PRESIDENT'S MESSAGE
Dear Shareholder:
I am pleased to present the Annual Report to Shareholders of Federated
California Municipal Income Fund, a portfolio of Municipal Securities
Income Trust. This report covers the 12-month period from September 1,
1996, through August31,1997. The report begins with a discussion with
the fund's portfolio manager, followed by a complete listing of the
fund's holdings and
its financial statements.
Designed for tax-sensitive California residents, Federated California
Municipal Income Fund continues to pursue opportunities for income
exempt from federal regular income tax and California personal income
tax.* This double tax-free advantage means you can earn a greater
after-tax yield than you could in a comparable high-quality taxable
investment.
At the end of the reporting period, the fund's 28 quality California
holdings were issued by municipalities to finance projects as varied
as health care, housing, community development, and transportation.
During the 12-month reporting period, the fund's quality portfolio
paid a monthly dividend stream totaling $0.55 per share, while the
share price increased 4%. As a result, the fund achieved a 12-month
total return of 10.11% based on net asset value.** The fund's net
assets stood at $22 million at the end of the reporting period.
Thank you for joining other shareholders of Federated California
Municipal Income Fund in pursuing monthly double tax-free investment
income. Of course, you have the option of receiving income from the
fund or building your account by reinvesting your dividends and
compounding tax free.
Sincerely,
[Graphic]
Richard B. Fisher
President
October 15, 1997
* Income may be subject to the federal alternative minimum tax.
** Performance quoted represents past performance and is not
indicative of future results. Investment return and principal value
will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost. The total return for
the 12-month reporting period based on offering price was 8.03%.
INVESTMENT REVIEW
In general, the market environment for fixed income investments and
municipal bonds over the previous fiscal year was relatively
favorable. Inflation expectations, which are the major determinants of
nominal interest rates, continued to be very well behaved. In fact,
several inflation indicators actually suggested a deflationary
environment for some markets. Municipal bond yields, as represented by
the Bond Buyer 40 Index,* peaked at 6.06% early in the fiscal year
(September 1996) and then began to trend lower, ending the reporting
period at 5.55% on August 29, 1997. The potentially biggest threat to
the municipal bond market over the fiscal year was the Taxpayer Relief
Act of 1997. The impact on the municipal bond market from the new tax
legislation is much more benign than was originally anticipated.
Municipal bonds emerged essentially unscathed. This favorable
legislative treatment combined with lower interest rates, stable
demand, and a relatively limited supply of municipal bonds provided a
firm market environment.
There are several reasons for the municipal bond markets' strong
relative performance this fiscal year. They have to do mostly with the
municipal markets technical position, or the supply and demand for,
municipal bonds. The demand for municipal bonds was relatively stable,
mostly due to strong institutional demand from commercial banks,
property and casualty insurers, and arbitrageurs. Retail buyers or
individuals are the primary component of municipal bond demand. Their
participation in the market over the fiscal year was mixed, but has
been stable enough to provide an important foundation for municipal
bond prices.
The state's credit position continued to improve while the California
economy recovered significantly from the previous recession. Statewide
unemployment in July 1997 was 6.1%, a seven-year low, down from 7.1%
in August 1996. Nonfarm employment was 2.9% higher in July 1997 than a
year prior, and new housing construction through July ran 12.7% higher
than in 1996. The state's financial performance reflected the healthy
regional economy. The state's fiscal year 1997 revenues were $1.6
billion (3.3%) higher than budgeted, with the bulk of the increase
coming from personal income taxes. Expenditures were a similar amount
above budget, due to school spending pressures. The areas of concern
remain the potential effects of voter initiated spending restrictions
and welfare reform. On balance, however, the outlook for the state's
economy and corresponding credit position is positive.
Federated California Municipal Income Fund's performance with respect
to investment return over its fiscal year was as follows. For the
12-month reporting period ended August 31, 1997, investors in the
fund's Class F Shares received a competitive total return of 10.11%
based on net asset value.** In comparison, the Lipper General
Municipal Debt Fund Average total return based on net asset value for
the year was 8.83%.***
The fund's performance over the reporting period was driven by its
neutral duration target relative to its benchmark. The fund's core
position in premium, high-coupon securities also provided positive
incremental return over the reporting period. Also, sector selection
was a very important factor which had a positive impact on
performance. Bonds from the electric utility, healthcare, and
transportation sectors provided the best relative performance over the
reporting period.
