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FEDERATED PENNSYLVANIA MUNICIPAL INCOME FUND
(FORMERLY, PENNSYLVANIA MUNICIPAL INCOME FUND)
(A PORTFOLIO OF MUNICIPAL SECURITIES INCOME TRUST)
CLASS A SHARES
CLASS B SHARES
PROSPECTUS
The shares of Federated 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 CLASS A SHARES OR CLASS B 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 March 4,
1997, with the Securities and Exchange Commission ("SEC"). 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 or a paper copy of this prospectus, if you have received
your prospectus electronically, free of charge by calling 1-800-341-7400. To
obtain other information or to make inquiries about the Fund, contact your
financial institution. The Statement of Additional Information, material
incorporated by reference into this document, and other information regarding
the Fund is maintained electronically with the SEC at Internet Web site
(http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Prospectus dated March 4, 1997
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TABLE OF CONTENTS
Summary of Fund Expenses.......................................................1
Financial Highlights--Class A Shares...........................................3
General Information............................................................4
Investment Information.........................................................5
Investment Objective.........................................................5
Investment Policies..........................................................5
Pennsylvania Municipal Securities............................................7
Investment Risks.............................................................7
Non-Diversification..........................................................8
Investment Limitations.......................................................8
Expenses of the Fund...........................................................9
Net Asset Value...............................................................10
Investing in the Fund.........................................................10
How to Purchase Shares......................................................11
Investing in Class A Shares.................................................12
Eliminating/Reducing the Sales Charges......................................12
Investing in Class B Shares.................................................14
Systematic Investment Program...............................................14
Certificates and Confirmations..............................................15
Dividends and Distributions.................................................15
Exchange Privilege............................................................15
Requirements for Exchange...................................................16
Tax Consequences............................................................16
Making an Exchange..........................................................16
How to Redeem Shares........................................................17
Through a Financial Institution.............................................17
Directly from the Fund......................................................17
Contingent Deferred Sales Charge............................................18
Elimination of Contingent Deferred
Sales Charge.............................................................19
Systematic Withdrawal Program...............................................20
Accounts with Low Balances..................................................20
Trust Information.............................................................21
Management of the Trust.....................................................21
Distribution of Shares......................................................22
Administration of the Fund..................................................23
Shareholder Information.......................................................24
Voting Rights...............................................................24
Tax Information...............................................................24
Federal Income Tax..........................................................24
State and Local Taxes.......................................................25
Performance Information.......................................................26
Financial Highlights--Income Shares...........................................27
Financial Statements..........................................................28
Independent Auditors' Report..................................................40
Addresses......................................................Inside Back Cover
=======================================================
SUMMARY OF FUND EXPENSES
FEDERATED PENNSYLVANIA MUNICIPAL INCOME FUND
(FORMERLY, PENNSYLVANIA MUNICIPAL INCOME FUND)
<TABLE>
<S> <C> <C>
CLASS A SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)(1).......................... 4.50%
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)(2).......................................................................................... 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)(3).......................................................................... 0.17%
12b-1 Fee(4).............................................................................................. 0.00%
Total Other Expenses...................................................................................... 0.58%
Shareholder Services Fee (after waiver)(5)................................................... 0.23%
Total Operating Expenses(6)....................................................................... 0.75%
</TABLE>
(1) The maximum sales charge imposed on purchases for the fiscal year ended
August 31, 1996 was 3.00%. Effective November 1, 1996, the maximum sales
charge has been increased to 4.50%
(2) 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% for redemptions made
within one year of purchase. See "Contingent Deferred Sales Charge."
(3) 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%.
(4) The class did not pay or accrue 12b-1 fees during the fiscal year ended
August 31, 1996. The class has no present intention of paying or accruing
the 12b-1 fee during the fiscal year ending August 31, 1997. 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 "Trust
Information."
(5) The shareholder services fee has been reduced to reflect the voluntary
waiver of a portion of the shareholder services fee. The shareholder
services provider can terminate this voluntary waiver at any time at its
sole discretion. The maximum shareholder services fee is 0.25%.
(6) The total operating expenses would have been 1.00% absent the voluntary
waivers of a portion of the management fee and a portion of 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 "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 CHARGES 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; (2) redemption at the end of each time period; and (3)
payment of the maximum sales charge $ 52 $68 $85 $134
</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.
=======================================================
SUMMARY OF FUND EXPENSES
FEDERATED PENNSYLVANIA MUNICIPAL INCOME FUND
(FORMERLY, PENNSYLVANIA MUNICIPAL INCOME FUND)
<TABLE>
<S> <C> <C>
CLASS B SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)...................... None
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)...................................................................... 5.50%
Redemption Fee (as a percentage of amount redeemed, if applicable)................................. None
Exchange Fee....................................................................................... None
ANNUAL OPERATING EXPENSES
(As a percentage of projected average net assets)*
Management Fee (after waiver)(2)................................................................... 0.18%
12b-1 Fee.......................................................................................... 0.75%
Total Other Expenses............................................................................... 0.57%
Shareholder Services Fee.............................................................. 0.25%
Total Operating Expenses(3)(4)............................................................ 1.50%
</TABLE>
(1) The contingent deferred sales charge is 5.50% in the first year declining to
1.00% in the sixth year and 0.00% thereafter. (See "Contingent Deferred
Sales Charge").
(2) The estimated management fee has been reduced to reflect the anticipated
voluntary waiver of a portion of the management fee. The advisor can
terminate this voluntary waiver at any time at its sole discretion. The
maximum management fee is 0.40%.
(3) Class B Shares convert to Class A Shares (which pay lower ongoing expenses)
approximately eight years after purchase.
(4) The total operating expenses are estimated to be 1.72% absent the
anticipated voluntary waiver of a portion of the management fee.
* Total Class B Shares operating expenses are estimated based on average
expenses expected to be incurred during the period ending August 31, 1997.
During the course of this period, expenses may be more or less than the
average amount shown.
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of Class B Shares of the Fund will
bear, either directly or indirectly. For more complete descriptions of the
various costs and expenses, see "Investing in Class B Shares" and "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 CHARGES PERMITTED UNDER THE RULES OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
- ----------------------------------------------------------------------------------------- ------ -------
<S> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1) 5% annual
return; (2) redemption at the end of each time period; and (3) payment of the maximum
sales charge............................................................................. $ 72 $92
You would pay the following expenses on the same investment, assuming no redemption...... $ 15 $47
</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. THIS
EXAMPLE IS BASED ON ESTIMATED DATA FOR THE FISCAL YEAR ENDING AUGUST 31, 1997.
=======================================================
FINANCIAL HIGHLIGHTS--CLASS A SHARES
FEDERATED PENNSYLVANIA MUNICIPAL INCOME FUND
(FORMERLY, PENNSYLVANIA MUNICIPAL INCOME FUND)
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(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 40.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-------------------------------------------------------
1996 1995 1994 1993 1992 1991(A)
------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.23 $10.94 $11.68 $10.93 $10.44 $10.00
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INCOME FROM INVESTMENT OPERATIONS
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Net investment income 0.65 0.65 0.60 0.60 0.627 0.588
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Net realized and unrealized gain (loss) on
investments 0.12 0.27 (0.75) 0.75 0.493 0.456
- ------------------------------------------------------ ------ ------ ------ ------ ------ -------
Total from investment operations 0.77 0.92 (0.15) 1.35 1.120 1.044
- ------------------------------------------------------ ------ ------ ------ ------ ------ -------
LESS DISTRIBUTIONS
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Distributions from net investment income (0.65) (0.63) (0.59) (0.60) (0.627) (0.588)
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Distributions in excess of net investment income -- -- -- -- (0.003)(c) (0.016) (c)
- ------------------------------------------------------ ------ ------ ------ ------ ------ -------
Total distributions (0.65) (0.63) (0.59) (0.60) (0.630) (0.604)
- ------------------------------------------------------ ------ ------ ------ ------ ------ -------
NET ASSET VALUE, END OF PERIOD $11.35 $11.23 $10.94 $11.68 $10.93 $10.44
- ------------------------------------------------------ ------ ------ ------ ------ ------ -------
TOTAL RETURN(B) 6.99% 8.76% (1.34%) 12.71% 11.06% 10.60%
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RATIOS TO AVERAGE NET ASSETS
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Expenses 0.75% 0.75% 0.75% 0.83% 0.73% 0.26 (e)
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Net investment income 5.73% 5.92% 5.27% 5.33% 5.88% 6.45 (e)
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Expense waiver/reimbursement(d) 0.25% 0.28% 0.45% 0.70% 0.97% 1.24%(e)
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SUPPLEMENTAL DATA
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Net assets, end of period (000 omitted) $84,116 $83,722 $85,860 $69,947 $48,261 $31,067
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Portfolio Turnover 23% 59% 17% 0% 0% 10%
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</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 principals. 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 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, 1996, which can be obtained
free of charge.
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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 two classes
of shares, known as Class A Shares and Class B Shares (individually and
collectively as the context requires, "Shares").
Shares of the Fund are 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. The minimum
initial investment is $500 for Class A Shares and $1,500 for Class B Shares. 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.
The Fund's current net asset value and offering price may be found in the mutual
funds section of local newspapers under "Federated" and the appropriate class
designation listing.
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INVESTMENT INFORMATION
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide current income which is
exempt from federal regular income tax (federal regular income tax does not
include the federal alternative minimum tax) and the personal income taxes
imposed by the Commonwealth of 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 a 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 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 AND ILLIQUID SECURITIES
As a matter of fundamental policy, 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. As a matter of operating policy which may be changed by the
Trustees without shareholder approval, 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.
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 limitations cannot be changed without shareholder approval.
- -------------------------------------------------------
EXPENSES OF THE FUND
Holders of Shares pay their allocable portion of Trust and portfolio expenses.
The Trust expenses for which holders of Shares pay their allocable portion
include, but are not limited to: the cost of organizing the Trust and continuing
its existence; registering the Trust with federal and state securities
authorities; Trustees' fees; auditors' fees; the cost of meetings of Trustees;
legal fees of the Trust; association membership dues; and such non-recurring and
extraordinary items as may arise from time to time.
