue Yield: 5.45%),
5/1/2003 A1 618,552
-----------------------------------------------------------
500,000 Avondale, MI School District, UT GO Refunding Bonds, 6.75%
(Michigan State GTD)/(Original Issue Yield: 6.95%),
5/1/2014 A1 525,730
-----------------------------------------------------------
500,000 Battle Creek, MI Building Authority, Revenue Bonds, 6.00%,
4/1/2002 A 533,085
-----------------------------------------------------------
</TABLE>
<TABLE>
<C> <S> <C> <C>
500,000 Battle Creek, MI Building Authority, Revenue Bonds, 6.10%,
4/1/2003 A 532,880
-----------------------------------------------------------
100,000 Battle Creek, MI Water Supply System, Revenue Bonds (Series
B), 6.90%, 9/1/1998 A 109,450
-----------------------------------------------------------
335,000 Calhoun County, MI, UT GO (Series II), 6.60% (AMBAC INS),
7/1/2002 Aaa 352,299
-----------------------------------------------------------
270,000 Dearborn, MI Economic Development Corp, Hospital Revenue
Refunding Bonds (Series A), 5.10% (Oakwood Obligated
Group)/(MBIA INS)/(Original Issue Yield: 5.20%), 8/15/2006 Aaa 270,440
-----------------------------------------------------------
100,000 Detroit, MI City School District, UT GO Refunding Bonds
(Series A), 7.15% (MBIA INS), 5/1/1998 Aaa 107,126
-----------------------------------------------------------
500,000 Detroit, MI Economic Development Corp., Resource Recovery
Revenue Bonds (Series A), 6.875% (FSA INS)/(Original Issue
Yield: 7.00%), 5/1/2009 Aaa 540,130
-----------------------------------------------------------
</TABLE>
MICHIGAN INTERMEDIATE MUNICIPAL TRUST
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
- ---------- ----------------------------------------------------------- -------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- -------------------------------------------------------------------------
MICHIGAN--CONTINUED
-----------------------------------------------------------
$3,000,000 Detroit, MI Water Supply System, Revenue Refunding Bonds,
6.00% (FGIC INS)/(Original Issue Yield: 6.10%), 7/1/2002 AAA $ 3,212,790
-----------------------------------------------------------
1,000,000 Eastern Michigan University, Revenue Bonds, 6.10% (AMBAC
INS)/(Original Issue Yield: 6.15%), 6/1/2004 Aaa 1,075,980
-----------------------------------------------------------
200,000 Farmington Hills, MI Hospital Finance Authority, Hospital
Revenue Refunding Bonds (Series A), 6.60% (Botsford General
Hospital)/(MBIA INS), 2/15/2000 Aaa 216,948
-----------------------------------------------------------
425,000 Forest Hills, MI Public School, UT GO Bonds, 7.375%
(Original Issue Yield: 7.397%), 5/1/2000 (@101) Aa 479,714
-----------------------------------------------------------
285,000 Garden City, MI School District, UT GO Refunding Bonds,
5.80% (FSA INS), 5/1/2004 AAA 303,950
-----------------------------------------------------------
250,000 Garden City, MI School District, UT GO Refunding Bonds,
5.90% (FSA INS), 5/1/2005 AAA 267,852
-----------------------------------------------------------
565,000 Garden City, MI School District, UT GO Refunding Bonds,
6.00% (FSA INS), 5/1/2006 AAA 603,821
-----------------------------------------------------------
515,000 Garden City, MI School District, UT GO Refunding Bonds,
6.10% (FSA INS), 5/1/2007 AAA 549,417
-----------------------------------------------------------
1,200,000 Grand Rapids, MI Public Schools, UT GO Bonds, 5.00%
(Original Issue Yield: 5.40%), 5/1/2002 Aa 1,233,456
-----------------------------------------------------------
250,000 Grand Rapids, MI Sanitation Sewer System, Revenue Bonds,
5.40% (Original Issue Yield: 5.45%), 1/1/2002 A1 259,195
-----------------------------------------------------------
300,000 Grand Rapids, MI Sanitation Sewer System, Revenue Bonds,
5.50% (Original Issue Yield: 5.55%), 1/1/2003 A1 312,078
-----------------------------------------------------------
250,000 Grand Rapids, MI Sanitation Sewer System, Revenue Bonds,
5.60% (Original Issue Yield: 5.65%), 1/1/2004 A1 261,140
-----------------------------------------------------------
130,000 Grand Valley, MI State College, Housing Revenue Bonds,
6.60% (United States Treasury COL), 10/1/1996 AAA 133,626
-----------------------------------------------------------
150,000 Huron Valley, MI School District, UT GO Bonds, 6.50%
(Michigan State GTD), 5/1/2001 (@102) A1 166,461
-----------------------------------------------------------
270,000 Ingham County MI Sewer Authority, Revenue Bonds, Project
#4, Delhi Charter Township, 5.70%, 11/1/2003 A1 285,722
-----------------------------------------------------------
</TABLE>
MICHIGAN INTERMEDIATE MUNICIPAL TRUST
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
- ---------- ----------------------------------------------------------- -------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- -------------------------------------------------------------------------
MICHIGAN--CONTINUED
-----------------------------------------------------------
$ 360,000 Ingham County MI Sewer Authority, Revenue Bonds, Project
#4, Delhi Charter Township, 5.80%, 11/1/2004 A1 $ 380,689
-----------------------------------------------------------
465,000 Ingham County MI Sewer Authority, Revenue Bonds, Project
#4, Delhi Charter Township, 5.90%, 11/1/2005 A1 491,379
-----------------------------------------------------------
265,000 Kent Hospital Finance Authority, MI, Hospital Revenue
Refunding Bonds, 6.30% (Pine Rest Christian Hospital,
MI)/(FGIC INS)/(Original Issue Yield: 6.40%), 11/1/2003 Aaa 290,382
-----------------------------------------------------------
415,000 Kent Hospital Finance Authority, MI, Hospital Revenue
Refunding Bonds, 6.30% (Pine Rest Christian Hospital,
MI)/(FGIC INS)/(Original Issue Yield: 6.45%), 11/1/2004 Aaa 452,304
-----------------------------------------------------------
500,000 Lake Orion, MI School District, UT GO Refunding Bonds,
5.90% (Michigan State GTD)/(AMBAC INS), 5/1/2001 AAA 533,090
-----------------------------------------------------------
2,000,000 Lake Orion, MI School District, UT GO Refunding Bonds,
6.05% (AMBAC INS)/(Michigan State LOC), 5/1/2002 AAA 2,156,400
-----------------------------------------------------------
900,000 Lansing, MI Sewer Disposal System, Revenue Refunding Bonds,
5.30% (FGIC INS)/(Original Issue Yield: 5.35%), 5/1/2005 AAA 924,597
-----------------------------------------------------------
500,000 Lansing, MI Sewer Disposal System, Revenue Refunding Bonds,
5.50% (FGIC INS)/(Original Issue Yield: 5.60%), 5/1/2007 AAA 511,710
-----------------------------------------------------------
750,000 Livonia, MI Public School District, UT GO Bonds (Series I),
6.00%, 5/1/2001 A1 802,957
-----------------------------------------------------------
100,000 Michigan Higher Education Student Loan Authority, Revenue
Refunding Bonds (Series X1), 7.10% (AMBAC INS), 10/1/1997 Aaa 105,599
-----------------------------------------------------------
1,500,000 Michigan Municipal Bond Authority, Revenue Refunding Q-SBLF
Bonds, 6.00% (Michigan State)/(Michigan State GTD)/
(Original Issue Yield: 6.10%), 5/1/2002 A1 1,604,190
-----------------------------------------------------------
3,000,000 Michigan Public Power Agency, Revenue Refunding Bonds
(Series A) Belle River Project, 5.70% (Original Issue
Yield: 5.80%), 1/1/2003 A1 3,165,030
-----------------------------------------------------------
100,000 Michigan State Comprehensive Transportation Board, Revenue
Refunding Bonds (Series 1988-I), 6.55% (Michigan State),
9/1/1997 A1 104,835
-----------------------------------------------------------
</TABLE>
MICHIGAN INTERMEDIATE MUNICIPAL TRUST
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
- ---------- ----------------------------------------------------------- -------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- -------------------------------------------------------------------------
MICHIGAN--CONTINUED
-----------------------------------------------------------
$1,000,000 Michigan State Comprehensive Transportation Board, Revenue
Refunding Bonds (Series B), 5.50% (Michigan
State)/(Original Issue Yield: 5.60%), 5/15/2002 A1 $ 1,049,880
-----------------------------------------------------------
1,000,000 Michigan State Comprehensive Transportation Board, Revenue
Refunding Bonds (Series B), 6.00% (Michigan
State)/(Original Issue Yield: 6.05%), 5/15/2007 A1 1,041,140
-----------------------------------------------------------
100,000 Michigan State Comprehensive Transportation Board, Revenue
Refunding Bonds (Series B-II), 6.55% (Michigan State),
11/1/1997 A1 105,213
-----------------------------------------------------------
100,000 Michigan State Hospital Finance Authority, Hospital Revenue
Refunding Bonds (Series A), 6.70% (Henry Ford Health
System, MI), 5/1/1996 Aa 101,460
-----------------------------------------------------------
100,000 Michigan State Hospital Finance Authority, Hospital Revenue
Refunding Bonds (Series A), 6.90% (Henry Ford Health
System, MI), 5/1/1996 (@102) Aa 104,083
-----------------------------------------------------------
415,000 Michigan State Hospital Finance Authority, Revenue Bonds
(Series A), 6.15% (Crittenton Hospital, MI), 3/1/2001 A 433,044
-----------------------------------------------------------
440,000 Michigan State Hospital Finance Authority, Revenue Bonds
(Series A), 6.25% (Crittenton Hospital, MI), 3/1/2002 A 461,252
-----------------------------------------------------------
500,000 Michigan State Hospital Finance Authority, Revenue Bonds,
Providence Hospital, 7.00% (Daughters of Charity)/(Original
Issue Yield: 7.04%), 11/1/2021 Aa 535,690
-----------------------------------------------------------
1,500,000 Michigan State Hospital Finance Authority, Revenue
Refunding Bonds (Series A), 5.50% (St. John Hospital,
MI)/(Original Issue Yield: 5.80%), 5/15/2001 Aa 1,517,415
-----------------------------------------------------------
100,000 Michigan State Hospital Finance Authority, Revenue
Refunding Bonds (Series A), 7.20% (Mercy Memorial Hospital,
MI)/ (MBIA Insurance Corporation INS), 6/1/1997 Aaa 105,521
-----------------------------------------------------------
400,000 Michigan State Hospital Finance Authority, Revenue
Refunding Bonds (Series B), 5.00% (Crittenton Hospital,
MI)/(Original Issue Yield: 5.10%), 3/1/2003 NR 386,176
-----------------------------------------------------------
</TABLE>
MICHIGAN INTERMEDIATE MUNICIPAL TRUST
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
- ---------- ----------------------------------------------------------- -------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- -------------------------------------------------------------------------
MICHIGAN--CONTINUED
-----------------------------------------------------------
$ 100,000 Michigan State Hospital Finance Authority, Revenue
Refunding Bonds (Series I), 7.10% (Sisters of Mercy Health
System)/ (MBIA INS)/(Original Issue Yield: 7.15%),
8/15/1997 Aaa $ 105,966
-----------------------------------------------------------
600,000 Michigan State Hospital Finance Authority, Revenue
Refunding Bonds (Series P), 4.90% (Sisters of Mercy Health
System)/ (MBIA INS)/(Original Issue Yield: 5.10%),
8/15/2005 AAA 590,244
-----------------------------------------------------------
500,000 Michigan State Hospital Finance Authority, Revenue
Refunding Bonds, 5.50% (Henry Ford Health System,
MI)/(Original Issue Yield: 5.55%), 9/1/2001 Aa 521,230
-----------------------------------------------------------
800,000 Michigan State Hospital Finance Authority, Revenue
Refunding Bonds, 5.95% (Oakwood Obligated Group)/(FGIC
INS)/ (Original Issue Yield: 6.05%), 5/1/2002 Aaa 853,776
-----------------------------------------------------------
575,000 Michigan State Hospital Finance Authority, Revenue
Refunding Bonds, 6.30% (Sparrow Obligated Group, MI)/(MBIA
INS), 11/15/2003 AAA 626,739
-----------------------------------------------------------
375,000 Michigan State Hospital Finance Authority, Revenue
Refunding Bonds, 6.85% (Oakland General Hospital,
MI)/(AMBAC INS), 7/1/2000 Aaa 410,749
-----------------------------------------------------------
1,000,000 Michigan State Housing Development Authority, (Series A)
Rental Housing Revenue Bonds, 5.55% (MBIA INS), 4/1/2004 Aaa 1,005,360
-----------------------------------------------------------
500,000 Michigan State Housing Development Authority, Revenue Bonds
(Series A), 5.90%, 12/1/2005 AA 519,030
-----------------------------------------------------------
500,000 Michigan State Housing Development Authority, Revenue Bonds
(Series A), 5.90%, 6/1/2005 AA 518,705
-----------------------------------------------------------
430,000 Michigan State Housing Development Authority, Revenue Bonds
(Series A), 6.25%, 6/1/2002 AA- 450,399
-----------------------------------------------------------
200,000 Michigan State Housing Development Authority, Revenue Bonds
(Series A), 7.00%, 12/1/2005 AA- 214,378
-----------------------------------------------------------
280,000 Michigan State Housing Development Authority, Revenue Bonds
(Series B), 6.30%, 12/1/2003 AA- 294,666
-----------------------------------------------------------
</TABLE>
MICHIGAN INTERMEDIATE MUNICIPAL TRUST
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
- ---------- ----------------------------------------------------------- -------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- -------------------------------------------------------------------------
MICHIGAN--CONTINUED
-----------------------------------------------------------
$ 200,000 Michigan State Housing Development Authority, Revenue Bonds
(Series B), 6.95%, 12/1/2020 AA- $ 209,022
-----------------------------------------------------------
100,000 Michigan State Housing Development Authority, Revenue Bonds
(Series B), 7.00%, 6/1/1996 AA- 101,340
-----------------------------------------------------------
1,850,000 Michigan State South Central Power Agency, Power Supply
System Revenue Refunding Bonds, 5.00% (AMBAC INS)/
(Original Issue Yield: 7.20%), 11/1/2009 AAA 1,752,672
-----------------------------------------------------------
250,000 Michigan State Strategic Fund, Ltd Obligation Revenue
Refunding Bonds (Series A), 7.10% (Ford Motor Co.)/
(Original Issue Yield: 7.127%), 2/1/2006 A2 281,383
-----------------------------------------------------------
1,000,000 Michigan State, UT GO Recreation Program Bonds, 5.75%
(Original Issue Yield: 5.80%), 11/1/2001 A1 1,069,360
-----------------------------------------------------------
4,250,000 Monroe County, MI Pollution Control Authority, PCR Revenue
Bonds (Series A), 6.35% (Detroit Edison Co.)/(AMBAC INS),
12/1/2004 AAA 4,595,143
-----------------------------------------------------------
1,750,000 Novi, MI Community School District, UT GO Bonds, Q-SBLF,
5.45% (Original Issue Yield: 5.50%), 5/1/2003 A1 1,816,430
-----------------------------------------------------------
950,000 Novi, MI, UT GO Bonds (Series A & B), 4.80%
(Original Issue Yield: 4.90%), 10/1/2005 A1 931,371
-----------------------------------------------------------
300,000 Oakland & Washtenaw Counties, MI, Revenue Bonds, 6.65%
(Oakland Community College District, MI)/(Original Issue
Yield: 6.743%), 5/1/2011 A 323,187
-----------------------------------------------------------
250,000 Oakland County, MI, LT GO Bonds, Evergreen-Farmington Sewer
Disposal, 6.30%, 5/1/2005 A 267,170
-----------------------------------------------------------
610,000 Okemos, MI Public School District, UT GO Refunding Bonds,
Q-SBLF, 6.00% (Michigan State GTD), 5/1/2002 A1 654,524
-----------------------------------------------------------
140,000 Ottawa County, MI, LT GO Bonds, Northwest Ottawa Water
Supply System, 6.50% (Original Issue Yield: 6.55%),
10/1/2002 A1 149,573
-----------------------------------------------------------
100,000 Ottawa County, MI, LT GO Bonds, Northwest Ottawa Water
System, 6.85%, 5/1/2000 A1 105,565
-----------------------------------------------------------
</TABLE>
MICHIGAN INTERMEDIATE MUNICIPAL TRUST
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
- ---------- ----------------------------------------------------------- -------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- -------------------------------------------------------------------------
MICHIGAN--CONTINUED
-----------------------------------------------------------
$ 220,000 Ottawa County, MI, LT GO Bonds, Northwest Ottawa Water
Supply System, 6.50%, 10/1/2001 A1 $ 235,701
-----------------------------------------------------------
795,000 Ottawa County, MI, LT GO Refunding Bonds, Ottawa County
Water Supply System, 5.40% (Original Issue Yield: 5.45%),
8/1/2002 A1 830,362
-----------------------------------------------------------
400,000 Plymouth-Canton, MI Community School District, UT GO Bonds
(Series C), Q-SBLF, 6.00% (Michigan State GTD)/ (Original
Issue Yield: 6.10%), 5/1/2003 A1 429,128
-----------------------------------------------------------
500,000 Plymouth-Canton, MI Community School District, UT GO
Refunding Bonds (Series B), Q-SBLF, 6.80% (Michigan State
GTD)/(Original Issue Yield: 6.90%), 5/1/2001 (@101) A1 559,205
-----------------------------------------------------------
615,000 Riverview, MI Community School District, UT GO Bonds, 6.20%
(FGIC INS), 5/1/2002 (@101.5) Aaa 678,081
-----------------------------------------------------------
570,000 Riverview, MI Community School District, UT GO Bonds, 6.20%
(FGIC INS), 5/1/2002 (@101.5) Aaa 628,465
-----------------------------------------------------------
350,000 Rochester, MI Community School District, UT GO Bonds, 6.50%
(Michigan State GTD)/(Original Issue Yield: 6.60%),
5/1/2002 (@100) A1 386,936
-----------------------------------------------------------
250,000 Rochester, MI Community School District, UT GO Bonds, 6.50%
(Michigan State GTD)/(Original Issue Yield: 6.75%),
5/1/2002 (@100) A1 276,383
-----------------------------------------------------------
270,000 Shelby Charter Townships, MI Building Authority, Revenue
Bonds, 6.25% (AMBAC INS)/(Original Issue Yield: 6.45%),
11/1/2006 Aaa 291,830
-----------------------------------------------------------
230,000 Shelby Charter Townships, MI Building Authority, Revenue
Bonds, 6.25% (AMBAC INS)/(Original Issue Yield: 6.50%),
11/1/2007 Aaa 247,068
-----------------------------------------------------------
250,000 University of Michigan, Hospital Revenue Bonds, 7.00%
(Original Issue Yield: 7.25%), 12/1/2000 (@102) Aa 283,120
-----------------------------------------------------------
1,500,000 University of Michigan, Hospital Revenue Refunding Bonds
(Series A), 5.70% (Original Issue Yield: 5.80%), 12/1/2004 Aa 1,593,990
-----------------------------------------------------------
</TABLE>
MICHIGAN INTERMEDIATE MUNICIPAL TRUST
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
- ---------- ----------------------------------------------------------- -------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- -------------------------------------------------------------------------
MICHIGAN--CONTINUED
-----------------------------------------------------------
$1,000,000 University of Michigan, Student Fee Revenue Bonds (Series
B), 5.20% (Original Issue Yield: 5.30%), 4/1/2004 Aa $ 1,026,410
-----------------------------------------------------------
1,000,000 Western Michigan University, Revenue Bonds, 5.50% (FGIC
INS)/(Original Issue Yield: 5.55%), 11/15/2002 Aaa 1,052,710
-----------------------------------------------------------
885,000 Wyandotte, MI Electric Authority, Revenue Refunding Bonds,
6.10% (MBIA INS), 10/1/2002 Aaa 960,535
----------------------------------------------------------- -----------
TOTAL LONG-TERM MUNICIPAL SECURITIES
(IDENTIFIED COST, $56,297,068) 59,357,637
----------------------------------------------------------- -----------
SHORT-TERM MUNICIPAL NOTES--0.7%
- -------------------------------------------------------------------------
PUERTO RICO--0.7%
-----------------------------------------------------------
450,000 Puerto Rico Government Development Bank Weekly VRDNs
(Credit Suisse, Zurich LOC) A-1 450,000
----------------------------------------------------------- -----------
TOTAL MUNICIPAL SECURITIES INVESTMENTS
(IDENTIFIED COST $56,747,068)(A) $59,807,637
----------------------------------------------------------- -----------
</TABLE>
* Please refer to the Appendix of the Statement of Additional Information for an
explanation of the credit ratings. Current credit ratings are unaudited.
Note: The categories of investments are shown as a percentage of net assets
($60,620,807) at August 31, 1995.
(a) The cost of investments for federal tax purposes amounts to $56,747,068. The
net unrealized appreciation on federal tax basis amounts to $3,060,569,
which is comprised of $3,155,642 appreciation and $95,073 depreciation at
August 31, 1995.
MICHIGAN INTERMEDIATE MUNICIPAL TRUST
- --------------------------------------------------------------------------------
The following acronyms are used throughout this portfolio:
<TABLE>
<S> <C>
AMBAC -- American Municipal Bond Assurance Corporation
COL -- Collateralized
FGIC -- Financial Guaranty Insurance Company
FSA -- Financial Security Assurance
GO -- General Obligation
GTD -- Guarantee
INS -- Insurance
LOC -- Letter of Credit
LT -- Limited Tax
MBIA -- Municipal Bond Investors Assurance
PCR -- Pollution Control Revenue
Q-SBLF -- Qualified State Bond Loan Fund
UT -- Unlimited Tax
VRDNs -- Variable Rate Demand Notes
</TABLE>
(See Notes which are an integral part of the Financial Statements)
MICHIGAN INTERMEDIATE MUNICIPAL TRUST
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- -------------------------------------------------------------------------------
Total investments in securities, at value (identified and tax cost $56,747,068) $59,807,637
- -------------------------------------------------------------------------------
Cash 47,830
- -------------------------------------------------------------------------------
Income receivable 983,922
- -------------------------------------------------------------------------------
Receivable for shares sold 2,286
- -------------------------------------------------------------------------------
Deferred expenses 4,682
- ------------------------------------------------------------------------------- -----------
Total assets 60,846,357
- -------------------------------------------------------------------------------
LIABILITIES:
- -------------------------------------------------------------------------------
Income distribution payable $209,362
- --------------------------------------------------------------------
Accrued expenses 16,188
- -------------------------------------------------------------------- --------
Total liabilities 225,550
- ------------------------------------------------------------------------------- -----------
Net Assets for 5,611,518 shares outstanding $60,620,807
- ------------------------------------------------------------------------------- -----------
NET ASSETS CONSIST OF:
- -------------------------------------------------------------------------------
Paid in capital $58,820,692
- -------------------------------------------------------------------------------
Net unrealized appreciation of investments 3,060,569
- -------------------------------------------------------------------------------
Accumulated net realized loss on investments (1,260,454)
- ------------------------------------------------------------------------------- -----------
Total Net Assets $60,620,807
- ------------------------------------------------------------------------------- -----------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
$60,620,807 / 5,611,518 shares outstanding $10.80
- ------------------------------------------------------------------------------- -----------
OFFERING PRICE per Share (100/97 of $10.80)* $11.13
- ------------------------------------------------------------------------------- -----------
REDEMPTION PROCEEDS per share (99.5/100 of $10.80)** $10.75
- ------------------------------------------------------------------------------- -----------
</TABLE>
* See "What Shares Cost."
** See "Contingent Deferred Sales Charge."
(See Notes which are an integral part of the Financial Statements)
MICHIGAN INTERMEDIATE MUNICIPAL TRUST
STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- -----------------------------------------------------------------------------------
Interest $3,319,697
- -----------------------------------------------------------------------------------
EXPENSES:
- -----------------------------------------------------------------------------------
Investment advisory fee $233,527
- ----------------------------------------------------------------------
Administrative personnel and services fee 125,000
- ----------------------------------------------------------------------
Custodian fees 50,650
- ----------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 25,268
- ----------------------------------------------------------------------
Directors'/Trustees' fees 1,094
- ----------------------------------------------------------------------
Auditing fees 13,971
- ----------------------------------------------------------------------
Legal fees 3,476
- ----------------------------------------------------------------------
Portfolio accounting fees 27,327
- ----------------------------------------------------------------------
Shareholder services fee 145,955
- ----------------------------------------------------------------------
Share registration costs 14,911
- ----------------------------------------------------------------------
Printing and postage 10,655
- ----------------------------------------------------------------------
Insurance premiums 4,808
- ----------------------------------------------------------------------
Taxes 60
- ----------------------------------------------------------------------
Miscellaneous 11,262
- ---------------------------------------------------------------------- --------
Total expenses 667,964
- ----------------------------------------------------------------------
Waivers and reimbursements--
- ----------------------------------------------------------------------
Waiver of investment advisory fee $(233,527)
- ----------------------------------------------------------
Waiver of shareholder services fee (113,738)
- ----------------------------------------------------------
Reimbursement of other operating expenses (28,124)
- ---------------------------------------------------------- ---------
Total waivers and reimbursements (375,389)
- ---------------------------------------------------------------------- --------
Net expenses 292,575
- ----------------------------------------------------------------------------------- ----------
Net investment income 3,027,122
- ----------------------------------------------------------------------------------- ----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- -----------------------------------------------------------------------------------
Net realized loss on investments (994,664)
- -----------------------------------------------------------------------------------
Net change in unrealized appreciation of investments 2,337,762
- ----------------------------------------------------------------------------------- ----------
Net realized and unrealized gain on investments 1,343,098
- ----------------------------------------------------------------------------------- ----------
Change in net assets resulting from operations $4,370,220
- ----------------------------------------------------------------------------------- ----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
MICHIGAN INTERMEDIATE MUNICIPAL TRUST
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
---------------------------
1995 1994
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- -----------------------------------------------------------------
OPERATIONS--
- -----------------------------------------------------------------
Net investment income $ 3,027,122 $ 2,790,803
- -----------------------------------------------------------------
Net realized gain (loss) on investments ($310,181 and $3,738,
respectively, as computed for federal tax purposes) (994,664) (249,785)
- -----------------------------------------------------------------
Net change in unrealized appreciation (depreciation) 2,337,762 (2,310,979)
- ----------------------------------------------------------------- ------------ ------------
Change in net assets resulting from operations 4,370,220 230,039
- ----------------------------------------------------------------- ------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS--
- -----------------------------------------------------------------
Distributions from net investment income (3,027,122) (2,790,803)
- ----------------------------------------------------------------- ------------ ------------
SHARE TRANSACTIONS--
- -----------------------------------------------------------------
Proceeds from sale of shares 15,838,005 26,346,131
- -----------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of
distributions declared 423,109 221,749
- -----------------------------------------------------------------
Cost of shares redeemed (15,463,625) (16,151,756)
- ----------------------------------------------------------------- ------------ ------------
Change in net assets resulting from share transactions 797,489 10,416,124
- ----------------------------------------------------------------- ------------ ------------
Change in net assets 2,140,587 7,855,360
- -----------------------------------------------------------------
NET ASSETS:
- -----------------------------------------------------------------
Beginning of period 58,480,220 50,624,860
- ----------------------------------------------------------------- ------------ ------------
End of period $ 60,620,807 $ 58,480,220
- ----------------------------------------------------------------- ------------ ------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
MICHIGAN INTERMEDIATE MUNICIPAL TRUST
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1995
- --------------------------------------------------------------------------------
(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 five, non-diversified
portfolios. The financial statements included herein are 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.
INVESTMENT VALUATIONS--Short-term securities with remaining maturities of
sixty days or less at the time of purchases may be valued at amortized
cost, which approximates fair market value. All other securities are valued
at prices provided by an independent pricing service.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and expenses
are accrued daily. Bond premium and discount, if applicable, are amortized
as required by the Internal Revenue Code, as amended (the "Code").
Distributions to shareholders are recorded on the ex-dividend date.
FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its income. Accordingly, no
provisions for federal tax are necessary.
At August 31, 1995, the Fund, for federal tax purposes, had a capital loss
carryforward of $326,186 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 as follows:
<TABLE>
<CAPTION>
EXPIRATION YEAR EXPIRATION AMOUNT
------------------------------------------ ------------------------------------------
<S> <C>
2001 $12,267
2002 $3,738
2003 $310,181
</TABLE>
Additionally, net capital losses of $934,269 attributable to security
transactions incurred after October 31, 1994 are treated as arising on the
first day of the Fund's next taxable year.
MICHIGAN INTERMEDIATE MUNICIPAL TRUST
- --------------------------------------------------------------------------------
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.
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 in that one state than would be a
comparable tax-exempt mutual fund that invests nationally. In order to
reduce the credit risk associated with such factors, at August 31, 1995,
51% 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
do not exceed 16% of total investments.
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.
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 shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
----------------------------------
1995 1994
--------------- ---------------
<S> <C> <C>
- ----------------------------------------------------------
Shares sold 1,533,015 2,416,275
- ----------------------------------------------------------
Shares issued to shareholders in payment of distributions
declared 40,304 20,450
- ----------------------------------------------------------
Shares redeemed (1,484,327) (1,508,248)
- ---------------------------------------------------------- ------------- -------------
Net change resulting from share transactions 88,992 928,477
- ---------------------------------------------------------- ------------- -------------
</TABLE>
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT 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 any portion of its fee and reimburse certain
MICHIGAN INTERMEDIATE MUNICIPAL TRUST
- --------------------------------------------------------------------------------
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"), under the
Administrative Services Agreement, provides the Fund with administrative
personnel and services. This 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 daily net assets of the Fund for the period. This fee is to obtain
certain services for shareholders and to maintain shareholder accounts. FSS may
voluntarily choose to waive a portion of this fee. FSS can modify or terminate
this voluntary waiver at any time at its sole discretion.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES--Federated Services
Company ("FServ")serves as transfer and dividend disbursing agent for the Fund.
This fee is based on the size, type, and number of accounts and transactions
made by shareholders.
PORTFOLIO ACCOUNTING FEES--FServ maintains the Fund's accounting records for
which it receives a fee. The fee is based on the level of the Fund's average
daily net assets for the period, plus out-of-pocket expenses.
ORGANIZATIONAL EXPENSES--Organizational and start-up administrative service
expenses of $111,559 were borne initially by the Adviser. The Fund has agreed to
reimburse the Adviser for the organizational and start-up administrative
expenses during the five year period following effective date. For the period
ended August 31, 1995, the Fund paid $1,493 pursuant to this agreement.
INTERFUND TRANSACTIONS--During the year ended August 31, 1995, the fund engaged
in purchase and sale transactions with funds that have a common investment
adviser, or affiliated investment advisers, common Directors/Trustees, and/or
common Officers. These transactions were made at current market value pursuant
to Rule 17a-7 under the Act amounting to $13,100,000 and $12,500,000,
respectively.
GENERAL--Certain of the Officers and Trustees of the Trust are Officers and
Directors or Trustees of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended August 31, 1995, were as follows:
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------
PURCHASES $12,973,064
- ------------------------------------------------------------------------------- -----------
SALES $12,241,360
- ------------------------------------------------------------------------------- -----------
</TABLE>
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 of Michigan
Intermediate Municipal Trust (one of the portfolios comprising Municipal
Securities Income Trust), including the portfolio of investments, as of August
31, 1995, the related statement of operations for the year then ended, the
statement of changes in net assets for the years ended August 31, 1995 and 1994,
and the financial highlights for each of the years in the four-year period ended
August 31, 1995. These financial statements and financial highlights are the
responsibility of the Fund'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, 1995, 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, 1995, 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
Pittsburgh, Pennsylvania
October 13, 1995
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <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 P.O. Box 8600
Trust Company Boston, Massachusetts 02266-8600
- ------------------------------------------------------------------------------------------------
Transfer Agent and Dividend Disbursing Agent
Federated Services Company P.O. Box 8600
Boston, Massachusetts 02266-8600
- ------------------------------------------------------------------------------------------------
Independent Auditors
Deloitte & Touche LLP 2500 One PPG Place
Pittsburgh, Pennsylvania 15222-5401
- ------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MICHIGAN INTERMEDIATE
MUNICIPAL TRUST
PROSPECTUS
A Non-Diversified Portfolio of
Municipal Securities
Income Trust, An Open-End,
Management Investment Company
October 31, 1995
FEDERATED SECURITIES CORP.
(LOGO)
- ---------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
CUSIP 625922703
G01389-01 (10/95)
MICHIGAN INTERMEDIATE MUNICIPAL TRUST
(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,
1995. 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, 1995
FEDERATED SECURITIES
CORP.
Distributor
A subsidiary of FEDERATED
INVESTORS
GENERAL INFORMATION ABOUT THE FUND1 Purchases by Sales Representatives,
Fund
INVESTMENT OBJECTIVE AND POLICIES1
Trustees, and Employees 14
Acceptable Investments 1 DETERMINING NET ASSET VALUE 14
When-Issued and Delayed
Valuing Municipal Bonds 14
Delivery Transactions 2
Use of Amortized Cost 14
Temporary Investments 2
REDEEMING SHARES 14
Portfolio Turnover 3
Investment Limitations 3 Redemption in Kind 14
Michigan Investment Risks 5 TAX STATUS 15
MUNICIPAL SECURITIES INCOME TRUST
The Fund's Tax Status 15
MANAGEMENT 6
Shareholders' Tax Status 15
Fund Ownership 11 TOTAL RETURN 15
Trustees Compensation 11
YIELD 15
Trustee Liability 12
INVESTMENT ADVISORY SERVICES 12 TAX-EQUIVALENT YIELD 16
Adviser to the Fund 12 Tax-Equivalency Table 16
Advisory Fees 12 PERFORMANCE COMPARISONS 17
ADMINISTRATIVE SERVICES 12
ABOUT FEDERATED INVESTORS 17
TRANSFER AGENT AND DIVIDEND
APPENDIX 19
DISBURSING AGENT 12
SHAREHOLDER SERVICES AGREEMENT 13
BROKERAGE TRANSACTIONS 13
PURCHASING SHARES 13
Conversion to Federal Funds 13
GENERAL INFORMATION ABOUT THE FUND
The Fund is a portfolio in 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. On June 1, 1994, Michigan Municipal Income Fund changed its name to
Michigan Intermediate Municipal Trust.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide current income exempt from federal
regular income tax and the personal income taxes imposed by the state of
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:
omunicipal notes and municipal commercial paper;
oserial bonds sold with differing maturity dates;
otax anticipation notes sold to finance working capital needs of
municipalities;
obond anticipation notes sold prior to the issuance of longer-term bonds;
opre-refunded municipal bonds; and
ogeneral 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.
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:
o whether the lease can be terminated by the lessee;
o the potential recovery, if any, from a sale of the leased property upon
termination of the lease;
o the lessee's general credit strength (e.g., its debt, administrative,
economic and financial characteristics and prospects);
o the likelihood that the lessee will discontinue appropriating funding for
the leased property because the property is no longer deemed essential to
its operations (e.g., the potential for an "event of non-appropriation");
o any credit enhancement or legal recourse provided upon an event of non-
appropriation or other termination of the lease.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an advantageous
price or yield for the Fund. 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.
TEMPORAY 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 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, 1995 and 1994, the Fund's
portfolio turnover rates were 23% and 13%, 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, such as 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 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 violationof such
restriction.
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.
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
Birthdate: July 28, 1924
Chairman and Trustee
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated Research
Corp. and Federated Global Research Corp.; Chairman, Passport Research, Ltd.;
Chief Executive Officer and Director, Trustee, or Managing General Partner of
the Funds. Mr. Donahue is the father of J. Christopher Donahue, Executive Vice
President and Trustee of the Trust.
Thomas G. Bigley
28th Floor, One Oxford Centre
Pittsburgh, PA
Birthdate: February 3, 1934
Trustee
Director, Oberg Manufacturing Co.; Chairman of the Board, Children's Hospital of
Pittsburgh; Director, Trustee, or Managing General Partner of the Funds;
formerly, Senior Partner, Ernst & Young LLP.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
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
Birthdate: July 4, 1918
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
Birthdate: April 11, 1949
Executive Vice President and Trustee
President and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated Research
Corp. and Federated Global Research Corp.; President, Passport Research, Ltd.;
Trustee, Federated Administrative Services, Federated Services Company, and
Federated Shareholder Services; President or Vice President of the Funds;
Director, Trustee, or Managing General Partner of some of the Funds. Mr. Donahue
is the son of John F. Donahue, Chairman and Trustee of the Trust.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Trustee
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director, Trustee,
or Managing General Partner of the Funds.
Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Trustee
Professor of Medicine and Member, Board of Trustees, University of Pittsburgh;
Medical Director, University of Pittsburgh Medical Center - Downtown; Member,
Board of Directors, University of Pittsburgh Medical Center; formerly,
Hematologist, Oncologist, and Internist, Presbyterian and Montefiore Hospitals;
Director, Trustee, or Managing General Partner of the Funds.
Edward L. Flaherty, Jr.@
Henny, Kochuba, Meyer and Flaherty
Two Gateway Center - Suite 674
Pittsburgh, PA
Birthdate: June 18, 1924
Trustee
Attorney-at-law; Shareholder, Henny, Kochuba, Meyer and Flaherty; Director,
Eat'N Park Restaurants, Inc., and Statewide Settlement Agency, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Counsel, Horizon
Financial, F.A., Western Region.
Peter E. Madden
70 Westcliff Road
Westin, MA
Birthdate: March 16, 1942
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.
Gregor F. Meyer
Henny, Kochuba, Meyer and Flaherty
Two Gateway Center - Suite 674
Pittsburgh, PA
Birthdate: October 6, 1926
Trustee
Attorney-at-law; Shareholder, Henny, Kochuba, Meyer and Flaherty; Chairman,
Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.; Director, Trustee, or
Managing General Partner of the Funds.
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Trustee
President, Law Professor, Duquesne University; Consulting Partner, Mollica,
Murray and Hogue; Director, Trustee or Managing General Partner of the Funds.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Trustee
Professor, International Politics and Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer Library
Center, Inc., and U.S. Space Foundation; Chairman, Czecho Management Center;
Director, Trustee, or Managing General Partner of the Funds; President Emeritus,
University of Pittsburgh; founding Chairman, National Advisory Council for
Environmental Policy and Technology and Federal Emergency Management Advisory
Board.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Trustee
Public relations/marketing consultant; Conference Coordinator, Non-profit
entities; Director, Trustee, or Managing General Partner of the Funds.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
President
Executive Vice President and Trustee, Federated Investors; Chairman and
Director, Federated Securities Corp.; President or Vice President of some of the
Funds; Director or Trustee of some of the Funds.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
Vice President and Treasurer
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated Research
Corp., Federated Global Research Corp. and Passport Research, Ltd.; Executive
Vice President and Director, Federated Securities Corp.; Trustee, Federated
Services Company; Chairman, Treasurer, and Trustee, Federated Administrative
Services; Trustee or Director of some of the Funds; Vice President and Treasurer
of the Funds.
David M. Taylor
Federated Investors Tower
Pittsburgh, PA
Birthdate: January 13, 1947
Treasurer
Senior Vice President, Controller, and Trustee, Federated Investors; Controller,
Federated Advisers, Federated Management, Federated Research, Federated Research
Corp., and Passport Research, Ltd.; Vice President, Federated Shareholder
Services; Senior Vice President, Federated Administrative Services; Treasurer of
the Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Executive Vice President and Secretary
Executive Vice President, Secretary, General Counsel, and Trustee, Federated
Investors; Trustee, Federated Advisers, Federated Management, and Federated
Research; Director, Federated Research Corp. and Federated Global Research Corp.
; Trustee, Federated Services Company; Executive Vice President, Secretary, and
Trustee, Federated Administrative Services; President and Trustee, Federated
Shareholder Services; Director, Federated Securities Corp.; 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.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: American Leaders Fund, Inc.; Annuity Management Series;
Arrow Funds; Automated Government Money Trust; Blanchard Funds; Blanchard
Precious Metals, Inc.; Cash Trust Series II; Cash Trust Series, Inc.; DG
Investor Series; Edward D. Jones & Co. Daily Passport Cash Trust; Federated ARMs
Fund; Federated Equity Funds; Federated Exchange Fund, Ltd.; Federated GNMA
Trust; Federated Government Trust; Federated High Yield Trust; Federated Income
Securities Trust; Federated Income Trust; Federated Index Trust; Federated
Institutional Trust; Federated Master Trust; Federated Municipal Trust;
Federated Short-Term Municipal Trust; Federated Short-Term U.S. Government
Trust; Federated Stock Trust; Federated Tax-Free Trust; Federated Total Return
Series, Inc.; Federated U.S. Government Bond Fund; Federated U.S. Government
Securities Fund: 1-3 Years; Federated U.S. Government Securities Fund: 3-5
Years; First Priority Funds; Fixed Income Securities, Inc.; Fortress Adjustable
Rate U.S. Government Fund, Inc.; Fortress Municipal Income Fund, Inc.; Fortress
Utility Fund, Inc.; Fund for U.S. Government Securities, Inc.; Government Income
Securities, Inc.; High Yield Cash Trust;; Insurance Management Series;
Intermediate Municipal Trust; International Series, Inc.; Investment Series
Funds, Inc.; Investment Series Trust; Liberty Equity Income Fund, Inc.; Liberty
High Income Bond Fund, Inc.; Liberty Municipal Securities Fund, Inc.; Liberty
U.S. Government Money Market Trust; Liberty Term Trust, Inc. - 1999; Liberty
Utility Fund, Inc.; Liquid Cash Trust; Managed Series Trust; Money Market
Management, Inc.; Money Market Obligations Trust; Money Market Trust; Newpoint
Funds; 111 Corcoran Funds; Peachtree Funds; The Planters Funds; RIMCO Monument
Funds; The Shawmut Funds; Star Funds; The Starburst Funds; The Starburst Funds
II; Stock and Bond Fund, Inc.; Sunburst Funds; Targeted Duration Trust; Tax-Free
Instruments Trust; Trademark Funds; Trust for Financial Institutions; Trust For
Government Cash Reserves; Trust for Short-Term U.S. Government Securities; Trust
for U.S. Treasury Obligations; The Virtus Funds; World Investment Series, Inc.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the outstanding Shares.
As of October 9, 1995, the following shareholders of record owned 5% or more of
the outstanding Shares of the Fund: ENBANCO, Traverse City, MI, owned
approximately 2,116,056 Shares (37.68%); FESCA, Escanaba, MI, owned
approximately 957,907 Shares (17.06%); Shoreline Co., South Haven, MI, owned
approximately 451,893 Shares (8.04%); Charles Schwab & Co., Inc., San Francisco,
CA, owned approximately 451,633 Shares (7.40%).
TRUSTEES COMPENSATION
AGGREGATE
NAME , COMPENSATION
POSITION WITH FROM TOTAL COMPENSATION PAID
TRUST TRUST*# FROM FUND COMPLEX +
John F. Donahue $ -0- $ -0- for the Trust and
Trustee and Chairman 68 other investment companies in the Fund Complex
Thomas G. Bigley $186 $20,688 for the Trust and
Trustee 49 other investment companies in the Fund Complex
John T. Conroy $201 $117,202 for the Trust and
Trustee 64 other investment companies in the Fund Complex
William J. Copeland $201 $117,202 for the Trust and
Trustee 64 other investment companies in the Fund Complex
J. Christopher Donahue $ -0- $ -0- for the Trust and
Trustee and Exec. Vice Pres. 14 other investment companies in the Fund
Complex
James E. Dowd $201 $117,202 for the Trust and
Trustee 64 other investment companies in the Fund Complex
Lawrence D. Ellis, M.D. $186 $106,460 for the Trust and
Trustee 64 other investment companies in the Fund Complex
Edward L. Flaherty, Jr. $201 $117,202 for the Trust and
Trustee 64 other investment companies in the Fund Complex
Peter E. Madden $162 $90,563 for the Trust and
Trustee 64 other investment companies in the Fund Complex
Gregor F. Meyer $186 $106,460 for the Trust and
Trustee 64 other investment companies in the Fund Complex
John E. Murray, Jr. $146 $ -0- for the Trust and
Trustee 64 other investment companies in the Fund Complex
Wesley W. Posvar $186 $106,460 for the Trust and
Trustee 64 other investment companies in the Fund Complex
Marjorie P. Smuts$186 $106,460 for the Trust and
Trustee 64 other investment companies in the Fund Complex
*Information is furnished for the fiscal year ended August 31, 1995.
#The aggregate compensation is provided for the Trust which is comprised of five
portfolios.
+The information is provided for the last calendar year.
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, 1995, 1994 and 1993, the Adviser earned advisory fees of $233,527, $229,413,
and $154,387, 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 years ended August 31, 1995 and 1994, the Administrators collectively
earned $125,000 and $197,395, respectively, none of which was waived. For the
fiscal year ended August 31, 1993, Federated Administrative Services, Inc.,
earned $237,374, 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 AGREEMENT
This arrangement permits the payment of fees to Federated Shareholder Services
and, indirectly, to financial institutions to cause services to be provided
which are necessary for the maintenance of shareholder accounts and to encourage
personal services 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. By adopting the Shareholder Services Agreement, the
Board of Trustees expects that the Fund will benefit by: (1) providing personal
services to shareholders; (2) investing shareholder assets with a minimum of
delay and administrative detail; (3) enhancing shareholder record-keeping
systems; and (4) responding promptly to shareholder's requests and inquiries
concerning their accounts.
For the fiscal year ended August 31, 1995, payments in the amount of $145,955
were made pursuant to the Shareholder Services Agreement.
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:
o advice as to the advisability of investing in securities;
o security analysis and reports;
o economic studies;
o industry studies;
o receipt of quotations for portfolio evaluations; and
o similar services.
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.
During the fiscal years ended August 31, 1995, 1994, and 1993, the Fund paid no
brokerage commissions.
PURCHASING SHARES
Except under certain circumstances described in the prospectus, shares are sold
at their net asset value plus a sales charge on days the New York Stock Exchange
is open for business. The procedure for purchasing shares 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 charge.
Shares may also be sold without a sales charge to trusts or pension or profit-
sharing plans for these persons. These sales are made with the purchaser's
written assurance that the purchase is for investment purposes and that the
securities will not be resold except through redemption by the Fund.
DETERMINING NET ASSET VALUE
Net asset value generally changes each day. The days on which net asset value is
calculated by the Fund are described in the prospectus.
VALUING MUNICIPAL BONDS
The 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 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 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:
o derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities;
o derive less than 30% of its gross income from the sale of securities held
less than three months;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income earned
during the year.
SHAREHOLDERS' TAX STATUS
CAPITAL GAINS
Capital gains or losses may be realized by the Fund on the sale of
portfolio securities and as a result of discounts from par value on
securities held to maturity. Sales would generally be made because of:
o the availability of higher relative yields;
o differentials in market values;
o new investment opportunities;
o changes in creditworthiness of an issuer; or
o an attempt to preserve gains or limit losses.
Distribution of long-term capital gains are taxed as such, whether they are
taken in cash or reinvested, and regardless of the length of time the
shareholder has owned the shares. Any loss by a shareholder on Fund shares
held for less than six months and sold after a capital gains distribution
will be treated as a long-term capital loss to the extent of the capital
gains distribution.
TOTAL RETURN
The Fund's average annual total returns for the one-year period ended August 31,
1995, and for the period from September 18, 1991 (date of initial public
investment) to August 31, 1995, were 4.14% and 6.58%, 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 charge, 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 the thirty-day period ended August 31, 1995 was 5.04%.
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, 1995
was 7.46%.
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.
TAXABLE YIELD EQUIVALENT FOR 1995
State of Michigan
COMBINED FEDERAL AND STATE INCOME TAX BRACKET:
19.47% 32.47% 35.47% 40.47% 44.07%
JOINT $1- $39,001- $94,251- $143,601- OVER
RETURN 39,000 94,250 143,600 256,500 256,500
SINGLE $1- $23,351- $56,551- $117,951- OVER
RETURN 23,350 56,550 117,950 256,500 256,500
Tax-Exempt Yield Taxable Yield Equivalent
1.50% 1.86% 2.22% 2.32% 2.52% 2.68%
2.00% 2.48% 2.96% 3.10% 3.36% 3.58%
2.50% 3.10% 3.70% 3.87% 4.20% 4.47%
3.00% 3.73% 4.44% 4.65% 5.04% 5.36%
3.50% 4.35% 5.18% 5.42% 5.88% 6.26%
4.00% 4.97% 5.92% 6.20% 6.72% 7.15%
4.50% 5.59% 6.66% 6.97% 7.56% 8.05%
5.00% 6.21% 7.40% 7.75% 8.40% 8.94%
5.50% 6.83% 8.14% 8.52% 9.24% 9.83%
6.00% 7.45% 8.88% 9.30% 10.08% 10.73%
Note: The maximum marginal tax rate for each bracket was used in
calculating the taxable yield equivalent. Furthermore, additional state and
local taxes paid on comparable taxable investments were not used to
increase federal deductions.
The chart above is for illustrative purposes only. It is not an indicator
of past or future performance of Fund shares.
* Some portion of the Fund's income may be subject to the federal
alternative minimum tax and state and local income taxes.
PERFORMANCE COMPARISONS
The Fund's performance depends upon such variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio securities;
o changes in the Fund's expenses; and
o various other factors.
The Fund's performance fluctuates on a daily basis largely because net earnings
and offering price per share fluctuate daily. Both net earnings and offering
price per share are factors in the computation of yield and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute offering price. The financial
publications and/or indices which the Fund uses in advertising may include:
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 charge.
ABOUT FEDERATED INVESTORS
Federated is dedicated to meeting investor needs which is reflected in its
investment decision making -- structured, straightforward, and consistent. This
has resulted in a history of competitive performance with a range of competitive
investment products that have gained the confidence of thousands of clients and
their customers.
The company's disciplined security selection process is firmly rooted in sound
methodologies backed by fundamental and technical research. Investment
decisions are made and executed by teams of portfolio managers, analysts, and
traders dedicated to specific market sectors.
In the municipal sector, as of December 31, 1994, Federated managed 18 bond
funds with approximately $1.9 billion in assets and 18 money market funds with
approximately $6.6 billion in total assets. In 1976, Federated introduced one
of the first municipal bond mutual funds in the industry and is now one of the
largest institutional buyers of municipal securities.
J. Thomas Madden, Executive Vice President, oversees Federated's equity and high
yield corporate bond management while William D. Dawson, Executive Vice
President, oversees Federated's domestic fixed income management. Henry A.
Frantzen, Executive Vice President, oversees the management of Federated's
international portfolios.
MUTUAL FUND MARKET
Twenty-seven percent of American households are pursuing their financial goals
through mutual funds. These investors, as well as businesses and institutions,
have entrusted over $2 trillion to the more than 5,500 funds available.*
Federated Investors, through it subsidiaries, distributes mutual funds for a
variety of investment applications. Specific markets include:
INSTITUTIONAL
Federated meets the needs of more than 4,000 institutional clients nationwide by
managing and servicing separate accounts and mutual funds for a variety of
applications, including defined benefit and defined contribution programs, cash
management, and asset/liability management. Institutional clients include
corporations, pension funds, tax-exempt entities, foundations/endowments,
insurance companies, and investment and financial advisors. The marketing
effort to theses institutional clients is headed by John B. Fisher, President,
Institutional Sales Division.
TRUST ORGANIZATIONS
Other institutional clients include close relationships with more than 1,500
banks and trust organizations. Virtually all of the trust divisions of the top
100 bank holding companies use Federated funds in their clients' portfolios.
The marketing effort to trust clients is headed by Mark R. Gensheimer, Executive
Vice President, Bank Marketing & Sales.
BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES
Federated mutual funds are available to consumers through major brokerage firms
nationwide -- including 200 New York Stock Exchange firms -- supported by more
wholesalers than any other mutual fund distributor. The marketing effort to
these firms is headed by James F. Getz, President, Broker/Dealer Division.
*source: Investment Company Institute
APPENDIX
STANDARD & 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 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 & 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 & 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.
Cusip #625922703
1041202B (10/95)
- --------------------------------------------------------------------------------
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, 1995, with the Securities and
Exchange Commission. The information contained in the Statement of
Additional Information is incorporated by reference into this
prospectus. You may request a copy of the Statement of Additional
Information, which is in paper form only, or a paper copy of this
prospectus, if you have received your prospectus electronically, 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, 1995
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 5
- ---------------------------------------------------
California Municipal Securities 7
Investment Risks 7
Non-Diversification 8
Investment Limitations 8
NET ASSET VALUE 8
- ---------------------------------------------------
INVESTING IN FORTRESS SHARES 9
- ---------------------------------------------------
Share Purchases 9
Minimum Investment Required 9
What Shares Cost 10
Eliminating/Reducing The Sales Charge 10
Systematic Investment Program 12
Exchange Privilege 12
Certificates and Confirmations 13
Dividends and Distributions 13
REDEEMING FORTRESS SHARES 13
- ---------------------------------------------------
Through a Financial Institution 13
Directly By Mail 14
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 Fortress Shares 17
Administration of The Fund 19
SHAREHOLDER INFORMATION 19
- ---------------------------------------------------
Voting Rights 19
Massachusetts Partnership Law 20
TAX INFORMATION 20
- ---------------------------------------------------
Federal Income Tax 20
California Income Taxes 21
Other State and Local Taxes 21
PERFORMANCE INFORMATION 22
- ---------------------------------------------------
FINANCIAL STATEMENTS 23
- ---------------------------------------------------
REPORT OF INDEPENDENT AUDITOR 33
- ---------------------------------------------------
ADDRESSES 34
- ---------------------------------------------------
</TABLE>
I
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FORTRESS SHARES
SHAREHOLDER TRANSACTION EXPENSES
<S> <C> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)..................... 1.00%
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of offering price).......... None
Contingent Deferred Sales Charge (as a percentage of original purchase price or redemption
proceeds, as applicable) (1).................................................................... 1.00%
Redemption Fee (as a percentage of amount redeemed, if applicable)................................ None
Exchange Fee...................................................................................... None
<CAPTION>
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
<S> <C> <C>
Management Fee (after waiver) (2)................................................................. 0.00%
12b-1 Fee (after waiver) (3)...................................................................... 0.02%
Total Other Expenses (after expense reimbursement)................................................ 0.98%
Shareholder Services Fee (after waiver) (4).......................................... 0.23%
Total 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 operating expenses in the table above are based on expenses
expected during the fiscal year ending August 31, 1996. The total operating
expenses were 0.55% for the fiscal year ended August 31, 1995 and would have
been 2.96% absent the voluntary waivers of the management fee, the 12b-1 fee
and the shareholder services 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 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
CALIFORNIA MUNICIPAL INCOME FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 33.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-------------------------------
1995 1994 1993(a)
------- ------- -------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.01 $10.92 $10.00
- -----------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------
Net investment income 0.59 0.59 0.44
- -----------------------------------------------
Net realized and unrealized gain (loss) on
investments 0.12 (0.91) 0.92
- ----------------------------------------------- ------- ------- -------
Total from investment operations 0.71 (0.32) 1.36
- ----------------------------------------------- ------- ------- -------
LESS DISTRIBUTIONS
- -----------------------------------------------
Distributions from net investment income (0.59) (0.59) (0.44)
- ----------------------------------------------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $10.13 $10.01 $10.92
- ----------------------------------------------- ------- ------- -------
------- ------- -------
TOTAL RETURN (b) 7.48% (3.04%) 14.08%
- -----------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------
Expenses 0.55% 0.25% 0.25%(c)
- -----------------------------------------------
Net investment income 6.04% 5.61% 5.58%(c)
- -----------------------------------------------
Expense waiver/reimbursement (d) 2.41% 2.86% 1.98%(c)
- -----------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------
Net assets, end of period (000 omitted) $14,400 $15,059 $11,513
- -----------------------------------------------
Portfolio turnover 63% 63% 0%
- -----------------------------------------------
</TABLE>
(a) Reflects operations for the period from December 2, 1992 (date of initial
public investment) to August 31, 1993.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) Computed on an annualized basis.