* The Bond Buyer 40 Index is a standard against which municipal bonds
are measured.
** Performance quoted represents past performance and is not
indicative of future results. Investment return and principal value
will fluctuate, so that an investor's shares, when redeemed, may be
worth more or less than their original cost. Total return for the
12-month reporting period based on offering price was 8.03%.
*** Lipper figures represent the average of the total returns reported
by all of the mutual funds designated by Lipper Analytical
Services, Inc. as falling into the representative categories
indicated. These figures do not reflect sales charges.
FEDERATED CALIFORNIA MUNICIPAL INCOME FUND
(Class F Shares)
GROWTH OF $10,000 INVESTED IN FEDERATED CALIFORNIA MUNICIPAL INCOME FUND
(CLASS F SHARES)
The graph below illustrates the hypothetical investment of $10,000 in
Federated California Municipal Income Fund (Class F Shares) (the
"Fund") from December 2, 1992 (start of performance) to August 31,
1997, compared to the
Lehman Brothers Revenue Bond Index (LBRBI).+
[Graphic]
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR
INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES
ARE REDEEMED, THEY MAY BE WORTH MORE OR LESS THAN ORIGINAL COST.
MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR GUARANTEED BY ANY BANK AND ARE
NOT FEDERALLY INSURED.
* Represents a hypothetical investment of $10,000 in the Fund after
deducting the maximum sales charge of 1.00% ($10,000 investment
minus $100 sales charge = $9,900). The Fund's performance assumes
the reinvestment of all dividends and distributions. The LBRBI has
been adjusted to reflect reinvestment of dividends on securities in
the index.
** Total return quoted reflects all applicable sales charges and
contingent deferred sales charges.
+ The LBRBI is not adjusted to reflect sales charges, expenses, or other
fees that the SEC requires to be reflected in the Fund's performance. This
index is unmanaged.
PORTFOLIO OF INVESTMENTS
FEDERATED CALIFORNIA MUNICIPAL INCOME FUND
AUGUST 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
<C> <S> <C> <C>
LONG-TERM MUNICIPALS--93.8%
CALIFORNIA--90.3%
$ 500,000 Anaheim, CA Public Financing Authority, Lease AAA $ 553,455
Revenue Bonds (Series 1997C), 6.00% (Anaheim
Public Improvements Project)/(FSA INS), 9/1/2010
500,000 Anaheim, CA Public Financing Authority, Lease AAA 546,335
Revenue Bonds (Series 1997C), 6.00% (Anaheim
Public Improvements Project)/(FSA INS), 9/1/2016
625,000 California Educational Facilities Authority, A1 675,606
Revenue Bonds (Series B), 6.60% (Loyola Marymount
University), 10/1/2022
600,000 California Educational Facilities Authority, A 660,798
Revenue Bonds, 6.70% (Southwestern
University)/(Original Issue Yield: 6.838%),
11/1/2024
685,000 California HFA, SFM Revenue Bonds (Series C), AA- 722,470
6.75%, 2/1/2025
1,290,000 California HFA, SFM Revenue Bonds (Series F-1), AA- 1,382,699
7.00%, 8/1/2026
1,000,000 California Health Facilities Financing Authority, A+ 984,640
Insured Health Facilities Refunding Revenue Bonds
(Series 1997), 5.50% (Valley Care Hospital
Corp.)/(California Mortgage Insurance
INS)/(Original Issue Yield: 5.737%), 5/1/2020
400,000 California Health Facilities Financing Authority, AA 428,968
Revenue Bonds (Series A), 6.50% (Kaiser
Permanente Medical Care Program)/(Original Issue
Yield: 7.097%), 12/1/2020
700,000 California Health Facilities Financing Authority, AAA 735,819
Revenue Refunding Bonds (1996 Series A), 6.00%
(Catholic Health Care West)/(MBIA INS)/(Original
Issue Yield: 6.15%), 7/1/2017
