Federated California Municipal Income Fund
(A Portfolio of Municipal Securities Income Trust)
Class A Shares (Formerly, Class F Shares)
Class B Shares
PROSPECTUS
The shares of Federated California Municipal Income Fund (the "Fund") offered by
this prospectus represent interests in a non-diversified portfolio of securities
which is one of a series of investment portfolios in Municipal Securities Income
Trust (the "Trust"), an open-end management investment company (a mutual fund).
The investment objective of the Fund is to provide current income which is
exempt from federal regular income tax and the personal income taxes imposed by
the state of California and California municipalities. The Fund invests
primarily in a portfolio of California municipal securities.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF ANY
BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN 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 December 1,
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 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 December 1, 1997
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TABLE OF CONTENTS
Summary of Fund Expenses.......................................................1
Financial Highlights...........................................................3
General Information............................................................4
Calling the Fund............................................................4
Investment Information.........................................................4
Investment Objective........................................................4
Investment Policies.........................................................4
California Municipal Securities.............................................6
Investment Risks............................................................7
Non-Diversification.........................................................7
Investment Limitations......................................................7
Expenses of the Fund...........................................................7
Net Asset Value................................................................8
Investing in the Fund..........................................................8
Purchasing Shares...........................................................9
Purchasing Shares Through a
Financial Intermediary...................................................9
Purchasing Shares by Wire...................................................9
Purchasing Shares by Check..................................................9
Systematic Investment Program...............................................9
Class A Shares..............................................................9
Class B Shares.............................................................10
Redeeming and Exchanging Shares...............................................10
Redeeming or Exchanging Shares Through a
Financial Intermediary..................................................10
Redeeming or Exchanging Shares by Telephone................................11
Redeeming or Exchanging Shares by Mail.....................................11
Requirements for Redemption................................................11
Requirements for Exchange..................................................11
Systematic Withdrawal Program..............................................11
Contingent Deferred Sales Charge...........................................12
Account and Share Information.................................................12
Confirmations and Account Statements.......................................12
Dividends and Distributions................................................12
Accounts with Low Balances.................................................12
Trust Information.............................................................13
Management of the Trust....................................................13
Distribution of Shares.....................................................13
Administration of the Fund.................................................14
Shareholder Information.......................................................15
Tax Information...............................................................15
Federal Income Tax.........................................................15
California Income Taxes....................................................16
State and Local Taxes......................................................16
Performance Information.......................................................16
Addresses........................................................Back Cover Page
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SUMMARY OF FUND EXPENSES
CLASS A SHARES (FORMERLY, CLASS F SHARES)
SHAREHOLDER TRANSACTION EXPENSES
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Maximum Sales Charge Imposed on Purchases (as a percentage of offering price).................. 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)..................................................................... None
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) (1).............................................................. 0.00%
12b-1 Fee (2).................................................................................. 0.00%
Total Other Expenses (after expense reimbursement)............................................. 0.75%
Shareholder Services Fee............................................................. 0.25%
Total Operating Expenses (3)............................................................. 0.75%
</TABLE>
(1) The management fee has been reduced to reflect the voluntary waiver of the
management fee. The adviser can terminate this voluntary waiver at any time
at its sole discretion. The maximum management fee is 0.40%
(2) The Class A Shares has no present intention of paying or accruing the 12b-1
fee during fiscal year ending August 31, 1998. If the Class A Shares were
paying or accruing the 12b-1 fee, Class A Shares would be able to pay up to
0.25% of its average daily net assets for the 12b-1 fee. "See Trust
Information."
(3) The total operating expenses in the table above are based on expenses
expected during the fiscal year ending August 31, 1998. The total operating
expenses were 0.66% for the fiscal year ended August 31, 1997 and would have
been 2.63% absent the voluntary waivers of the management fee and portions
of the 12b-1 fee and the shareholder services fee and the voluntary
reimbursement of certain other operating expenses.