The portfolio expenses for which holders of Shares pay their allocable portion
include, but are not limited to: registering the portfolio and Shares of the
portfolio; investment advisory services; taxes and commissions; custodian fees;
insurance premiums; auditors' fees; and such non-recurring and extraordinary
items as may arise from time to time.
At present, the only expenses which are allocated specifically to Class A Shares
as a class are expenses under the Trust's Shareholder Services Plan, and the
only expenses which are allocated specifically to Class B Shares as a class are
expenses under the Trust's Shareholder Services Plan and Distribution Plan.
However, the Trustees reserve the right to allocate certain other expenses to
holders of Shares as they deem appropriate ("Class Expenses"). In any case,
Class Expenses would be limited to: distribution fees; transfer agent fees as
identified by the transfer agent as attributable to holders of Shares; fees
under the Trust's Shareholder Services Plan; printing and postage expenses
related to preparing and distributing materials such as shareholder reports,
prospectuses and proxies to current shareholders; registration fees paid to the
Securities and Exchange Commission and to state securities commissions; expenses
related to administrative personnel and services as required to support holders
of Shares; legal fees relating solely to Shares; and Trustees' fees incurred as
a result of issues relating solely to Shares.
- -------------------------------------------------------
NET ASSET VALUE
The Fund's net asset value per Share fluctuates. The net asset value for Shares
is determined by adding the interest of each class of Shares in the market value
of all securities and other assets of the Fund, subtracting the interest of each
class of Shares in the liabilities of the Fund and those attributable to each
class of Shares, and dividing the remainder by the total number of each class of
Shares outstanding. The net asset value for each class of Shares may differ due
to the variance in daily net income realized by each class. Such variance will
reflect only accrued net income to which the shareholders of a particular class
are entitled.
The net asset value of each class of Shares of the Fund 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.
- -------------------------------------------------------
INVESTING IN THE FUND
The Fund offers investors two classes of shares that carry either a sales charge
and/or a contingent deferred sales charge and which bear different levels of
expenses.
CLASS A SHARES
An investor who purchases Class A Shares pays a maximum sales charge of 4.50% at
the time of purchase. Certain purchases of Class A Shares are not subject to a
sales charge. See "Investing in Class A Shares." As a result, Class A Shares are
not subject to any charges when they are redeemed (except for special programs
offered under "Purchases with Proceeds From Redemptions of Unaffiliated
Investment Companies"). Certain purchases of Class A Shares qualify for reduced
sales charges. See "Reducing or Eliminating the Sales Charge." Class A Shares
have no conversion feature.
CLASS B SHARES
Class B Shares are sold without an initial sales charge, but are subject to a
contingent deferred sales charge of up to 5.50% if redeemed within six full
years following purchase. Class B Shares also bear a 12b-1 fee while Class A
Shares do not bear such a fee. Class B Shares will automatically convert into
Class A Shares, based on relative net asset value, on or around the fifteenth of
the month, eight full years after the purchase date. Class B Shares provide an
investor the benefit of putting all of the investor's dollars to work from the
time the investment is made, but (until conversion) will have a higher expense
ratio and pay lower dividends than Class A Shares due to the 12b-1 fee.
HOW TO PURCHASE SHARES
Shares of the Fund are sold on days on which the New York Stock Exchange is open
for business. Shares of the Fund may be purchased through a financial
institution (such as a bank or broker/ dealer) which has a sales agreement with
the distributor, or directly from the distributor with a minimum initial
investment of $500 for Class A shares and $1,500 for Class B Shares. Additional
investments can be made for as little as $100. (Financial institutions may
impose different minimum investment requirements on their customers).
In connection with any sale, Federated Securities Corp. may from time to time
offer certain items of nominal value to any shareholder or investor. The Fund
reserves the right to reject any purchase request. An account must be
established at a financial institution or by completing, signing, and returning
the new account form available from the Fund before Shares can be purchased.
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 Federated
Pennsylvania Municipal Income Fund--and designate Class A Shares or Class B
Shares; and mail both to Federated 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 directly from Federated Securities Corp. by Federal Reserve
wire once an account has been established, 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 Shareholder Services Company, c/o State Street Bank and Trust
Company, Boston, Massachusetts; Attention: EDGEWIRE; For Credit to: Federated
Pennsylvania Municipal Income Fund--and designate Class A Shares or Class B
Shares; (Fund Number--this number can be found on the account statement or by
contacting the Fund); Account Number; Trade Date and Order Number; Group Number
or Dealer Number; Nominee or Institution Name; and ABA Number 011000028. Shares
cannot be purchased by wire on holidays when wire transfers are restricted.
Questions on wire purchases should be directed to your shareholder services
representative at the telephone number listed on your account statement.
INVESTING IN CLASS A SHARES
Class A 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 DEALER
SALES CHARGE AS A PERCENTAGE CONCESSION
A PERCENTAGE OF NET AS A PERCENTAGE
AMOUNT OF OF PUBLIC AMOUNT OF PUBLIC
TRANSACTION OFFERING PRICE INVESTED OFFERING PRICE
- -------------- --------------- --------------- ---------------
<S> <C> <C> <C>
Less than
$100,000.... 4.50% 4.71% 4.00%
$100,000 but
less than
$250,000.... 3.75% 3.90% 3.25%
$250,000 but
less than
$500,000.... 2.50% 2.56% 2.25%
$500,000 but
less than $1
million..... 2.00% 2.04% 1.80%
$1 million or
greater..... 0.00% 0.00% 0.25%*
</TABLE>
* See sub-section entitled "Dealer Concession."
No sales charge is imposed for Class A Shares purchased through financial
intermediaries that do not receive a reallowance of a sales charge. However,
investors who purchase Class A Shares through a trust department, investment
adviser, or other financial intermediary may be charged a service or other fee
by the financial intermediary. Additionally, no sales charge is imposed on
shareholders designated as Liberty Life Members or on Class A Shares purchased
through "wrap accounts" or similar programs under which clients pay a fee for
services.
DEALER CONCESSION
For sales of Class A Shares, the distributor will normally offer to pay dealers
up to 90% of the applicable sales charge. Any portion of the sales charge which
is not paid to a dealer will be retained by the distributor. However, the
distributor may offer to pay dealers up to 100% of the sales charge retained by
it. Such payments may take the form of cash or promotional incentives, such as
reimbursement of certain expenses of qualified employees and their spouses to
attend informational meetings about the Fund or other special events at
recreational-type facilities, or items of material value. In some instances,
these incentives will be made available only to dealers whose employees have
sold or may sell a significant amount of Class A Shares. 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 Class A Shares outstanding at each month
end.
The sales charge for Class A 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 Class A
Shares.
ELIMINATING/REDUCING THE
SALES CHARGE
The sales charge can be reduced or eliminated on the purchase of Class A 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 Class A Shares is made, the Fund will consider the
previous purchases still invested in the Fund. For example, if a shareholder
already owns Class A Shares having a current value at the public offering price
of $90,000 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 3.75%, not 4.50%.
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 Class A 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 Class A Shares are already owned.)
LETTER OF INTENT
If a shareholder intends to purchase a specific dollar amount of Class A 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 $100,000 in Class A 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 4.50% of the total amount intended to be purchased in escrow (in Class A
Shares) until such purchase is completed.
The applicable portion of the 4.50% 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 Class A 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 Class A
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 Class A 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 Class A 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 Class A Shares of two or more
funds for which affiliates of Federated Investors serve as investment advisers
or principal underwriter (the "Federated Funds"), the purchase prices of which
include a sales charge. For example, if a shareholder concurrently invested
$80,000 in one of the other Class A Shares of the Federated Funds and $20,000 in
Class A Shares of the Fund, the sales charge would be reduced. 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 Class A 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 Class A
Shares purchased under this program. If Class A 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.
INVESTING IN CLASS B SHARES
Class B Shares are sold at their net asset value next determined after an order
is received. While Class B Shares are sold without an initial sales charge,
under certain circumstances described under "Contingent Deferred Sales Charge--
Class B Shares," a contingent deferred sales charge may be applied by the
distributor at the time Class B Shares are redeemed.
CONVERSION OF CLASS B SHARES
Class B Shares will automatically convert into Class A Shares on or around the
fifteenth of the month eight full years after the purchase date, except as noted
below, and may no longer be subject to a distribution services fee (see
"Distribution of Shares"). Such conversion will be on the basis of the relative
net asset values per share, without the imposition of any sales charge, fee, or
other charge. Class B Shares acquired by exchange from Class B Shares of another
fund in the Federated Funds will convert into Class A Shares based on the time
of the initial purchase. For purposes of conversion to Class A Shares, Shares
purchased through the reinvestment of dividends and distributions paid on Class
B Shares will be considered to be held in a separate sub-account. Each time any
Class B Shares in the shareholder's account (other than those in the
sub-account) convert to Class A Shares, an equal pro rata portion of the Class B
Shares in the sub-account will also convert to Class A Shares. The conversion of
Class B Shares to Class A Shares is subject to the continuing availability of a
ruling from the Internal Revenue Service or an opinion of counsel that such
conversions will not constitute taxable events for federal tax purposes. There
can be no assurance that such ruling or opinion will be available, and the
conversion of Class B Shares to Class A Shares will not occur if such ruling or
opinion is not available. In such event, Class B Shares would continue to be
subject to higher expenses than Class A Shares for an indefinite period.
Orders for $250,000 or more of Class B Shares will automatically be invested in
Class A Shares.
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 Shareholder Services Company, plus any 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 Shareholder 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 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
Shareholder Services Company. All shareholders on the record date are entitled
to the dividend.
- -------------------------------------------------------
EXCHANGE PRIVILEGE
CLASS A SHARES
Class A shareholders may exchange all or some of their Class A Shares of the
Fund for Class A Shares of other Federated Funds at net asset value. Neither the
Fund nor any of the Federated Funds imposes any additional fees on exchanges.
Shareholders in certain other Federated Funds may exchange all or some of their
shares for Class A Shares of the Fund.
Please contact your financial institution directly or Federated Securities Corp.
at 1-800-341-7400 for more information on and prospectuses for the Federated
Funds into which your Class A Shares may be exchanged free of charge.