(d) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(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, 1995, 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 (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 charge 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 one to 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., 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;
3
- Liberty Equity Income Fund, Inc., providing above average income and
capital appreciation through income producing equity securities;
- Limited Term Fund, providing a high level of current income consistent
with minimum fluctuation in principal value;
- Limited Term Municipal Fund, providing a high level of current income
which is exempt from federal regular income tax consistent with the
preservation of capital;
- Money Market Management, Inc., providing current income consistent with
stability of principal through high-quality money market instruments;
- New York Municipal Income Fund, providing current income exempt from
federal regular income tax, New York personal income taxes, and New York
municipalities income taxes;
- Ohio Municipal Income Fund, 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.
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. 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.
4
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 & 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
5
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 also 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
6
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.
7
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.
8
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 "Supplemental 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, P.O. Box 8600,
Boston, MA 02266-8600.
Purchases by mail are considered received after payment by check is converted by
the transfer agent's bank, State Street Bank 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.
9
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received, plus a sales charge of 1% of the offering price (which is 1.01% of the
net amount invested). Further, there is no sales charge for purchases of $1
million or more. In addition, no sales charge is imposed for Shares purchased
through bank trust departments or investment advisers registered under the
Investment Advisers Act of 1940 purchasing on behalf of their clients, 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 as of the close of trading (normally 4:00
p.m., Eastern time) on the New York Stock Exchange, Monday through Friday,
except on: (i) days on which there are not sufficient changes in the value of
the Fund's portfolio securities that its net asset value might be materially
affected; (ii) days during which no Shares are tendered for redemption and no
orders to purchase Shares are received; 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 charge retained by it. Any portion of the
sales charge 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 charge for Shares sold other than through registered broker/dealers
will be retained by Federated Securities Corp. Federated Securities Corp. may
pay fees to banks out of the sales charge in exchange for sales and/or
administrative services performed on behalf of the bank's customers in
connection with the initiation of customer accounts and purchases of Shares.
ELIMINATING/REDUCING THE SALES CHARGE
The sales charge 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;
- purchases with proceeds from redemptions of unaffiliated investment
companies; or
- concurrent purchases.
10
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES. There is no sales charge for
purchases of $1 million or more. The Fund will combine purchases made on the
same day by the investor, his spouse, and his children under age 21 when it
calculates the sales charge.
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 charge 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 charge 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 charge 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 charge may be reduced by signing a
letter of intent to that effect. This letter of intent includes a provision for
a sales charge elimination depending on the amount actually purchased within the
13-month period and a provision for the Fund's custodian to hold 1.00% 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 charge.
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 charge on prior
purchases will not be adjusted to reflect a lower sales charge.
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 charge. Federated Securities
Corp. must be notified by the shareholder in writing or by his financial
institution of the reinvestment in order to receive this elimination of the
sales charge. If the shareholder redeems his Shares, there may be tax
consequences.
11
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 charge
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 charge. For example, if a shareholder concurrently
invested $400,000 in one of the other Fortress Funds and $600,000 in Shares, the
sales charge would be eliminated. To receive this sales charge elimination,
Federated Securities Corp. must be notified by the shareholder in writing or by
his financial institution at the time the concurrent purchases are made. The
Fund will eliminate the sales charge after it confirms the purchases.
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their investment on
a regular basis in a minimum 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 1% sales charge 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 charge (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 may be subject to a CDSC and possibly a
sales charge.
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.
12
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 charge, 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
13
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.
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, P.O. Box 8600, Boston, MA 02266-8600. 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 should be sent by insured mail with
the written request to: Federated Services Company, 500 Victory Road - 2nd
Floor, North Quincy, MA 02171.
SIGNATURES. Shareholders requesting a redemption of any amount to be sent to an
address other than that on record with the Fund, or a redemption payable other
than to the shareholder of record must have signatures on written redemption
requests guaranteed by:
- a trust company or commercial bank whose deposits are insured by the Bank
Insurance Fund, 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.
14
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 4 years or less 1%
$2,000,000 to $4,999,999 2 years or less 50%
$5,000,000 or more 1 year or less .25%
</TABLE>
In instances in which Shares have been acquired in exchange for shares in other
Fortress Funds, (i) the purchase price is the price of the shares when
originally purchased and (ii) the time period during which the shares are held
will run from the date of the original purchase. The 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 to the extent that
no payment was advanced for purchases made by or through such entities. 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.
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 70 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
15
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 charge, 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.
Both the Trust and the Adviser have adopted strict codes of ethics governing the
conduct of all employees who manage the Fund and its portfolio securities. These
codes recognize that such persons owe a fiduciary duty to the Fund's
shareholders and must place the interests of shareholders ahead of the
employees' own interest. Among other things, the codes: require preclearance and
periodic reporting of personal securities transactions; prohibit personal
transactions in securities being purchased or sold, or being considered for
purchase or sale, by the Fund; prohibit purchasing securities in initial
16
public offerings; and prohibit taking profits on securities held for less than
sixty days. Violation of the codes are subject to review by the Board of
Trustees, and could result in severe penalties.
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. With over $72 billion invested across more
than 260 funds under management and/or administration by its subsidiaries,
as of December 31, 1994, Federated Investors is one of the largest mutual
fund investment managers in the United States. With more than 1,750
employees, Federated continues to be led by the management who founded the
company in 1955. Federated funds are presently at work in and through 4,000
financial institutions nationwide. More than 100,000 investment
professionals have selected Federated funds for their clients.
J. Scott Albrecht has been the Fund's portfolio manager since March, 1995.
Mr. Albrecht joined Federated Investors in 1989 and has been a Vice
President of the Fund's investment adviser since October, 1994. Prior to
this, Mr. Albrecht served as an Assistant Vice President of the Fund's
investment adviser. 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.
Jonathan C. Conley has been the Fund's portfolio manager since its
inception. Mr. Conley joined Federated Investors in 1979 and has been a Vice
President of the Fund's investment adviser since 1982. Mr. Conley is a
Chartered Financial Analyst and received his M.B.A. in Finance from the
University of Virginia.
DISTRIBUTION OF 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.
17
DISTRIBUTION PLAN AND SHAREHOLDER SERVICES. 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 services or distribution related 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 Fund has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, under which
the Fund may make payments up to 0.25 of 1% of the average daily net asset value
of Shares, computed at an annual rate, to obtain certain personal services for
shareholders and for the maintenance of shareholder accounts. Under the
Shareholder Services Agreement, Federated Shareholder will either perform
shareholder services directly or will select financial institutions to perform
shareholder services. Financial institutions will receive fees based upon Shares
owned by their clients or customers. The schedules of such fees and the basis
upon which such fees will be paid will be determined from time to time by the
Fund and Federated Shareholder Services.
SUPPLEMENTAL PAYMENTS TO FINANCIAL INSTITUTIONS. Federated Securities Corp.
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, in addition to payments made pursuant to the Distribution Plan and
Shareholder Services Agreement, Federated Securities Corp. and Federated
Shareholder Services, from their own assets, may pay financial institutions
supplemental fees for the performance of substantial sales services,
distribution-related support services, or shareholder services. The support may
include sponsoring sales, educational and training seminars for their employees
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 Adviser or its affiliates, and
not the Fund.
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
18
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
-------------------- ------------------------------------
<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 8600, Boston,
Massachusetts 02266-8600, is custodian for the securities and cash of the Fund.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company, P.O.
Box 8600, Boston, Massachusetts 02266-8600, is transfer agent for the Shares of
the Fund and dividend disbursing agent for the Fund.
INDEPENDENT AUDITORS. The independent auditors for the Fund are Deloitte &
Touche LLP, Pittsburgh, Pennsylvania.
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 October 9, 1995, Merrill Lynch Pierce Fenner & Smith,
Jacksonville, FL, owned 40.70% 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.
19
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.
20
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.
21
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 charge 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, advertisements for the Fund may refer to ratings, rankings
and other information in certain financial publications and/or compare the
Fund's performance to certain indices.
22
CALIFORNIA MUNICIPAL INCOME FUND
PORTFOLIO OF INVESTMENTS
AUGUST 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
- ---------- ------------------------------------------------------- ---------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES
- -------------------------------------------------------------------
CALIFORNIA--97.3%
-------------------------------------------------------
$ 700,000 ABAG Finance Authority for Non-Profit Corporations,
(Series 1995A1) Local Agency Revenue Bonds, 5.50% (CGIC
INS)/(Original Issue Yield: 6.10%), 9/3/2012 Aaa $ 665,868
-------------------------------------------------------
625,000 California Educational Facilities Authority, Revenue
Bonds (Series B), 6.60% (Loyola Marymount University),
10/1/2022 A1 638,638
-------------------------------------------------------
600,000 California Educational Facilities Authority, Revenue
Bonds, 6.70% (Southwestern University)/(Original Issue
Yield: 6.838%), 11/1/2024 A 622,866
-------------------------------------------------------
400,000 California Health Facilities Financing Authority,
Revenue Bonds (Series A), 6.50% (Kaiser Permanente
Medical Care Program)/(Original Issue Yield: 7.097%),
12/1/2020 AA 408,272
-------------------------------------------------------
2,000,000 California HFA, SFM Revenue Bonds (Series C), 6.75%,
2/1/2025 AA- 2,049,500
-------------------------------------------------------
1,300,000 California HFA, SFM Revenue Bonds (Series F-l), 7.00%,
8/1/2026 AA- 1,359,189
-------------------------------------------------------
500,000 California PCFA, PCR Revenue Bonds (Series B), 6.40%
(Southern California Edison Co.)/(Original Issue Yield:
6.55%), 12/1/2024 Aa3 507,250
-------------------------------------------------------
600,000 California Statewide Communities Development Authority,
Revenue Certificates of Participation, 6.50% (Good
Samaritan Health System)/(Cap MAC INS)/(Original Issue
Yield: 6.53%), 5/1/2024 Aaa 622,362
-------------------------------------------------------
600,000 California Statewide Communities Development Authority,
Revenue Certificates of Participation, 6.625% (St.
Joseph Health System Group, CA)/(Original Issue Yield:
6.674%), 7/1/2021 AA 629,490
-------------------------------------------------------
500,000 Chula Vista, CA IDA, Revenue Bonds (Series A), 6.40%
(San Diego Gas & Electric)/(Original Issue Yield:
6.473%), 12/1/2027 Aa3 504,795
-------------------------------------------------------
</TABLE>
23
CALIFORNIA MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
- ---------- ------------------------------------------------------- ---------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- -------------------------------------------------------------------
CALIFORNIA--CONTINUED
-------------------------------------------------------
$1,500,000 Eden Township, CA Hospital District, Hospital Revenue
Bonds, 7.40% (Original Issue Yield: 7.483%), 11/1/2019 BBB- $ 1,501,230
-------------------------------------------------------
1,400,000 Foothill/Eastern Transportation Corridor Agency, CA,
(Series 1995A) Senior Lien Toll Road Revenue Bonds,
6.50% (Original Issue Yield: 6.78%), 1/1/2032 BBB- 1,382,528
-------------------------------------------------------
600,000 Los Angeles, CA Community Redevelopment Agency, Housing
Revenue Refunding Bonds (Series A), 6.55% (AMBAC INS),
1/1/2027 Aaa 617,754
-------------------------------------------------------
200,000 Los Angeles, CA Community Redevelopment Financing
Authority, Revenue Refunding Bonds (Series A)
Proposition A Sales Tax, 5.90% (Grand Central Square
Project, CA)/(Original Issue Yield: 6.00%), 12/1/2026 A 183,024
-------------------------------------------------------
700,000 Los Angeles, CA Regional Airport Improvement Corp, LA
International Airport Lease Revenue Bonds, 6.50%
(Laxfuel)/(FSA INS)/(Original Issue Yield: 6.90%),
1/1/2032 Aaa 712,243
-------------------------------------------------------
675,000 Santa Cruz, CA Sewer System, Secondary Wastewater
Treatment Revenue Bonds (Series C), 6.25%, 11/1/2023 A 655,789
-------------------------------------------------------
300,000 Sequoia, CA Hospital District, Revenue Bonds, 5.375%
(Original Issue Yield: 5.65%), 8/15/2023 A 247,458
-------------------------------------------------------
700,000 University of California, Research Facilities Revenue
Bonds (1995 Series B), 6.55%, 9/1/2024 A- 699,993
------------------------------------------------------- -----------
Total Long-Term Municipal Securities (IDENTIFIED
COST, $13,733,615) $14,008,249
------------------------------------------------------- -----------
</TABLE>
24
CALIFORNIA MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
- ---------- ------------------------------------------------------- ---------- -----------
<C> <S> <C> <C>
CALIFORNIA--CONTINUED
-------------------------------------------------------
SHORT-TERM MUNICIPAL SECURITIES
- -------------------------------------------------------------------
PUERTO RICO--1.0%
-------------------------------------------------------
$ 150,000 Puerto Rico Government Development Bank Weekly VRDNs
(Credit Suisse, Zurich LOC) A-1+ $ 150,000
------------------------------------------------------- -----------
Total Short-Term Municipal Securities (IDENTIFIED
COST, $150,000) $ 150,000
------------------------------------------------------- -----------
Total Investments (IDENTIFIED COST $13,883,615 AT
AMORTIZED COST)(A) $14,158,249
------------------------------------------------------- -----------
-----------
</TABLE>
(a) The cost of investments for federal tax purposes amounts to $13,883,615. The
unrealized appreciation of investments on a federal tax basis amounts to
$274,634 which is comprised of $348,459 appreciation and $73,825
depreciation at August 31, 1995.
* Please refer to the Appendix of the Statement of Additional Information for
an explanation of the credit ratings. Current credit ratings are unaudited.
Note: The categories of investments are shown as a percentage of net assets
($14,400,089) at August 31, 1995.
<TABLE>
<S> <C>
The following acronyms are used throughout this portfolio:
AMBAC --American Municipal Bond Assurance Corporation
CGIC --Capital Guaranty Insurance Corporation
FSA --Financial Security Assurance
HFA --Housing Finance Authority
IDA --Industrial Development Authority
INS --Insurance
LOC --Letter of Credit
PCFA --Pollution Control Finance Authority
PCR --Pollution Control Revenue
SFM --Single Family Mortgage
VRDNs --Variable Rate Demand Notes
</TABLE>
(See Notes which are an integral part of the Financial Statements)
25
CALIFORNIA MUNICIPAL INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- ------------------------------------------------------------------
Total investments in securities, at value (identified and
tax cost $13,883,615) $14,158,249
- ------------------------------------------------------------------
Cash 84,144
- ------------------------------------------------------------------
Income receivable 200,607
- ------------------------------------------------------------------
Receivable for shares sold 13,524
- ------------------------------------------------------------------
Deferred expenses 2,979
- ------------------------------------------------------------------ -----------
Total assets 14,459,503
- ------------------------------------------------------------------
LIABILITIES:
- ------------------------------------------------------------------
Income distribution payable $49,720
- ---------------------------------------------------------
Accrued expenses 9,694
- --------------------------------------------------------- -------
Total liabilities 59,414
- ------------------------------------------------------------------ -----------
NET ASSETS for 1,421,430 shares outstanding $14,400,089
- ------------------------------------------------------------------ -----------
-----------
NET ASSETS CONSIST OF:
- ------------------------------------------------------------------
Paid in capital $15,122,260
- ------------------------------------------------------------------
Net unrealized appreciation of investments 274,634
- ------------------------------------------------------------------
Accumulated net realized loss on investments (996,805)
- ------------------------------------------------------------------ -----------
Total Net Assets $14,400,089
- ------------------------------------------------------------------ -----------
-----------
NET ASSET VALUE, Offering Price and Redemption Proceeds
Per Share:
- ------------------------------------------------------------------
Net Asset Value Per Share ($14,400,089 / 1,421,430 shares
outstanding) $ 10.13
- ------------------------------------------------------------------ -----------
-----------
Offering Price Per Share (100/99.00 of $10.13)* $ 10.23
- ------------------------------------------------------------------ -----------
-----------
Redemption Proceeds Per Share (99.00/100 of $10.13)** $ 10.03
- ------------------------------------------------------------------ -----------
-----------
</TABLE>
* See "What Shares Cost."
** See "Contingent Deferred Sales Charge."
(See Notes which are an integral part of the Financial Statements)
26
CALIFORNIA MUNICIPAL INCOME FUND
STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ----------------------------------------------------------------------------------------
Interest $ 936,548
- ----------------------------------------------------------------------------------------
EXPENSES:
- ----------------------------------------------------------------------------------------
Investment advisory fee $ 56,899
- ----------------------------------------------------------------------------
Administrative personnel and services fee 125,000
- ----------------------------------------------------------------------------
Custodian fees 43,419
- ----------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 16,214
- ----------------------------------------------------------------------------
Directors'/Trustees' fees 790
- ----------------------------------------------------------------------------
Auditing fees 13,521
- ----------------------------------------------------------------------------
Legal fees 2,659
- ----------------------------------------------------------------------------
Portfolio accounting fees 15,311
- ----------------------------------------------------------------------------
Distribution services fee 71,122
- ----------------------------------------------------------------------------
Shareholder services fee 35,563
- ----------------------------------------------------------------------------
Share registration costs 14,972
- ----------------------------------------------------------------------------
Printing and postage 8,148
- ----------------------------------------------------------------------------
Insurance premiums 4,166
- ----------------------------------------------------------------------------
Taxes 137
- ----------------------------------------------------------------------------
Miscellaneous 12,148
- ---------------------------------------------------------------------------- ---------
Total expenses 420,069
- ----------------------------------------------------------------------------
Waivers and reimbursements--
- ----------------------------------------------------------------------------
Waiver of investment advisory fee $ (56,899)
- ----------------------------------------------------------------
Waiver of distribution services fee (68,277)
- ----------------------------------------------------------------
Waiver of shareholder services fee (2,847)
- ----------------------------------------------------------------
Reimbursement of other operating expenses (214,426)
- ---------------------------------------------------------------- ---------
Total waivers and reimbursements (342,449)
- ---------------------------------------------------------------------------- ---------
Net expenses 77,620
- ---------------------------------------------------------------------------------------- ---------
Net investment income 858,928
- ---------------------------------------------------------------------------------------- ---------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ----------------------------------------------------------------------------------------
Net realized loss on investments (450,962)
- ----------------------------------------------------------------------------------------
Net change in unrealized appreciation of investments 565,250
- ---------------------------------------------------------------------------------------- ---------
Net realized and unrealized gain on investments 114,288
- ---------------------------------------------------------------------------------------- ---------
Change in net assets resulting from operations $ 973,216
- ---------------------------------------------------------------------------------------- ---------
---------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
27
CALIFORNIA MUNICIPAL INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
------------------------
1995 1994
----------- -----------
<S> <C> <C>
- ------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS:
- ------------------------------------------------------
OPERATIONS--
- ------------------------------------------------------
Net investment income $ 858,928 $ 848,723
- ------------------------------------------------------
Net realized gain (loss) on investments ($778,475 net
loss and $0, respectively, as computed for federal tax
purposes) (450,962) (545,843)
- ------------------------------------------------------
Net change in unrealized appreciation (depreciation) 565,250 (926,760)
- ------------------------------------------------------ ----------- -----------
Change in net assets resulting from operations 973,216 (623,880)
- ------------------------------------------------------ ----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS--
- ------------------------------------------------------
Distributions from net investment income (858,928) (848,723)
- ------------------------------------------------------ ----------- -----------
SHARE TRANSACTIONS--
- ------------------------------------------------------
Proceeds from sale of shares 3,113,093 9,167,860
- ------------------------------------------------------
Net asset value of shares issued to shareholders in
payment of distributions declared 282,851 273,901
- ------------------------------------------------------
Cost of shares redeemed (4,168,669) (4,424,058)
- ------------------------------------------------------ ----------- -----------
Change in net assets resulting from share
transactions (772,725) 5,017,703
- ------------------------------------------------------ ----------- -----------
Change in net assets (658,437) 3,545,100
- ------------------------------------------------------
NET ASSETS:
- ------------------------------------------------------
Beginning of period 15,058,526 11,513,426
- ------------------------------------------------------ ----------- -----------
End of period $14,400,089 $15,058,526
- ------------------------------------------------------ ----------- -----------
----------- -----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
28
CALIFORNIA MUNICIPAL INCOME FUND
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1995
- --------------------------------------------------------------------------------
(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 five, 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. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS--Short-term securities with remaining maturities of
sixty days or less at the time of purchase may be valued at amortized cost,
which approximates fair market value. All other securities are valued at
prices provided by an independent pricing service.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and expenses
are accrued daily. Bond premium and discount, if applicable, are amortized
as required by the Internal Revenue Code, as amended (the "Code").
Distributions to shareholders are recorded on the ex-dividend date.
FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its income. Accordingly, no
provisions for federal tax are necessary. At August 31, 1995, the Fund, for
federal tax purposes, had a capital loss carryforward of $778,475, which
will reduce the Fund's taxable income arising from future net realized gains
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 as follows:
<TABLE>
<CAPTION>
EXPIRATION
YEAR EXPIRATION AMOUNT
- -------------- ------------------
<S> <C>
2003 $778,475
</TABLE>
Additionally, net capital losses of $218,330 attributable to security
transactions incurred after October 31, 1994, are treated as arising on the
first day of the Fund's next taxable year.
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
29
CALIFORNIA MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
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.
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 in one state than would be a
comparable tax-exempt mutual fund that invests nationally. In order to
reduce the credit risk associated with such factors, at August 31, 1995,
19.6% of the securities in the portfolio of investments are backed by
letters of credit or bond insurance of various financial institutions and
financial guaranty assurance agencies. The value of investments insured by
or supported (backed) by a letter of credit for any one institution or
agency does not exceed 5.0% of total investments.
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.
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,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
- -------------------------------------------------------------------------
Shares sold 320,931 848,498
- -------------------------------------------------------------------------
Shares issued to shareholders in payment of distributions declared 29,021 26,342
- -------------------------------------------------------------------------
Shares redeemed (432,976) (424,266)
- ------------------------------------------------------------------------- --------- ---------
Net change resulting from Fund share transactions (83,024) 450,574
- ------------------------------------------------------------------------- --------- ---------
--------- ---------
</TABLE>
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT 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 any 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"), under the
Administrative Services Agreement, provides the Fund with administrative
personnel and services. The FAS fee is based on
30
CALIFORNIA MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
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 SERVICES FEE--The Fund has adopted a Distribution Plan (the "Plan")
pursuant to Rule 12b-1 under the Act. Under the terms of the Plan, the Fund will
compensate Federated Securities Corp. ("FSC"), the principal distributor, from
the net assets of the Fund to finance activities intended to result in the sale
of the Fund's shares. The Plan provides that the Fund may incur distribution
expenses up to .50 of 1% of the average daily net assets of the Fund shares,
annually, to compensate FSC. FSC may voluntarily choose to waive any portion of
its fee. FSC can modify or terminate this voluntary waiver at any time at its
sole discretion.
SHAREHOLDER SERVICES FEE--Under the terms of a Shareholder Services Agreement
with Federated Shareholder Services ("FSS"), the Fund will pay FSS up to .25 of
1% of average daily net assets of the Fund for the period. This fee is to obtain
certain services for shareholders and to maintain shareholder accounts. FSS may
voluntarily choose to waive a portion of this fee. FSS can modify or terminate
this voluntary waiver at any time at its sole discretion.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES--Federated Services
Company ("FServ") serves as transfer and dividend disbursing agent for the Fund.
This fee is based on the size, type, and number of accounts and transactions
made by shareholders.
PORTFOLIO ACCOUNTING FEES--FServ maintains the Fund's accounting records for
which it receives a fee. The fee is based on the level of the Fund's average
daily net assets for the period, plus out-of-pocket expenses.
ORGANIZATIONAL EXPENSES--Organizational expenses of $26,245 and start-up
administrative services 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 effective
date. For the period ended August 31, 1995, the Fund paid $5,249 and $10,880,
respectively, pursuant to this agreement.
INTERFUND TRANSACTIONS--During the year ended August 31, 1995, the Fund engaged
in purchase and sale transactions with funds that have a common investment
adviser, common Directors/Trustees, and/ or common officers. These transactions
were made at current market value pursuant to Rule 17a-7 under the Act amounting
to $3,250,000 and $3,100,000, respectively.
GENERAL--Certain of the Officers and Trustees of the Trust are Officers and
Directors or Trustees of the above companies.
31
CALIFORNIA MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended August 31, 1995, were as follows:
<TABLE>
<S> <C>
- --------------------------------------------------------------------
PURCHASES $8,761,493
- -------------------------------------------------------------------- ----------
SALES $9,582,374
- -------------------------------------------------------------------- ----------
</TABLE>
32
INDEPENDENT AUDITOR'S REPORT
- --------------------------------------------------------------------------------
To the Board of Trustees of Municipal Securities Income Trust
and Shareholders of California Municipal Income Fund:
We have audited the accompanying statement of assets and liabilities of
California Municipal Income Fund (one of the portfolios comprising Municipal
Securities Income Trust), including the portfolio of investments, as of August
31, 1995, the related statement of operations for the year then ended, the
statement of changes in net assets for the years ended August 31, 1995 and 1994,
and the financial highlights for each of the years in the three-year period
ended August 31, 1995. These financial statements and financial highlights are
the responsibility of the Fund'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 as
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
August 31, 1995, 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 California Municipal
Income Fund as of August 31, 1995, 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
Pittsburgh, Pennsylvania
October 13, 1995
33
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
California 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 8600
Boston, Massachusetts 02266-8600
- -------------------------------------------------------------------------------------------
Transfer Agent and Dividend Disbursing Agent
Federated Services Company P.O. Box 8600
Boston, Massachusetts 02266-8600
- -------------------------------------------------------------------------------------------
Independent Auditors
Deloitte & Touche LLP 2500 One PPG Place
Pittsburgh, Pennsylvania 15222-5401
- -------------------------------------------------------------------------------------------
</TABLE>
34
- --------------------------------------------------------------------------------
CALIFORNIA MUNICIPAL
INCOME FUND
FORTRESS SHARES
PROSPECTUS
A Non-Diversified Portfolio of
Municipal Securities Income
Trust, An Open-End, Management
Investment Company
October 31, 1995
[LOGO] FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
CUSIP #625922109
2092918A (10/95) [RECYCLED PAPER LOGO]
CALIFORNIA MUNICIPAL INCOME FUND
FORTRESS SHARES
(A PORTFOLIO OF MUNICIPAL SECURITIES INCOME TRUST)
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, 1995. 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, 1995
FEDERATED SECURITIES
CORP.
Distributor
A subsidiary of FEDERATED
INVESTORS
GENERAL INFORMATION ABOUT THE FUND1 Conversion to Federal Funds 15
Purchases by Sales Representatives,
INVESTMENT OBJECTIVE AND POLICIES1
Fund
Acceptable Investments 1 Trustees, and Employees 15
When-Issued and Delayed DETERMINING NET ASSET VALUE 15
Delivery Transactions 2
Valuing Municipal Bonds 15
Temporary Investments 2
Use of Amortized Cost 15
Portfolio Turnover 3
REDEEMING FORTRESS SHARES 15
Investment Limitations 3
California Investment Risks 4 Redemption in Kind 15
MUNICIPAL SECURITIES INCOME TRUST EXCHANGE PRIVILEGE 16
MANAGEMENT 7
Reduced Sales Charge 16
Fund Ownership 11 Requirements for Exchange 16
Trustees Compensation 12 Tax Consequences 16
Trustee Liability 12 Making An Exchange 16
INVESTMENT ADVISORY SERVICES 13 TAX STATUS 16
Adviser to the Fund 13 The Fund's Tax Status 16
Advisory Fees 13 TOTAL RETURN 17
ADMINISTRATIVE SERVICES 13
YIELD 17
TRANSFER AGENT AND DIVIDEND
TAX-EQUIVALENT YIELD 17
DISBURSING AGENT 13
Tax-Equivalency Table 17
BROKERAGE TRANSACTIONS 14
PERFORMANCE COMPARISONS 18
PURCHASING FORTRESS SHARES 14
ABOUT FEDERATED INVESTORS 19
Distribution Plan and Shareholder
APPENDIX 21
Services Agreement 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 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 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.