*Total operating expenses are estimated based on average expenses expected to be
incurred during the fiscal year ending August 31, 1998. 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 A Shares of the Fund will bear,
either directly or indirectly. For more complete descriptions of the various
costs and expenses, see "Investing in the Fund" and "Trust Information."
Wire-transferred redemptions of less than $5,000 may be subject to additional
fees.
<TABLE>
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EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
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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. THIS EXAMPLE
IS BASED ON ESTIMATED DATA FOR THE CLASS A SHARES FISCAL YEAR ENDING AUGUST 31,
1998.
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SUMMARY OF FUND EXPENSES
CLASS B SHARES
SHAREHOLDER TRANSACTION EXPENSES
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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).............................................................. 0.00%
12b-1 Fee...................................................................................... 0.75%
Total Other Expenses (after expense reimbursement)............................................. 0.75%
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. (For more information, see
"Contingent Deferred Sales Charge.")
(2) The estimated management fee has been reduced to reflect the anticipated
voluntary waiver of the management fee. The adviser can terminate this
voluntary waiver at any time at its sole discretion. The maximum management
fee is 0.40%.
(3) 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 2.25% absent the
anticipated voluntary waiver of the management fee and the anticipated
voluntary reimbursement of certain other operating expenses.
*Total operating expenses are estimated based on average expenses expected to be
incurred during the fiscal year ending August 31, 1998. 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 the Fund" and "Trust Information."
Wire-transferred redemptions of less than $5,000 may be subject to additional
fees.
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
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<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return, (2) redemption at the end of each time period
and (3) payment of the maximum sales charge.......................... $ 72 $ 92 $106 $158
You would pay the following expenses on the same investment, assuming
no redemption........................................................ $ 15 $ 47 $ 82 $158
</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 CLASS B SHARES FISCAL YEAR ENDING AUGUST 31,
1998.
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FINANCIAL HIGHLIGHTS--CLASS A SHARES (FORMERLY CLASS F SHARES)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
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1997 1996 1995 1994 1993(A)
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NET ASSET VALUE, BEGINNING OF PERIOD $ 10.27 $ 10.13 $ 10.01 $ 10.92 $ 10.00
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INCOME FROM INVESTMENT OPERATIONS
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Net investment income 0.55 0.58 0.59 0.59 0.44
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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
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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%
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RATIOS TO AVERAGE NET ASSETS
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Expenses 0.66% 0.60% 0.55% 0.25% 0.25%*
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Net investment income 5.25% 5.61% 6.04% 5.61% 5.58%*
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Expense waiver/reimbursement(c) 1.97% 2.38% 2.41% 2.86% 1.98%*
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SUPPLEMENTAL DATA
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Net assets, end of period (000 omitted) $22,000 $17,148 $14,400 $15,059 $11,513
- ---------------------------------------------------
Portfolio turnover 29% 21% 63% 63% 0%
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</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)
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GENERAL INFORMATION
The Trust was established as a Massachusetts business trust on August 6, 1990.
On November 18, 1997, the Board of Trustees ("Trustees") approved the addition
of Class B Shares to the Fund and the conversion of its presently offered Class
F Shares to Class A Shares. Class A Shares and Class B Shares of the Fund
("Shares") are designed for customers of financial institutions such as
broker/dealers, banks, fiduciaries, and investment advisers as a convenient
means of accumulating an interest in a professionally managed, non-diversified
portfolio of California municipal securities. The Fund is not likely to be a
suitable investment for non-California taxpayers or retirement plans since
California municipal securities are not likely to produce competitive after-tax
yields for such persons and entities when compared to other investments.
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.
CALLING THE FUND
Call the Fund at 1-800-341-7400.
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INVESTMENT INFORMATION
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide current income exempt from
federal regular income tax (federal regular income tax does not include the
federal alternative minimum tax) and the personal income taxes imposed by the
state of California and California municipalities. The investment objective
cannot be changed without approval of shareholders. While there is no assurance
that the Fund will achieve its investment objective, it endeavors to do so by
following the investment policies described in this prospectus.