Shareholders of Class A Shares who have been designated Liberty Life Members are
exempt from sales charges on future purchases in and exchanges between the Class
A Shares of any Federated Fund, as long as they maintain a $500 balance in one
of the Federated Funds. Instructions for exchanging Class A Shares must be given
in writing by the shareholder. Written instructions may require a signature
guarantee.
CLASS B SHARES
Class B shareholders may exchange all or some of their Class B Shares of the
Fund for Class B Shares of other funds in the Federated Funds. (Not all funds in
the Federated Funds currently offer Class B Shares. Contact your financial
institution regarding the availability of other Class B Shares in the Federated
Funds.) Exchanges are made at net asset value without being assessed a
contingent deferred sales charge on the exchanged Class B Shares. In determining
the applicability of the contingent deferred sales charge, the required holding
period for your new Class B Shares received through an exchange will include the
pe-
riod for which your original Class B Shares were held. For more information, see
"Contingent Deferred Sales Charge."
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. 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.
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 Federated 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 Shareholder Services Company, 1099 Hingham
Street, Rockland, Massachusetts 02370-3317.
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 your
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 Shareholder 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.
- -------------------------------------------------------
HOW TO REDEEM SHARES
The Fund redeems Shares at their net asset value, less any applicable contingent
deferred sales charge, next determined after Federated Shareholder 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 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 the Fund by telephoning Federated Shareholder 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. Proceeds from redemption requests received on holidays when
wire transfers are restricted will be wired the following business day.
Questions about telephone redemptions on days when wire transfers are restricted
should be directed to your shareholder services representative at the telephone
number listed on your account statement. 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 Shares by sending a written request to Federated
Shareholder Services Company, P.O. Box 8600, Boston, MA 02266-8600. If share
certificates have been issued, they should be sent unendorsed with the written
request by registered or certified mail to the address noted above.
The written request should state: Fund Name and the Class designation; the
account name as registered with the Fund; the account number; and the number of
Shares to be redeemed or the dollar amount requested. All owners of the account
must sign the request exactly as the Shares are registered. 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. Dividends are
paid
up to and including the day that a redemption request is processed.
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 their signatures guaranteed by a commercial
or savings bank, Trust company or savings association whose deposits are insured
by an organization which is administered by the Federal Deposit Insurance
Corporation; a member firm of a domestic stock exchange; 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.
CONTINGENT DEFERRED SALES CHARGE
Shareholders may be subject to a contingent deferred sales charge upon
redemption of their Shares under the following circumstances:
CLASS A SHARES
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% 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
Class A Shares at the time of purchase or the net asset value of the redeemed
Class A Shares at the time of the redemption.
CLASS B SHARES
Shareholders redeeming Class B Shares from their Fund accounts within six full
years of the purchase date of those Class B Shares will be charged a contingent
deferred sales charge by the Fund's distributor. Any applicable contingent
deferred sales charge will be imposed on the lesser of the net asset value of
the redeemed Class B Shares at the time of purchase or the net asset value of
the redeemed Class B Shares at the time of redemption in accordance with the
following schedule:
<TABLE>
<CAPTION>
CONTINGENT
YEAR OF REDEMPTION DEFERRED
AFTER PURCHASE SALES CHARGE
- ---------------------- ------------
<S> <C>
First 5.50%
Second 4.75%
Third 4.00%
Fourth 3.00%
Fifth 2.00%
Sixth 1.00%
Seventh and thereafter 0.00%
</TABLE>
CLASS A SHARES AND
CLASS B SHARES
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 six
full years from the date of purchase with respect to Class B Shares and 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, 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 six full years from the date of purchase
with respect to Class B Shares and more than one full year from the date of
purchase with respect to applicable Class A Shares; and (3) Shares held for
fewer than six years with respect to Class B Shares and 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 Federated 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. Moreover, the contingent deferred
sales charge will be eliminated with respect to certain redemptions (see
"Elimination of Contingent Deferred Sales Charge").
ELIMINATION OF CONTINGENT
DEFERRED SALES CHARGE
A contingent deferred sales charge will not be charged in connection with
exchanges of Class A Shares of the Fund for Class A Shares in other Federated
Funds.
With respect to Class B Shares, the contingent deferred sales charge will be
eliminated with respect to the following redemptions: (1) redemptions following
the death or disability, as defined in Section 72(m)(7) of the Internal Revenue
Code of 1986, of the last surviving shareholder; (2) redemptions representing
minimum required distributions from an Individual Retirement Account or other
retirement plan to a shareholder who has attained the age of 70 1/2; (3)
involuntary redemptions by the Fund of Class B Shares in shareholder accounts
that do not comply with the minimum balance requirements; and (4) qualifying
redemptions of Class B Shares under a Systematic Withdrawal Program. To qualify
for elimination of the contingent deferred sales charge through a Systematic
Withdrawal Program, the redemptions of Class B Shares must be from an account:
that is at least 12 months old, has all Fund distributions reinvested in Fund
Shares, and has a value of at least $10,000 when the Systematic Withdrawal
Program is established. Qualifying redemptions may not exceed 1.00% monthly of
the account value as periodically determined by the Fund. For more information
regarding the elimination of the contingent deferred sales charge through a
Systematic Withdrawal Program contact your financial institution or the Fund. No
contingent deferred sales charge will be imposed on redemptions of Class B
Shares held by Trustees, employees and sales representatives of the Fund, the
distributor, or affiliates of the Fund or distributor, and their immediate
family members; employees of any financial institution that sells Class B Shares
of the Fund pursuant to a sales agreement with the distributor; and spouses and
children under the age of 21 of the aforementioned persons. Finally, no
contingent deferred sales charge will be imposed on the redemption of Class B
Shares originally purchased through a bank trust department, an investment
adviser registered under the Investment Advisers Act of 1940 or retirement plans
where the third party administrator has entered into certain arrangements with
Federated Securities Corp. or its affiliates, or any other financial
institution, to the extent that no payments were advanced for purchases made
through such entities. The Fund reserves the right to discontinue or modify the
elimination of the contingent deferred sales charge. Shareholders will be
notified of a discontinuation. Any Class B Shares purchased prior to the
termination of such waiver would have the contingent deferred sales charge
eliminated as provided in the Fund's pro-
spectus at the time of the purchase of the Class B Shares. If a shareholder
making a redemption qualifies for an elimination of the contingent deferred
sales charge, the shareholder must notify Federated Securities Corp. or the
transfer agent in writing that the shareholder is entitled to such elimination.
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 Class A Shares
are sold with a sales charge, it is not advisable for shareholders to be
purchasing Class A 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 $500 for Class A
Shares or $1,500 for Class B Shares. This requirement does not apply, however,
if the balance falls below the required minimum amounts 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.
- -------------------------------------------------------
TRUST INFORMATION
MANAGEMENT OF THE 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 Trustees, and could
result in severe penalties.
ADVISORY FEES
The Fund's Adviser receives an annual investment advisory fee equal to .40% 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.
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 $110 billion invested across over 300 funds
under management and/or administration by its subsidiaries, as of December 31,
1996, Federated Investors is one of the largest mutual fund investment managers
in the United States. With more than 2,000 employees, Federated continues to be
led by the management who founded the company in 1955. Federated funds are
presently at work in and through 4,500 financial institutions nationwide.
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. From 1992 to 1994, Mr. Albrecht
served as an Assistant Vice President of the Fund's investment adviser. In 1991,
Mr. Albrecht acted as an investment analyst. Mr. Albrecht is a Chartered
Financial Analyst and received his M.S. in Public Management from Carnegie
Mellon University.
DISTRIBUTION OF 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.
The distributor will pay dealers an amount equal to 5.5% of the net asset value
of Class B Shares purchased by their clients or customers. These payments will
be made directly by the distributor from its assets, and will not be made from
the assets of the Fund. Dealers may voluntarily waive receipt of all or any
portion of these payments. The distributor may pay a portion of the distribution
fee discussed below to financial institutions that waive all or any portion of
the advance payments.
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 the average daily net asset value of
Class A Shares and 0.75% of the average daily net asset value of Class B 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. With respect to Class
B Shares, because distribution fees to be paid by the Fund to the distributor
may not exceed an annual rate of .75% of Class B Shares' average daily net
assets, it will take the distributor a number of years to recoup the expenses it
has incurred for its sales services and distribution-related support services
pursuant to the Plan.
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 the average daily net asset value of
both Class A Shares and Class B 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 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.
f
SUPPLEMENTAL PAYMENTS TO
FINANCIAL INSTITUTIONS
Federated Securities Corp. may pay financial institutions, at the time of
purchase of Class A Shares, an amount equal to .50% of the net asset value of
Class A Shares purchased by their clients or customers under certain qualified
retirement plans as approved by Federated Securities Corp. (Such payments are
subject to a reclaim from the financial institution should the assets leave the
program within 12 months after purchase.)
Furthermore, with respect to both Class A Shares and Class B Shares, 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, providing sales
literature, and engineering computer software programs that emphasize the
attributes of the Fund. Such assistance may be predicated upon the amount of
Shares the financial institution sells or may sell, and/or upon the type and
nature of sales or marketing support furnished by the financial institution. Any
payments made by the distributor may be reimbursed by the Adviser or its
affiliates.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES
Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services (including certain legal and financial
reporting services) necessary to operate the Trust. Federated Services Company
provides these at an annual rate which relates to the average aggregate daily
net assets of all funds advised by affiliates of Federated Investors as
specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE
ADMINISTRATIVE FEE DAILY NET ASSETS
- ------------------- --------------------------------
<S> <C>
0.150% on the first $250 million
0.125% on the next $250 million
0.100% on the next $250 million
0.075% 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 Services Company may choose voluntarily to waive a portion of its fee.
- -------------------------------------------------------
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.
- -------------------------------------------------------
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 the 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 earned on some municipal bonds
may be included in calculating the federal individual alternative minimum tax or
the federal alternative minimum tax for corporations.
The alternative minimum tax, up to 28% of alternative minimum taxable income for
individuals and 20% for Corporations, applies when it exceeds the regular tax
for the taxable year. Alternative minimum taxable income is equal to the regular
taxable income of the taxpayer increased by certain "tax preference" items not
included in regular taxable income and reduced by only a portion of the
deductions allowed in the calculation of the regular tax.