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. ("Moody's"), Standard & Poor's Ratings Group
("S&P") or Fitch's Investors Service Inc. ("Fitch") 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:
ogovernmental lease certificates of participation issued by state or
municipal authorities where payment is secured by installment payments
for equipment, buildings, or other facilities being leased by the state
or municipality;
omunicipal notes and tax-exempt commercial paper;
oserial bonds;
otax anticipation notes sold to finance working capital needs of
municipalities in anticipation of receiving taxes;
obond anticipation notes sold in anticipation of the issuance of long-term
bonds;
opre-refunded municipal bonds whose timely payment of interest and
principal is ensured by an escrow of U.S. government obligations; and
ogeneral obligation bonds.
PARTICIPATION INTERESTS
The financial institutions from which the Fund purchases participation
interests frequently provide or secure from another financial institution
irrevocable letters of credit or guarantees and give the Fund the right to
demand payment of the principal amounts of the participation interests plus
accrued interest on short notice (usually within seven days).
VARIABLE-RATE MUNICIPAL SECURITIES
Variable interest rates generally reduce changes in the market value of
municipal securities from their original purchase prices. Accordingly, as
interest rates decrease or increase, the potential for capital appreciation
or depreciation is less for variable rate municipal securities than for
fixed income obligations. Many municipal securities with variable interest
rates purchased by the Fund are subject to repayment of principal (usually
within seven days) on the Fund's demand. The terms of these variable-rate
demand instruments require payment of principal and accrued interest from
the issuer of the municipal obligations, the issuer of the participation
interests, or a guarantor of either issuer.
MUNICIPAL LEASES
The Fund may purchase municipal securities in the form of participation
interests which represent undivided proportional interests in lease
payments by a governmental or non-profit entity. The lease payments and
other rights under the lease provide for and secure the payments on the
certificates. Lease obligations may be limited by municipal charter or the
nature of the appropriation for the lease. In particular, lease obligations
may be subject to periodic appropriation. If the entity does not
appropriate funds for future lease payments, the entity cannot be compelled
to make such payments. Furthermore, a lease may provide that the
certificate trustee cannot accelerate lease obligations upon default. The
trustee would only be able to enforce lease payments as they became due. In
the event of a default or failure of appropriation, it is unlikely that the
trustee would be able to obtain an acceptable substitute source of payment.
In determining the liquidity of municipal lease securities, the investment
adviser, under the authority delegated by the Trustees, will base its
determination on the following factors:
owhether the lease can be terminated by the lessee;
othe potential recovery, if any, from a sale of the leased property upon
termination of the lease;
othe lessee's general credit strength (e.g., its debt, administrative,
economic and financial characteristics and prospects);
othe likelihood that the lessee will discontinue appropriating funding for
the leased property because the property is no longer deemed essential to
its operations (e.g., the potential for an "event of nonappropriation");
and
oany credit enhancement or legal recourse provided upon an event of non-
appropriation or other termination of the lease.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an advantageous
price or yield for the Fund. No fees or other expenses, other than normal
transaction costs, are incurred. However, liquid assets of the Fund sufficient
to make payment for the securities to be purchased are segregated on the Fund's
records at the trade date. These assets are marked to market daily and are
maintained until the transaction has been settled. The Fund does not intend to
engage in when-issued and delayed delivery transactions to an extent that would
cause the segregation of more than 20% of the total value of its assets.
TEMPORARY INVESTMENTS
The Fund may also invest in temporary investments 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 years ended August 31, 1995 and
1994, the Fund's portfolio turnover rates were 63% and 63%, 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 twothirds 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, S&P, 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
Birthdate: July 28, 1924
Chairman and Trustee
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated Research
Corp. and Federated Global Research Corp.; Chairman, Passport Research, Ltd.;
Chief Executive Officer and Director, Trustee, or Managing General Partner of
the Funds. Mr. Donahue is the father of J. Christopher Donahue, Executive Vice
President and Trustee of the Trust.
Thomas G. Bigley
28th Floor, One Oxford Centre
Pittsburgh, PA
Birthdate: February 3, 1934
Trustee
Director, Oberg Manufacturing Co.; Chairman of the Board, Children's Hospital of
Pittsburgh; Director, Trustee, or Managing General Partner of the Funds;
formerly, Senior Partner, Ernst & Young LLP.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
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
Birthdate: July 4, 1918
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
Birthdate: April 11, 1949
Executive Vice President and Trustee
President and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated Research
Corp. and Federated Global Research Corp.; President, Passport Research, Ltd.;
Trustee, Federated Administrative Services, Federated Services Company, and
Federated Shareholder Services; President or Vice President of the Funds;
Director, Trustee, or Managing General Partner of some of the Funds. Mr. Donahue
is the son of John F. Donahue, Chairman and Trustee of the Trust.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Trustee
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director, Trustee,
or Managing General Partner of the Funds.
Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Trustee
Professor of Medicine and Member, Board of Trustees, University of Pittsburgh;
Medical Director, University of Pittsburgh Medical Center - Downtown; Member,
Board of Directors, University of Pittsburgh Medical Center; formerly,
Hematologist, Oncologist, and Internist, Presbyterian and Montefiore Hospitals;
Director, Trustee, or Managing General Partner of the Funds.
Edward L. Flaherty, Jr.@
Henny, Kochuba, Meyer and Flaherty
Two Gateway Center - Suite 674
Pittsburgh, PA
Birthdate: June 18, 1924
Trustee
Attorney-at-law; Shareholder, Henny, Kochuba, Meyer and Flaherty; Director,
Eat'N Park Restaurants, Inc., and Statewide Settlement Agency, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Counsel, Horizon
Financial, F.A., Western Region.
Peter E. Madden
70 Westcliff Road
Westin, MA
Birthdate: March 16, 1942
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.
Gregor F. Meyer
Henny, Kochuba, Meyer and Flaherty
Two Gateway Center - Suite 674
Pittsburgh, PA
Birthdate: October 6, 1926
Trustee
Attorney-at-law; Shareholder, Henny, Kochuba, Meyer and Flaherty; Chairman,
Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.; Director, Trustee, or
Managing General Partner of the Funds.
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Trustee
President, Law Professor, Duquesne University; Consulting Partner, Mollica,
Murray and Hogue; Director, Trustee or Managing General Partner of the Funds.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Trustee
Professor, International Politics and Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer Library
Center, Inc., and U.S. Space Foundation; Chairman, Czecho Management Center;
Director, Trustee, or Managing General Partner of the Funds; President Emeritus,
University of Pittsburgh; founding Chairman, National Advisory Council for
Environmental Policy and Technology and Federal Emergency Management Advisory
Board.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Trustee
Public relations/marketing consultant; Conference Coordinator, Non-profit
entities; Director, Trustee, or Managing General Partner of the Funds.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
President
Executive Vice President and Trustee, Federated Investors; Chairman and
Director, Federated Securities Corp.; President or Vice President of some of the
Funds; Director or Trustee of some of the Funds.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
Vice President and Treasurer
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated Research
Corp., Federated Global Research Corp. and Passport Research, Ltd.; Executive
Vice President and Director, Federated Securities Corp.; Trustee, Federated
Services Company; Chairman, Treasurer, and Trustee, Federated Administrative
Services; Trustee or Director of some of the Funds; Vice President and Treasurer
of the Funds.
David M. Taylor
Federated Investors Tower
Pittsburgh, PA
Birthdate: January 13, 1947
Treasurer
Senior Vice President, Controller, and Trustee, Federated Investors; Controller,
Federated Advisers, Federated Management, Federated Research, Federated Research
Corp., and Passport Research, Ltd.; Vice President, Federated Shareholder
Services; Senior Vice President, Federated Administrative Services; Treasurer of
the Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Executive Vice President and Secretary
Executive Vice President, Secretary, General Counsel, and Trustee, Federated
Investors; Trustee, Federated Advisers, Federated Management, and Federated
Research; Director, Federated Research Corp. and Federated Global Research Corp.
; Trustee, Federated Services Company; Executive Vice President, Secretary, and
Trustee, Federated Administrative Services; President and Trustee, Federated
Shareholder Services; Director, Federated Securities Corp.; 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.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: American Leaders Fund, Inc.; Annuity Management Series;
Arrow Funds; Automated Government Money Trust; Blanchard Funds; Blanchard
Precious Metals, Inc.; Cash Trust Series II; Cash Trust Series, Inc.; DG
Investor Series; Edward D. Jones & Co. Daily Passport Cash Trust; Federated ARMs
Fund; Federated Equity Funds; Federated Exchange Fund, Ltd.; Federated GNMA
Trust; Federated Government Trust; Federated High Yield Trust; Federated Income
Securities Trust; Federated Income Trust; Federated Index Trust; Federated
Institutional Trust; Federated Master Trust; Federated Municipal Trust;
Federated Short-Term Municipal Trust; Federated Short-Term U.S. Government
Trust; Federated Stock Trust; Federated Tax-Free Trust; Federated Total Return
Series, Inc.; Federated U.S. Government Bond Fund; Federated U.S. Government
Securities Fund: 1-3 Years; Federated U.S. Government Securities Fund: 3-5
Years; First Priority Funds; Fixed Income Securities, Inc.; Fortress Adjustable
Rate U.S. Government Fund, Inc.; Fortress Municipal Income Fund, Inc.; Fortress
Utility Fund, Inc.; Fund for U.S. Government Securities, Inc.; Government Income
Securities, Inc.; High Yield Cash Trust;; Insurance Management Series;
Intermediate Municipal Trust; International Series, Inc.; Investment Series
Funds, Inc.; Investment Series Trust; Liberty Equity Income Fund, Inc.; Liberty
High Income Bond Fund, Inc.; Liberty Municipal Securities Fund, Inc.; Liberty
U.S. Government Money Market Trust; Liberty Term Trust, Inc. - 1999; Liberty
Utility Fund, Inc.; Liquid Cash Trust; Managed Series Trust; Money Market
Management, Inc.; Money Market Obligations Trust; Money Market Trust; Newpoint
Funds; 111 Corcoran Funds; Peachtree Funds; The Planters Funds; RIMCO Monument
Funds; The Shawmut Funds; Star Funds; The Starburst Funds; The Starburst Funds
II; Stock and Bond Fund, Inc.; Sunburst Funds; Targeted Duration Trust; Tax-Free
Instruments Trust; Trust for Financial Institutions; Trust For Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S.
Treasury Obligations; The Virtus Funds; World Investment Series, Inc.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the outstanding Shares.
As of October 9,1995, 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 588,952 Shares (40.70%) and BHC Securities
Inc., Philadelphia, PA, owned approximately 76,507 Shares (5.29%).
TRUSTEES COMPENSATION
AGGREGATE
NAME , COMPENSATION
POSITION WITH FROM TOTAL COMPENSATION PAID
TRUST TRUST*# FROM FUND COMPLEX +
John F. Donahue $ -0- $ -0- for the Trust and
Trustee and Chairman 68 other investment companies in the Fund Complex
Thomas G. Bigley $141 $20,688 for the Trust and
Trustee 49 other investment companies in the Fund Complex
John T. Conroy $153 $117,202 for the Trust and
Trustee 64 other investment companies in the Fund Complex
William J. Copeland $153 $117,202 for the Trust and
Trustee 64 other investment companies in the Fund Complex
J. Christopher Donahue $ -0- $ -0- for the Trust and
Trustee and Exec. Vice Pres. 14 other investment companies in the Fund
Complex
James E. Dowd $153 $117,202 for the Trust and
Trustee 64 other investment companies in the Fund Complex
Lawrence D. Ellis, M.D. $141 $106,460 for the Trust and
Trustee 64 other investment companies in the Fund Complex
Edward L. Flaherty, Jr. $153 $117,202 for the Trust and
Trustee 64 other investment companies in the Fund Complex
Peter E. Madden $124 $90,563 for the Trust and
Trustee 64 other investment companies in the Fund Complex
Gregor F. Meyer $141 $106,460 for the Trust and
Trustee 64 other investment companies in the Fund Complex
John E. Murray, Jr. $112 $ -0- for the Trust and
Trustee 64 other investment companies in the Fund Complex
Wesley W. Posvar $141 $106,460 for the Trust and
Trustee 64 other investment companies in the Fund Complex
Marjorie P. Smuts$141 $106,460 for the Trust and
Trustee 64 other investment companies in the Fund Complex
*Information is furnished for the fiscal year ended August 31, 1995.
#The aggregate compensation is provided for the Trust which is comprised of five
portfolios.
+The information is provided for the last calendar year.
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, the Adviser receives an annual investment advisory
fee as described in the prospectus. For the fiscal years ended August 31, 1995
and 1994, and for the period from December 2, 1992 (date of initial public
investment) to August 31, 1993, the Adviser earned advisory fees of $56,899,
$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 years ended August 31, 1995 and 1994, the Administrators collectively
earned $125,000 and $176,127, respectively, 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:
o advice as to the advisability of investing in securities;
o security analysis and reports;
o economic studies;
o industry studies;
o receipt of quotations for portfolio evaluations; and
o similar services.
The Adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions charged
by such persons are reasonable in relationship to the value of the brokerage and
research services provided.
Research services provided by brokers may be used by the Adviser or by
affiliates of Federated Investors in advising Federated Funds and other
accounts. To the extent that receipt of these services may supplant services for
which the Adviser or its affiliates might otherwise have paid, it would tend to
reduce their expenses.
During the fiscal years ended August 31, 1995 and 1994, and for the period from
December 2, 1992 (date of initial public investment) to August 31, 1993, the
Fund paid no brokerage commissions.
PURCHASING FORTRESS SHARES
Except under certain circumstances described in the prospectus, Shares are sold
at their net asset value plus a sales charge on days the New York Stock Exchange
is open for business. The procedure for purchasing Shares is explained in the
prospectus under "Investing in Fortress Shares."
DISTRIBUTION PLAN AND SHAREHOLDER SERVICES AGREEMENT
These arrangements permit the payment of fees to financial institutions, the
distributor, and Federated Shareholder Services, to stimulate distribution
activities and to cause services to be provided to shareholders by a
representative who has knowledge of the shareholder's particular circumstances
and goals. These activities and services may include, but are not limited to,
marketing efforts; providing office space, equipment, telephone facilities, and
various clerical, supervisory, computer, and other personnel as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries; and assisting
clients in changing dividend options, account designations, and addresses.
By adopting the Distribution Plan, the 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, 1995 and 1994, and for the period from
December 2, 1992 (date of initial public investment) to August 31, 1993,
payments in the amount of $71,122, $75,651 and $29,255, respectively, were made
pursuant to the Distribution Plan. In addition, for the fiscal year ended August
31, 1995, payments in the amount of
$35,563 were made pursuant to the Shareholder Services Agreement.
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 charge.
Shares may also be sold without a sales charge to trusts or pension or profit-
sharing plans for these persons. These sales are made with the purchaser's
written assurance that the purchase is for investment purposes and that the
securities will not be resold except through redemption by the Fund.
DETERMINING NET ASSET VALUE
Net asset value generally changes each day. The days on which net asset value is
calculated 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 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 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 charge different from that of the Fund's or
with no sales charge and which are advised by subsidiaries or affiliates of
Federated Investors. These exchanges are made at net asset value plus the
difference between the Fund's sales charge already paid and any sales charge of
the fund into which the Shares are to be exchanged, if higher.
REDUCED SALES CHARGE
If a shareholder making such an exchange qualifies for a reduction or an
elimination of the sales charge, 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:
o derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;
o derive less than 30% of its gross income from the sale of securities held
less than three months;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income earned during
the year.
CAPITAL GAINS
Capital gains or losses may be realized by the Fund on the sale of
portfolio securities and as a result of discounts from par value on
securities held to maturity. Sales would generally be made because of:
othe availability of higher relative yields;
odifferentials in market values;
onew investment opportunities;
ochanges in creditworthiness of an issuer; or
oan attempt to preserve gains or limit losses.
Distributions of long-term capital gains are taxed as such, whether they are
taken in cash or reinvested, and regardless of the length of time 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 returns for the one-year period ended August 31,
1995, and for the period from December 2, 1992 (date of initial public
investment) to August 31, 1995, were 5.37% and 5.66%, 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, 1995 was 5.98%.
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, 1995
was 9.54%.
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.
TAXABLE YIELD EQUIVALENT FOR 1995
State of California
TAX BRACKET
Combined Federal and State Tax Bracket:
21.00% 37.30% 40.30% 46.00%49.60%
50.60%
Joint $1- $39,001- $94,251-
$143,601- $256,501- OVER
Return 39,000 94,250 143,600
$256,500 $429,858 $429,858
Tax-Exempt Yield Taxable
Yield Equivalent
1.50% 1.90% 2.39% 2.51% 2.78% 2.98% 3.04%
2.00 2.53 3.19 3.35 3.70 3.97 4.05
2.50 3.16 3.99 4.19 4.63 4.96 5.06
3.00 3.80 4.78 5.03 5.56 5.95 6.07
3.50 4.43 5.58 5.86 6.48 6.94 7.09
4.00 5.06 6.38 6.70 7.41 7.94 8.10
4.50 5.70 7.18 7.54 8.33 8.93 9.11
5.00 6.33 7.97 8.38 9.26 9.92 10.12
5.50 6.96 8.77 9.21 10.19 10.91 11.13
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. If you itemize deductions, your taxable yield
equivalent will be lower.
The chart above is for illustrative purposes only. It is not an indicator
of past or future performance of Fund shares.
* Some portion of the Fund's income may be subject to the federal
alternative minimum tax and state and local income taxes.
PERFORMANCE COMPARISONS
The performance of Shares depends upon such variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio securities;
o changes in the Fund's expenses; and
o various other factors.
The Fund's performance fluctuates on a daily basis largely because net earnings
and offering price per share fluctuate daily. Both net earnings and offering
price per share are factors in the computation of yield and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute offering price. The financial
publications and/or indices which the Fund uses in advertising may include:
o LEHMAN BROTHERS REVENUE BOND INDEX is a total return performance benchmark
for the long-term, investment grade, revenue bond market. Returns and
attributes for the index are calculated semi-monthly.
o 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.
o MORNINGSTAR, INC., an independent rating service, is the publisher of the
bi-weekly MUTUAL FUND VALUES. MUTUAL FUND VALUES rates more than 1,000
NASDAQ-listed mutual funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and ratings are effective for
two weeks.
Advertisements and other sales literature for the Fund may quote total returns
which are calculated on non-standardized base periods. 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 charge.
ABOUT FEDERATED INVESTORS
Federated is dedicated to meeting investor needs which is reflected in its
investment decision making -- structured, straightforward, and consistent. This
has resulted in a history of competitive performance with a range of competitive
investment products that have gained the confidence of thousands of clients and
their customers.
The company's disciplined security selection process is firmly rooted in sound
methodologies backed by fundamental and technical research. Investment
decisions are made and executed by teams of portfolio managers, analysts, and
traders dedicated to specific market sectors.
In the municipal sector, as of December 31, 1994, Federated managed 18 bond
funds with approximately $1.9 billion in assets and 18 money market funds with
approximately $6.6 billion in total assets. In 1976, Federated introduced one
of the first municipal bond mutual funds in the industry and is now one of the
largest institutional buyers of municipal securities.
J. Thomas Madden, Executive Vice President, oversees Federated's equity and high
yield corporate bond management while William D. Dawson, Executive Vice
President, oversees Federated's domestic fixed income management. Henry A.
Frantzen, Executive Vice President, oversees the management of Federated's
international portfolios.
MUTUAL FUND MARKET
Twenty-seven percent of American households are pursuing their financial goals
through mutual funds. These investors, as well as businesses and institutions,
have entrusted over $2 trillion to the more than 5,500 funds available.*
*source: Investment Company Institute
Federated Investors, through it subsidiaries, distributes mutual funds for a
variety of investment applications. Specific markets include:
INSTITUTIONAL
Federated meets the needs of more than 4,000 institutional clients nationwide by
managing and servicing separate accounts and mutual funds for a variety of
applications, including defined benefit and defined contribution programs, cash
management, and asset/liability management. Institutional clients include
corporations, pension funds, tax-exempt entities, foundations/endowments,
insurance companies, and investment and financial advisors. The marketing
effort to theses institutional clients is headed by John B. Fisher, President,
Institutional Sales Division.
TRUST ORGANIZATIONS
Other institutional clients include close relationships with more than 1,500
banks and trust organizations. Virtually all of the trust divisions of the top
100 bank holding companies use Federated funds in their clients' portfolios.
The marketing effort to trust clients is headed by Mark R. Gensheimer, Executive
Vice President, Bank Marketing & Sales.
BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES
Federated mutual funds are available to consumers through major brokerage firms
nationwide -- including 200 New York Stock Exchange firms -- supported by more
wholesalers than any other mutual fund distributor. The marketing effort to
these firms is headed by James F. Getz, President, Broker/Dealer Division.
APPENDIX
STANDARD & 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 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. ("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 & 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 & 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.
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.
Cusip #625922109
2092918B (10/95)
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, 1995, with the Securities and Exchange Commission. The
information contained in the Statement of Additional Information is incorporated
by reference into this prospectus. You may request a copy of the Statement of
Additional Information, which is in paper form only, or a paper copy of this
prospectus, if you have received your prospectus electronically, 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, 1995
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 5
New York Municipal Securities 7
Investment Risks 7
Non-Diversification 8
Investment Limitations 8
NET ASSET VALUE 8
- ------------------------------------------------------
INVESTING IN FORTRESS SHARES 8
- ------------------------------------------------------
Share Purchases 8
Minimum Investment Required 9
What Shares Cost 9
Eliminating/Reducing the Sales Charge 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 15
MUNICIPAL SECURITIES INCOME TRUST
INFORMATION 15
- ------------------------------------------------------
Management of Municipal Securities
Income Trust 15
Distribution of Fortress Shares 17
Administration of the Fund 18
SHAREHOLDER INFORMATION 19
- ------------------------------------------------------
Voting Rights 19
Massachusetts Partnership Law 19
TAX INFORMATION 20
- ------------------------------------------------------
Federal Income Tax 20
New York Taxes 21
Other State and Local Taxes 21
PERFORMANCE INFORMATION 21
- ------------------------------------------------------
FINANCIAL STATEMENTS 23
- ------------------------------------------------------
INDEPENDENT AUDITORS' REPORT 33
- ------------------------------------------------------
ADDRESSES 34
- ------------------------------------------------------
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
FORTRESS SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price).......................... 1.00%
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price).................................................................. None
Contingent Deferred Sales Charge (as a percentage of original purchase price
or redemption proceeds, as applicable) (1)........................................................... 1.00%
Redemption Fee (as a percentage of amount redeemed, if applicable)..................................... None
Exchange Fee........................................................................................... None
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver) (2)...................................................................... 0.00%
12b-1 Fee (after waiver) (3)........................................................................... 0.02%
Total Other Expenses (after expense reimbursement)..................................................... 0.98%
Shareholder Services Fee (after waiver) (4)................................................ 0.23%
Total 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 operating expenses in the table above are based on expenses
expected during the fiscal year ending August 31, 1996. The total operating
expenses were 0.59% for the fiscal year ended August 31, 1995 and would have
been 2.33% absent the voluntary waivers of the management fee, the 12b-1 fee
and the shareholder services 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 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.
NEW YORK MUNICIPAL INCOME FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 33.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1995 1994 1993(A)
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.10 $ 10.92 $ 10.04
- ---------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------------------------------------------------------
Net investment income 0.57 0.57 0.44
- ---------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 0.03 (0.82) 0.88
- --------------------------------------------------------------------------------- --------- --------- ----------
Total from investment operations 0.60 (0.25) 1.32
- --------------------------------------------------------------------------------- --------- --------- ----------
LESS DISTRIBUTIONS
- ---------------------------------------------------------------------------------
Distributions from net investment income (0.57) (0.57) (0.44)
- --------------------------------------------------------------------------------- --------- --------- ----------
NET ASSET VALUE, END OF PERIOD $ 10.13 $ 10.10 $ 10.92
- --------------------------------------------------------------------------------- --------- --------- ----------
TOTAL RETURN (B) 6.41% (2.31%) 13.38%
- ---------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ---------------------------------------------------------------------------------
Expenses 0.59% 0.39% 0.25%(c)
- ---------------------------------------------------------------------------------
Net investment income 5.94% 5.49% 5.53%(c)
- ---------------------------------------------------------------------------------
Expense waiver/reimbursement (d) 1.74% 2.07% 1.91%(c)
- ---------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ---------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $21,600 $23,152 $14,495
- ---------------------------------------------------------------------------------
Portfolio turnover 55% 37% 0%
- ---------------------------------------------------------------------------------
</TABLE>
(a) Reflects operations for the period from December 2, 1992 (date of initial
public investment) to August 31, 1993.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) Computed on an annualized basis.
(d) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
Further information about the Fund's performance is contained in the Fund's
annual report dated August 31, 1995, which can be obtained free of charge.
GENERAL INFORMATION
- --------------------------------------------------------------------------------
The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated August 6, 1990. The Declaration of Trust permits the Trust to
offer separate series of shares of beneficial interest representing interests in
separate portfolios of securities. The shares in any one portfolio may be
offered in separate classes. With respect to this Fund, as of the date of this
prospectus, the Board of Trustees ("Trustees") has 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 charge 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 one to 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., providing growth of capital and income
through high-quality stocks;
. California Municipal Income Fund, providing current income exempt from
federal regular income tax and California personal income taxes;
. Fortress Adjustable Rate U.S. Government Fund, Inc., providing current
income with volatility of principal which is lower than investment
companies investing primarily in fixed-rate mortgage securities.
. 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 federal regular income tax by investing
primarily in a diversified portfolio of municipal bonds;
. Fortress Utility Fund, Inc., providing high current income and moderate
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., an equity fund investing primarily in
stocks which have a history of regular dividends;
. Limited Term Fund, providing a high level of current income consistent
with minimum fluctuation in principal value;
. Limited Term Municipal Fund, providing a high level of current income
which is exempt from federal regular income tax consistent with the
preservation of capital;
. Money Market Management, Inc., providing current income consistent with
stability of principal through high-quality money market instruments;
. Ohio Municipal Income Fund, providing current income exempt from federal
regular income tax and Ohio personal taxes;
. Strategic Income Fund, providing high current income through investing
in domestic corporate debt obligations, U.S. government securities, and
foreign government and corporate debt obligations; and
. World Utility Fund, providing total return by investing primarily in
securities issued by domestic and foreign companies in the utilities
industry.Each of the funds may also invest in certain other types of
securities as described in each fund's prospectus.
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.
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. 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 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 & 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, 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 also 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 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 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 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 "Supplemental 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, P.O. Box
8600, Boston, MA 02266-8600.
Purchases by mail are considered received after payment by check is converted by
the transfer agent's bank, State Street Bank into federal funds. This is
generally the next business day after State Street Bank receives the check.
DIRECTLY BY WIRE. To purchase Shares directly from Federated Securities Corp. by
Federal Reserve Wire, call the Fund. All information needed will be taken over
the telephone, and the order is considered received when 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 charge of 1% of the offering price (which is 1.01% of the
net amount invested). Further, there is no sales charge for purchases of $1
million or more. In addition, no charge 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 as of the close of trading (normally 4:00
p.m., Eastern time) on the New York Stock Exchange, Monday through Friday,
except on: (i) days on which there are not sufficient changes in the value of
the Fund's portfolio securities that its net asset value might be materially
affected; (ii) days during which no Shares are tendered for redemption and no
orders to purchase Shares are received; 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 charge retained by it. Any portion of the
sales charge 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 charge for Shares sold other than through registered broker/dealers
will be retained by Federated Securities Corp. Federated Securities Corp. may
pay fees to banks out of the sales charge in exchange for sales and/or
administrative services performed on behalf of the bank's customers in
connection with the initiation of customer accounts and purchases of Shares.
ELIMINATING/REDUCING THE SALES CHARGE
The sales charge 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; or
. concurrent purchases.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES. There is no sales charge for
purchases of $1 million or more. The Fund will combine purchases made on the
same day by the investor, his spouse, and his children under age 21 when it
calculates the sales charge.
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 charge 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 charge 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
charge 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 charge may be eliminated by signing a
letter of intent to that effect. This letter of intent includes a provision for
a sales charge elimination depending on the amount actually purchased within the
13-month period and a provision for the Fund's custodian to hold 1.00% 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 charge.