The Fund invests its assets so that at least 80% of its annual interest income
is exempt from federal regular income tax and the personal income taxes imposed
by the state of California and California municipalities. Interest income of the
Fund that is exempt from the income taxes described above retains its exempt
status when distributed to the Fund's shareholders. Income distributed by the
Fund may not necessarily be exempt from state or municipal taxes in states other
than California.
INVESTMENT POLICIES
The Fund pursues its investment objective by investing primarily in California
municipal securities which are exempt from federal regular income tax and
personal income taxes imposed by the state of California and California
municipalities. Unless indicated otherwise, investment policies of the Fund may
be changed by the Trustees without approval of shareholders. Shareholders will
be notified before any material changes in these policies become effective.
ACCEPTABLE INVESTMENTS
The securities in which the Fund invests include:
N obligations issued by or on behalf of the state of California, its political
subdivisions, or agencies;
N debt obligations of any state, territory, or possession of the United States,
including the District of Columbia, or any political subdivision of any of
these; and
N participation interests, as described below, in any of the above obligations,
the interest from which is, in the opinion of bond counsel for the issuers or
in the opinion of officers of the Fund and/or the investment adviser to the
Fund, exempt from both federal regular income tax and the personal income tax
imposed by the state of California and California municipalities ("California
municipal securities"). At least 65% of the value of the Fund's total assets
will be invested in obligations issued by or on behalf of the state of
California, its political subdivisions, or agencies.
The prices of fixed income securities fluctuate inversely to the direction of
interest rates.
CHARACTERISTICS
The California municipal securities which the Fund buys are investment grade
bonds rated Aaa, Aa, A, or Baa by Moody's Investors Service, Inc. ("Moody's"),
or AAA, AA, A, or BBB by Standard & Poor's Ratings Service ("S&P") or Fitch
Investors Service, L.P. ("Fitch"). In certain cases the Fund's adviser may
choose bonds which are unrated if it determines such bonds are of comparable
quality or have similar characteristics to the investment grade bonds described
above. If a bond is rated below investment grade according to the
characteristics set forth here after the Fund has pur-
chased it, the Fund is not required to drop the bond from the portfolio, but
will consider appropriate action. Bonds rated "BBB" by S&P or Fitch or "Baa" by
Moody's have speculative characteristics. Changes in economic or other
circumstances are more likely to lead to weakened capacity to make principal and
interest payments than higher rated bonds. A description of the rating
categories is contained in the Appendix to the Statement of Additional
Information.
PARTICIPATION INTERESTS
The Fund may purchase participation interests from financial institutions such
as commercial banks, savings associations, and insurance companies. These
participation interests give the Fund an undivided interest in California
municipal securities. The financial institutions from which the Fund purchases
participation interests frequently provide or secure irrevocable letters of
credit or guarantees to assure that the participation interests are of high
quality. The Trustees of the Trust will determine that participation interests
meet the prescribed quality standards for the Fund.
VARIABLE-RATE MUNICIPAL SECURITIES
Some of the California municipal securities which the Fund purchases may have
variable interest rates. Variable interest rates are ordinarily based on a
published interest rate, interest rate index, or a similar standard, such as the
91-day U.S. Treasury bill rate. Many variable-rate municipal securities are
subject to payment of principal on demand by the Fund in not more than seven
days. All variable-rate municipal securities will meet the quality standards for
the Fund. The Fund's investment adviser has been instructed by the Trustees to
monitor the pricing, quality, and liquidity of the variable-rate municipal
securities, including participation interests held by the Fund on the basis of
published financial information and reports of the rating agencies and other
analytical services.
MUNICIPAL LEASES
Municipal leases are obligations issued by state and local governments or
authorities to finance the acquisition of equipment and facilities and may be
considered to be illiquid. They may take the form of a lease, an installment
purchase contract, a conditional sales contract or a participation certificate
on any of the above. Lease obligations may be subject to periodic appropriation.