The Tax Reform Act of 1986 treats interest on certain "private activity" bonds
issued after August 7, 1986, as a tax preference item for both individuals and
corporations. Unlike traditional governmental purpose municipal bonds, which
finance roads, schools, libraries, prisons, and other
public facilities, private activity bonds provide benefits to private parties.
The Fund may purchase all types of municipal bonds, including private activity
bonds. Thus, should it purchase any such bonds, a portion of the Fund's
dividends may be treated as a tax preference item.
In addition, in the case of a corporate shareholder, dividends of the Fund which
represent interest on municipal bonds will become subject to the 20% corporate
alternative minimum tax because the dividends are included in a corporation's
"adjusted current earnings." The corporate alternative minimum tax treats 75% of
the excess of a taxpayer's pre-tax "adjusted current earnings" over the
taxpayer's alternative minimum taxable income as a tax preference item.
"Adjusted current earnings" is based upon the concept of a corporation's
"earnings and profits." Since "earnings and profits" generally includes the full
amount of any Fund dividend, and alternative minimum taxable income does not
include the portion of the Fund's dividend attributable to municipal bonds which
are not private activity bonds, the difference will be included in the
calculation of the corporation's alternative minimum tax.
Dividends of the Fund representing net interest income earned on some temporary
investments and any realized net short-term gains are taxed as ordinary income.
These tax consequences apply whether dividends are received in cash or as
additional shares. Information on the tax status of dividends and distributions
is provided annually.
STATE AND LOCAL TAXES
In the opinion of Houston, Donnelly & Meck, counsel to the Fund, Fund Shares may
be subject to personal property taxes imposed by counties, municipalities, and
school districts in Pennsylvania to the extent that the portfolio securities in
the Fund would be subject to such taxes if owned directly by residents of those
jurisdictions.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
PENNSYLVANIA TAXES
Under existing Pennsylvania laws, distributions made by the Fund derived from
interest on obligations free from state taxation in Pennsylvania are not subject
to Pennsylvania personal income taxes. Distributions made by the Fund will be
subject to Pennsylvania personal income taxes to the extent that they are
derived from gain realized by the Fund from the sale or exchange of otherwise
tax-exempt obligations.
- -------------------------------------------------------
PERFORMANCE INFORMATION
From time to time, the Fund advertises the total return, yield, and
tax-equivalent yield for each class of 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 SEC) earned by each class of shares over a thirty-day
period by the maximum offering price per share of each class of shares on the
last day of the period. This number is then annualized using semi-annual
compounding. The tax-equivalent yield of each class of shares is calculated
similarly to the yield, but is adjusted to reflect the taxable yield that each
class of 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 each class of 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 contingent deferred sales
charge, which, if excluded, would increase the total return, yield, and
tax-equivalent yield.
Total return and yield will be calculated separately for Class A Shares and
Class B Shares.
From time to time, advertisements for Class A Shares and Class B Shares of the
Fund may refer to ratings, rankings and other information in certain financial
publications and/or compare the performance of Class A Shares and Class B Shares
to certain indices.
=======================================================
FINANCIAL HIGHLIGHTS--INCOME SHARES
FEDERATED PENNSYLVANIA MUNICIPAL INCOME FUND
(FORMERLY, PENNSYLVANIA MUNICIPAL INCOME FUND)
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 40.
<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.
(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, 1996, which can be obtained
free of charge.
FEDERATED PENNSYLVANIA MUNICIPAL INCOME FUND
(FORMERLY, PENNSYLVANIA MUNICIPAL INCOME FUND)
PORTFOLIO OF INVESTMENTS
AUGUST 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
- ---------- ---------------------------------------------------------- ------- ------------
<C> <S> <C> <C>
LONG-TERM MUNICIPALS--97.2%
- ------------------------------------------------------------------------
PENNSYLVANIA--97.2%
----------------------------------------------------------
$2,000,000 Allegheny County, PA HDA, Health & Education Revenue
Bonds, 7.00% (Rehabilitation Institute of
Pittsburgh)/(Original Issue Yield: 7.132%), 6/1/2022 BBB $ 2,027,100
----------------------------------------------------------
2,325,000 Allegheny County, PA HDA, Revenue Refunding Bonds, 6.875%
(Children's Hospital of Pittsburgh)/(MBIA INS)/(Original
Issue Yield: 7.061%), 7/1/2014 AAA 2,467,337
----------------------------------------------------------
465,000 Allegheny County, PA Residential Finance Agency, SFM
Revenue Bonds (Series K), 7.75% (GNMA COL), 12/1/2022 Aaa 489,087
----------------------------------------------------------
775,000 Allegheny County, PA Residential Finance Agency, SFM
Revenue Bonds (Series Q), 7.40% (GNMA COL), 12/1/2022 Aaa 815,548
----------------------------------------------------------
2,060,000 Allentown, PA Area Hospital Authority, Revenue Bonds
(Series B), 6.75% (Sacred Heart Hospital of Allentown),
11/15/2015 BBB 2,064,326
----------------------------------------------------------
4,250,000 Bradford County, PA IDA, Solid Waste Disposal Revenue
Bonds (Series A), 6.60% (International Paper Co.),
3/1/2019 A- 4,394,713
----------------------------------------------------------
750,000 Butler County, PA Hospital Authority, Hospital Revenue
Bonds (Series A), 7.00% (North Hills Passavant
Hospital)/(FSA INS), 6/1/2022 AAA 809,798
----------------------------------------------------------
1,750,000 Delaware County, PA Authority, Hospital Revenue Bonds,
5.30% (Crozer-Chester Medical Center)/(MBIA INS)/(Original
Issue Yield: 5.55%), 12/15/2020 AAA 1,603,630
----------------------------------------------------------
750,000 Derry Township, PA School District, GO Bonds, 7.00%
(United States Treasury PRF), 9/15/2009 A1 832,110
----------------------------------------------------------
1,600,000 Dormont Borough, PA, Allegheny County, UT GO Bonds (Series
1995), 7.00% (United States Treasury PRF)/(Original Issue
Yield: 7.125%), 3/1/2000 (@100) BBB 1,719,872
----------------------------------------------------------
</TABLE>
FEDERATED PENNSYLVANIA MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
- ---------- ---------------------------------------------------------- ------- ------------
<C> <S> <C> <C>
LONG-TERM MUNICIPALS--CONTINUED
- ------------------------------------------------------------------------
Pennsylvania--Continued
----------------------------------------------------------
$2,000,000 Fayette County, PA Hospital Authority, Hospital Revenue
Bonds (Series 1996A), 5.75% (Uniontown Hospital)/ (Connie
Lee INS)/(Original Issue Yield: 6.05%), 6/15/2015 AAA $ 1,898,580
----------------------------------------------------------
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) AA 1,101,990
----------------------------------------------------------
1,000,000 Lackawanna Trail School District, PA, UT GO Refunding
Bonds, 6.90% (AMBAC INS), 3/15/2010 AAA 1,089,060
----------------------------------------------------------
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 1,389,067
----------------------------------------------------------
1,500,000 Lebanon County, PA Good Samaritan Hospital Authority,
Hospital Revenue Bonds, 6.00% (Good Samaritan Hospital)/
(Original Issue Yield: 6.10%), 11/15/2018 BBB+ 1,395,705
----------------------------------------------------------
1,000,000 Lehigh County, PA General Purpose Authority, Hospital
Refunding Revenue Bonds (Series 1996A), 5.75% (Muhlenberg
Hospital Center)/(Original Issue Yield: 5.85%), 7/15/2010 A 975,680
----------------------------------------------------------
2,500,000 Luzerne County, PA IDA, Revenue Refunding Bonds (Series
A), 7.00% (Pennsylvania Gas & Water Company)/ (AMBAC INS),
12/1/2017 AAA 2,747,100
----------------------------------------------------------
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- 4,275,440
----------------------------------------------------------
1,000,000 Monroeville, PA Hospital Authority, Hospital Refunding
Revenue Bonds (Series 1995), 6.25% (Forbes Health System,
PA)/(Original Issue Yield: 6.60%), 10/1/2015 BBB 983,530
----------------------------------------------------------
4,000,000 Pennsylvania EDFA, Revenue Bonds, 7.60% (Macmillan Bloedel
LTD Partnership)/(Original Issue Yield: 7.65%), 12/1/2020 BBB- 4,398,080
----------------------------------------------------------
</TABLE>
FEDERATED PENNSYLVANIA MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
- ---------- ---------------------------------------------------------- ------- ------------
<C> <S> <C> <C>
LONG-TERM MUNICIPALS--CONTINUED
- ------------------------------------------------------------------------
Pennsylvania--Continued
----------------------------------------------------------
$8,000,000 Pennsylvania EDFA, Wastewater Treatment Revenue Bonds
(Series A), 7.60% (Sun Co., Inc.)/(Original Issue Yield:
7.653%), 12/1/2024 BBB- $ 8,807,840
----------------------------------------------------------
2,290,000 Pennsylvania Housing Finance Authority, SFM Revenue Bonds
(Series 39B), 6.875%, 10/1/2024 AA 2,380,157
----------------------------------------------------------
750,000 Pennsylvania Housing Finance Authority, SFM Revenue Bonds
(Series 33), 6.90%, 4/1/2017 AA 785,490
----------------------------------------------------------
1,000,000 Pennsylvania Housing Finance Authority, SFM Revenue Bonds
(Series 34-B), 7.00% (FHA GTDs), 4/1/2024 AA 1,040,410
----------------------------------------------------------
4,540,000 Pennsylvania Housing Finance Authority, SFM Revenue Bonds
(Series 28), 7.65% (FHA GTD), 10/1/2023 AA 4,774,673
----------------------------------------------------------
2,500,000 Pennsylvania Intergovernmental Coop Authority, Special Tax
Revenue Bond, Philadelphia Funding Program, 6.75% (FGIC
INS)/(United States Treasury PRF)/(Original Issue Yield:
7.13%), 6/15/2021 AAA 2,803,200
----------------------------------------------------------
2,000,000 Pennsylvania State Higher Education Facilities Authority,
Health Services Revenue Bonds (Series A of 1996), 5.75%
(University of Pennsylvania)/(Original Issue Yield:
6.035%), 1/1/2022 AA 1,949,080
----------------------------------------------------------
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- 1,065,760
----------------------------------------------------------
2,000,000 Pennsylvania State Higher Education Facilities Authority,
Revenue Bonds (Series 1996), 7.20% (Thiel College),
5/15/2026 NR 2,000,480
----------------------------------------------------------
4,000,000 Pennsylvania State Higher Education Facilities Authority,
Revenue Bonds (Series A), 7.375% (Medical College of
Pennsylvania)/(United States Treasury PRF)/(Original Issue
Yield: 7.45%), 3/1/2021 AAA 4,475,720
----------------------------------------------------------
</TABLE>
FEDERATED PENNSYLVANIA MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
- ---------- ---------------------------------------------------------- ------- ------------
<C> <S> <C> <C>
LONG-TERM MUNICIPALS--CONTINUED
- ------------------------------------------------------------------------
Pennsylvania--Continued
----------------------------------------------------------
$2,000,000 Pennsylvania State Higher Education Facilities Authority,
Revenue Bonds (Series N), 5.875% (MBIA INS)/(Original
Issue Yield: 5.913%), 6/15/2021 AAA $ 1,993,320
----------------------------------------------------------
2,000,000 Pennsylvania State Higher Education Facilities Authority,
Revenue Bonds, 6.375% (Drexel University)/(Original Issue
Yield: 6.415%), 5/1/2017 BBB+ 2,019,640
----------------------------------------------------------
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 3,991,480
----------------------------------------------------------
2,500,000 Scranton-Lackawanna, PA Health & Welfare Authority,