900,000 California PCFA, Exempt Facilities Revenue Bonds AA 885,231
(Series 1996), 5.50% (Mobil Corp.)/(Original
Issue Yield: 5.72%), 12/1/2029
500,000 California PCFA, Revenue Bonds (Series B), 6.40% A+ 535,420
(Southern California Edison Co.)/(Original Issue
Yield: 6.55%), 12/1/2024
900,000 California PCFA, Sewer & Solid Waste Disposal A+ 911,034
Revenue Bonds, 5.75% (Anheuser-Busch Cos.,
Inc.)/(Original Issue Yield: 5.818%), 12/1/2030
700,000 California PCFA, Solid Waste Disposal Revenue A 771,295
Bonds, 6.875% (Browning-Ferris Industries,
Inc.)/(Original Issue Yield: 6.95%), 11/1/2027
600,000 California State, UT GO Bonds, 5.75% (Original A+ 615,006
Issue Yield: 6.25%), 3/1/2019
600,000 California Statewide Communities Development AA 661,458
Authority, Revenue Certificates of Participation,
6.625% (St. Joseph Health System Group,
CA)/(Original Issue Yield: 6.674%), 7/1/2021
500,000 Chula Vista, CA IDA, Revenue Bonds (Series A), A+ 535,585
6.40% (San Diego Gas & Electric)/(Original Issue
Yield: 6.473%), 12/1/2027
1,000,000 Eden Township, CA Hospital District, Hospital BBB+ 1,054,830
Revenue Bonds, 7.40% (Original Issue Yield:
7.483%), 11/1/2019
500,000 El Dorado Cnty, CA Public Agency Financing AAA 499,335
Authority, Revenue Bonds, 5.50% (FGIC
INS)/(Original Issue Yield: 5.85%), 2/15/2021
</TABLE>
FEDERATED CALIFORNIA MUNICIPAL INCOME FUND
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
<C> <S> <C> <C>
LONG-TERM MUNICIPALS--CONTINUED
CALIFORNIA--CONTINUED
$ 700,000 Foothill/Eastern Transportation Corridor Agency, BBB- $ 747,362
CA, (Series 1995A) Senior Lien Toll Road Revenue
Bonds, 6.50% (Original Issue Yield: 6.78%),
1/1/2032
500,000 Inland Empire Solid Waste Financing Authority, AAA 551,795
CA, Revenue Bonds (Series B), 6.25% (FSA INS),
8/1/2011
900,000 Los Angeles County, CA Unified School District, AAA 995,706
UT GO Bonds (Series A), 6.00% (FGIC INS),
7/1/2011
600,000 Los Angeles, CA Community Redevelopment Agency, AAA 631,566
Housing Revenue Refunding Bonds (Series A), 6.55%
(AMBAC INS), 1/1/2027
900,000 Port of Oakland, CA, Revenue Bonds (Series AAA 893,421
1997G), 5.50% (MBIA INS)/(Original Issue Yield:
5.83%), 11/1/2017
700,000 Regents of University of California, Research A 743,358
Facilities Revenue Bonds (1995 Series B), 6.55%,
9/1/2024
600,000 Sacramento, CA Municipal Utility District, AAA 599,190
Electric Revenue Bonds (Series J), 5.50% (AMBAC
INS)/(Original Issue Yield: 5.80%), 8/15/2021
300,000 San Francisco, CA City & County Airport A+ 307,749
Commission, Second Series Revenue Bonds (Issue
12A), 5.90% (San Francisco International
Airport)/(Original Issue Yield: 5.97%), 5/1/2026
500,000 Watsonville, CA, Insured Hospital Revenue A 540,165
Refunding Bonds (Series 1996A), 6.20%
(Watsonville Community Hospital)/(California
State INS)/ (Original Issue Yield: 6.225%),
7/1/2012
700,000 West Basin, CA Municipal Water District, AAA 700,273
Refunding Revenue Certificates of Participation
(Series A), 5.375% (AMBAC INS)/(Original Issue
Yield: 5.50%), 8/1/2014
TOTAL 19,870,569
PUERTO RICO--3.5%
700,000 Puerto Rico Electric Power Authority, Revenue BBB+ 762,545
Bonds (Series T), 6.375% (Original Issue Yield:
6.58%), 7/1/2024
TOTAL LONG-TERM MUNICIPALS
(IDENTIFIED COST $19,566,505) 20,633,114
SHORT-TERM MUNICIPAL--4.5%
PUERTO RICO--4.5%
1,000,000 Puerto Rico Government Development Bank Weekly AA+ 1,000,000
VRDNs (Credit Suisse, Zurich LOC)
(AT AMORTIZED COST)
TOTAL INVESTMENTS $ 21,633,114
(IDENTIFIED COST $20,566,505)(A)
</TABLE>
Securities that are subject to Alternative Minimum Tax represent 34.7%
of the portfolio as calculated based upon total portfolio market
value.