If the entity does not appropriate funds for future lease payments, the entity
cannot be compelled to make such payments. In the event of failure of
appropriation, unless the participation interests are credit enhanced, it is
unlikely that the participants would be able to obtain an acceptable substitute
source of payment.
RESTRICTED AND ILLIQUID SECURITIES
The Fund may invest up to 10% of its total assets in restricted securities.
Restricted securities are any securities in which the Fund may otherwise invest
pursuant to its investment objective and policies but which are subject to
restriction upon resale under federal securities laws. To the extent these
securities are deemed to be illiquid, the Fund will limit its purchases,
together with other securities considered to be illiquid, to 15% of its net
assets.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may purchase securities on a when-issued or delayed delivery basis.
These transactions are arrangements in which the Fund purchases securities with
payment and delivery scheduled for a future time. The seller's failure to
complete these transactions may cause the Fund to miss a price or yield
considered to be advantageous. Settlement dates may be a month or more after
entering into these transactions, and the market values of the securities
purchased may vary from the purchase prices.
The Fund may dispose of a commitment prior to settlement if the adviser deems it
appropriate to do so. In addition, the Fund may enter 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.
INVERSE FLOATERS
The Fund may invest in securities known as "inverse floaters" which represent
interests in municipal securities. The Fund intends to purchase inverse floaters
to assist in duration management and to seek current income. These obligations
pay interest rates that vary inversely with changes in the interest rates of
specified short-term municipal securities or an index of short-term municipal
securities. The interest rates on inverse floaters will typically decline as
short-term market interest rates increase and increase as short-term market
rates decline. Inverse floaters will generally respond to changes in market
interest rates more rapidly than fixed-rate long-term securities (typically
twice as fast). As a result, the market values of inverse floaters will
generally be more volatile than the market values of fixed-rate municipal
securities. Typically, the portion of the portfolio invested in inverse floaters
will be subject to additional volatility.
FINANCIAL FUTURES
The Fund may purchase and sell interest rate and index financial futures
contracts. These financial futures contracts may be used to hedge all or a
portion of its portfolio against changes in the market value of portfolio
securities and interest rates, provide additional liquidity, and accomplish its
current strategies in a more expeditious fashion. Financial futures contracts
call for the delivery of particular debt instruments at a certain time in the
future. The seller of the contract agrees to make delivery of the type of
instrument called for in the contract and the buyer agrees to take delivery of
the instrument at the specified future time.
As a matter of investment policy, which may be changed without shareholder
approval, the Fund may not purchase or sell futures contracts if immediately
thereafter the sum of the amount of margin deposits on the Fund's existing
futures positions would exceed 5% of the market value of the Fund's total
assets. When the Fund purchases futures contracts, an amount of municipal
securities, cash, or cash equivalents, equal to the underlying commodity value
of the futures contracts (less any related margin deposits), will be deposited
in a segregated account with the Fund's custodian (or the broker, if legally
permitted) to collateralize the position.
RISKS
When the Fund uses financial futures, there is a risk that the prices of the
securities subject to the futures contracts may not correlate perfectly with
the prices of the securities in the Fund's portfolio. This may cause the
futures contract to react differently than the portfolio securities to market
changes. In addition, the Fund's investment adviser could be incorrect in its
expectations about the direction or extent of market factors such as interest
rate movements. In these events, the Fund may lose money on the futures
contract. It is not certain that a secondary market for positions in futures
contracts will exist at all times. Although the investment adviser will
consider liquidity before entering into futures transactions, there is no
assurance that a liquid secondary market on an exchange or otherwise will
exist for any particular futures contract at any particular time. The Fund's
ability to establish and close out futures positions depends on this
secondary market.