Revenue Bonds (Series 1994-A), 7.60% (Allied Services
Rehabilitation Hospitals, PA), 7/15/2020 NR 2,562,923
----------------------------------------------------------
2,650,000 Sharon, PA General Hospital Authority, Hospital Revenue
Bonds, 6.875% (Sharon Regional Health System), 12/1/2022 BBB+ 2,659,196
----------------------------------------------------------
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+ 1,008,450
---------------------------------------------------------- ------------
Total 81,795,572
---------------------------------------------------------- ------------
</TABLE>
FEDERATED PENNSYLVANIA MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
- ---------- ---------------------------------------------------------- ------- ------------
<C> <S> <C> <C>
SHORT-TERM MUNICIPALS--0.6%
- ------------------------------------------------------------------------
PENNSYLVANIA--0.6%
----------------------------------------------------------
$ 500,000 Geisinger Authority, PA Health System, (Series 1992B)
Daily VRDNs (at amortized cost) AA $ 500,000
---------------------------------------------------------- ------------
TOTAL INVESTMENTS (IDENTIFIED COST $77,683,811)(A) $ 82,295,572
---------------------------------------------------------- ------------
</TABLE>
Securities that are subject to alternative minimum tax represent 41.1% of the
portfolio as calculated based upon total portfolio market value.
(a) The cost of investments for federal tax purposes amounts to $77,683,811. The
net unrealized appreciation of investments on a federal tax basis amounts to
$4,611,761 which is comprised of $4,838,788 appreciation and $227,027
depreciation at August 31, 1996.
* 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
($84,115,530) at August 31, 1996.
The following acronym(s) are used throughout this portfolio:
<TABLE>
<S> <C>
AMBAC -- American Municipal Bond Assurance Corporation
COL -- Collateralized
EDFA -- Economic Development Financing Authority
FGIC -- Financial Guaranty Insurance Company
FHA -- Federal Housing Administration
FSA -- Financial Security Assurance
GNMA -- Government National Mortgage Association
GO -- General Obligation
GTD -- Guaranty
HDA -- Hospital Development Authority
IDA -- Industrial Development Authority
INS -- Insured
LTD -- Limited
MBIA -- Municipal Bond Investors Assurance
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)
FEDERATED PENNSYLVANIA MUNICIPAL INCOME FUND
(formerly, Pennsylvania Municipal Income Fund)
STATEMENT OF ASSETS AND LIABILITIES
August 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- --------------------------------------------------------------------------------
Total investments in securities, at value (identified and tax cost $77,683,811) $82,295,572
- --------------------------------------------------------------------------------
Cash 84,381
- --------------------------------------------------------------------------------
Income receivable 1,798,545
- --------------------------------------------------------------------------------
Receivable for shares sold 168,137
- -------------------------------------------------------------------------------- -----------
Total assets 84,346,635
- --------------------------------------------------------------------------------
LIABILITIES:
- --------------------------------------------------------------------------------
Income distribution payable $176,401
- ---------------------------------------------------------------------
Accrued expenses 54,704
- --------------------------------------------------------------------- --------
Total liabilities 231,105
- -------------------------------------------------------------------------------- -----------
NET ASSETS for 7,408,593 shares outstanding $84,115,530
- -------------------------------------------------------------------------------- -----------
NET ASSETS CONSIST OF:
- --------------------------------------------------------------------------------
Paid in capital $81,237,429
- --------------------------------------------------------------------------------
Net unrealized appreciation of investments 4,611,761
- --------------------------------------------------------------------------------
Accumulated net realized loss on investments (1,930,489)
- --------------------------------------------------------------------------------
Undistributed net investment income 196,829
- -------------------------------------------------------------------------------- -----------
Total Net Assets $84,115,530
- -------------------------------------------------------------------------------- -----------
NET ASSET VALUE AND REDEMPTION PROCEEDS PER SHARE:
- --------------------------------------------------------------------------------
($84,115,530 / 7,408,593 shares outstanding) $11.35
- -------------------------------------------------------------------------------- -----------
Offering Price Per Share (100/97.00 of $11.35)* $11.70
- -------------------------------------------------------------------------------- -----------
</TABLE>
* See "Investing In Class A Shares."
(See Notes which are an integral part of the Financial Statements)
FEDERATED PENNSYLVANIA MUNICIPAL INCOME FUND
(formerly, Pennsylvania Municipal Income Fund)
STATEMENT OF OPERATIONS
Year Ended August 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ---------------------------------------------------------------------------------------------
Interest $5,530,462
- ---------------------------------------------------------------------------------------------
EXPENSES:
- ---------------------------------------------------------------------------------------------
Investment advisory fee $ 341,175
- --------------------------------------------------------------------------------
Administrative personnel and services fee 125,000
- --------------------------------------------------------------------------------
Custodian fees 20,600
- --------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 37,388
- --------------------------------------------------------------------------------
Directors'/Trustees' fees 3,302
- --------------------------------------------------------------------------------
Auditing fees 13,772
- --------------------------------------------------------------------------------
Legal fees 5,061
- --------------------------------------------------------------------------------
Portfolio accounting fees 50,654
- --------------------------------------------------------------------------------
Shareholder services fee 213,235
- --------------------------------------------------------------------------------
Share registration costs 14,447
- --------------------------------------------------------------------------------
Printing and postage 18,838
- --------------------------------------------------------------------------------
Insurance premiums 4,394
- --------------------------------------------------------------------------------
Miscellaneous 8,084
- -------------------------------------------------------------------------------- ---------
Total expenses 855,950
- --------------------------------------------------------------------------------
Waivers and reimbursements--
- --------------------------------------------------------------------------------
Waiver of investment advisory fee $(195,433)
- --------------------------------------------------------------------
Waiver of shareholder services fee (17,059)
- -------------------------------------------------------------------- ---------
Total waivers (212,492)
- -------------------------------------------------------------------------------- ---------
Net expenses 643,458
- --------------------------------------------------------------------------------------------- ----------
Net investment income 4,887,004
- --------------------------------------------------------------------------------------------- ----------
Realized and Unrealized Gain (Loss) on Investments:
- ---------------------------------------------------------------------------------------------
Net realized gain on investments 556,055
- ---------------------------------------------------------------------------------------------
Net change in unrealized appreciation of investments 353,374
- --------------------------------------------------------------------------------------------- ----------
Net realized and unrealized gain on investments 909,429
- --------------------------------------------------------------------------------------------- ----------
Change in net assets resulting from operations $5,796,433
- --------------------------------------------------------------------------------------------- ----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED PENNSYLVANIA MUNICIPAL INCOME FUND
(formerly, Pennsylvania Municipal Income Fund)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- -------------------------------------------------------------------
OPERATIONS--
- -------------------------------------------------------------------
Net investment income/operating loss $ 4,887,004 $ 5,043,454
- -------------------------------------------------------------------
Net realized gain (loss) on investments ($881,533 and $1,036,056,
net losses, respectively, as computed for federal tax purposes) 556,055 (1,957,166)
- -------------------------------------------------------------------
Net change in unrealized appreciation 353,374 3,480,605
- ------------------------------------------------------------------- ----------- -----------
Change in net assets resulting from operations 5,796,433 6,566,893
- ------------------------------------------------------------------- ----------- -----------
Net equalization credits (debits)-- (6,300) (4,832)
- ------------------------------------------------------------------- ----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS--
- -------------------------------------------------------------------
Distributions from net investment income
- -------------------------------------------------------------------
Class A Shares (4,846,944) (4,814,395)
- -------------------------------------------------------------------
Income Shares 0 (83,724)
- ------------------------------------------------------------------- ----------- -----------
Change in net assets resulting from distributions to
shareholders (4,846,944) (4,898,119)
- ------------------------------------------------------------------- ----------- -----------
SHARE TRANSACTIONS--
- -------------------------------------------------------------------
Proceeds from sale of shares 10,957,322 18,979,060
- -------------------------------------------------------------------
Net asset value of shares issued to shareholders in
payment of distributions declared 3,064,941 2,687,386
- -------------------------------------------------------------------
Cost of shares redeemed (14,571,991) (34,449,869)
- ------------------------------------------------------------------- ----------- -----------
Change in net assets resulting from share transactions (549,728) (12,783,423)
- ------------------------------------------------------------------- ----------- -----------
Change in net assets 393,461 (11,119,481)
- -------------------------------------------------------------------
NET ASSETS:
- -------------------------------------------------------------------
Beginning of period 83,722,069 94,841,550
- ------------------------------------------------------------------- ----------- -----------
End of period (including undistributed net investment income of
$196,829 and $163,069, respectively) $84,115,530 $83,722,069
- ------------------------------------------------------------------- ----------- -----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED PENNSYLVANIA MUNICIPAL INCOME FUND
(FORMERLY, PENNSYLVANIA MUNICIPAL INCOME FUND)
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1996
- --------------------------------------------------------------------------------
(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 portfolios. The
financial statements included herein are only those of Federated Pennsylvania
Municipal Income Fund (the "Fund"), a non-diversified portfolio. The financial
statements of the other portfolios are presented separately. The assets of each
portfolio are segregated and a shareholder's interest is limited to the
portfolio in which shares are held. The 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. 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.