(a) The cost of investments for federal tax purposes amounts to
$20,566,505. The net unrealized appreciation of investments on a
federal tax basis amounts to $1,066,609, which consist entirely of
appreciation, at August 31, 1997.
* 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
($22,000,121) at August 31, 1997.
The following acronyms are used throughout this portfolio:
AMBAC --American Municipal Bond Assurance Corporation FGIC --Financial
Guaranty Insurance Company FSA --Financial Security Assurance GO
- --General Obligation HFA --Housing Finance Authority IDA --Industrial
Development Authority INS --Insured LOC --Letter of Credit MBIA
- --Municipal Bond Investors Assurance PCFA --Pollution Control Finance
Authority SFM --Single Family Mortgage UT --Unlimited Tax VRDNs
- --Variable Rate Demand Notes
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF ASSETS AND LIABILITIES
FEDERATED CALIFORNIA MUNICIPAL INCOME FUND
AUGUST 31, 1997
<TABLE>
<S> <C> <C>
ASSETS:
Total investments in securities, at value $ 21,633,114
(identified and tax cost $20,566,505)
Cash 119,893
Income receivable 306,284
Receivable for shares sold 99
Total assets 22,059,390
LIABILITIES:
Income distribution payable $ 45,574
Accrued expenses 13,695
Total liabilities 59,269
NET ASSETS for 2,051,158 shares outstanding $ 22,000,121
NET ASSETS CONSIST OF:
Paid in capital $ 21,687,284
Net unrealized appreciation of investments 1,066,609
Accumulated net realized loss on investments (753,772)
Total Net Assets $ 22,000,121
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
Net Asset Value Per Share ($22,000,121/2,051,158 shares outstanding) $10.73
Offering Price Per Share (100/99.00 of $10.73)* $10.84
Redemption Proceeds Per Share (99.00/100 of $10.73)** $10.62
</TABLE>
* See "What Shares Cost" in the Prospectus.
** See "Contingent Deferred Sales Charge" in the Prospectus.
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF OPERATIONS
FEDERATED CALIFORNIA MUNICIPAL INCOME FUND
YEAR ENDED AUGUST 31, 1997
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest $ 1,136,467
EXPENSES:
Investment advisory fee $ 76,824
Administrative personnel and services fee 125,002
Custodian fees 6,116
Transfer and dividend disbursing agent fees and expenses 27,159
Directors'/Trustees' fees 2,950
Auditing fees 13,838
Legal fees 2,667
Portfolio accounting fees 50,137
Distribution services fee 96,030
Shareholder services fee 48,015
Share registration costs 13,796
Printing and postage 17,654
Insurance premiums 2,677
Miscellaneous 23,153
Total expenses 506,018
Waivers and reimbursements--
Waiver of investment advisory fee $ (76,824)
Waiver of distribution services fee (92,188)
Waiver of shareholder services fee (3,841)
Reimbursement of other operating expenses by Adviser (205,665)
Total waivers and reimbursements (378,518)
Net expenses 127,500
Net investment income 1,008,967
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 243,124
Net change in unrealized appreciation of investments 581,586
Net realized and unrealized gain on investments 824,710
Change in net assets resulting from operations $ 1,833,677
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF CHANGES IN NET ASSETS
FEDERATED CALIFORNIA MUNICIPAL INCOME FUND
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1997 1996
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS--
Net investment income $ 1,008,967 $ 878,898
Net realized gain (loss) on investments ($243,033 net gain and 243,124 (91)
($218,330) net loss, respectively, as computed for federal tax
purposes)
Net change in unrealized appreciation 581,586 210,389
Change in net assets resulting from operations 1,833,677 1,089,196
DISTRIBUTIONS TO SHAREHOLDERS--
Distributions from net investment income (1,008,967) (878,898)
SHARE TRANSACTIONS--
Proceeds from sale of shares 5,429,830 4,529,060
Net asset value of shares issued to shareholders in payment of 482,845 353,502
distributions declared
Cost of shares redeemed (1,884,903) (2,345,310)
Change in net assets resulting from share transactions 4,027,772 2,537,252
Change in net assets 4,852,482 2,747,550
NET ASSETS:
Beginning of period 17,147,639 14,400,089
End of period $ 22,000,121 $ 17,147,639
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FINANCIAL HIGHLIGHTS--CLASS F SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1997 1996 1995 1994 1993(A)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.27 $10.13 $10.01 $10.92 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.55 0.58 0.59 0.59 0.44
Net realized and unrealized gain (loss) on investments 0.46 0.14 0.12 (0.91) 0.92
Total from investment operations 1.01 0.72 0.71 (0.32) 1.36
LESS DISTRIBUTIONS
Distributions from net investment income (0.55) (0.58) (0.59) (0.59) (0.44)
NET ASSET VALUE, END OF PERIOD $10.73 $10.27 $10.13 $10.01 $10.92
TOTAL RETURN(B) 10.11% 7.21% 7.48% (3.04%) 14.08%
RATIOS TO AVERAGE NET ASSETS
Expenses 0.66% 0.60% 0.55% 0.25% 0.25%*
Net investment income 5.25% 5.61% 6.04% 5.61% 5.58%*
Expense waiver/reimbursement(c) 1.97% 2.38% 2.41% 2.86% 1.98%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $22,000 $17,148 $14,400 $15,059 $11,513
Portfolio turnover 29% 21% 63% 63% 0%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from December 2, 1992 (date of
initial public investment) to August 31, 1993.