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 charge on prior
purchases will not be adjusted to reflect a lower sales charge.
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 charge. Federated Securities
Corp. must be notified by the shareholder in writing or by his financial
institution of the reinvestment in order to receive this elimination of the
sales charge. If the shareholder redeems his Shares, there may be tax
consequences.
CONCURRENT PURCHASES. For purposes of qualifying for a sales charge elimination,
a shareholder has the privilege of combining concurrent purchases of two or more
funds in the Fortress Investment Program, the purchase prices of which include a
sales charge. For example, if a shareholder concurrently invested $400,000 in
one of the other Fortress Funds and $600,000 in Shares, the sales charge would
be eliminated. To receive this sales charge elimination, Federated Securities
Corp. must be notified by the shareholder in writing or by his financial
institution at the time the concurrent purchases are made. The Fund will
eliminate the sales charge after it confirms the purchases.
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their investment on
a regular basis in a minimum 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 1% sales charge 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 charge (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 New York Municipal Cash Trust and
other Fortress Funds, such exchanges may be subject to a CDSC and possibly a
sales charge.
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 charge, 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. 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, P.O. Box 8600, Boston, MA 02266-8600. 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 should be sent by insured mail with
the written request to: Federated Services Company, 500 Victory Road--2nd Floor,
North Quincy, MA 02171.
SIGNATURES. Shareholders requesting a redemption of any amount to be sent to an
address other than that on record with the Fund, or a redemption payable other
than to the shareholder of record must have signatures on written redemption
requests guaranteed by:
. a trust company or commercial bank whose deposits are insured by the
Bank Insurance Fund, which is administered by the Federal Deposit
Insurance Corporation ("FDIC");
. a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchanges;
. a savings bank or savings and loan association whose deposits are
insured by the Savings Association Insurance Fund, 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.......................... 4 years or less 1%
$2,000,000 to $4,999,999.................. 2 years or less .50%
$5,000,000 or more........................ 1 year or less .25%
</TABLE>
In instances in which Shares have been acquired in exchange for shares in other
Fortress Funds, (i) the purchase price is the price of the shares when
originally purchased and (ii) the time period during which the shares are held
will run from the date of the original purchase. The 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 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 to the extent that
no payment was advanced for purchases made by or through such entities.
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 charge, 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 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.
Both the Trust and the Adviser have adopted strict codes of ethics governing the
conduct of all employees who manage the Fund and its portfolio securities. These
codes recognize that such persons owe a fiduciary duty to the Fund's
shareholders and must place the interests of shareholders ahead of the
employees' own interest. Among other things, the codes: require preclearance and
periodic reporting of personal securities transactions; prohibit personal
transactions in securities being purchased or sold, or being considered for
purchase or sale, by the Fund; prohibit purchasing securities in initial public
offerings; and prohibit taking profits on securities held for less than sixty
days. Violation of the codes are subject to review by the Board of Trustees, and
could result in severe penalties.
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. With over $72 billion invested across
more than 260 funds under management and/or administration by its
subsidiaries, as of December 31, 1994, Federated Investors is one of the
largest mutual fund investment managers in the United States. With more
than 1,750 employees, Federated continues to be led by the management who
founded the company in 1955. Federated funds are presently at work in and
through 4,000 financial institutions nationwide. More than 100,000
investment professionals have selected Federated funds for their clients.
J. Scott Albrecht has been the Fund's portfolio manager since March, 1995.
Mr. Albrecht joined Federated Investors in 1989 and has been a Vice
President of the Fund's investment adviser since October, 1994. Prior to
this, Mr. Albrecht served as an Assistant Vice President of the
Fund's investment adviser. 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.
Jonathan C. Conley has been the Fund's portfolio manager since its
inception. Mr. Conley joined Federated Investors in 1979 and has been a
Vice President of the Fund's investment adviser since 1982. Mr. Conley is a
Chartered Financial Analyst and received his M.B.A. in Finance from the
University of Virginia.
DISTRIBUTION OF 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 PLAN AND SHAREHOLDER SERVICES. 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 services or distribution related 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 Fund has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, under which
the Fund may make payments up to 0.25 of 1% of the average daily net asset value
of Shares, computed at an annual rate, to obtain certain personal services for
shareholders and for the maintenance of shareholder accounts. Under the
Shareholder Services Agreement, Federated Shareholder will either perform
shareholder services directly or will select financial institutions to perform
shareholder services. Financial institutions will receive fees based upon Shares
owned by their clients or customers. The schedules of such fees and the basis
upon which such fees will be paid will be determined from time to time by the
Fund and Federated Shareholder Services.
SUPPLEMENTAL PAYMENTS TO FINANCIAL INSTITUTIONS. Federated Securities Corp. 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, in addition to payments made pursuant to the Distribution Plan and
Shareholder Services Agreement, Federated Securities Corp. and Federated
Shareholder Services, from their own assets, may pay financial institutions
supplemental fees for the performance of substantial sales services,
distribution-related support services, or shareholder services. The support may
include sponsoring sales, educational and training seminars for their employees
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 Adviser or its affiliates, and
not the Fund.
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
<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 8600, Boston,
Massachusetts 02266-8600, is custodian for the securities and cash of the Fund.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company, P.O.
Box 8600, Boston, Massachusetts 02266-8600, is transfer agent for the Shares of
the Fund and dividend disbursing agent for the Fund.
INDEPENDENT AUDITORS. The independent auditors for the Fund are Deloitte &
Touche LLP, Pittsburgh, Pennsylvania.
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 October 9,
1995, Merrill Lynch Pierce Fenner & Smith, Jacksonville, FL, owned 48.01% 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.
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.
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 charge 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, advertisements for the Fund may refer to ratings, rankings
and other information in certain financial publications and/or compare the
Fund's performance to certain indices.
NEW YORK MUNICIPAL INCOME FUND
PORTFOLIO OF INVESTMENTS
AUGUST 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
<C> <S> <C> <C>
- ------------ ---------------------------------------------------------------------- ----------- --------------
LONG-TERM MUNICIPAL SECURITIES--102.0%
- ------------------------------------------------------------------------------------
NEW YORK--98.0%
----------------------------------------------------------------------
$ 305,000 Nassau County, NY IDA, Civic Facility Revenue Bonds, 6.85% (Hofstra
University), 1/1/2012 A $ 324,514
----------------------------------------------------------------------
330,000 Nassau County, NY IDA, Civic Facility Revenue Bonds, 6.85% (Hofstra
University), 1/1/2013 A 349,998
----------------------------------------------------------------------
350,000 New York City Municipal Water Finance Authority, Water & Sewer System
Revenue Bonds (Series B), 6.375%
(Original Issue Yield: 6.57%), 6/15/2022 A 356,192
----------------------------------------------------------------------
1,000,000 New York City, NY IDA, (Series 1995) Civic Facility Revenue Bonds,
6.30% (College of New Rochelle)/(Original Issue Yield: 6.45%),
9/1/2015 Baa 985,480
----------------------------------------------------------------------
500,000 New York City, NY IDA, Civic Facility Revenue Bonds, 7.00% (Mt. St.
Vincent College, NY), 5/1/2008 NR 528,815
----------------------------------------------------------------------
1,000,000 New York City, NY IDA, Special Facilities Revenue Bonds, 6.125%
(Terminal One Group Association)/(Original Issue Yield: 6.50%),
1/1/2024 A 970,480
----------------------------------------------------------------------
750,000 New York City, NY IDA, Special Facilities Revenue Bonds, 6.90%
(American Airlines), 8/1/2024 Baa 776,100
----------------------------------------------------------------------
2,000,000 New York City, NY, UT GO Bonds (Series B), 7.25%
(Original Issue Yield: 7.55%), 8/15/2019 BBB+ 2,137,080
----------------------------------------------------------------------
500,000 New York City, NY, UT GO Bonds (Series C), 7.25%
(Original Issue Yield: 7.375%), 8/15/2024 BBB+ 521,375
----------------------------------------------------------------------
900,000 New York State Dormitory Authority, Revenue Bonds (Series A), 6.50%
(University of Rochester, NY)/(Original Issue Yield: 6.582%), 7/1/2019 A+ 931,023
----------------------------------------------------------------------
500,000 New York State Energy Research & Development
Authority, Revenue Bonds (Series B), 6.375%
(Consolidated Edison Co.)/(Original Issue Yield: 6.521%),
12/1/2027 Aa2 509,720
----------------------------------------------------------------------
$ 1,000,000 New York State Environmental Facilities Corp., Solid Waste Disposal
Revenue Bonds (Series A), 5.70% (Occidental Petroleum Corp.)/(Original
Issue Yield: 5.75%), 9/1/2028 BBB $ 893,060
----------------------------------------------------------------------
900,000 New York State Environmental Facilities Corp., Water Facilities
Revenue Refunding Bonds (Series A), 6.30% (Spring Valley Water Co.,
NY)/(AMBAC INS), 8/1/2024 AAA 918,450
----------------------------------------------------------------------
1,000,000 New York State HFA, (Series 1995A) Sevice Contract
Obligation Revenue Bonds, 6.375% (Original Issue
Yield: 6.45%), 9/15/2015 BBB 1,012,110
----------------------------------------------------------------------
1,000,000 New York State Medical Care Facilities Finance Agency, FHA-Mortgage
Revenue Bonds (Series A), 6.50% (Lockport Memorial Hospital, NY)/(FHA
GTD), 2/15/2035 AA 1,035,090
----------------------------------------------------------------------
1,000,000 New York State Medical Care Facilities Finance Agency, Revenue Bonds
(Series B), 6.60% (FHA GTD)/(Original Issue Yield: 6.625%), 8/15/2034 AA 1,037,460
----------------------------------------------------------------------
1,200,000 New York State Mortgage Agency, Homeowner Mortgage Revenue Bonds
(Series 46), 6.65%, 10/1/2025 Aa 1,221,240
----------------------------------------------------------------------
3,975,000 New York State Mortgage Agency, Revenue Bonds (Series 40A), 6.70%,
4/1/2025 Aa 4,056,845
----------------------------------------------------------------------
1,000,000 New York State Thruway Authority, Local Highway and Bridge Service
Contract Revenue Bonds, (Series 1995), 6.25% (Original Issue Yield:
6.435%), 4/1/2014 BBB 1,004,840
----------------------------------------------------------------------
750,000 Niagra Frontier Transportation Authority, Airport Revenue Bonds, 6.25%
(Greater Buffalo International Airport)/ (AMBAC INS)/(Original Issue
Yield: 6.536%), 4/1/2024 AAA 764,482
----------------------------------------------------------------------
300,000 Port Authority of New York and New Jersey, Revenue Bonds (Series 76),
6.50% (Original Issue Yield: 6.782%),
11/1/2026 A1 309,930
----------------------------------------------------------------------
500,000 Port Authority of New York and New Jersey, Revenue Bonds (Series 96),
6.60% (FGIC INS)/(Original Issue Yield: 6.65%), 10/1/2023 AAA 524,735
---------------------------------------------------------------------- --------------
Total 21,169,019
---------------------------------------------------------------------- --------------
PUERTO RICO--4.0%
----------------------------------------------------------------------
$ 300,000 Puerto Rico Electric Power Authority, Power Revenue Bonds (Series R),
6.25% (Original Issue Yield: 6.494%),
7/1/2017 Baa1 $ 304,641
----------------------------------------------------------------------
550,000 Puerto Rico Electric Power Authority, Revenue Bonds (Series T), 6.375%
(Original Issue Yield: 6.58%), 7/1/2024 Baa1 565,757
---------------------------------------------------------------------- --------------
Total 870,398
---------------------------------------------------------------------- --------------
TOTAL LONG-TERM MUNICIPAL SECURITIES
(IDENTIFIED COST $21,357,761) 22,039,417
---------------------------------------------------------------------- --------------
SHORT-TERM MUNICIPAL SECURITIES--0.9%
- ------------------------------------------------------------------------------------
PUERTO RICO--0.9%
----------------------------------------------------------------------
200,000 Puerto Rico Government Development Bank Weekly VRDNs (Credit Suisse,
Zurich LOC) AA1 200,000
---------------------------------------------------------------------- --------------
TOTAL SHORT-TERM MUNICIPAL SECURITIES
(AT AMORTIZED COST) 200,000
---------------------------------------------------------------------- --------------
TOTAL MUNICIPAL SECURITIES
(IDENTIFIED COST $21,557,761) (A) $ 22,239,417
---------------------------------------------------------------------- --------------
</TABLE>
*Please refer to the Appendix of the Statement of Additional Information for an
explanation of the credit ratings. Current credit ratings are unaudited.
(a) The cost of investments for federal tax purposes amounts to $21,557,761. The
net unrealized appreciation on a federal tax cost basis amounts to $681,656,
and is comprised of $781,149 appreciation and $99,493 depreciation at August
31, 1995.
Note: The categories of investments are shown as a percentage of net assets
($21,600,270) at August 31,1995.
The following acronyms are used throughout this portfolio:
AMBAC -- American Municipal Bond Assurance
Corporation
FGIC -- Financial Guaranty Insurance Company
FHA -- Federal Housing Administration
GO -- General Obligation
GTD -- Guaranteed
HFA -- Housing Finance Authority
IDA -- Industrial Development Authority
INS -- Insurance
LOC -- Letter of Credit
UT -- Unlimited Tax
VRDNs -- Variable Rate Demand Notes
(See Notes which are an integral part of the Financial Statements)
NEW YORK MUNICIPAL INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- ---------------------------------------------------------------------------------------------------
Total investments in securities, at value (identified and tax cost $21,557,761) $ 22,239,417
- ---------------------------------------------------------------------------------------------------
Cash 53,849
- ---------------------------------------------------------------------------------------------------
Income receivable 334,401
- ---------------------------------------------------------------------------------------------------
Receivable for shares sold 42,003
- ---------------------------------------------------------------------------------------------------
Deferred expenses 3,842
- --------------------------------------------------------------------------------------------------- -------------
Total assets 22,673,512
- ---------------------------------------------------------------------------------------------------
LIABILITIES:
- ---------------------------------------------------------------------------------------------------
Payable for investments purchased $ 984,861
- ---------------------------------------------------------------------------------------
Income distribution payable 73,784
- ---------------------------------------------------------------------------------------
Accrued expenses 14,597
- --------------------------------------------------------------------------------------- ----------
Total liabilities 1,073,242
- --------------------------------------------------------------------------------------------------- -------------
NET ASSETS for 2,133,081 shares outstanding $ 21,600,270
- --------------------------------------------------------------------------------------------------- -------------
NET ASSETS CONSIST OF:
- ---------------------------------------------------------------------------------------------------
Paid in capital $ 22,676,049
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 681,656
- ---------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (1,757,435)
- --------------------------------------------------------------------------------------------------- -------------
Total Net Assets $ 21,600,270
- --------------------------------------------------------------------------------------------------- -------------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
- ---------------------------------------------------------------------------------------------------
Net Asset Value Per Share ($21,600,270 / 2,133,081 shares outstanding) $10.13
- --------------------------------------------------------------------------------------------------- -------------
Offering Price Per Share (100/99.00 of $10.13)* $10.23
- --------------------------------------------------------------------------------------------------- -------------
Redemption Proceeds Per Share (99.00/100 of $10.13)** $10.03
- --------------------------------------------------------------------------------------------------- -------------
</TABLE>
* See "What Shares Cost."
** See "Contingent Deferred Sales Charge."
(See Notes which are an integral part of the Financial Statements)
NEW YORK MUNICIPAL INCOME FUND
STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ----------------------------------------------------------------------------------------------------
Interest $ 1,425,137
- ----------------------------------------------------------------------------------------------------
EXPENSES:
- ----------------------------------------------------------------------------------------------------
Investment advisory fee $ 87,317
- ----------------------------------------------------------------------------------------
Administrative personnel and services fee 125,000
- ----------------------------------------------------------------------------------------
Custodian fees 45,426
- ----------------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 20,875
- ----------------------------------------------------------------------------------------
Directors'/Trustees' fees 1,005
- ----------------------------------------------------------------------------------------
Auditing fees 13,521
- ----------------------------------------------------------------------------------------
Legal fees 2,771
- ----------------------------------------------------------------------------------------
Portfolio accounting fees 15,359
- ----------------------------------------------------------------------------------------
Distribution services fee 109,146
- ----------------------------------------------------------------------------------------
Shareholder services fee 54,573
- ----------------------------------------------------------------------------------------
Share registration costs 13,136
- ----------------------------------------------------------------------------------------
Printing and postage 3,624
- ----------------------------------------------------------------------------------------
Insurance premiums 4,284
- ----------------------------------------------------------------------------------------
Taxes 110
- ----------------------------------------------------------------------------------------
Miscellaneous 11,591
- ---------------------------------------------------------------------------------------- ----------
Total expenses 507,738
- ----------------------------------------------------------------------------------------
Waivers and reimbursements--
- ----------------------------------------------------------------------------------------
Waiver of investment advisory fee $ (87,317)
- ----------------------------------------------------------------------------
Waiver of distribution services fee (104,780)
- ----------------------------------------------------------------------------
Waiver of shareholder services fee (4,367)
- ----------------------------------------------------------------------------
Reimbursement of other operating expenses (182,382)
- ---------------------------------------------------------------------------- ----------
Total waivers and reimbursements (378,846)
- ---------------------------------------------------------------------------------------- ----------
Net expenses 128,892
- ---------------------------------------------------------------------------------------------------- -----------
Net investment income 1,296,245
- ---------------------------------------------------------------------------------------------------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ----------------------------------------------------------------------------------------------------
Net realized loss on investments (1,275,390)
- ----------------------------------------------------------------------------------------------------
Net change in unrealized appreciation of investments 1,320,408
- ---------------------------------------------------------------------------------------------------- -----------
Net realized and unrealized gain on investments 45,018
- ---------------------------------------------------------------------------------------------------- -----------
Change in net assets resulting from operations $ 1,341,263
- ---------------------------------------------------------------------------------------------------- -----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
NEW YORK MUNICIPAL INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1995 1994
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- -----------------------------------------------------------------------------------
OPERATIONS--
- -----------------------------------------------------------------------------------
Net investment income $ 1,296,245 $ 1,157,074
- -----------------------------------------------------------------------------------
Net realized gain (loss) on investments ($716,692 net loss and $0,
respectively, as computed for federal tax purposes) (1,275,390) (482,045)
- -----------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) 1,320,408 (1,327,995)
- ----------------------------------------------------------------------------------- ------------- --------------
Change in net assets resulting from operations 1,341,263 (652,966)
- ----------------------------------------------------------------------------------- ------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS--
- -----------------------------------------------------------------------------------
Distributions from net investment income (1,296,245) (1,157,074)
- ----------------------------------------------------------------------------------- ------------- --------------
SHARE TRANSACTIONS--
- -----------------------------------------------------------------------------------
Proceeds from sale of shares 4,339,252 12,080,816
- -----------------------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment
of distributions declared 335,077 266,053
- -----------------------------------------------------------------------------------
Cost of shares redeemed (6,271,295) (1,879,694)
- ----------------------------------------------------------------------------------- ------------- --------------
Change in net assets resulting from share transactions (1,596,966) 10,467,175
- ----------------------------------------------------------------------------------- ------------- --------------
Change in net assets (1,551,948) 8,657,135
- -----------------------------------------------------------------------------------
NET ASSETS:
- -----------------------------------------------------------------------------------
Beginning of period 23,152,218 14,495,083
- ----------------------------------------------------------------------------------- ------------- --------------
End of period $ 21,600,270 $ 23,152,218
- ----------------------------------------------------------------------------------- ------------- --------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
NEW YORK MUNICIPAL INCOME FUND
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1995
- --------------------------------------------------------------------------------
(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 five, non-diversified
portfolios. The financial statements included herein are 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.
INVESTMENT VALUATIONS--Short-term securities with remaining maturities of
sixty days or less at the time of purchase may be stated at amortized cost,
which approximates fair market value. All other securities are valued at
prices provided by an independent pricing services.
INVESTMENT INCOME, EXPENSES, AND DISTRIBUTIONS--Interest income and
expenses are accrued daily. Bond premium and discount, if applicable, are
amortized as required by the Internal Revenue Code, as amended (the
"Code"). Distributions to shareholders are recorded on the ex-dividend
date.
FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its income. Accordingly, no
provisions for federal tax are necessary.
At August 31, 1995, the Fund, for federal tax purposes, had a capital loss
carryforward of $716,692, 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 as follows:
<TABLE>
<CAPTION>
EXPIRATION YEAR EXPIRATION AMOUNT
<S> <C>
2003 $ 716,692
</TABLE>
Additionally, net capital losses of $1,040,743 attributable to security
transactions incurred after October 31, 1994, are treated as arising on
September 1, 1995, the first day of the Fund next taxable year.
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.
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 tax-exempt mutual fund that invest nationally. In order to
reduce the credit risk associated with such factors, at August 31, 1995,
20.1% of the securities in the portfolio of investments are backed by
letters of credit or bond insurance of various financial institutions and
financial guaranty assurance agencies. The value of investments insured by
or supported (backed) by a letter of credit for any one institution or
agency does not exceed 9.3% of total investments.
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.
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,
1995 1994
<S> <C> <C>
Shares sold 446,112 1,122,810
- ------------------------------------------------------------------------------------------
Shares issued to shareholders in payment of distributions declared 34,269 25,601
- ------------------------------------------------------------------------------------------
Shares redeemed (639,821) (183,192)
- ------------------------------------------------------------------------------------------ --------- ----------
Net change resulting from Fund share transactions (159,440) 965,219
- ------------------------------------------------------------------------------------------ --------- ----------
</TABLE>
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT 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"), under the
Administrative Services Agreement, provides the Fund administrative personnel
and services. This 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 SERVICES FEE--The Fund has adopted a Distribution Plan (the "Plan")
pursuant to Rule 12b-1 under the Act. Under the terms of the Plan, the Fund will
compensate Federated Securities Corp. ("FSC"), the principal distributor, from
the net assets of the Fund to finance activities intended to result in the sale
of the Fund's shares. The Plan provides that the Fund, may incur distribution
expenses up to .50 of 1% of the average daily net assets of the Fund, annually,
to compensate FSC. FSC may voluntarily choose to waive a portion of its fee. FSC
can modify or terminate this voluntary waiver at any time at its sole
discretion.
SHAREHOLDER SERVICES FEE--Under the terms of a Shareholder Services Agreement
with Federated Shareholder Services ("FSS"), the Fund will pay FSS up to .25 of
1% of average daily net assets for the Fund for the period. This fee is to
obtain certain services for shareholders and to maintain shareholder accounts.
FSS may voluntarily choose to waive a portion of this fee. FSS can modify or
terminate this voluntary waiver at any time at its sole discretion.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES--Federated Services
Company ("FServ") serves as transfer agent and dividend disbursing agent for the
Fund. This fee is based on the size, type, and number of accounts and
transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES--FServ also maintains the Fund's accounting records
for which it receives a fee. The fee is based on the level of the Fund's average
daily net assets for the period, plus out of pocket expenses.
ORGANIZATIONAL EXPENSES--Organizational expenses of $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,
1995, the Fund paid $3,249 and $7,285, respectively, pursuant to this agreement.
INTERFUND TRANSACTIONS--During the year ended August 31, 1995, the Fund engaged
in purchase and sale transactions with other funds that have a common investment
Advisor (or affiliated investment Advisors), common Directors/Trustees, and/or
common Officers. These transactions were made at current market value pursuant
to Rule 17a-7 under the Act amounting to $5,850,000 and $5,700,000,
respectively.
GENERAL--Certain Officers and Trustees of the Trust 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, 1995, were as follows:
<TABLE>
<S> <C>
- ---------------------------------------------------------------------------------------------------
PURCHASES $ 11,681,930
- --------------------------------------------------------------------------------------------------- -------------
SALES $ 12,248,577
- --------------------------------------------------------------------------------------------------- -------------
</TABLE>
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
To the Board Trustees of Municipal Securities Income Trust
and Shareholders of New York Municipal Income Fund:
We have audited the accompanying statement of assets and liabilities of New York
Municipal Income Fund (one of the portfolios comprising Municipal Securities
Income Trust), including the portfolio of investments, as of August 31, 1995,
the related statement of operations for the year then ended, the statement of
changes in net assets for the years ended August 31, 1995 and 1994, and the
financial highlights for each of the years in the three-year period ended August
31, 1995. These financial statements and financial highlights are the
responsibility of the Fund'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, 1995, 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 New York Municipal
Income Fund as of August 31, 1995, 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
Pittsburgh, Pennsylvania
October 13, 1995
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
New York Municipal Income Fund
Fortress Shares Federated Investors Tower
Pittsburgh, PA 15222-3779
- ---------------------------------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, PA 15222-3779
- ---------------------------------------------------------------------------------------------------------------------
Investment Adviser
Federated Advisers Federated Investors Tower
Pittsburgh, PA 15222-3779
- ---------------------------------------------------------------------------------------------------------------------
Custodian
State Street Bank and Trust Company P.O. Box 8600
Boston, MA 02266-8600
- ---------------------------------------------------------------------------------------------------------------------
Transfer Agent and Dividend Disbursing Agent
Federated Services Company P.O. Box 8600
Boston, Massachusetts 02266-8600
- ---------------------------------------------------------------------------------------------------------------------
Independent Auditors
Deloitte & Touche LLP 2500 One PPG Place
Pittsburgh, Pennsylvania 15222-5401
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
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, 1995
[LOGO] FEDERATED SECURITIES CORP.
---------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Cusip 625922208
2092919A-FS (10/95)
NEW YORK MUNICIPAL INCOME FUND
FORTRESS SHARES
(A PORTFOLIO OF MUNICIPAL SECURITIES INCOME TRUST)
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, 1995. 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, 1995
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED
INVESTORS
GENERAL INFORMATION ABOUT THE FUND1 Conversion to Federal Funds 14
Purchases by Sales Representatives,
INVESTMENT OBJECTIVE AND POLICIES1
Fund
Acceptable Investments 1 Trustees, and Employees 14
When-Issued and Delayed DETERMINING NET ASSET VALUE 14
Delivery Transactions 2
Valuing Municipal Bonds 14
Temporary Investments 2
Use of Amortized Cost 14
Portfolio Turnover 3
REDEEMING FORTRESS SHARES 14
Investment Limitations 3
New York Investment Risks 4 Redemption in Kind 14
MUNICIPAL SECURITIES INCOME TRUST EXCHANGE PRIVILEGE 15
MANAGEMENT 6
Reduced Sales Charge 15
Fund Ownership 10 Requirements for Exchange 15
Trustees Compensation 11 Tax Consequences 15
Trustee Liability 11 Making An Exchange 15
INVESTMENT ADVISORY SERVICES 12 TAX STATUS 15
Adviser to the Fund 12 The Fund's Tax Status 15
Advisory Fees 12 TOTAL RETURN 16
ADMINISTRATIVE SERVICES 12
YIELD 16
TRANSFER AGENT AND DIVIDEND
TAX-EQUIVALENT YIELD 16
DISBURSING AGENT 12
Tax-Equivalency Table 16
BROKERAGE TRANSACTIONS 13
PERFORMANCE COMPARISONS 17
PURCHASING FORTRESS SHARES 13
ABOUT FEDERATED INVESTORS 18
Distribution Plan and Shareholder
APPENDIX 20
Services Agreement 13
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 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.
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:
ogovernmental lease certificates of participation issued by state or
municipal authorities where payment is secured by installment payments
for equipment, buildings, or other facilities being leased by the state
or municipality;
omunicipal notes and tax-exempt commercial paper;
oserial bonds;
otax anticipation notes sold to finance working capital needs of
municipalities in anticipation of receiving taxes;
obond anticipation notes sold in anticipation of the issuance of long-term
bonds;
opre-refunded municipal bonds whose timely payment of interest and
principal is ensured by an escrow of U.S. government obligations; and
ogeneral obligation bonds.
PARTICIPATION INTERESTS
The financial institutions from which the Fund purchases participation
interests frequently provide or secure from another financial institution
irrevocable letters of credit or guarantees and give the Fund the right to
demand payment of the principal amounts of the participation interests plus
accrued interest on short notice (usually within seven days).