Shareholders approved a change in the name of the Fund as follows:
<TABLE>
<CAPTION>
EFFECTIVE DATE NEW NAME
- --------------- -----------------------------------
<S> <C>
March 31, 1996 Federated Pennsylvania Municipal
Income Fund
</TABLE>
(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--Municipal bonds are valued by an independent pricing
service, taking into consideration yield, liquidity, risk, credit quality,
coupon, maturity, type of issue, and any other factors or market data the
pricing service deems relevant. Short-term securities are valued at the
prices provided by an independent pricing service. However, 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.
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, 1996, the Fund, for
FEDERATED PENNSYLVANIA MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
federal tax purposes, had a capital loss carryforward of $1,930,489, 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 EXPIRATION
YEAR AMOUNT
---------- ----------
<S> <C>
2000 $ 12,837
2001 $ 63
2003 $1,036,056
2004 $ 881,533
</TABLE>
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 investment 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.
USE OF ESTIMATES--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts of assets, liabilities,
expenses and revenues reported in the financial statements. Actual results
could differ from those estimated.
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).
FEDERATED PENNSYLVANIA MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
Transactions in shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
--------------------------------------------------------
1996 1995
-------------------------- --------------------------
CLASS A SHARES SHARES DOLLARS SHARES DOLLARS
- ------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 965,079 $ 10,957,322 4,627,974 $ 18,593,886
- ------------------------------------------
Shares issued to shareholders in payment
of distributions declared 270,041 3,064,941 242,874 2,621,531
- ------------------------------------------
Shares redeemed (1,284,868) (14,571,991) (5,262,476) (25,822,912)
- ------------------------------------------ ---------- ------------ ---------- ------------
Net change resulting from share
transactions (49,748) $ (549,728) (391,628) $ (4,607,495)
- ------------------------------------------ ---------- ------------ ---------- ------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
--------------------------------------------------------
1996 1995*
-------------------------- --------------------------
INCOME SHARES SHARES DOLLARS SHARES DOLLARS
- ------------------------------------------
<S> <C> <C> <C> <C>
Shares sold -- -- 39,353 $ 385,174
- ------------------------------------------
Shares issued to shareholders in payment
of distributions declared -- -- 6,434 65,855
- ------------------------------------------
Shares redeemed -- -- (873,482) (8,626,957)
- ------------------------------------------ ---------- ------------ ---------- ------------
Net change resulting from share
transactions -- -- (827,695) $ (8,175,928)
- ------------------------------------------ ---------- ------------ ---------- ------------
</TABLE>
* Reflect operations for the period from September 1, 1994 to November 18, 1994
(date Income Shares ceased operations).
(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
0.40% 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 waiver at any time at its sole
discretion.
ADMINISTRATIVE FEE--Federated Services Company ("FServ"), under the
Administrative Services Agreement, provides the Fund with administrative
personnel and services. The fee paid to FServ 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 Administra-
FEDERATED PENNSYLVANIA MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
tive 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 0.25%
of average daily net assets of the Fund for the period. The fee paid to FSS is
used to finance certain services for the shareholders and to maintain
shareholder accounts.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES--FServ, through its
subsidiary, Federated Shareholder Services Company ("FSSC") serves as transfer
and dividend disbursing agent for the Fund. The fee paid to FSSC 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.
INTERFUND TRANSACTIONS--During the period ended August 31, 1996, 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 purchase and sale transactions
were made at current market value pursuant to Rule 17a-7 under the Act amounting
to $9,850,000 and $9,350,000, 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, 1996, were as follows:
<TABLE>
<S> <C>
- -----------------------------------------------------------------
Purchases $19,063,621
- ----------------------------------------------------------------- -----------
Sales $20,266,375
- ----------------------------------------------------------------- -----------
</TABLE>
(6) CONCENTRATION OF CREDIT RISK
Since the Fund invests a substantial portion of its assets in issuers located in
one state, it will be more susceptible to factors adversely affecting issuers of
that state than would be a comparable tax-exempt mutual fund that invests
nationally. In order to reduce the credit risk associated with such factors, at
August 31, 1996, 32% 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 from any one institution or agency
did not exceed 9.5% of total investments.
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
To the Board of Trustees of MUNICIPAL SECURITIES INCOME TRUST
and Shareholders of FEDERATED PENNSYLVANIA MUNICIPAL INCOME FUND
(formerly, Pennsylvania Municipal Income Fund):
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Federated Pennsylvania Municipal Income Fund as
of August 31, 1996, the related statement of operations for the years then
ended, the statements of changes in net assets for the years ended August 31,
1996 and 1995, and the financial highlights for the periods presented. 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 at
August 31, 1996, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights present
fairly, in all material respects, the financial position of Federated
Pennsylvania Municipal Income Fund as of August 31, 1996, 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 11, 1996
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Federated Pennsylvania Municipal Income Fund
Class A Shares Federated Investors Tower
Class B Shares Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Investment Adviser
Federated Advisers Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Custodian
State Street Bank and P.O. Box 8600
Trust Company Boston, Massachusetts 02266-8600
- ------------------------------------------------------------------------------------------------
Transfer Agent and Dividend Disbursing Agent
Federated Shareholder Services Company P.O. Box 8600
Boston, Massachusetts 02266-8600
- ------------------------------------------------------------------------------------------------
Independent Auditors
Deloitte & Touche LLP 2500 One PPG Place
Pittsburgh, Pennsylvania 15222-5401
- ------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FEDERATED PENNSYLVANIA
MUNICIPAL INCOME FUND
(FORMERLY, PENNSYLVANIA MUNICIPAL
INCOME FUND)
(A PORTFOLIO OF MUNICIPAL
SECURITIES INCOME TRUST)
CLASS A SHARES, CLASS B SHARES
PROSPECTUS
A Non-Diversified Portfolio of
Municipal Securities Income Trust,
An Open-End, Management
Investment Company
March 4, 1997
LOGO
Cusip 625922505
Cusip 625922836
G00577-02 (3/97)
FEDERATED PENNSYLVANIA MUNICIPAL INCOME FUND
(FORMERLY, PENNSYLVANIA MUNICIPAL INCOME FUND)
(A PORTFOLIO OF MUNICIPAL SECURITIES INCOME TRUST)
CLASS A SHARES
CLASS B SHARES
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the
prospectus of Federated Pennsylvania Municipal Income Fund (the
`Fund''), a portfolio of Municipal Securities Income Trust (the
`Trust'') dated March 4, 1997. This Statement is not a prospectus. You
may request a copy of a prospectus or a paper copy of this Statement,
if you have received it electronically, free of charge by calling
1-800-341-7400.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated March 4, 1997
Federated Securities Corp. is the distributor of the Fund
and is a subsidiary of Federated Investors.
Cusip 625922505
Cusip 625922836
0090702B(3/97)
GENERAL INFORMATION ABOUT THE FUND 1
INVESTMENT OBJECTIVE AND POLICIES 1
Acceptable Investments 1
When-Issued and Delayed Delivery Transactions 2
Temporary Investments 2
Portfolio Turnover 3
Investment Limitations 3
Pennsylvania Investment Risks 4
MUNICIPAL SECURITIES INCOME TRUST MANAGEMENT 5
Fund Ownership 9
Trustees Compensation 9
Trustee Liability 10
INVESTMENT ADVISORY SERVICES 10
Adviser to the Fund 10
Advisory Fees 10
OTHER SERVICES 10
Fund Administration 10
Custodian and Portfolio Accountant 11
Transfer Agent 11
Independent Auditors 11
BROKERAGE TRANSACTIONS 11
PURCHASING SHARES 11
Distribution Plan and Shareholder Services
Agreement 11
Purchases by Sales Representatives, Trustees,
and Employees 12
DETERMINING NET ASSET VALUE 12
Valuing Municipal Bonds 12
Use of Amortized Cost 12
REDEEMING SHARES 12
Redemption in Kind 13
Elimination of the Contingent Deferred
Sales Charge (Class B Shares only) 13
Massachusetts Partnership Law 13
TAX STATUS 13
The Fund's Tax Status 13
Shareholders' Tax Status 14
TOTAL RETURN 14
YIELD 14
TAX-EQUIVALENT YIELD 14
Tax-Equivalency Table 15
PERFORMANCE COMPARISONS 16
Economic and Market Information 16
ABOUT FEDERATED INVESTORS 16
Mutual Fund Market 17
Institutional Clients 17
Bank Marketing 17
Broker/Dealers and Bank Broker/Dealer
Subsidiaries 17
APPENDIX 18
GENERAL INFORMATION ABOUT THE FUND
The Fund is a portfolio in Municipal Securities Income 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 (`Trustees'') approved changing the name of
the Trust from Federated Municipal Income Trust to Municipal Securities
Income Trust. On February 26, 1996, the Trustees approved changing the name
of the Fund from Pennsylvania Municipal Income Fund to Federated
Pennsylvania Municipal Income Fund (effective date March 31, 1996). Shares
of the Fund are presently offered in two classes known as Class A Shares
and Class B Shares (individually and collectively referred to as `Shares''
as the context may require). This Statement of Additional Information
relates to both classes of 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 Ratings Group or Fitch 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,
1996 and 1995, the portfolio turnover rates were 23% and 59%, 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 ILLIQUID SECURITIES
The Fund will not invest more than 15% of its net assets in illiquid
obligations, including certain restricted securities determined to be
liquid under criteria established by the Trustees and repurchase
agreements providing for settlement in more than seven days after
notice, and certain restricted securities.