(b) Based on net asset value, which does not reflect the sales charge
or contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense
and net investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
NOTES TO FINANCIAL STATEMENTS
FEDERATED CALIFORNIA MUNICIPAL INCOME FUND
AUGUST 31, 1997
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 California 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 exempt from federal regular income tax (federal
regular income tax does not include the federal alternative minimum
tax) and personal income taxes imposed by the state of California and
California municipalities.
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"). Dividend income and
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, 1997, the
Fund, for federal tax purposes, had a capital loss carryforward of
$753,772, 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 carryforwards will expire as follows:
EXPIRATION YEAR EXPIRATION AMOUNT
2003 $535,442
2004 $218,330
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.
DEFERRED EXPENSES
The costs incurred by the Fund with respect to registration of its
shares in its first fiscal year, excluding the initial expense of
registering its shares, have been deferred and are being amortized
over a period not to exceed five years from the Fund's commencement
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.
SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Board of Trustees (the
"Trustees"), to issue an unlimited number of full and fractional
shares of beneficial interest (without par value).
Transactions in shares were as follows:
<TABLE>
<CAPTION>
Year Ended August 31,
1997 1996
<S> <C> <C>
Shares sold 515,114 440,835
Shares issued to shareholders in payment of distributions declared 45,852 34,378
Shares redeemed (179,343) (227,108)
Net change resulting from share transactions 381,623 248,105
</TABLE>
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 and reimburse
certain operating expenses of the Fund. The Adviser can modify or
terminate this voluntary waiver and reimbursement at any time at its
sole discretion.
ADMINISTRATIVE FEE
Federated 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 Administrative Services Agreement shall be at
least $125,000 per portfolio and $30,000 per each additional class of
shares.
DISTRIBUTION SERVICES FEE
The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule
12b-1 under the Act. Under the terms of the Plan, the Fund will
compensate Federated Securities Corp. ("FSC"), the principal
distributor, from the net assets of the Fund's Class F Shares. The
Plan provides that the Fund may incur distribution expenses up to
0.50% of the average daily net assets of the Fund's Class F Shares,
annually, to compensate FSC. FSC may voluntarily choose to waive any
portion of its fee. FSC can modify or terminate this voluntary waiver
at any time at its sole discretion.
SHAREHOLDER SERVICES FEE
Under the terms of a Shareholder Services Agreement with Federated
Shareholder Services ("FSS"), the Fund will pay FSS up to 0.25% of
average daily net assets of the Fund's Class F Shares for the period.
The fee paid to FSS is used to obtain certain services for
shareholders and to maintain shareholder accounts. FSS may voluntarily
choose to waive any portion of its fee. FSS can modify or terminate
this voluntary waiver at any time at its sole discretion.
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.
ORGANIZATIONAL EXPENSES
Organizational expenses of $26,245 and start-up administrative service
expenses of $54,398 were borne initially by the Fund's Adviser. The
Fund has agreed to reimburse the Adviser for the organizational and
start-up administrative expenses during the five-year period following
the Fund's effective date. For the year ended August 31, 1997, the
Fund paid $6,999 and $14,506 pursuant to this agreement.
INTERFUND TRANSACTIONS
During the year ended August 31, 1997, the Fund engaged in purchase
and sale transactions with funds that have a common investment adviser
(or affiliated investment adviser), 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
$7,375,005 and $5,950,000, respectively.