TEMPORARY INVESTMENTS
The Fund invests its assets so that at least 80% of its annual interest income
is exempt from federal regular income tax and the personal income taxes imposed
by the state of California and California municipalities. However, from time to
time, when the investment adviser determines that market conditions call for a
temporary defensive posture, the Fund may invest in short-term non-California
municipal tax-exempt obligations or taxable temporary investments. These
temporary investments include: notes issued by or on behalf of municipal or
corporate issuers; obligations issued or guaranteed by the U.S. government, its
agencies, or instrumentalities; other debt securities; commercial paper;
certificates of deposit of banks; and repurchase agreements (arrangements in
which the organization selling the Fund, a bond or temporary investment agrees
at the time of sale to repurchase it at a mutually agreed upon time and price).
There are no rating requirements applicable to temporary investments. However,
the investment adviser will limit temporary investments to those rated within
the investment grade categories described under "Acceptable Investments--
Characteristics" (if rated) or (if unrated) those which the investment adviser
judges to have the same characteristics as such investment grade securities.
Although the Fund is permitted to make taxable, temporary investments, there is
no current intention of generating income subject to federal regular income tax
or personal income taxes imposed by the state of California or California
municipalities.
CALIFORNIA MUNICIPAL SECURITIES
California municipal securities are generally issued to finance public works,
such as airports, bridges, highways, housing, hospitals, mass transportation
projects, schools, streets, and water and sewer works. They are also issued to
repay outstanding obligations, to raise funds for general operating expenses,
and to make loans to other public institutions and facilities.
California municipal securities include industrial development bonds issued by
or on behalf of public authorities to provide financing aid to acquire sites or
construct and equip facilities for privately or publicly owned corporations. The
availability of this financing encourages these corporations to locate within
the sponsoring communities and thereby increases local employment.
The two principal classifications of municipal securities are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its full faith and credit and taxing power for the payment of
principal and interest. 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 California municipal securities depend on a variety of factors,
including: the general conditions of the short-term municipal note market and of
the municipal bond market; the size of the particular offering; the maturity of
the obligations; and the rating of the issue. The ability of the Fund to achieve
its investment objective also depends on the continuing ability of the issuers
of California municipal securities and demand features, or the credit enhancers
of either, to meet their obligations for the payment of interest and principal
when due. Investing in California municipal securities which meet the Fund's
quality standards may not be possible if the state of California or its
municipalities do not maintain their current credit ratings. In addition,
certain California constitutional amendments, legislative measures, executive
orders, administrative regulations, and voter initiatives could result in
adverse consequences affecting California municipal securities. Further, any
adverse economic conditions or developments affecting the state of California or
its municipalities could have an impact on the Fund's portfolio.
A further discussion of the risks of a portfolio which invests largely in
California municipal securities is contained in the Statement of Additional
Information.
NON-DIVERSIFICATION
The Fund is a non-diversified investment portfolio. As such, there is no limit
on the percentage of assets which can be invested in any single issuer. An
investment in the Fund, therefore, will entail greater risk than would exist in
a diversified portfolio of securities because the higher percentage of
investments among fewer issuers may result in greater fluctuation in the total
market value of the Fund's portfolio. Any economic, political, or regulatory
developments affecting the value of the securities in the Fund's portfolio will
have a greater impact on the total value of the portfolio than would be the case
if the portfolio were diversified among more issuers.
The Fund intends to comply with Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"). This undertaking requires that at the end of each
quarter of the taxable year: (a) with regard to at least 50% of the Fund's total
assets, no more than 5% of its total assets are invested in the securities of a
single issuer and (b) no more than 25% of its total assets are invested in the
securities of a single issuer.
INVESTMENT LIMITATIONS
The Fund will not borrow money directly through reverse repurchase agreements
(arrangements in which the Fund sells a portfolio instrument for a percentage of
its cash value with an agreement to buy it back on a set date) or pledge
securities except, under certain circumstances, the Fund may borrow up to
one-third of the value of its total assets and pledge up to 10% of the value of
those assets to secure such borrowings.
The above investment limitation cannot be changed without shareholder approval.
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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 advi-
sory 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.