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.
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 association 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 which 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 brought a corporate net income tax cut.
The rate fell 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, birthdates, 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 or Trustee of the
Funds.
Thomas G. Bigley
28th Floor, One Oxford Centre
Pittsburgh, PA
Birthdate: February 3, 1934
Trustee
Chairman of the Board, Children's Hospital of Pittsburgh; formerly, Senior
Partner, Ernst & Young LLP; Director, MED 3000 Group, Inc.; Trustee,
University of Pittsburgh; Director or Trustee of the Funds.
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; Partner or Trustee in private real
estate ventures in Southwest Florida; formerly, President, Naples Property
Management, Inc. and Northgate Village Development Corporation; Director or
Trustee of the Funds.
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.;
formerly, Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp.;
Director, Ryan Homes, Inc.; Director or Trustee of the Funds.
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 Shareholder Services Company, and
Federated Shareholder Services; Director, Federated Services Company;
President or Executive Vice President of the Funds; Director or Trustee of
some of the Funds. Mr. Donahue is the son of John F. Donahue, Chairman and
Trustee of the Company.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Trustee
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Trustee of the
Funds.
Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Trustee
Professor of Medicine, 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
or Trustee of the Funds.
Edward L. Flaherty, Jr.@
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: June 18, 1924
Trustee
Attorney of Counsel, Miller, Ament, Henny & Kochuba; Director, Eat'N Park
Restaurants, Inc.; formerly, Counsel, Horizon Financial, F.A., Western
Region; Director or Trustee of the Funds.
Peter E. Madden
One Royal Palm Way
100 Royal Palm Way
Palm Beach, FL
Birthdate: March 16, 1942
Trustee
Consultant; Former State Representative, Commonwealth of Massachusetts;
formerly, President, State Street Bank and Trust Company and State Street
Boston Corporation; Director or Trustee of the Funds.
Gregor F. Meyer
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: October 6, 1926
Trustee
Attorney, Member of Miller, Ament, Henny & Kochuba; Chairman, Meritcare,
Inc.; Director, Eat'N Park Restaurants, Inc.; Director or Trustee 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 or Trustee of the Funds.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Trustee
Professor, International Politics; Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer
Library Center, Inc., National Defense University, U.S. Space Foundation
and Czech Management Center; President Emeritus, University of Pittsburgh;
Founding Chairman, National Advisory Council for Environmental Policy and
Technology, Federal Emergency Management Advisory Board and Czech
Management Center; Director or Trustee of the Funds.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Trustee
Public relations/Marketing/Conference Planning, Manchester Craftsmen's
Guild; Restaurant Consultant, Frick Art & History Center; Conference
Coordinator, University of Pittsburgh Art History Department; Director or
Trustee 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
Executive Vice President
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 Shareholder Services Company; Trustee or Director of
some of the Funds; President, Executive Vice President and Treasurer of
some of the Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Executive Vice President , Secretary and Treasurer
Executive Vice President, Secretary, and Trustee, Federated Investors;
Trustee, Federated Advisers, Federated Management, and Federated Research;
Director, Federated Research Corp. and Federated Global Research Corp.;
Trustee, Federated Shareholder Services Company; Director, Federated
Services Company; President and Trustee, Federated Shareholder Services;
Director, Federated Securities Corp.; Executive Vice President and
Secretary of the Funds; Treasurer of some of the Funds.
*This Trustee is deemed to be an ``interested person'' as defined in
the Investment Company Act of 1940.
@Member of the Executive Committee. The Executive Committee of the
Board of Trustees handles the responsibilities of the Board between
meetings of the Board.
As used in the table above, `The Funds'' and ``Funds" mean the following
investment companies: 111 Corcoran Funds; Arrow Funds; Automated Government
Money Trust; Blanchard Funds; Blanchard Precious Metals Fund, Inc.; Cash
Trust Series II; Cash Trust Series, Inc. ; DG Investor Series; Edward D.
Jones & Co. Daily Passport Cash Trust; Federated Adjustable Rate U.S.
Government Fund, Inc.; Federated American Leaders Fund, Inc.; Federated
ARMs Fund; Federated Equity Funds; Federated Equity Income Fund, Inc.;
Federated Fund for U.S. Government Securities, Inc.; Federated GNMA Trust;
Federated Government Income Securities, Inc.; Federated Government Trust;
Federated High Income Bond Fund, Inc.; Federated High Yield Trust;
Federated Income Securities Trust; Federated Income Trust; Federated Index
Trust; Federated Institutional Trust; Federated Insurance Series; Federated
Investment Portfolios; Federated Investment Trust; Federated Master Trust;
Federated Municipal Opportunities Fund, Inc.; Federated Municipal
Securities Fund, Inc.; Federated Municipal Trust; Federated Short-Term
Municipal Trust; Federated Short-Term U.S. Government Trust; Federated
Stock and Bond Fund, Inc.; 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: 2-5 Years; Federated U.S. Government Securities
Fund: 5-10 Years; Federated Utility Fund, Inc.; First Priority Funds; Fixed
Income Securities, Inc.; High Yield Cash Trust; Intermediate Municipal
Trust; International Series, Inc.; Investment Series Funds, Inc.;
Investment Series Trust; Liberty Term Trust, Inc. - 1999; Liberty U.S.
Government Money Market Trust; Liquid Cash Trust; Managed Series Trust;
Money Market Management, Inc.; Money Market Obligations Trust; Money Market
Trust; Municipal Securities Income Trust; Newpoint Funds; Peachtree Funds;
RIMCO Monument Funds; Targeted Duration Trust; Tax-Free Instruments Trust;
The Planters Funds; The Starburst Funds; The Starburst Funds II; The Virtus
Funds; Trust for Financial Institutions; Trust for Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S.
Treasury Obligations; Westmark Funds; and World Investment Series, Inc.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding shares.
As of February 5, 1997, the following shareholder of record owned 5% or
more of the outstanding Class A Shares of the Fund: Merrill Lynch Pierce
Fenner & Smith, Jacksonville, Florida, acting in various capacities for
numerous accounts, owned approximately 1,110,011.00 Class A Shares
(15.17%).
TRUSTEES COMPENSATION
AGGREGATE
NAME , COMPENSATION TOTAL COMPENSATION PAID
POSITION WITH FROM FROM FUND COMPLEX +
TRUST TRUST*#
JOHN F. DONAHUE $ -0- $ -0- FOR THE TRUST AND
TRUSTEE AND CHAIRMAN 56 OTHER INVESTMENT COMPANIES IN
THE FUND COMPLEX
THOMAS G. BIGLEY++ $1,243.22 $108,725 FOR THE TRUST AND
TRUSTEE 56 OTHER INVESTMENT COMPANIES IN
THE FUND
COMPLEX
JOHN T. CONROY $1,363.10 $119,615 FOR THE TRUST AND
TRUSTEE 56 OTHER INVESTMENT COMPANIES IN
THE FUND
COMPLEX
WILLIAM J. COPELAND $1,363.10 $119,615 FOR THE TRUST AND
TRUSTEE 56 OTHER INVESTMENT COMPANIES IN
THE FUND
COMPLEX
J. CHRISTOPHER DONAHUE$ -0- $ -0- FOR THE TRUST AND
TRUSTEE AND EXEC. VICE PRES.
18 OTHER INVESTMENT COMPANIES IN THE FUND
COMPLEX
JAMES E. DOWD $1,363.10 $119,615 FOR THE TRUST AND
TRUSTEE 56 OTHER INVESTMENT COMPANIES IN
THE FUND
COMPLEX
LAWRENCE D. ELLIS, M.D. $1,243.22
$108,725 FOR THE TRUST AND
TRUSTEE 56 OTHER INVESTMENT COMPANIES IN
THE FUND
COMPLEX
EDWARD L. FLAHERTY, JR. $1,363.10
$119,615 FOR THE TRUST AND
TRUSTEE 56 OTHER INVESTMENT COMPANIES IN
THE FUND
COMPLEX
PETER E. MADDEN $1,243.22 $108,725 FOR THE TRUST AND
TRUSTEE 56 OTHER INVESTMENT COMPANIES IN
THE FUND
COMPLEX
GREGOR F. MEYER $1,243.22 $108,725 FOR THE TRUST AND
TRUSTEE 56 OTHER INVESTMENT COMPANIES IN
THE FUND
COMPLEX
JOHN E. MURRAY, JR. $1,243.22 $108,725 FOR THE TRUST AND
TRUSTEE 56 OTHER INVESTMENT COMPANIES IN
THE FUND
COMPLEX
WESLEY W. POSVAR $1,243.22 $108,725 FOR THE TRUST AND
TRUSTEE 56 OTHER INVESTMENT COMPANIES IN
THE FUND
COMPLEX
MARJORIE P. SMUTS $1,243.22 $108,725 FOR THE TRUST AND
TRUSTEE 56 OTHER INVESTMENT COMPANIES IN
THE FUND
COMPLEX
*Information is furnished for the fiscal year ended August 31, 1996.
#The aggregate compensation is provided for the Trust which is comprised of
five portfolios.
+The information is provided for the last calendar year.
++Mr Bigley served on 39 investment companies in the Federated funds
Complex from January 1 through
September 30, 1995. On October 1, 1995, he was appointed a Trustee on 15
additional Federated funds.
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 Advisers receives an annual investment
advisory fee as described in the prospectus. For the fiscal years ended
August 31, 1996, 1995, and 1994, the Adviser earned $341,175, $341,354, and
$394,564, respectively, of which $195,433, $222,052, and $394,564,
respectively, were voluntarily waived.
OTHER SERVICES
FUND ADMINISTRATION
Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for a fee as described in
the prospectus. From March 1, 1994, to March 1, 1996, Federated
Administrative Services served as the Fund's Administrator. Prior to March
1, 1994, Federated Administrative Services, Inc. served as the Fund's
Administrator. Both former Administrators are subsidiaries of Federated
Investors. For purposes of this Statement of Additional Information,
Federated Services Company, Federated Administrative Services, and
Federated Administrative Services, Inc. may hereinafter collectively be
referred to as the "Administrators". For the fiscal years ended August 31,
1996, 1995 and 1994, the Administrators collectively earned $125,000,
$134,042 and $247,255, respectively.