GENERAL
Certain of the Officers and Trustees of the Trust are Officers and
Directors or Trustees of the above companies.
INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities,
for the year ended August 31, 1997, were as follows:
PURCHASES $8,843,776
SALES $5,282,873
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, 1997, 43% 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% of total investments.
SUBSEQUENT EVENT
At the next regularly scheduled Trustees meeting in November 1997, the
Trustees will consider renaming the Class F Shares to Class A Shares,
in addition to establishing a new class of shares, known as Class B
Shares.
Specifically, in conjunction with the renaming of Class F Shares to
Class A Shares, the Trustees will consider the removal of the 1.00%
contingent deferred sales charge, and instead, add a 4.50% front-end
sales charge to Class A Shares. The Trustees will also consider
imposition of a no front-end sales charge, 5.50% contingent deferred
sales charge structure to the Class B Shares.
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees of
MUNICIPAL SECURITIES INCOME TRUST and Shareholders of
FEDERATED CALIFORNIA MUNICIPAL INCOME FUND:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Federated California
Municipal Income Fund as of August 31, 1997, the related statement of
operations for the year then ended, the statements of changes in net
assets for the years ended August 31, 1997 and 1996, 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 disclosure in the financial statements. Our procedures included
confirmation of the securities owned at August 31, 1997, by
correspondence with the custodian and brokers. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights
present fairly, in all material respects, the financial position of
Federated California Municipal Income Fund as of August 31, 1997, the
results of its operations, the changes in its net assets and its
financial highlights for the respective stated periods in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
October 13, 1997
DIRECTORS
John F. Donahue
Thomas G. Bigley
John T. Conroy, Jr.
William J. Copeland
J. Christopher Donahue
James E. Dowd
Lawrence D. Ellis, M.D.
Edward L. Flaherty, Jr.
Peter E. Madden
Gregor F. Meyer
John E. Murray, Jr.
Wesley W. Posvar
Marjorie P. Smuts
OFFICERS
John F. Donahue
Chairman
Richard B. Fisher
President
J. Christopher Donahue
Executive Vice President
Edward C. Gonzales
Executive Vice President
John W. McGonigle
Executive Vice President, Treasurer, and Secretary
J. Crilley Kelly
Assistant Secretary
Mutual funds are not bank deposits or obligations, are not guaranteed
by any bank, and are not insured or guaranteed by the U.S. government,
the Federal Deposit Insurance Corporation, the Federal Reserve Board,
or any other government agency. Investment in mutual funds involves
investment risk, including the possible loss of principal.
This report is authorized for distribution to prospective investors
only when preceded or accompanied by the fund's prospectus which
contains facts concerning its objective and policies, management fees,
expenses, and other information.
[Federated Securities Logo]
Federated California Municipal Income Fund
(A Portfolio of Municipal Securities Income Trust)
Class F Shares
ANNUAL REPORT
TO SHAREHOLDERS
AUGUST 31, 1997
Federated Securities Corp., Distributor
Federated Investors Tower
Pittsburgh, PA 15222-3779
1-800-341-7400
www.federatedinvestors.com
Cusip 625922109
G01006-01 (10/97)
Federated California Municipal Income Fund Appendix
A1. The graphic presentation here displayed consists of a line graph.
The corresponding components of the line graph are listed underneath.
The Class F Shares of Federated California Municipal Income Fund (the
"Fund"), based on a 1.00% sales charge are represented by a solid
line. The Lehman Brothers Revenue Bond Index (the "LBRBI") is
represented by a dotted line. The line graph is a visual
representation of a comparison of change in value of a $10,000
hypothetical investment in the Class F Shares of the Fund, and the
LBRBI. The "x" axis reflects computation periods from 12/2/92 to
8/31/97. The "y" axis measured in increments of $1,000 and ranging
from $9,500 to $14,500, reflects the cost of the investment. The right
margin reflects the ending value of the hypothetical investment in the
Fund's Class F Shares, based on a 1.00% sales charge, as compared to
the LBRBI. The ending values were $13,868 for the Fund, and $14,062
for the LBRBI, respectively. The legend in the bottom quadrant of the
graphic presentation indicates the Fund's Class F Shares Average
Annual Total Returns, reflecting all applicable sales charges and
contingent deferred sales charge, for the one-year, and from the
Fund's start of performance (12/2/92) to 8/31/97. The total returns
were 8.03% and 7.13%, respectively.