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NET ASSET VALUE
The Fund's net asset value ("NAV") per Share fluctuates and is based on the
market value of all securities and other assets of the Fund. The NAV 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.
All purchases, redemptions and exchanges are processed at the NAV next
determined after the request in proper form is received by the Fund. The NAV is
determined as of the close of trading on the New York Stock Exchange (normally
4:00 p.m., Eastern time) every day the New York Stock Exchange is open.
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INVESTING IN THE FUND
This prospectus offers two classes of Shares each with the characteristics
described below.
<TABLE>
<CAPTION>
CLASS A CLASS B
--------- ----------
<S> <C> <C>
Minimum and Subsequent $500/$100 $1500/$100
Investment Amounts
Minimum and Subsequent $50 $50
Investment Amount for
Retirement Plans
Maximum Sales Charge 4.50%* None
Maximum Contingent Deferred None 5.5%+
Sales Charge**
Conversion Feature......... No Yes++
</TABLE>
* Class A Shares are sold at NAV, plus a sales charge as follows:
<TABLE>
<CAPTION>
DEALER
SALES CHARGE AS A CONCESSION
PERCENTAGE OF AS A
-------------------- PERCENTAGE
PUBLIC NET OF PUBLIC
OFFERING AMOUNT OFFERING
AMOUNT OF TRANSACTION PRICE INVESTED 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>
** Computed on the lesser of the NAV of the redeemed Shares at the time of
purchase or the NAV of the redeemed Shares at the time of redemption.
+ The following contingent deferred sales charge schedule applies to Class B
Shares:
<TABLE>
<CAPTION>
YEAR OF REDEMPTION CONTINGENT 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 B Shares convert to Class A Shares (which pay lower ongoing expenses)
approximately eight years after purchase. See "Conversion of Class B Shares."
------------------------------------------------------
PURCHASING SHARES
Shares of the Fund are sold on days on which the New York Stock Exchange is
open. Shares of the Fund may be purchased as described below, either through a
financial intermediary (such as a bank or broker/dealer) or by sending a wire or
check directly to the Fund. Financial intermediaries may impose different
minimum investment requirements on their customers. An account must be
established with a financial intermediary or by completing, signing, and
returning the new account form available from the Fund before Shares can be
purchased. Shareholders in certain other funds advised and distributed by
affiliates of Federated Investors ("Federated Funds") may exchange their shares
for Shares of the corresponding class of the Fund. The Fund reserves the right
to reject any purchase or exchange request.
In connection with any sale, Federated Securities Corp. may, from time to time,
offer certain items of nominal value to any shareholder or investor.
PURCHASING SHARES THROUGH A FINANCIAL INTERMEDIARY
Orders placed through a financial intermediary are considered received when the
Fund is notified of the purchase order or when payment is converted into federal
funds. Purchase orders through a broker/dealer must be received by the broker
before 4:00 p.m. (Eastern time) and must be transmitted by the broker to the
Fund before 5:00 p.m. (Eastern time) in order for Shares to be purchased at that
day's price. Purchase orders through other financial intermediaries must be
received by the financial intermediary and transmitted to the Fund before 4:00
p.m. (Eastern time) in order for Shares to be purchased at that day's price. It
is the financial intermediary's responsibility to transmit orders promptly.
Financial intermediaries may charge fees for their services.
The financial intermediary which maintains investor accounts in Class B Shares
with the Fund must do so on a fully disclosed basis unless it accounts for share
ownership periods used in calculating the contingent deferred sales charge (see
"Contingent Deferred Sales Charge"). In addition, advance payments made to
financial intermediaries may be subject to reclaim by the distributor for
accounts transferred to financial intermediaries which do not maintain investor
accounts on a fully disclosed basis and do not account for share ownership
periods.
PURCHASING SHARES BY WIRE
Shares may be purchased by Federal Reserve wire by calling 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, MA 02266-8600; Attention; EDGEWIRE; For Credit
to: (Fund Name) (Fund Class); (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.