CUSTODIAN AND PORTFOLIO ACCOUNTANT
State Street Bank and Trust Company (`State Street Bank''), Boston,
Massachusetts, is custodian for the securities and cash of the Fund.
Federated Services Company, Pittsburgh, Pennsylvania, provides certain
accounting and recordkeeping services with respect to the Fund's portfolio
investments.
TRANSFER AGENT
Federated Services Company, through it registered transfer agent, Federated
Shareholder Services Company, Boston, Massachusetts, maintains all
necessary shareholder records. For its services, the transfer agent
receives a fee based on the size, type and number of accounts and
transactions made by shareholders.
INDEPENDENT AUDITORS
The independent auditors for the Fund are Deloitte & Touche LLP,
Pittsburgh, Pennsylvania.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of
portfolio instruments, the Adviser looks for prompt execution of the order
at a favorable price. In working with dealers, the Adviser will generally
use those that are recognized dealers in specific portfolio instruments,
except when a better price and execution of the order can be obtained
elsewhere. The Adviser makes decisions on portfolio transactions and
selects brokers and dealers subject to review by the Trustees. The Adviser
may select brokers and dealers who offer brokerage and research services.
These services may be furnished directly to the Fund or to the Adviser and
may include: advice as to the advisability of investing in securities;
security analysis and reports; economic studies; industry studies; receipt
of quotations for portfolio evaluations; and similar services. Research
services provided by brokers and dealers may be used by the Adviser or by
its affiliates in advising the Fund 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. 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. During the fiscal
years ended August 31, 1996, 1995 and 1994, the Fund paid no brokerage
commissions. Although investment decisions for the Fund are made
independently from those of the other accounts managed by the Adviser,
investments of the type the Fund may make may also be made by those other
accounts. When the Fund and one or more other accounts managed by the
adviser are prepared to invest in, or desire to dispose of, the same
security, available investments or opportunities for sales will be
allocated in a manner believed by the adviser to be equitable to each. In
some cases, this procedure may adversely affect the price paid or received
by the Fund or the size of the position obtained or disposed of by the
Fund. In other cases, however, it is believed that coordination and the
ability to participate in volume transactions will be to the benefit of the
Fund.
PURCHASING SHARES
Except under certain circumstances described in the prospectus, Shares are
sold at their net asset value (plus a sales charge on Class A Shares only)
on days the New York Stock Exchange is open for business. The procedure for
purchasing shares is explained in the prospectus under `How to Purchase
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, 1996, 1995 and 1994, payments in the
amount of $0, $8,482 and $49,274, respectively, were made by Class A Shares
pursuant to the Distribution Plan, none of which were waived. In addition,
for the fiscal year ended August 31, 1996, the Fund's Class A Shares paid
shareholder service fees in the amount of $213,235, of which $17,059 were
waived.
PURCHASES BY SALES REPRESENTATIVES, TRUSTEES, AND EMPLOYEES
Trustees, employees, and sales representatives of the Fund, Federated
Advisers, and Federated Securities Corp. or their affiliates and their
immediate family members, or any investment dealer who has a sales
agreement with Federated Securities Corp., and their spouses and children
under 21, may buy Class A Shares at net asset value without a sales charge.
Class A 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, less any
applicable contingent deferred sales charge, after the Fund receives the
redemption request. Redemption procedures and contingent deferred sales
charges are explained in the prospectus under `How to Redeem 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.
Class B Shares redeemed within one to six years of purchase and applicable
Class A Shares redeemed within one year of purchase may be subject to a
contingent deferred sales charge. The amount of the contingent deferred
sales charge is based upon the amount of the administrative fee paid at the
time of purchase by the distributor to the financial institution for
services rendered, and the length of time the investor remains a
shareholder in the Fund. Should financial institutions elect to receive an
amount less than the administrative fee that is stated in the prospectus
for servicing a particular shareholder, the contingent deferred sales
charge and/or holding period for that particular shareholder will be
reduced accordingly.
REDEMPTION IN KIND
The 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.
ELIMINATION OF THE CONTINGENT DEFERRED SALES CHARGE (CLASS B SHARES ONLY)
The amounts that a shareholder may withdraw under a Systematic Withdrawal
Program that qualify for elimination of the Contingent Deferred Sales
Charge may not exceed 12% annually with reference initially to the value of
the Class B Shares upon establishment of the Systematic Withdrawal Program
and then as calculated at the annual valuation date. Redemptions on a
qualifying Systematic Withdrawal Program can be made at a rate of 1.00%
monthly, 3.00% quarterly, or 6.00% semi-annually with reference to the
applicable account valuation amount. Amounts that exceed the 12.00% annual
limit for redemption, as described, may be subject to the Contingent
Deferred Sales Charge. To the extent that a shareholder exchanges Class B
Shares for Class B Shares of other Federated Funds, the time for which the
exchanged-for Class B Shares are to be held will be added to the time for
which exchanged-from Class B Shares were held for purposes of satisfying
the 12 month holding requirement. However, for purposes of meeting the
$10,000 minimum account value requirement, Class B Share accounts will not
be aggregated.
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 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:
oderive at least 90% of its gross income from dividends, interest,
and gains from the sale of securities;
oderive less than 30% of its gross income from the sale of securities
held less than three months;
oinvest in securities within certain statutory limits; and
odistribute to its shareholders at least 90% of its net income earned
during the year.
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 Class A Shares for the fiscal
year ended August 31, 1996, and for the period from October 11, 1990 (date
of initial public investment) to August 31, 1996, were 3.75% and 7.64%,
respectively.
The Fund's average annual total return for each class of shares 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 Class A Shares for the thirty-day period ended August
31, 1996 was 5.11%.
The yield for each class of shares of the Fund is determined by dividing
the net investment income per share (as defined by the Securities and
Exchange Commission) earned by any class of 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 any class of shares because of certain
adjustments required by the Securities and Exchange Commission and,
therefore, may not correlate to the dividends or other distributions paid
to shareholders. To the extent that financial institutions and
broker/dealers charge fees in connection with services provided in
conjunction with an investment in any class of shares of the Fund,
performance will be reduced for those shareholders paying those fees.
TAX-EQUIVALENT YIELD
The Fund's tax-equivalent yield for Class A Shares for the thirty-day
period ended August 31, 1996 was 7.38%.
The tax-equivalent yield for each class of 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
state and federal tax rate of 30.80% 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 1997
STATE OF PENNSYLVANIA
COMBINED FEDERAL AND STATE INCOME TAX BRACKET:
17.80% 30.80% 33.80% 38.80% 42.40%
JOINT $1- $41,201- $99,601- $151,751- OVER
RETURN 41,200 99,600 151,750 271,050 $271,050
SINGLE $1- $24,651- $59,751- $124,651- OVER
RETURN 24,650 59,750 124,650 271,050 $271,050
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 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 each class of shares depends upon such variables as:
oportfolio quality;
oaverage portfolio maturity;
otype of instruments in which the portfolio is invested;
ochanges in interest rates and market value of portfolio securities;
ochanges in the Fund's class expenses; and
ovarious 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:
oLEHMAN 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.
oLIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund
categories by making comparative calculations using total return.
Total return assumes the reinvestment of all capital gains
distributions and income dividends and takes into account any change
in offering price over a specific period of time. From time to time,
the Fund will quote its Lipper ranking in the ``general municipal
bond funds'' category in advertising and sales literature.
oMORNINGSTAR, INC., an independent rating service, is the publisher
of the bi-weekly MUTUAL FUND VALUES. MUTUAL FUND VALUES rates more
than 1,000 NASDAQ-listed mutual funds of all types, according to
their risk-adjusted returns. The maximum rating is five stars, and
ratings are effective for two weeks.
Advertisements and other sales literature for the Fund may quote total
returns which are calculated on non-standardized base periods. The total
returns represent the historic change in the value of an investment in the
Fund based on monthly reinvestment of dividends over a specific period of
time.
Advertisements may quote performance information which does not reflect the
effect of the sales charge.
Advertising and other promotional literature may include charts, graphs and
other illustrations using the Fund's returns, or returns in general, that
demonstrate basic investment concepts such as tax-deferred compounding,
dollar-cost averaging and systematic investment. In addition, the Fund can
compare its performance, or performance for the types of securities in
which it invests, to a variety of other investments, such as bank savings
accounts, certificates of deposit, and Treasury bills.
ECONOMIC AND MARKET INFORMATION
Advertising and sales literature for the Fund may include discussions of
economic, financial and political developments and their effect on the
securities market. Such discussions may take the form of commentary on
these developments by Fund portfolio managers and their views and analysis
on how such developments could affect the Funds. In addition, advertising
and sales literature may quote statistics and give general information
about the mutual fund industry, including the growth of the industry, from
sources such as the Investment Company Institute.
ABOUT FEDERATED INVESTORS
Federated Investors 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. These traders
handle trillions of dollars in annual trading volume.
In the municipal sector, as of December 31, 1996, Federated Investors
managed 12 bond funds with approximately $2.0 billion in assets and 21
money market funds with approximately $9.5 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. The Funds may quote statistics from organizations
including The Tax Foundation and the National Taxpayers Union regarding the
tax obligations of Americans.
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
Thirty-seven percent of American households are pursuing their financial
goals through mutual funds. These investors, as well as businesses and
institutions, have entrusted over $3.5 trillion to the more than 6,000
funds available.*
Federated Investors, through it subsidiaries, distributes mutual funds for
a variety of investment applications. Specific markets include:
INSTITUTIONAL CLIENTS
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.
BANK MARKETING
Other institutional clients include close relationships with more than
1,600 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 -- we have over 2,200 broker/dealer and bank broker/dealer
relationships across the country -- supported by more wholesalers than any
other mutual fund distributor. Federated's service to financial
professionals and institutions has earned it high rankings in several
surveys performed by DALBAR, Inc. DALBAR is recognized as the industry
benchmark for service quality measurement. 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.