VARIABLE RATE MUNICIPAL SECURITIES
Variable interest rates generally reduce changes in the market value of
municipal securities from their original purchase prices. Accordingly, as
interest rates decrease or increase, the potential for capital appreciation
or depreciation is less for variable rate municipal securities than for
fixed-income obligations. Many municipal securities with variable-interest
rates purchased by the Fund are subject to repayment of principal (usually
within seven days) on the Fund's demand. The terms of these variable rate
demand instruments require payment of principal and accrued interest from
the issuer of the municipal obligations, the issuer of the participation
interests, or a guarantor of either issuer.
MUNICIPAL LEASES
The Fund may purchase municipal securities in the form of participation
interests which represent undivided proportional interests in lease
payments by a governmental or non-profit entity. The lease payments and
other rights under the lease provide for and secure the payments on the
certificates. Lease obligations may be limited by municipal charter or the
nature of the appropriation for the lease. In particular, lease obligations
may be subject to periodic appropriation. If the entity does not
appropriate funds for future lease payments, the entity cannot be compelled
to make such payments. Furthermore, a lease may provide that the
certificate trustee cannot accelerate lease obligations upon default. The
trustee would only be able to enforce lease payments as they became due. In
the event of a default or failure of appropriation, it is unlikely that the
trustee would be able to obtain an acceptable substitute source of payment.
In determining the liquidity of municipal lease securities, the investment
adviser, under the authority delegated by the Trustees, will base its
determination on the following factors:
owhether the lease can be terminated by the lessee;
othe potential recovery, if any, from a sale of the leased property upon
termination of the lease;
othe lessee's general credit strength (e.g., its debt, administrative,
economic and financial characteristics and prospects);
othe likelihood that the lessee will discontinue appropriating funding for
the leased property because the property is no longer deemed essential to
its operations (e.g., the potential for an "event of non-appropriation");
and
oany credit enhancement or legal recourse provided upon an event of non-
appropriation or other termination of the lease.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an advantageous
price or yield for the Fund. No fees or other expenses, other than normal
transaction costs, are incurred. However, liquid assets of the Fund sufficient
to make payment for the securities to be purchased are segregated on the Fund's
records at the trade date. These assets are marked to market daily and are
maintained until the transaction has been settled. The Fund does not intend to
engage in when-issued and delayed delivery transactions to an extent that would
cause the segregation of more than 20% of the total value of its assets.
TEMPORARY INVESTMENTS
The Fund may also invest in temporary investments 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 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 years ended August 31, 1995 and 1994, the Fund's
portfolio turnover rates were 55% and 37%, respectively.
INVESTMENT LIMITATIONS
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities on
margin but may obtain such short-term credits as may be necessary for
clearance of purchases and sales of securities.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities except that the Fund may borrow
money and engage in reverse repurchase agreements in amounts up to one-
third of the value of its total assets, including the amounts borrowed. The
Fund will not borrow money or engage in reverse repurchase agreements for
investment leverage, but rather as a temporary, extraordinary, or emergency
measure to facilitate management of the portfolio by enabling the Fund to,
for example, meet redemption requests when the liquidation of portfolio
securities is deemed to be inconvenient or disadvantageous. The Fund will
not purchase any securities while borrowings in excess of 5% of its total
assets are outstanding.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate its assets except to
secure permitted borrowings. In those cases, it may mortgage, pledge, or
hypothecate assets having a market value not exceeding 10% of the value of
its total assets at the time of the pledge.
UNDERWRITING
The Fund will not underwrite any issue of securities except as it may be
deemed to be an underwriter under the Securities Act of 1933 in connection
with the sale of securities in accordance with its investment objective,
policies, and limitations.
INVESTING IN REAL ESTATE
The Fund will not purchase or sell real estate including limited
partnership interests although it may invest in municipal bonds secured by
real estate or interests in real estate.
INVESTING IN COMMODITIES
The Fund will not 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."
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
Birthdate: July 28, 1924
Chairman and Trustee
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated Research
Corp. and Federated Global Research Corp.; Chairman, Passport Research, Ltd.;
Chief Executive Officer and Director, Trustee, or Managing General Partner of
the Funds. Mr. Donahue is the father of J. Christopher Donahue, Executive Vice
President and Trustee of the Trust.
Thomas G. Bigley
28th Floor, One Oxford Centre
Pittsburgh, PA
Birthdate: February 3, 1934
Trustee
Director, Oberg Manufacturing Co.; Chairman of the Board, Children's Hospital of
Pittsburgh; Director, Trustee, or Managing General Partner of the Funds;
formerly, Senior Partner, Ernst & Young LLP.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
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
Birthdate: July 4, 1918
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
Birthdate: April 11, 1949
Executive Vice President and Trustee
President and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated Research
Corp. and Federated Global Research Corp.; President, Passport Research, Ltd.;
Trustee, Federated Administrative Services, Federated Services Company, and
Federated Shareholder Services; President or Vice President of the Funds;
Director, Trustee, or Managing General Partner of some of the Funds. Mr. Donahue
is the son of John F. Donahue, Chairman and Trustee of the Trust.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Trustee
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director, Trustee,
or Managing General Partner of the Funds.
Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Trustee
Professor of Medicine and Member, Board of Trustees, University of Pittsburgh;
Medical Director, University of Pittsburgh Medical Center - Downtown; Member,
Board of Directors, University of Pittsburgh Medical Center; formerly,
Hematologist, Oncologist, and Internist, Presbyterian and Montefiore Hospitals;
Director, Trustee, or Managing General Partner of the Funds.
Edward L. Flaherty, Jr.@
Henny, Kochuba, Meyer and Flaherty
Two Gateway Center - Suite 674
Pittsburgh, PA
Birthdate: June 18, 1924
Trustee
Attorney-at-law; Shareholder, Henny, Kochuba, Meyer and Flaherty; Director,
Eat'N Park Restaurants, Inc., and Statewide Settlement Agency, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Counsel, Horizon
Financial, F.A., Western Region.
Peter E. Madden
70 Westcliff Road
Westin, MA
Birthdate: March 16, 1942
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.
Gregor F. Meyer
Henny, Kochuba, Meyer and Flaherty
Two Gateway Center - Suite 674
Pittsburgh, PA
Birthdate: October 6, 1926
Trustee
Attorney-at-law; Shareholder, Henny, Kochuba, Meyer and Flaherty; Chairman,
Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.; Director, Trustee, or
Managing General Partner of the Funds.
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Trustee
President, Law Professor, Duquesne University; Consulting Partner, Mollica,
Murray and Hogue; Director, Trustee or Managing General Partner of the Funds.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Trustee
Professor, International Politics and Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer Library
Center, Inc., and U.S. Space Foundation; Chairman, Czecho Management Center;
Director, Trustee, or Managing General Partner of the Funds; President Emeritus,
University of Pittsburgh; founding Chairman, National Advisory Council for
Environmental Policy and Technology and Federal Emergency Management Advisory
Board.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Trustee
Public relations/marketing consultant; Conference Coordinator, Non-profit
entities; Director, Trustee, or Managing General Partner of the Funds.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
President
Executive Vice President and Trustee, Federated Investors; Chairman and
Director, Federated Securities Corp.; President or Vice President of some of the
Funds; Director or Trustee of some of the Funds.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
Vice President and Treasurer
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated Research
Corp., Federated Global Research Corp. and Passport Research, Ltd.; Executive
Vice President and Director, Federated Securities Corp.; Trustee, Federated
Services Company; Chairman, Treasurer, and Trustee, Federated Administrative
Services; Trustee or Director of some of the Funds; Vice President and Treasurer
of the Funds.
David M. Taylor
Federated Investors Tower
Pittsburgh, PA
Birthdate: January 13, 1947
Treasurer
Senior Vice President, Controller, and Trustee, Federated Investors; Controller,
Federated Advisers, Federated Management, Federated Research, Federated Research
Corp., and Passport Research, Ltd.; Vice President, Federated Shareholder
Services; Senior Vice President, Federated Administrative Services; Treasurer of
the Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Executive Vice President and Secretary
Executive Vice President, Secretary, General Counsel, and Trustee, Federated
Investors; Trustee, Federated Advisers, Federated Management, and Federated
Research; Director, Federated Research Corp. and Federated Global Research Corp.
; Trustee, Federated Services Company; Executive Vice President, Secretary, and
Trustee, Federated Administrative Services; President and Trustee, Federated
Shareholder Services; Director, Federated Securities Corp.; 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.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: American Leaders Fund, Inc.; Annuity Management Series;
Arrow Funds; Automated Government Money Trust; Blanchard Funds; Blanchard
Precious Metals, Inc.; Cash Trust Series II; Cash Trust Series, Inc.; DG
Investor Series; Edward D. Jones & Co. Daily Passport Cash Trust; Federated ARMs
Fund; Federated Equity Funds; Federated Exchange Fund, Ltd.; Federated GNMA
Trust; Federated Government Trust; Federated High Yield Trust; Federated Income
Securities Trust; Federated Income Trust; Federated Index Trust; Federated
Institutional Trust; Federated Master Trust; Federated Municipal Trust;
Federated Short-Term Municipal Trust; Federated Short-Term U.S. Government
Trust; Federated Stock Trust; Federated Tax-Free Trust; Federated Total Return
Series, Inc.; Federated U.S. Government Bond Fund; Federated U.S. Government
Securities Fund: 1-3 Years; Federated U.S. Government Securities Fund: 3-5
Years; First Priority Funds; Fixed Income Securities, Inc.; Fortress Adjustable
Rate U.S. Government Fund, Inc.; Fortress Municipal Income Fund, Inc.; Fortress
Utility Fund, Inc.; Fund for U.S. Government Securities, Inc.; Government Income
Securities, Inc.; High Yield Cash Trust; Insurance Management Series;
Intermediate Municipal Trust; International Series, Inc.; Investment Series
Funds, Inc.; Investment Series Trust; Liberty Equity Income Fund, Inc.; Liberty
High Income Bond Fund, Inc.; Liberty Municipal Securities Fund, Inc.; Liberty
U.S. Government Money Market Trust; Liberty Term Trust, Inc. - 1999; Liberty
Utility Fund, Inc.; Liquid Cash Trust; Managed Series Trust; Money Market
Management, Inc.; Money Market Obligations Trust; Money Market Trust; Newpoint
Funds; 111 Corcoran Funds; Peachtree Funds; The Planters Funds; RIMCO Monument
Funds; The Shawmut Funds; Star Funds; The Starburst Funds; The Starburst Funds
II; Stock and Bond Fund, Inc.; Sunburst Funds; Targeted Duration Trust; Tax-Free
Instruments Trust; Trust for Financial Institutions; Trust For Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S.
Treasury Obligations; The Virtus Funds; World Investment Series, Inc.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the outstanding Shares.
As of October 9, 1995, the following shareholder of record owned 5% or more of
the outstanding Shares of the Fund: Merrill Lynch Pierce Fenner & Smith,
Jacksonville, FL, owned approximately 1,021,550 Shares (48.01%).
TRUSTEES COMPENSATION
AGGREGATE
NAME , COMPENSATION
POSITION WITH FROM TOTAL COMPENSATION PAID
TRUST TRUST*# FROM FUND COMPLEX +
John F. Donahue $ -0- $ -0- for the Trust and
Trustee and Chairman 68 other investment companies in the Fund Complex
Thomas G. Bigley $149 $20,688 for the Trust and
Trustee 49 other investment companies in the Fund Complex
John T. Conroy $162 $117,202 for the Trust and
Trustee 64 other investment companies in the Fund Complex
William J. Copeland $162 $117,202 for the Trust and
Trustee 64 other investment companies in the Fund Complex
J. Christopher Donahue $ -0- $ -0- for the Trust and
Trustee and Exec. Vice Pres. 14 other investment companies in the Fund
Complex
James E. Dowd $162 $117,202 for the Trust and
Trustee 64 other investment companies in the Fund Complex
Lawrence D. Ellis, M.D. $149 $106,460 for the Trust and
Trustee 64 other investment companies in the Fund Complex
Edward L. Flaherty, Jr. $162 $117,202 for the Trust and
Trustee 64 other investment companies in the Fund Complex
Peter E. Madden $130 $90,563 for the Trust and
Trustee 64 other investment companies in the Fund Complex
Gregor F. Meyer $149 $106,460 for the Trust and
Trustee 64 other investment companies in the Fund Complex
John E. Murray, Jr. $118 $ -0- for the Trust and
Trustee 64 other investment companies in the Fund Complex
Wesley W. Posvar $149 $106,460 for the Trust and
Trustee 64 other investment companies in the Fund Complex
Marjorie P. Smuts$149 $106,460 for the Trust and
Trustee 64 other investment companies in the Fund Complex
*Information is furnished for the fiscal year ended August 31, 1995.
#The aggregate compensation is provided for the Trust which is comprised of five
portfolios.
+The information is provided for the last calendar year.
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, the Adviser receives an annual investment advisory
fee as described in the prospectus. For the fiscal years ended August 31, 1995
and 1994, and for the period from December 2, 1992 (date of initial public
investment) to August 31, 1993, the Adviser earned advisory fees of $87,317,
$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 years ended August 31, 1995 and 1994, the Administrators collectively
earned $125,000 and $177,907, respectively, 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.
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:
o advice as to the advisability of investing in securities;
o security analysis and reports;
o economic studies;
o industry studies;
o receipt of quotations for portfolio evaluations; and
o similar services.
The Adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions charged
by such persons are reasonable in relationship to the value of the brokerage and
research services provided.
Research services provided by brokers may be used by the Adviser or by
affiliates of Federated Investors in advising Federated Funds and other
accounts. To the extent that receipt of these services may supplant services for
which the Adviser or its affiliates might otherwise have paid, it would tend to
reduce their expenses.
During the fiscal years ended August 31, 1995 and 1994, and for the period from
December 2, 1992 (date of initial public investment) to August 31, 1993, the
Fund paid no brokerage commissions.
PURCHASING FORTRESS SHARES
Except under certain circumstances described in the prospectus, Shares are sold
at their net asset value plus a sales charge on days the New York Stock Exchange
is open for business. The procedure for purchasing Shares is explained in the
prospectus under "Investing in Fortress Shares."
DISTRIBUTION PLAN AND SHAREHOLDER SERVICES AGREEMENT
These arrangements permit the payment of fees to financial institutions, the
distributor, and Federated Shareholder Services, to stimulate distribution
activities and to cause services to be provided to shareholders by a
representative who has knowledge of the shareholder's particular circumstances
and goals. These activities and services may include, but are not limited to,
marketing efforts; providing office space, equipment, telephone facilities, and
various clerical, supervisory, computer, and other personnel as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries; and assisting
clients in changing dividend options, account designations, and addresses.
By adopting the Distribution Plan, the 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, 1995 and 1994, and for the period from
December 2, 1992 (date of initial public investment) to August 31, 1993 payments
in the amount of $4,366, $105,399 and $31,628, respectively, were made pursuant
to the Distribution Plan. In addition, for the fiscal year ended August 31,
1995, payments in the amount of $50,206 were made pursuant to the Shareholder
Services Agreement.
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 charge.
Shares may also be sold without a sales charge to trusts or pension or profit-
sharing plans for these persons. These sales are made with the purchaser's
written assurance that the purchase is for investment purposes and that the
securities will not be resold except through redemption by the Fund.
DETERMINING NET ASSET VALUE
Net asset value generally changes each day. The days on which net asset value is
calculated 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 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 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 charge different from that of the Fund's or with no
sales charge and which are advised by subsidiaries or affiliates of Federated
Investors. These exchanges are made at net asset value plus the difference
between the Fund's sales charge already paid and any sales charge of the fund
into which the Shares are to be exchanged, if higher.
REDUCED SALES CHARGE
If a shareholder making such an exchange qualifies for a reduction or an
elimination of the sales charge, 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:
o derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;
o derive less than 30% of its gross income from the sale of securities held
less than three months;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income earned during
the year.
CAPITAL GAINS
Capital gains or losses may be realized by the Fund on the sale of
portfolio securities and as a result of discounts from par value on
securities held to maturity. Sales would generally be made because of:
othe availability of higher relative yields;
odifferentials in market values;
onew investment opportunities;
ochanges in creditworthiness of an issuer; or
oan attempt to preserve gains or limit losses.
Distributions of long-term capital gains are taxed as such, whether they are
taken in cash or reinvested, and regardless of the length of time 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 returns for the one-year period ended August 31,
1995, and for the period from December 2, 1992 (date of initial public
investment) to August 31, 1995 were 4.33% and 5.56%, 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, 1995 was 5.78%.
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, 1995
was 9.01%.
The tax-equivalent yield of the Fund is calculated similarly to the yield, but
is adjusted to reflect the taxable yield that the Fund would have had to earn to
equal its actual yield, assuming a tax rate of 28% and assuming that income is
100% tax-exempt.
TAX-EQUIVALENCY TABLE
The Fund may also use a tax-equivalency table in advertising and sales
literature. The interest earned by the municipal obligations in the Fund's
portfolio generally remains free from federal regular income tax,* and 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.
TAXABLE YIELD EQUIVALENT FOR 1995
State of New York
TAX BRACKET:
FEDERAL 15.00% 28.00% 31.00% 36.00% 39.60%
COMBINED FEDERAL
AND STATE 22.875% 35.875% 38.875% 43.875% 47.475%
JOINT $1- $39,001- $94,251- $143,601- OVER
RETURN 39,000 94,250 143,600 256,500 256,500
SINGLE $1- $23,351- $56,551- $117,951- OVER
RETURN 23,350 56,550 117,950 256,500 256,500
Tax-Exempt
Yield Taxable Yield Equivalent
1.50% 1.94% 2.34% 2.45% 2.67% 2.86%
2.00% 2.59% 3.12% 3.27% 3.56% 3.81%
2.50% 3.24% 3.90% 4.09% 4.45% 4.76%
3.00% 3.89% 4.68% 4.91% 5.35% 5.71%
3.50% 4.54% 5.46% 5.73% 6.24% 6.66%
4.00% 5.19% 6.24% 6.54% 7.13% 7.62%
4.50% 5.83% 7.02% 7.36% 8.02% 8.57%
5.00% 6.48% 7.80% 8.18% 8.91% 9.52%
5.50% 7.13% 8.58% 9.00% 9.80% 10.47%
6.00% 7.78% 9.36% 9.82% 10.69% 11.42%
Note: The maximum marginal tax rate for each bracket was used in
calculating the taxable yield equivalent. Furthermore, additional state and
local taxes paid on comparable taxable investments were not used to
increase federal deductions.
The chart above is for illustrative purposes only. It is not an indicator
of past or future performance of Fund shares.
* Some portion of the Fund's income may be subject to the federal
alternative minimum tax and state and local income taxes.
PERFORMANCE COMPARISONS
The performance of Shares depends upon such variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio securities;
o changes in the Fund's expenses; and
o various other factors.
The Fund's performance fluctuates on a daily basis largely because net earnings
and offering price per share fluctuate daily. Both net earnings and offering
price per share are factors in the computation of yield and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute offering price. The financial
publications and/or indices which the Fund uses in advertising may include:
O LEHMAN BROTHERS REVENUE BOND INDEX is a total return performance benchmark
for the long-term, investment grade, revenue bond market. Returns and
attributes for the index are calculated semi-monthly.
o 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.
o MORNINGSTAR, INC., an independent rating service, is the publisher of the
bi-weekly MUTUAL FUND VALUES. MUTUAL FUND VALUES rates more than 1,000
NASDAQ-listed mutual funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and ratings are effective for
two weeks.
Advertisements and other sales literature for the Fund may quote total returns
which are calculated on non-standardized base periods. 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 charge.
ABOUT FEDERATED INVESTORS
Federated is dedicated to meeting investor needs which is reflected in its
investment decision making -- structured, straightforward, and consistent. This
has resulted in a history of competitive performance with a range of competitive
investment products that have gained the confidence of thousands of clients and
their customers.
The company's disciplined security selection process is firmly rooted in sound
methodologies backed by fundamental and technical research. Investment
decisions are made and executed by teams of portfolio managers, analysts, and
traders dedicated to specific market sectors.
In the municipal sector, as of December 31, 1994, Federated managed 18 bond
funds with approximately $1.9 billion in assets and 18 money market funds with
approximately $6.6 billion in total assets. In 1976, Federated introduced one
of the first municipal bond mutual funds in the industry and is now one of the
largest institutional buyers of municipal securities.
J. Thomas Madden, Executive Vice President, oversees Federated's equity and high
yield corporate bond management while William D. Dawson, Executive Vice
President, oversees Federated's domestic fixed income management. Henry A.
Frantzen, Executive Vice President, oversees the management of Federated's
international portfolios.
MUTUAL FUND MARKET
Twenty-seven percent of American households are pursuing their financial goals
through mutual funds. These investors, as well as businesses and institutions,
have entrusted over $2 trillion to the more than 5,500 funds available.*
*source: Investment Company Institute
Federated Investors, through it subsidiaries, distributes mutual funds for a
variety of investment applications. Specific markets include:
INSTITUTIONAL
Federated meets the needs of more than 4,000 institutional clients nationwide by
managing and servicing separate accounts and mutual funds for a variety of
applications, including defined benefit and defined contribution programs, cash
management, and asset/liability management. Institutional clients include
corporations, pension funds, tax-exempt entities, foundations/endowments,
insurance companies, and investment and financial advisors. The marketing
effort to theses institutional clients is headed by John B. Fisher, President,
Institutional Sales Division.
TRUST ORGANIZATIONS
Other institutional clients include close relationships with more than 1,500
banks and trust organizations. Virtually all of the trust divisions of the top
100 bank holding companies use Federated funds in their clients' portfolios.
The marketing effort to trust clients is headed by Mark R. Gensheimer, Executive
Vice President, Bank Marketing & Sales.
BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES
Federated mutual funds are available to consumers through major brokerage firms
nationwide -- including 200 New York Stock Exchange firms -- supported by more
wholesalers than any other mutual fund distributor. The marketing effort to
these firms is headed by James F. Getz, President, Broker/Dealer Division.
APPENDIX
STANDARD & 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 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. ("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 & 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 & 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.
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,
Cusip #625922208
2092919B (10/95)
1990) to the Declaration of Trust (6);
(iv) Conformed Copy of Amendment No. 3 (dated August 31,
1992) to the Declaration of Trust (8);
(v) Conformed Copy of Amendment No. 4 (dated September 17,
1992) to the Declaration of Trust (8);
(vi) Conformed Copy of Amendment No. 5 (dated February 4,
1993) to the Declaration of Trust (10);
(vii) Conformed Copy of Amendment No. 6 (dated May 24, 1993)
to the Declaration of Trust; (13)
(2) Copy of By-Laws of the Registrant (1);
(3) Not applicable;
(4) Copy of Specimen Certificate for Shares of Beneficial
Interest for:
(i) Pennsylvania Municipal Income Fund-Class A Shares
(16);
(ii) Ohio Municipal Income Fund-Trust Shares (6);
(iii) California Municipal Income Fund (10);
(iv) New York Municipal Income Fund (10);
(v) Michigan Intermediate Municipal Trust (16);
+ 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)
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)
16. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 15 on Form N-1A filed on October 27, 1994. (File Nos.
33-36729 and 811-6165)
(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);
(iii) The Registrant incorporates the conformed copy of the
specimen Mutual Fund Sales and Service Agreement;
Mutual Funds Service Agreement; and Plan Trustee/Mutual
Funds Service Agreement from Item 24(b)(6) of the Cash
Trust Series II Registration Statement filed with the
Commission on July 24, 1995. (File Number 33-38550 and
811-6269).
(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(17);
(iii) Conformed Copy of Administrative Services
Agreement (16);
(iv) The response and exhibits described in Item 24(b)(6)
are hereby incorporated by reference;
(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;
+ 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)
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)
16. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 15 on Form N-1A filed on October 27, 1994. (File Nos.
33-36729 and 811-6165)
17. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 17 on Form N-1A filed on December 30, 1994. (File Nos.
33-36729 and 811-6165)
(13) Conformed Copy of Initial Capital Understanding (1);
(14) Not applicable;
(15) (i) Copy of Distribution Plan (12);
(ii) Copy of 12b-1 Agreement (8);
(iii) The response and exhibits described in Item 24(b)(6)
are hereby incorporated by reference;
(16) Copy of Schedule for Computation of Fund Performance Data
for:
(i) Ohio Municipal Income Fund;+
(ii) Pennsylvania Municipal Income Fund;+
(iii) California Municipal Income Fund (11);
(iv) New York Municipal Income Fund (11);
(v) Michigan Municipal Income Fund (11);
(17) Copy of Financial Data Schedules;+
(18) Not applicable.
(19) Conformed Copy of Power of Attorney;+
Item 25. Persons Controlled by or Under Common Control with Registrant
None
+ All exhibits are filed electronically.
1. Response is incorporated by reference to Registrant's Initial
Registration Statement on Form N-1A filed August 31, 1990. (File Nos.
33-36729 and 811-6165)
8. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 7 on Form N-1A filed on September 25, 1992. (File Nos.
33-36729 and 811-6165)
11. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 11 on Form N-1A filed on April 28, 1993. (File Nos. 33-
36729 and 811-6165)
12. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 12 on Form N-1A filed on May 17, 1993. (File Nos. 33-
36729 and 811-6165)
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 26. Number of Holders of Securities:
Number of Record Holders
Title of Class as of October 9, 1995
Shares of
beneficial interest
California Municipal Income Fund 410
Michigan Municipal Income Trust 896
New York Municipal Income Fund 410
Ohio Municipal Income Fund 2,002
Pennsylvania Municipal Income Fund 2,301
Item 27. Indemnification: (1)
Item 28. Business and Other Connections of Investment Adviser:
(a)For a description of the other business of the investment
adviser, see the section entitled "Municipal Securities
Income Trust Information - Management of Municipal Securities
Income 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 "Municipal Securities Income
Trust Management." 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, Drew J. Collins,
Jonathan C. Conley, and J. Alan Minteer, Senior Vice
Presidents; J. Scott Albrecht, Joseph M. Balestrino, Randall
S. Bauer, David A. Briggs Kenneth J. Cody, Deborah A.
Cunningham, Michael P. Donnelly, Linda A. Duessel, Mark E.
Durbiano, Kathleen Foody-Malus, Thomas M. Franks, Edward C.
Gonzales, Timothy E. Keefe, Stephen A. Keen, Mark S.
Kopinski, Jeff A. Kozemchak, Marian R. Marinack, Susan M.
Nason, Mary Jo Ochson, Robert J. Ostrowski, Frederick L.
Plautz, Jr., Charles A. Ritter, James D. Roberge, Frank
Semack, William F. Stotz, Sandra L. Weber and Christopher H.
Wiles, Vice Presidents; Thomas R. Donahue, Treasurer; and
Stephen A. Keen, 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.
+ 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)
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 Government Money Trust;
BayFunds; The Biltmore Funds; The Biltmore Municipal Funds;
Blanchard Funds; Blanchard Precious Metals, Inc.; Cash Trust
Series, Inc.; Cash Trust Series II; DG Investor Series;
Edward D. Jones & Co. Daily Passport Cash Trust; Federated
ARMs Fund; Federated Equity Funds; Federated Exchange Fund,
Ltd.; Federated GNMA Trust; Federated Government Trust;
Federated High Yield Trust; Federated Income Securities
Trust; Federated Income Trust; Federated Index Trust;
Federated Institutional Trust; Federated Master Trust;
Federated Municipal Trust; Federated Short-Term Municipal
Trust; Federated Short-Term U.S. Government Trust; Federated
Stock Trust; Federated Tax-Free Trust; Federated Total Return
Series, Inc.; Federated U.S. Government Bond Fund; Federated
U.S. Government Securities Fund: 1-3 Years; Federated
U.S. Government Securities Fund: 3-5 Years;First Priority
Funds; 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; 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.; Money Market
Obligations Trust; Money Market Trust; The Monitor Funds;
Newpoint Funds; 111 Corcoran Funds; Peachtree Funds; The
Planters Funds; RIMCO Monument Funds; The Shawmut Funds;
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; The Virtus Funds; 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 Vice President Federated
Investors Tower Executive Officer, Chief
Pittsburgh, PA 15222-3779 Operating Officer, Asst.
Secretary, and Asst.
Treasurer, Federated
Securities Corp.
Edward C. Gonzales Director, Executive ViceExecutive Vice
Federated Investors Tower President, Federated, President
Pittsburgh, PA 15222-3779 Securities Corp.
John W. McGonigle Director, Federated Executive Vice
Federated Investors Tower Securities Corp. President and
Pittsburgh, PA 15222-3779 Secretary
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, Federated
Pittsburgh, PA 15222-3779 Securities Corp.
Mark W. Bloss Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard W. Boyd Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Theodore Fadool, Jr. Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Bryant R. Fisher Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Christopher T. Fives Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
James S. Hamilton Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
James M. Heaton 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
Solon A. Person, IV 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
Thomas E. Territ Senior Vice President, --
Federated Investors Tower Federated Securities Corp
Pittsburgh, PA 15222-3779
John B. Bohnet Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Byron F. Bowman Vice President, Secretary, --
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
Kevin J. Crenny Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Daniel T. Culbertson Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
G. Michael Cullen Vice President, --
Federated Investors Tower Federated Securites Corp.
Pittsburgh, PA 15222-3779
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
Laura M. Deger Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Jill Ehrenfeld Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mark D. Fisher Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Michael D. Fitzgerald Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Joseph D. Gibbons Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Craig S. Gonzales 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
H. Joeseph Kenedy 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
Steven A. La Versa 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
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
J. Michael Miller Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Michael P. O'Brien Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Robert D. Oehlschlager Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
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
John C. Shelar, Jr. 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
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
Paul A. Uhlman 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
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
Michael P. Wolff Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Charlene H. Jennings Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
J. Timothy Radcliff Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Denis McAuley Treasurer, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Thomas R. Donahue Asstistant Secretary, --
Federated Investors Tower Assistant Treasurer,
Pittsburgh, PA 15222-3779 Federated Securities Corp.
Joseph M. Huber Assistant Secretary, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
David M. Taylor Assistant Secretary, Treasurer
Federated Investors Tower Federated Securities Corp.
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 P.O. Box 8600
("Transfer Agent and Dividend Boston, MA 02266-8600
Disbursing Agent")
Federated Adminstrative ServicesFederated 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 8600
("Custodian") Boston, MA 02266-8600
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, certifies that it meets all of the requirements for effectiveness of
this Amendment to its Registration Statement pursuant to Rule 485(b) under
the Securities Act of 1933 and has duly caused this Amendment to its
Registration Statement to be signed on its behalf by the undersigned,
thereto duly authorized, in the City of Pittsburgh and Commonwealth of
Pennsylvania, on the 26th day of October, 1995.
MUNICIPAL SECURITIES INCOME TRUST
BY: /s/Charles H. Field
Charles H. Field, Assistant Secretary
Attorney in Fact for John F. Donahue
October 26, 1995
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/Charles H. Field
Charles H. Field Attorney In Fact October 26, 1995
ASSISTANT SECRETARY For the Persons
Listed Below
NAME TITLE
John F. Donahue* Chairman and Trustee
(Chief Executive Officer)
Richard B. Fisher* President
J. Christopher Donahue* Executive Vice President
and Trustee
David M. Taylor* Treasurer
(Principal Financial and
Accounting Officer)
Thomas G. Bigley* Trustee
John T. Conroy, Jr.* Trustee
William J. Copeland* Trustee
James E. Dowd* Trustee
Lawrence D. Ellis, M.D.* Trustee
Edward L. Flaherty, Jr.* Trustee
Peter E. Madden* Trustee
Gregor F. Meyer* Trustee
John E. Murray* Trustee
Wesley W. Posvar* Trustee
Exhibit (11) under Form N-1A
Exhibit 23 under 601/Reg SK
INDEPENDENT AUDITORS' CONSENT
To the Board of Trustees and Shareholders of
Municipal Securities Income Trust
We consent to the use in Post-Effective Amendment No. 19 to Registration
Statement (No. 33-36729) of Municipal Securities Income Trust (including
California Municipal Income Fund, Michigan Intermediate Municipal Trust, New
York Municipal Income Fund, Ohio Municipal Income Fund and Pennsylvania
Municipal Income Fund) of our reports dated October 13, 1995, appearing in the
Prospectuses, which are a part of such Registration Statement, and to the
reference to us under the heading "Financial Highlights" in such Prospectuses.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
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 business 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
segregate 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
receipt 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
similar 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 name
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,
consolidation, 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
surrender 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
securities 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 agreement
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 agreement
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 ("Transfer
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 receipt
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 (other
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.
2.7Collection 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, which
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
securities 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 Fund,
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
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 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 Purchased.
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.
2.10 Payments for Repurchases or Redemptions of Shares of a Fund. From
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.
2.11 Appointment 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.
2.12 Deposit 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.
2.13 Segregated 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.
2.14 Joint Repurchase Agreements. Upon the receipt of Proper
Instructions, 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.
2.15 Ownership Certificates for Tax Purposes. The Custodian shall
execute 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.
2.16 Proxies. The Custodian shall, with respect to the securities held
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.
2.17 Communications Relating to Fund Portfolio Securities. The Custodian
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.
2.18 Proper 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.
2.19 Actions 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 handling
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
definitive 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 connection
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.
2.20 Evidence of Authority. The Custodian shall be protected in acting
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.
2.21 Notice to Trust by Custodian Regarding Cash Movement. The Custodian
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 Calculation
of Net Asset Value and Net Income.
The Custodian shall cooperate with and supply necessary information to
the 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
/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 COMPANY
/s/ Jeannette Fisher-Garber By /s/ James J. Dolan
------ ------------
Jeannette Fisher-Garber James J. Dolan
Secretary President
EXHIBIT 1
<TABLE>
<S> <C>
CONTRACT
DATE INVESTMENT COMPANY
12/01/93 Municipal Securities Income Trust
California Municipal Income Fund (Fortress Shares)
Michigan Intermediate Municipal Trust
New York Municipal Income Fund (Fortress Shares)
Ohio Municipal Income Fund (Fortress Shares)
Pennsylvania Municipal Income Fund (Class A Shares)
</TABLE>
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 December 1, 1994, by and between those investment
companies listed on Exhibit 1 as may be amended from time to time, having
their principal office and place of business at Federated Investors Tower,
Pittsburgh, PA 15222-3779 (the "Trust"), on behalf of the portfolios
(individually referred to herein as a "Fund" and collectively as "Funds") of
the Trust, and FEDERATED SERVICES COMPANY, a Delaware business trust, having
its principal office and place of business at Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779 (the "Company").
WHEREAS, the Trust is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act"),
with authorized and issued shares of capital stock or beneficial interest
("Shares"); and
WHEREAS, the Trust may desire to retain the Company to provide certain
pricing, accounting and recordkeeping services for each of the Funds,
including any classes of shares issued by any Fund ("Classes") if so indicated
on Exhibit 1, and the Company is willing to furnish such services; and
WHEREAS, the Trust may desire to appoint the Company as its transfer agent,
dividend disbursing agent if so indicated on Exhibit 1, and agent in
connection with certain other activities, and the Company desires to accept
such appointment; and
WHEREAS, the Trust may desire to appoint the Company as its agent to
select, negotiate and subcontract for custodian services from an approved list
of qualified banks if so indicated on Exhibit 1, and the Company desires to
accept such appointment; and
WHEREAS, from time to time the Trust may desire and may instruct the
Company to subcontract for the performance of certain of its duties and
responsibilities hereunder to State Street Bank and Trust Company or another
agent (the "Agent"); and
WHEREAS, the words Trust and Fund may be used interchangeably for those
investment companies consisting of only one portfolio;
NOW THEREFORE, in consideration of the premises and mutual covenants herein
contained, and intending to be legally bound hereby, the parties hereto agree
as follows:
SECTION ONE: FUND ACCOUNTING.
ARTICLE 1. APPOINTMENT.
The Trust hereby appoints the Company to provide certain pricing and
accounting services to the Funds, and/or the Classes, for the period and on
the terms set forth in this Agreement. The Company accepts such appointment
and agrees to furnish the services herein set forth in return for the
compensation as provided in Article 3 of this Section.
ARTICLE 2. THE COMPANY'S DUTIES.
Subject to the supervision and control of the Trust's Board of Trustees or
Directors ("Board"), the Company will assist the Trust with regard to fund
accounting for the Trust, and/or the Funds, and/or the Classes, and in
connection therewith undertakes to perform the following specific services;
A. Value the assets of the Funds using: primarily, market quotations,
including the use of matrix pricing, supplied by the independent pricing
services selected by the Company in consultation with the adviser, or
sources selected by the adviser, and reviewed by the board; secondarily,
if a designated pricing service does not provide a price for a security
which the Company believes should be available by market quotation, the
Company may obtain a price by calling brokers designated by the
investment adviser of the fund holding the security, or if the adviser
does not supply the names of such brokers, the Company will attempt on
its own to find brokers to price those securities; thirdly, for
securities for which no market price is available, the Pricing Committee
of the Board will determine a fair value in good faith. Consistent with
Rule 2a-4 of the 40 Act, estimates may be used where necessary or
appropriate. The Company's obligations with regard to the prices
received from outside pricing services and designated brokers or other
outside sources, is to exercise reasonable care in the supervision of
the pricing agent. The Company is not the guarantor of the securities
prices received from such agents and the Company is not liable to the
Fund for potential errors in valuing a Fund's assets or calculating the
net asset value per share of such Fund or Class when the calculations
are based upon such prices. All of the above sources of prices used as
described are deemed by the Company to be authorized sources of security
prices. The Company provides daily to the adviser the securities prices
used in calculating the net asset value of the fund, for its use in
preparing exception reports for those prices on which the adviser has
comment. Further, upon receipt of the exception reports generated by the
adviser, the Company diligently pursues communication regarding
exception reports with the designated pricing agents.
B. Determine the net asset value per share of each Fund and/or Class, at
the time and in the manner from time to time determined by the Board and
as set forth in the Prospectus and Statement of Additional Information
("Prospectus") of each Fund;
C. Calculate the net income of each of the Funds, if any;
D. Calculate capital gains or losses of each of the Funds resulting from
sale or disposition of assets, if any;
E. Maintain the general ledger and other accounts, books and financial
records of the Trust, including for each Fund, and/or Class, as required
under Section 31(a) of the 1940 Act and the Rules thereunder in
connection with the services provided by the Company;
F. Preserve for the periods prescribed by Rule 31a-2 under the 1940 Act the
records to be maintained by Rule 31a-1 under the 1940 Act in connection
with the services provided by the Company. The Company further agrees
that all such records it maintains for the Trust are the property of the
Trust and further agrees to surrender promptly to the Trust such records
upon the Trust's request;
G. At the request of the Trust, prepare various reports or other financial
documents required by federal, state and other applicable laws and
regulations; and
H. Such other similar services as may be reasonably requested by the Trust.
ARTICLE 3. COMPENSATION AND ALLOCATION OF EXPENSES.
A. The Funds will compensate the Company for its services rendered pursuant
to Section One of this Agreement in accordance with the fees agreed upon
from time to time between the parties hereto. Such fees do not include
out-of-pocket disbursements of the Company for which the Funds shall
reimburse the Company upon receipt of a separate invoice. Out-of-pocket
disbursements shall include, but shall not be limited to, the items
agreed upon between the parties from time to time.
B. The Fund and/or the Class, and not the Company, shall bear the cost of:
custodial expenses; membership dues in the Investment Company Institute
or any similar organization; transfer agency expenses; investment
advisory expenses; costs of printing and mailing stock certificates,
Prospectuses, reports and notices; administrative expenses; interest on
borrowed money; brokerage commissions; taxes and fees payable to
federal, state and other governmental agencies; fees of Trustees or
Directors of the Trust; independent auditors expenses; Federated
Administrative Services and/or Federated Administrative Services, Inc.
legal and audit department expenses billed to Federated Services Company
for work performed related to the Trust, the Funds, or the Classes; law
firm expenses; or other expenses not specified in this Article 3 which
may be properly payable by the Funds and/or classes.
C. The compensation and out-of-pocket expenses shall be accrued by the Fund
and shall be paid to the Company no less frequently than monthly, and
shall be paid daily upon request of the Company. The Company will
maintain detailed information about the compensation and out-of-pocket
expenses by Fund and Class.
D. Any schedule of compensation agreed to hereunder, as may be adjusted
from time to time, shall be dated and signed by a duly authorized
officer of the Trust and/or the Funds and a duly authorized officer of
the Company.
E. The fee for the period from the effective date of this Agreement with
respect to a Fund or a Class to the end of the initial month shall be
prorated according to the proportion that such period bears to the full
month period. Upon any termination of this Agreement before the end of
any month, the fee for such period shall be prorated according to the
proportion which such period bears to the full month period. For
purposes of determining fees payable to the Company, the value of the
Fund's net assets shall be computed at the time and in the manner
specified in the Fund's Prospectus.
F. The Company, in its sole discretion, may from time to time subcontract
to, employ or associate with itself such person or persons as the
Company may believe to be particularly suited to assist it in performing
services under this Section One. Such person or persons may be third-
party service providers, or they may be officers and employees who are
employed by both the Company and the Funds. The compensation of such
person or persons shall be paid by the Company and no obligation shall
be incurred on behalf of the Trust, the Funds, or the Classes in such
respect.
SECTION TWO: SHAREHOLDER RECORDKEEPING.
ARTICLE 4. TERMS OF APPOINTMENT.
Subject to the terms and conditions set forth in this Agreement, the Trust
hereby appoints the Company to act as, and the Company agrees to act as,
transfer agent and dividend disbursing agent for each Fund's Shares, and agent
in connection with any accumulation, open-account or similar plans provided to
the shareholders of any Fund ("Shareholder(s)"), including without limitation
any periodic investment plan or periodic withdrawal program.
As used throughout this Agreement, a "Proper Instruction" means a writing
signed or initialed by one or more person or persons as the Board shall have
from time to time authorized. Each such writing shall set forth the specific
transaction or type of transaction involved. Oral instructions will be deemed
to be Proper Instructions if (a) the Company reasonably believes them to have
been given by a person previously authorized in Proper Instructions to give
such instructions with respect to the transaction involved, and (b) the Trust,
or the Fund, and the Company promptly cause such oral instructions to be
confirmed in writing. Proper Instructions may include communications effected
directly between electro-mechanical or electronic devices provided that the
Trust, or the Fund, and the Company are satisfied that such procedures afford
adequate safeguards for the Fund's assets. Proper Instructions may only be
amended in writing.
ARTICLE 5. DUTIES OF THE COMPANY.
The Company shall perform the following services in accordance with Proper
Instructions as may be provided from time to time by the Trust as to any Fund:
A. Purchases
(1) The Company shall receive orders and payment for the purchase of
shares and promptly deliver payment and appropriate documentation
therefore to the custodian of the relevant Fund, (the "Custodian").
The Company shall notify the Fund and the Custodian on a daily
basis of the total amount of orders and payments so delivered.
(2) Pursuant to purchase orders and in accordance with the Fund's
current Prospectus, the Company shall compute and issue the
appropriate number of Shares of each Fund and/or Class and hold
such Shares in the appropriate Shareholder accounts.
(3) For certificated Funds and/or Classes, if a Shareholder or its
agent requests a certificate, the Company, as Transfer Agent, shall
countersign and mail by first class mail, a certificate to the
Shareholder at its address as set forth on the transfer books of
the Funds, and/or Classes, subject to any Proper Instructions
regarding the delivery of certificates.
(4) In the event that any check or other order for the purchase of
Shares of the Fund and/or Class is returned unpaid for any reason,
the Company shall debit the Share account of the Shareholder by the
number of Shares that had been credited to its account upon receipt
of the check or other order, promptly mail a debit advice to the
Shareholder, and notify the Fund and/or Class of its action. In the
event that the amount paid for such Shares exceeds proceeds of the
redemption of such Shares plus the amount of any dividends paid
with respect to such Shares, the Fund and/the Class or its
distributor will reimburse the Company on the amount of such
excess.
B. Distribution
(1) Upon notification by the Funds of the declaration of any
distribution to Shareholders, the Company shall act as Dividend
Disbursing Agent for the Funds in accordance with the provisions of
its governing document and the then-current Prospectus of the Fund.
The Company shall prepare and mail or credit income, capital gain,
or any other payments to Shareholders. As the Dividend Disbursing
Agent, the Company shall, on or before the payment date of any such
distribution, notify the Custodian of the estimated amount required
to pay any portion of said distribution which is payable in cash
and request the Custodian to make available sufficient funds for
the cash amount to be paid out. The Company shall reconcile the
amounts so requested and the amounts actually received with the
Custodian on a daily basis. If a Shareholder is entitled to receive
additional Shares by virtue of any such distribution or dividend,
appropriate credits shall be made to the Shareholder's account, for
certificated Funds and/or Classes, delivered where requested; and
(2) The Company shall maintain records of account for each Fund and
Class and advise the Trust, each Fund and Class and its
Shareholders as to the foregoing.
C. Redemptions and Transfers
(1) The Company shall receive redemption requests and redemption
directions and, if such redemption requests comply with the
procedures as may be described in the Fund Prospectus or set forth
in Proper Instructions, deliver the appropriate instructions
therefor to the Custodian. The Company shall notify the Funds on a
daily basis of the total amount of redemption requests processed
and monies paid to the Company by the Custodian for redemptions.
(2) At the appropriate time upon receiving redemption proceeds from the
Custodian with respect to any redemption, the Company shall pay or
cause to be paid the redemption proceeds in the manner instructed
by the redeeming Shareholders, pursuant to procedures described in
the then-current Prospectus of the Fund.
(3) If any certificate returned for redemption or other request for
redemption does not comply with the procedures for redemption
approved by the Fund, the Company shall promptly notify the
Shareholder of such fact, together with the reason therefor, and
shall effect such redemption at the price applicable to the date
and time of receipt of documents complying with said procedures.
(4) The Company shall effect transfers of Shares by the registered
owners thereof.
(5) The Company shall identify and process abandoned accounts and
uncashed checks for state escheat requirements on an annual basis
and report such actions to the Fund.
D. Recordkeeping
(1) The Company shall record the issuance of Shares of each Fund,
and/or Class, and maintain pursuant to applicable rules of the
Securities and Exchange Commission ("SEC") a record of the total
number of Shares of the Fund and/or Class which are authorized,
based upon data provided to it by the Fund, and issued and
outstanding. The Company shall also provide the Fund on a regular
basis or upon reasonable request with the total number of Shares
which are authorized and issued and outstanding, but shall have no
obligation when recording the issuance of Shares, except as
otherwise set forth herein, to monitor the issuance of such Shares
or to take cognizance of any laws relating to the issue or sale of
such Shares, which functions shall be the sole responsibility of
the Funds.
(2) The Company shall establish and maintain records pursuant to
applicable rules of the SEC relating to the services to be
performed hereunder in the form and manner as agreed to by the
Trust or the Fund to include a record for each Shareholder's
account of the following:
(a) Name, address and tax identification number (and whether such
number has been certified);
(b) Number of Shares held;
(c) Historical information regarding the account, including
dividends paid and date and price for all transactions;
(d) Any stop or restraining order placed against the account;
(e) Information with respect to withholding in the case of a
foreign account or an account for which withholding is
required by the Internal Revenue Code;
(f) Any dividend reinvestment order, plan application, dividend
address and correspondence relating to the current maintenance
of the account;
(g) Certificate numbers and denominations for any Shareholder
holding certificates;
(h) Any information required in order for the Company to perform
the calculations contemplated or required by this Agreement.
(3) The Company shall preserve any such records required to be
maintained pursuant to the rules of the SEC for the periods
prescribed in said rules as specifically noted below. Such record
retention shall be at the expense of the Company, and such records
may be inspected by the Fund at reasonable times. The Company may,
at its option at any time, and shall forthwith upon the Fund's
demand, turn over to the Fund and cease to retain in the Company's
files, records and documents created and maintained by the Company
pursuant to this Agreement, which are no longer needed by the
Company in performance of its services or for its protection. If
not so turned over to the Fund, such records and documents will be
retained by the Company for six years from the year of creation,
during the first two of which such documents will be in readily
accessible form. At the end of the six year period, such records
and documents will either be turned over to the Fund or destroyed
in accordance with Proper Instructions.
E. Confirmations/Reports
(1) The Company shall furnish to the Fund periodically the following
information:
(a) A copy of the transaction register;
(b) Dividend and reinvestment blotters;
(c) The total number of Shares issued and outstanding in each
state for "blue sky" purposes as determined according to
Proper Instructions delivered from time to time by the Fund to
the Company;
(d) Shareholder lists and statistical information;
(e) Payments to third parties relating to distribution agreements,
allocations of sales loads, redemption fees, or other
transaction- or sales-related payments;
(f) Such other information as may be agreed upon from time to
time.
(2) The Company shall prepare in the appropriate form, file with the
Internal Revenue Service and appropriate state agencies, and, if
required, mail to Shareholders, such notices for reporting
dividends and distributions paid as are required to be so filed and
mailed and shall withhold such sums as are required to be withheld
under applicable federal and state income tax laws, rules and
regulations.
(3) In addition to and not in lieu of the services set forth above, the
Company shall:
(a) Perform all of the customary services of a transfer agent,
dividend disbursing agent and, as relevant, agent in
connection with accumulation, open-account or similar plans
(including without limitation any periodic investment plan or
periodic withdrawal program), including but not limited to:
maintaining all Shareholder accounts, mailing Shareholder
reports and Prospectuses to current Shareholders, withholding
taxes on accounts subject to back-up or other withholding
(including non-resident alien accounts), preparing and filing
reports on U.S. Treasury Department Form 1099 and other
appropriate forms required with respect to dividends and
distributions by federal authorities for all Shareholders,
preparing and mailing confirmation forms and statements of
account to Shareholders for all purchases and redemptions of
Shares and other conformable transactions in Shareholder
accounts, preparing and mailing activity statements for
Shareholders, and providing Shareholder account information;
and
(b) provide a system which will enable the Fund to monitor the
total number of Shares of each Fund and/or Class sold in each
state ("blue sky reporting"). The Fund shall by Proper
Instructions (i) identify to the Company those transactions
and assets to be treated as exempt from the blue sky reporting
for each state and (ii) verify the classification of
transactions for each state on the system prior to activation
and thereafter monitor the daily activity for each state. The
responsibility of the Company for each Fund's and/or Class's
state blue sky registration status is limited solely to the
recording of the initial classification of transactions or
accounts with regard to blue sky compliance and the reporting
of such transactions and accounts to the Fund as provided
above.
F. Other Duties
(1) The Company shall answer correspondence from Shareholders relating
to their Share accounts and such other correspondence as may from
time to time be addressed to the Company;
(2) The Company shall prepare Shareholder meeting lists, mail proxy
cards and other material supplied to it by the Fund in connection
with Shareholder Meetings of each Fund; receive, examine and
tabulate returned proxies, and certify the vote of the
Shareholders;
(3) The Company shall establish and maintain facilities and procedures
for safekeeping of stock certificates, check forms and facsimile
signature imprinting devices, if any; and for the preparation or
use, and for keeping account of, such certificates, forms and
devices.
ARTICLE 6. DUTIES OF THE TRUST.
A. Compliance
The Trust or Fund assume full responsibility for the preparation,
contents and distribution of their own and/or their classes' Prospectus
and for complying with all applicable requirements of the Securities Act
of 1933, as amended (the "1933 Act"), the 1940 Act and any laws, rules
and regulations of government authorities having jurisdiction.
B. Share Certificates
The Trust shall supply the Company with a sufficient supply of blank
Share certificates and from time to time shall renew such supply upon
request of the Company. Such blank Share certificates shall be properly
signed, manually or by facsimile, if authorized by the Trust and shall
bear the seal of the Trust or facsimile thereof; and notwithstanding the
death, resignation or removal of any officer of the Trust authorized to
sign certificates, the Company may continue to countersign certificates
which bear the manual or facsimile signature of such officer until
otherwise directed by the Trust.
C. Distributions
The Fund shall promptly inform the Company of the declaration of any
dividend or distribution on account of any Fund's shares.
ARTICLE 7. COMPENSATION AND EXPENSES.
A. Annual Fee
For performance by the Company pursuant to Section Two of this
Agreement, the Trust and/or the Fund agree to pay the Company an annual
maintenance fee for each Shareholder account as agreed upon between the
parties and as may be added to or amended from time to time. Such fees
may be changed from time to time subject to written agreement between
the Trust and the Company. Pursuant to information in the Fund
Prospectus or other information or instructions from the Fund, the
Company may sub-divide any Fund into Classes or other sub-components for
recordkeeping purposes. The Company will charge the Fund the same fees
for each such Class or sub-component the same as if each were a Fund.
B. Reimbursements
In addition to the fee paid under Article 7A above, the Trust and/or
Fund agree to reimburse the Company for out-of-pocket expenses or
advances incurred by the Company for the items agreed upon between the
parties, as may be added to or amended from time to time. In addition,
any other expenses incurred by the Company at the request or with the
consent of the Trust and/or the Fund, will be reimbursed by the
appropriate Fund.
C. Payment
The compensation and out-of-pocket expenses shall be accrued by the Fund
and shall be paid to the Company no less frequently than monthly, and
shall be paid daily upon request of the Company. The Company will
maintain detailed information about the compensation and out-of-pocket
expenses by Fund and Class.
D. Any schedule of compensation agreed to hereunder, as may be adjusted
from time to time, shall be dated and signed by a duly authorized
officer of the Trust and/or the Funds and a duly authorized officer of
the Company.
ARTICLE 8. ASSIGNMENT OF SHAREHOLDER RECORDKEEPING.
Except as provided below, no right or obligation under this Section Two may
be assigned by either party without the written consent of the other party.
A. This Agreement shall inure to the benefit of and be binding upon the
parties and their respective permitted successors and assigns.
B. The Company may without further consent on the part of the Trust
subcontract for the performance hereof with (A) State Street Bank and
its subsidiary, Boston Financial Data Services, Inc., a Massachusetts
Trust ("BFDS"), which is duly registered as a transfer agent pursuant to
Section 17A(c)(1) of the Securities Exchange Act of 1934, as amended, or
any succeeding statute ("Section 17A(c)(1)"), or (B) a BFDS subsidiary
duly registered as a transfer agent pursuant to Section 17A(c)(1), or
(C) a BFDS affiliate, or (D) such other provider of services duly
registered as a transfer agent under Section 17A(c)(1) as Company shall
select; provided, however, that the Company shall be as fully
responsible to the Trust for the acts and omissions of any subcontractor
as it is for its own acts and omissions; or
C. The Company shall upon instruction from the Trust subcontract for the
performance hereof with an Agent selected by the Trust, other than BFDS
or a provider of services selected by Company, as described in (2)
above; provided, however, that the Company shall in no way be
responsible to the Trust for the acts and omissions of the Agent.
SECTION THREE: CUSTODY SERVICES PROCUREMENT.
ARTICLE 9. APPOINTMENT.
The Trust hereby appoints Company as its agent to evaluate and obtain
custody services from a financial institution that (i) meets the criteria
established in Section 17(f) of the 1940 Act and (ii) has been approved by the
Board as eligible for selection by the Company as a custodian (the "Eligible
Custodian"). The Company accepts such appointment.
ARTICLE 10. THE COMPANY AND ITS DUTIES.
Subject to the review, supervision and control of the Board, the Company
shall:
A. evaluate the nature and the quality of the custodial services provided
by the Eligible Custodian;
B. employ the Eligible Custodian to serve on behalf of the Trust as
Custodian of the Trust's assets substantially on the terms set forth as
the form of agreement in Exhibit 2;
C. negotiate and enter into agreements with the Custodians for the benefit
of the Trust, with the Trust as a party to each such agreement. The
Company shall not be a party to any agreement with any such Custodian;
D. establish procedures to monitor the nature and the quality of the
services provided by the Custodians;
E. continuously monitor the nature and the quality of services provided by
the Custodians; and
F. periodically provide to the Trust (i) written reports on the activities
and services of the Custodians; (ii) the nature and amount of
disbursement made on account of the Trust with respect to each custodial
agreement; and (iii) such other information as the Board shall
reasonably request to enable it to fulfill its duties and obligations
under Sections 17(f) and 36(b) of the 1940 Act and other duties and
obligations thereof.
ARTICLE 11. FEES AND EXPENSES.
A. Annual Fee
For the performance by the Company pursuant to Section Three of this
Agreement, the Trust and/or the Fund agree to pay the Company an annual
fee as agreed upon between the parties.
B. Reimbursements
In addition to the fee paid under Section 11A above, the Trust and/or
Fund agree to reimburse the Company for out-of-pocket expenses or
advances incurred by the Company for the items agreed upon between the
parties, as may be added to or amended from time to time. In addition,
any other expenses incurred by the Company at the request or with the
consent of the Trust and/or the Fund, will be reimbursed by the
appropriate Fund.
C. Payment
The compensation and out-of-pocket expenses shall be accrued by the Fund
and shall be paid to the Company no less frequently than monthly, and
shall be paid daily upon request of the Company. The Company will
maintain detailed information about the compensation and out-of-pocket
expenses by Fund.
D. Any schedule of compensation agreed to hereunder, as may be adjusted
from time to time, shall be dated and signed by a duly authorized
officer of the Trust and/or the Funds and a duly authorized officer of
the Company.
ARTICLE 12. REPRESENTATIONS.
The Company represents and warrants that it has obtained all required
approvals from all government or regulatory authorities necessary to enter
into this arrangement and to provide the services contemplated in Section
Three of this Agreement.
SECTION FOUR: GENERAL PROVISIONS.
ARTICLE 13. DOCUMENTS.
A. In connection with the appointment of the Company under this Agreement,
the Trust shall file with the Company the following documents:
(1) A copy of the Charter and By-Laws of the Trust and all amendments
thereto;
(2) A copy of the resolution of the Board of the Trust authorizing this
Agreement;
(3) Specimens of all forms of outstanding Share certificates of the
Trust or the Funds in the forms approved by the Board of the Trust
with a certificate of the Secretary of the Trust as to such
approval;
(4) All account application forms and other documents relating to
Shareholders accounts; and
(5) A copy of the current Prospectus for each Fund.
B. The Fund will also furnish from time to time the following documents:
(1) Each resolution of the Board of the Trust authorizing the original
issuance of each Fund's, and/or Class's Shares;
(2) Each Registration Statement filed with the SEC and amendments
thereof and orders relating thereto in effect with respect to the
sale of Shares of any Fund, and/or Class;
(3) A certified copy of each amendment to the governing document and
the By-Laws of the Trust;
(4) Certified copies of each vote of the Board authorizing officers to
give Proper Instructions to the Custodian and agents for fund
accountant, custody services procurement, and shareholder
recordkeeping or transfer agency services;
(5) Specimens of all new Share certificates representing Shares of any
Fund, accompanied by Board resolutions approving such forms;
(6) Such other certificates, documents or opinions which the Company
may, in its discretion, deem necessary or appropriate in the proper
performance of its duties; and
(7) Revisions to the Prospectus of each Fund.
ARTICLE 14. REPRESENTATIONS AND WARRANTIES.
A. Representations and Warranties of the Company
The Company represents and warrants to the Trust that:
(1) It is a business trust duly organized and existing and in good
standing under the laws of the State of Delaware.
(2) It is duly qualified to carry on its business in the State of
Delaware.
(3) It is empowered under applicable laws and by its charter and by-
laws to enter into and perform this Agreement.
(4) All requisite corporate proceedings have been taken to authorize it
to enter into and perform its obligations under this Agreement.
(5) It has and will continue to have access to the necessary
facilities, equipment and personnel to perform its duties and
obligations under this Agreement.
(6) It is in compliance with federal securities law requirements and in
good standing as a transfer agent.
B. Representations and Warranties of the Trust
The Trust represents and warrants to the Company that:
(1) It is an investment company duly organized and existing and in good
standing under the laws of its state of organization;
(2) It is empowered under applicable laws and by its Charter and By-
Laws to enter into and perform its obligations under this
Agreement;
(3) All corporate proceedings required by said Charter and By-Laws have
been taken to authorize it to enter into and perform its
obligations under this Agreement;
(4) The Trust is an open-end investment company registered under the
1940 Act; and
(5) A registration statement under the 1933 Act will be effective, and
appropriate state securities law filings have been made and will
continue to be made, with respect to all Shares of each Fund being
offered for sale.
ARTICLE 15. STANDARD OF CARE AND INDEMNIFICATION.
A. Standard of Care
The Company shall be held to a standard of reasonable care in carrying
out the provisions of this Contract. The Company shall be entitled to
rely on and may act upon advice of counsel (who may be counsel for the
Trust) on all matters, and shall be without liability for any action
reasonably taken or omitted pursuant to such advice, provided that such
action is not in violation of applicable federal or state laws or
regulations, and is in good faith and without negligence.
B. Indemnification by Trust
The Company shall not be responsible for and the Trust or Fund shall
indemnify and hold the Company, including its officers, directors,
shareholders and their agents employees and affiliates, harmless against
any and all losses, damages, costs, charges, counsel fees, payments,
expenses and liabilities arising out of or attributable to:
(1) The acts or omissions of any Custodian, Adviser, Sub-adviser or
other party contracted by or approved by the Trust or Fund,
(2) The reliance on or use by the Company or its agents or
subcontractors of information, records and documents in proper form
which
(a) are received by the Company or its agents or subcontractors
and furnished to it by or on behalf of the Fund, its
Shareholders or investors regarding the purchase, redemption
or transfer of Shares and Shareholder account information;
(b) are received by the Company from independent pricing services
or sources for use in valuing the assets of the Funds; or
(c) are received by the Company or its agents or subcontractors
from Advisers, Sub-advisers or other third parties contracted
by or approved by the Trust of Fund for use in the performance
of services under this Agreement;
(d) have been prepared and/or maintained by the Fund or its
affiliates or any other person or firm on behalf of the Trust.
(3) The reliance on, or the carrying out by the Company or its agents
or subcontractors of Proper Instructions of the Trust or the Fund.
(4) The offer or sale of Shares in violation of any requirement under
the federal securities laws or regulations or the securities laws
or regulations of any state that such Shares be registered in such
state or in violation of any stop order or other determination or
ruling by any federal agency or any state with respect to the offer
or sale of such Shares in such state.
Provided, however, that the Company shall not be protected by this
Article 15.A. from liability for any act or omission resulting from
the Company's willful misfeasance, bad faith, negligence or
reckless disregard of its duties of failure to meet the standard of
care set forth in 15.A. above.
C. Reliance
At any time the Company may apply to any officer of the Trust or Fund
for instructions, and may consult with legal counsel with respect to any
matter arising in connection with the services to be performed by the
Company under this Agreement, and the Company and its agents or
subcontractors shall not be liable and shall be indemnified by the Trust
or the appropriate Fund for any action reasonably taken or omitted by it
in reliance upon such instructions or upon the opinion of such counsel
provided such action is not in violation of applicable federal or state
laws or regulations. The Company, its agents and subcontractors shall be
protected and indemnified in recognizing stock certificates which are
reasonably believed to bear the proper manual or facsimile signatures of
the officers of the Trust or the Fund, and the proper countersignature
of any former transfer agent or registrar, or of a co-transfer agent or
co-registrar.
D. Notification
In order that the indemnification provisions contained in this
Article 15 shall apply, upon the assertion of a claim for which either
party may be required to indemnify the other, the party seeking
indemnification shall promptly notify the other party of such assertion,
and shall keep the other party advised with respect to all developments
concerning such claim. The party who may be required to indemnify shall
have the option to participate with the party seeking indemnification in
the defense of such claim. The party seeking indemnification shall in no
case confess any claim or make any compromise in any case in which the
other party may be required to indemnify it except with the other
party's prior written consent.
ARTICLE 16. TERMINATION OF AGREEMENT.
This Agreement may be terminated by either party upon one hundred twenty
(120) days written notice to the other. Should the Trust exercise its rights
to terminate, all out-of-pocket expenses associated with the movement of
records and materials will be borne by the Trust or the appropriate Fund.
Additionally, the Company reserves the right to charge for any other
reasonable expenses associated with such termination. The provisions of
Article 15 shall survive the termination of this Agreement.
ARTICLE 17. AMENDMENT.
This Agreement may be amended or modified by a written agreement executed
by both parties.
ARTICLE 18. INTERPRETIVE AND ADDITIONAL PROVISIONS.
In connection with the operation of this Agreement, the Company and the
Trust may from time to time agree on such provisions interpretive of or in
addition to the provisions of this Agreement as may in their joint opinion be
consistent with the general tenor of this Agreement. Any such interpretive or
additional provisions shall be in a writing signed by both parties and shall
be annexed hereto, provided that no such interpretive or additional provisions
shall contravene any applicable federal or state regulations or any provision
of the Charter. No interpretive or additional provisions made as provided in
the preceding sentence shall be deemed to be an amendment of this Agreement.
ARTICLE 19. GOVERNING LAW.
This Agreement shall be construed and the provisions hereof interpreted
under and in accordance with the laws of the Commonwealth of Massachusetts
ARTICLE 20. NOTICES.
Except as otherwise specifically provided herein, Notices and other
writings delivered or mailed postage prepaid to the Trust at Federated
Investors Tower, Pittsburgh, Pennsylvania, 15222-3779, or to the Company at
Federated Investors Tower, Pittsburgh, Pennsylvania, 15222-3779, or to such
other address as the Trust or the Company may hereafter specify, shall be
deemed to have been properly delivered or given hereunder to the respective
address.
ARTICLE 21. COUNTERPARTS.
This Agreement may be executed simultaneously in two or more counterparts,
each of which shall be deemed an original.
ARTICLE 22. LIMITATIONS OF LIABILITY OF TRUSTEES AND SHAREHOLDERS OF THE TRUST.
The execution and delivery of this Agreement have been authorized by the
Trustees of the Trust and signed by an authorized officer of the Trust, acting
as such, and neither such authorization by such Trustees nor such execution
and delivery by such officer shall be deemed to have been made by any of them
individually or to impose any liability on any of them personally, and the
obligations of this Agreement are not binding upon any of the Trustees or
Shareholders of the Trust, but bind only the appropriate property of the Fund,
or Class, as provided in the Declaration of Trust.
ARTICLE 23. LIMITATIONS OF LIABILITY OF TRUSTEES AND SHAREHOLDERS OF
THE COMPANY.
The execution and delivery of this Agreement have been authorized by the
Trustees of the Company and signed by an authorized officer of the Company,
acting as such, and neither such authorization by such Trustees nor such
execution and delivery by such officer shall be deemed to have been made by
any of them individually or to impose any liability on any of them personally,
and the obligations of this Agreement are not binding upon any of the Trustees
or Shareholders of the Company, but bind only the property of the Company as
provided in the Declaration of Trust.
ARTICLE 24. ASSIGNMENT.
This Agreement and the rights and duties hereunder shall not be assignable
with respect to the Trust or the Funds by either of the parties hereto except
by the specific written consent of the other party.
ARTICLE 25. MERGER OF AGREEMENT.
This Agreement constitutes the entire agreement between the parties hereto
and supersedes any prior agreement with respect to the subject hereof whether
oral or written.
ARTICLE 26. SUCCESSOR AGENT.
If a successor agent for the Trust shall be appointed by the Trust, the
Company shall upon termination of this Agreement deliver to such successor
agent at the office of the Company all properties of the Trust held by it
hereunder. If no such successor agent shall be appointed, the Company shall at
its office upon receipt of Proper Instructions deliver such properties in
accordance with such instructions.
In the event that no written order designating a successor agent or Proper
Instructions shall have been delivered to the Company on or before the date
when such termination shall become effective, then the Company shall have the
right to deliver to a bank or trust company, which is a "bank" as defined in
the 1940 Act, of its own selection, having an aggregate capital, surplus, and
undivided profits, as shown by its last published report, of not less than
$2,000,000, all properties held by the Company under this Agreement.
Thereafter, such bank or trust company shall be the successor of the Company
under this Agreement.
ARTICLE 27. FORCE MAJEURE.
The Company shall have no liability for cessation of services hereunder or
any damages resulting therefrom to the Fund as a result of work stoppage,
power or other mechanical failure, natural disaster, governmental action,
communication disruption or other impossibility of performance.
ARTICLE 28. ASSIGNMENT; SUCCESSORS.
This Agreement shall not be assigned by either party without the prior
written consent of the other party, except that either party may assign to a
successor all of or a substantial portion of its business, or to a party
controlling, controlled by, or under common control with such party. Nothing
in this Article 28 shall prevent the Company from delegating its
responsibilities to another entity to the extent provided herein.
ARTICLE 29. SEVERABILITY.
In the event any provision of this Agreement is held illegal, void or
unenforceable, the balance shall remain in effect.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in their names and on their behalf under their seals by and through
their duly authorized officers, as of the day and year first above written.
ATTEST: INVESTMENT COMPANIES
(LISTED ON EXHIBIT 1)
/s/ 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
CONTRACT
DATE: INVESTMENT COMPANY:
12/01/94 Municipal Securities Income Trust
California Municipal Income Fund (Fortress Shares)
Michigan Intermediate Municipal Trust
New York Municipal Income Fund (Fortress Shares)
Ohio Municipal Income Fund (Fortress Shares)
Exhibit 16(i) under Form N-1A
Exhibit 99 under Item 601/Reg. S-K
DECLARED: MONTHLY Schedule for Computation FUND: OHIO MUNICIPAL
of Fund Performance Data INCOME FUND
PAID: MONTHLY
Performance 6 months
ending 3/31/91
Average Total Return FYE: AUGUST 31
Initial Investment of: $1,000.00 on 10/02/91
Offering Price/Share = $10.31
NAV = $10.00
Beginning Capital Reinvest Ending Total
Reinvest Period Dividend Gain Price Period Ending Investment
Dates Share /Share /Share /Share Share Price Value
Base Base
10/02/90 96.993 0.000000000 0.00000 $10.00 96.993 $10.00 $969.93
10/31/90 96.993 0.001500000 0.00000 $10.05 97.138 $10.05 $976.24
11/30/90 97.138 0.060000000 0.00000 $10.18 97.710 $10.18 $994.69
12/27/90 97.710 0.060000000 0.00000 $10.15 98.288 $10.15 $997.62
01/31/91 98.288 0.060000000 0.00000 $10.21 98.866 $10.21 $1,009.42
02/28/91 98.866 0.056000000 0.00000 $10.28 99.404 $10.28 $1,021.88
03/28/91 99.404 0.056000000 0.00000 $10.17 99.952 $10.17 $1,016.51
$1,000 (1+T) = Ending Redeemable Value
Exhibit 16(ii) under Form N-1A
Exhibit 99 under Item 601/Reg. S-K
DECLARED: MONTHLY Schedule for Computation FUND: PENNSYLVANIA MUNICIPAL
of Fund Performance Data INCOME FUND
PAID: MONTHLY
Performance 6 months
ending 3/31/91
Average Total Return FYE: AUGUST 31
Initial Investment of: $1,000.00 on 10/02/91
Offering Price/Share = $10.31
NAV = $10.00
Beginning Capital Reinvest Ending Total
Reinvest Period Dividend Gain Price Period Ending Investment
Dates Share /Share /Share /Share Share Price Value
Base Base
10/02/90 96.993 0.000000000 0.00000 $10.00 96.993 $10.00 $969.93
10/31/90 96.993 0.030000000 0.00000 $10.08 97.282 $10.08 $980.60
11/30/90 97.282 0.060000000 0.00000 $10.21 97.854 $10.21 $999.08
12/27/90 97.854 0.060000000 0.00000 $10.19 98.430 $10.19 $1,003.00
01/31/91 98.430 0.060000000 0.00000 $10.26 99.005 $10.26 $1,015.79
02/28/91 99.005 0.059000000 0.00000 $10.30 99.572 $10.30 $1,025.60
03/28/91 99.572 0.060000000 0.00000 $10.20 100.154 $10.20 $1,021.61
$1,000 (1+T) = Ending Redeemable Value
Exhibit 19 under Form N-1A
Exhibit 24 under Item 601/Reg. S-K
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
the Secretary and Assistant Secretary of MUNICIPAL SECURITIES INCOME TRUST
and the Deputy General Counsel of Federated Investors, and each of them,
their true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution for them and in their names, place and stead, in
any and all capacities, to sign any and all documents to be filed with the
Securities and Exchange Commission pursuant to the Securities Act of 1933, the
Securities Exchange Act of 1934 and the Investment Company Act of 1940, by means
of the Securities and Exchange Commission's electronic disclosure system known
as EDGAR; and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
sign and perform each and every act and thing requisite and necessary to be done
in connection therewith, as fully to all intents and purposes as each of them
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.
SIGNATURES TITLE DATE
/s/John F. Donahue Chairman and TrusteeOctober 3, 1995
John F. Donahue (Chief Executive Officer)
/s/Richard B. Fisher President October 3, 1995
Richard B. Fisher
/s/J. Christopher Donahue Executive Vice PresidentOctober 3, 1995
J. Christopher Donahue and Trustee
/s/David M. Taylor Treasurer October 3, 1995
David M. Taylor (Principal Financial and
Accounting Officer)
/s/Thomas G. Bigley Trustee October 3, 1995
Thomas G. Bigley
/s/John T. Conroy, Jr. Trustee October 3, 1995
John T. Conroy, Jr.
SIGNATURES TITLE DATE
/s/William J. Copeland Trustee October 3, 1995
William J. Copeland
/s/James E. Dowd Trustee October 3, 1995
James E. Dowd
/s/Lawrence D. Ellis, M.D. Trustee October 3, 1995
Lawrence D. Ellis, M.D.
/s/Edward L. Flaherty, Jr. Trustee October 3, 1995
Edward L. Flaherty, Jr.
/s/Peter E. Madden Trustee October 3, 1995
Peter E. Madden
/s/Gregor F. Meyer Trustee October 3, 1995
Gregor F. Meyer
/s/John E. Murray, Jr. Trustee October 3, 1995
John E. Murray, Jr.
/s/Wesley W. Posvar Trustee October 3, 1995
Wesley W. Posvar
/s/Marjorie P. Smuts Trustee October 3, 1995
Marjorie P. Smuts
Sworn to and subscribed before me this 3rd day of October, 1995
/s/Marie M. Hamm
Notarial Seal
Marie M. Hamm, Notary Public
Plum Boro, Allegheny County
My Commission Expires Sept. 16, 1996
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 04
<NAME> Municipal Securities Income Trust
California Municipal Income Fund
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Aug-31-1995
<PERIOD-END> Aug-31-1995
<INVESTMENTS-AT-COST> 13,883,615
<INVESTMENTS-AT-VALUE> 14,158,249
<RECEIVABLES> 214,131
<ASSETS-OTHER> 87,123
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 14,459,503
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 59,414
<TOTAL-LIABILITIES> 59,414
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 15,122,260
<SHARES-COMMON-STOCK> 1,421,430
<SHARES-COMMON-PRIOR> 1,504,452
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (996,805)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 274,634
<NET-ASSETS> 14,400,089
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 936,548
<OTHER-INCOME> 0
<EXPENSES-NET> 77,620
<NET-INVESTMENT-INCOME> 858,928
<REALIZED-GAINS-CURRENT> (450,962)
<APPREC-INCREASE-CURRENT> 565,250
<NET-CHANGE-FROM-OPS> 973,216
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 858,928
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 320,931
<NUMBER-OF-SHARES-REDEEMED> 432,976
<SHARES-REINVESTED> 29,021
<NET-CHANGE-IN-ASSETS> (658,437)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (545,843)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 56,899
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 420,069
<AVERAGE-NET-ASSETS> 14,249,288
<PER-SHARE-NAV-BEGIN> 10.010
<PER-SHARE-NII> 0.590
<PER-SHARE-GAIN-APPREC> 0.120
<PER-SHARE-DIVIDEND> 0.590
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 10.130
<EXPENSE-RATIO> 0.55
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 03
<NAME> Municipal Securities Income Trust
Michigan Intermediate Municipal Trust
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Aug-31-1995
<PERIOD-END> Aug-31-1995
<INVESTMENTS-AT-COST> 56,747,068
<INVESTMENTS-AT-VALUE> 59,807,637
<RECEIVABLES> 986,208
<ASSETS-OTHER> 52,512
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 60,846,357
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 225,550
<TOTAL-LIABILITIES> 225,550
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 58,820,692
<SHARES-COMMON-STOCK> 5,611,518
<SHARES-COMMON-PRIOR> 5,522,526
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,260,454)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3,060,569
<NET-ASSETS> 60,620,807
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,319,697
<OTHER-INCOME> 0
<EXPENSES-NET> 292,575
<NET-INVESTMENT-INCOME> 3,027,122
<REALIZED-GAINS-CURRENT> (994,664)
<APPREC-INCREASE-CURRENT> 2,337,762
<NET-CHANGE-FROM-OPS> 4,370,220
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 3,027,122
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,533,015
<NUMBER-OF-SHARES-REDEEMED> 1,484,327
<SHARES-REINVESTED> 40,304
<NET-CHANGE-IN-ASSETS> 2,140,587
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (265,790)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 233,527
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 667,964
<AVERAGE-NET-ASSETS> 58,617,844
<PER-SHARE-NAV-BEGIN> 10.590
<PER-SHARE-NII> 0.540
<PER-SHARE-GAIN-APPREC> 0.210
<PER-SHARE-DIVIDEND> 0.540
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 10.800
<EXPENSE-RATIO> 0.50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 05
<NAME> Municipal Securities Income Trust
New York Municipal Income Fund
<PERIOD-TYPE> 12-Mos
<FISCAL-YEAR-END> Aug-31-1995
<PERIOD-END> Aug-31-1995
<INVESTMENTS-AT-COST> 21,557,761
<INVESTMENTS-AT-VALUE> 22,239,417
<RECEIVABLES> 376,404
<ASSETS-OTHER> 57,691
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 22,673,512
<PAYABLE-FOR-SECURITIES> 984,861
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 88,381
<TOTAL-LIABILITIES> 1,073,242
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 22,676,049
<SHARES-COMMON-STOCK> 2,133,081
<SHARES-COMMON-PRIOR> 2,292,521
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,757,435)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 681,656
<NET-ASSETS> 21,600,270
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,425,137
<OTHER-INCOME> 0
<EXPENSES-NET> 128,892
<NET-INVESTMENT-INCOME> 1,296,245
<REALIZED-GAINS-CURRENT> (1,275,390)
<APPREC-INCREASE-CURRENT> 1,320,408
<NET-CHANGE-FROM-OPS> 1,341,263
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,296,245
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 446,112
<NUMBER-OF-SHARES-REDEEMED> 639,821
<SHARES-REINVESTED> 34,269
<NET-CHANGE-IN-ASSETS> (1,551,948)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (482,045)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 87,317
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 507,738
<AVERAGE-NET-ASSETS> 21,887,012
<PER-SHARE-NAV-BEGIN> 10.100
<PER-SHARE-NII> 0.570
<PER-SHARE-GAIN-APPREC> 0.030
<PER-SHARE-DIVIDEND> 0.570
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 10.130
<EXPENSE-RATIO> 0.59
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 02
<NAME> Municipal Securities Income Trust
Ohio Municipal Income Fund
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Aug-31-1995
<PERIOD-END> Aug-31-1995
<INVESTMENTS-AT-COST> 66,298,148
<INVESTMENTS-AT-VALUE> 69,437,731
<RECEIVABLES> 1,313,937
<ASSETS-OTHER> 74,771
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 70,826,439
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 294,916
<TOTAL-LIABILITIES> 294,916
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 68,304,646
<SHARES-COMMON-STOCK> 6,284,930
<SHARES-COMMON-PRIOR> 7,410,283
<ACCUMULATED-NII-CURRENT> 65,223
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (977,929)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3,139,583
<NET-ASSETS> 70,531,523
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 4,683,841
<OTHER-INCOME> 0
<EXPENSES-NET> 655,591
<NET-INVESTMENT-INCOME> 4,028,250
<REALIZED-GAINS-CURRENT> (712,819)
<APPREC-INCREASE-CURRENT> 1,576,901
<NET-CHANGE-FROM-OPS> 4,892,332
<EQUALIZATION> (39,884)
<DISTRIBUTIONS-OF-INCOME> 3,954,127
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 626,737
<NUMBER-OF-SHARES-REDEEMED> 1,896,511
<SHARES-REINVESTED> 144,421
<NET-CHANGE-IN-ASSETS> (11,034,436)
<ACCUMULATED-NII-PRIOR> 30,984
<ACCUMULATED-GAINS-PRIOR> (265,110)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 291,144
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,093,832
<AVERAGE-NET-ASSETS> 73,068,652
<PER-SHARE-NAV-BEGIN> 11.010
<PER-SHARE-NII> 0.600
<PER-SHARE-GAIN-APPREC> 0.200
<PER-SHARE-DIVIDEND> 0.590
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 11.220
<EXPENSE-RATIO> 0.90
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 011
<NAME> Pennsylvania Municipal Income Fund
Class A Shares
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Aug-31-1995
<PERIOD-END> Aug-31-1995
<INVESTMENTS-AT-COST> 77,815,496
<INVESTMENTS-AT-VALUE> 82,073,883
<RECEIVABLES> 1,746,955
<ASSETS-OTHER> 85,634
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 83,906,472
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 184,403
<TOTAL-LIABILITIES> 184,403
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 81,787,157
<SHARES-COMMON-STOCK> 7,458,342
<SHARES-COMMON-PRIOR> 7,849,970
<ACCUMULATED-NII-CURRENT> 163,069
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (2,486,544)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,258,387
<NET-ASSETS> 83,722,069
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 5,693,026
<OTHER-INCOME> 0
<EXPENSES-NET> 649,572
<NET-INVESTMENT-INCOME> 5,043,454
<REALIZED-GAINS-CURRENT> (1,957,166)
<APPREC-INCREASE-CURRENT> 3,480,605
<NET-CHANGE-FROM-OPS> 6,566,893
<EQUALIZATION> (4,832)
<DISTRIBUTIONS-OF-INCOME> 4,814,395
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,627,974
<NUMBER-OF-SHARES-REDEEMED> 5,262,476
<SHARES-REINVESTED> 242,874
<NET-CHANGE-IN-ASSETS> (11,119,481)
<ACCUMULATED-NII-PRIOR> 14,084
<ACCUMULATED-GAINS-PRIOR> (529,378)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 341,354
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 887,115
<AVERAGE-NET-ASSETS> 85,715,546
<PER-SHARE-NAV-BEGIN> 10.940
<PER-SHARE-NII> 0.650
<PER-SHARE-GAIN-APPREC> 0.270
<PER-SHARE-DIVIDEND> 0.630
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 11.230
<EXPENSE-RATIO> 0.75
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 012
<NAME> Pennsylvania Municipal Income Fund
Income Shares
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Aug-31-1995
<PERIOD-END> Aug-31-1995
<INVESTMENTS-AT-COST> 77,815,496
<INVESTMENTS-AT-VALUE> 82,073,883
<RECEIVABLES> 1,746,955
<ASSETS-OTHER> 85,634
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 83,906,472
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 184,403
<TOTAL-LIABILITIES> 184,403
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 81,787,157
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 827,695
<ACCUMULATED-NII-CURRENT> 163,069
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (2,486,544)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,258,387
<NET-ASSETS> 0
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 5,693,026
<OTHER-INCOME> 0
<EXPENSES-NET> 649,572
<NET-INVESTMENT-INCOME> 5,043,454
<REALIZED-GAINS-CURRENT> (1,957,166)
<APPREC-INCREASE-CURRENT> 3,480,605
<NET-CHANGE-FROM-OPS> 6,566,893
<EQUALIZATION> (4,832)
<DISTRIBUTIONS-OF-INCOME> 83,724
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 39,353
<NUMBER-OF-SHARES-REDEEMED> 873,482
<SHARES-REINVESTED> 6,434
<NET-CHANGE-IN-ASSETS> (11,119,481)
<ACCUMULATED-NII-PRIOR> 14,084
<ACCUMULATED-GAINS-PRIOR> (529,378)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 341,354
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 887,115
<AVERAGE-NET-ASSETS> 85,715,546
<PER-SHARE-NAV-BEGIN> 10.850
<PER-SHARE-NII> 0.190
<PER-SHARE-GAIN-APPREC> (1.000)
<PER-SHARE-DIVIDEND> 0.150
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 9.890
<EXPENSE-RATIO> 1.18
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