PURCHASING SHARES BY CHECK
Shares may be purchased by mailing a check made payable to the name of the Fund
(designate class of Shares and account number) to: Federated Shareholder
Services Company, P.O. Box 8600, Boston, MA 02266-8600. Orders by mail are
considered received when payment by check is converted into federal funds
(normally the business day after the check is received).
SYSTEMATIC INVESTMENT PROGRAM
Under this program, funds may be automatically withdrawn periodically from the
shareholder's checking account at an Automated Clearing House ("ACH") member and
invested in the Fund. Shareholders should contact their financial intermediary
or the Fund to participate in this program.
CLASS A SHARES
Class A Shares are sold at NAV, plus a sales charge. However:
NO SALES CHARGE IS IMPOSED FOR CLASS A SHARES PURCHASED:
N through financial intermediaries that do not receive sales charge dealer
concessions;
N by Federated Life Members who maintain a $500 minimum balance in at least one
of the Federated Funds; or
N through "wrap accounts" or similar programs under which clients pay a fee for
services.
IN ADDITION, THE SALES CHARGE CAN BE REDUCED OR ELIMINATED BY:
N purchasing in quantity and accumulating purchases at the levels in the table
under "Investing in the Fund";
N combining concurrent purchases of two or more funds;
N signing a letter of intent to purchase a specific quantity of shares within 13
months; or
N using the reinvestment privilege.
Consult a financial intermediary or Federated Securities Corp. for details on
these programs. In order to eliminate the sales charge or receive sales charge
reductions, Federated Securities Corp. must be notified by the shareholder in
writing or by a financial intermediary at the time of purchase.
DEALER CONCESSION
For sales of Class A Shares, a dealer will normally receive 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 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 establishment of customer accounts and
purchases of Class A Shares.
CLASS B SHARES
Class B Shares are sold at NAV. Under certain circumstances, a contingent
deferred sales charge will be assessed at the time of a redemption. Orders for
$250,000 or more of Class B Shares will automatically be invested in Class A
Shares.
CONVERSION OF CLASS B SHARES
Class B Shares will automatically convert into Class A Shares after eight full
years from the purchase date. Such conversion will be on the basis of the
relative NAVs per Share, without the imposition of any charges. Class B Shares
acquired by exchange from Class B Shares of another Federated Fund will convert
into Class A Shares based on the time of the initial purchase.
------------------------------------------------------
REDEEMING AND EXCHANGING SHARES
Shares of the Fund may be redeemed for cash or exchanged for Shares of the same
class of other Federated Funds on days on which the Fund computes its NAV.
Shares are redeemed at NAV less any applicable contingent deferred sales charge.
Exchanges are made at NAV. Shareholders who desire to automatically exchange
Shares, of a like class, in a pre-determined amount on a monthly, quarterly, or
annual basis may take advantage of a systematic exchange privilege. Information
on this privilege is available from the Fund or your financial intermediary.
Depending upon the circumstances, a capital gain or loss may be realized when
Shares are redeemed or exchanged.
REDEEMING OR EXCHANGING SHARES THROUGH A FINANCIAL INTERMEDIARY
Shares of the Fund may be redeemed or exchanged by contacting your financial
intermediary before 4:00 p.m. (Eastern time). In order for these transactions to
be processed at that day's NAV, financial intermediaries (other than
broker/dealers) must transmit the request to the Fund before 4:00 p.m. (Eastern
time), while broker/dealers must transmit the request to the Fund before 5:00
p.m. (Eastern time). The financial intermediary is responsible for promptly
submitting transaction requests and providing proper written instructions.
Customary fees and commissions may be charged by the financial intermediary for
this service. Appropriate authorization forms for these transactions must be on
file with the Fund.
REDEEMING OR EXCHANGING SHARES
BY TELEPHONE
Shares acquired directly from the Fund may be redeemed in any amount, or
exchanged, by calling 1-800-341-7400. Appropriate authorization forms for these
transactions must be on file with the Fund. Shares held in certificate form must
first be returned to the Fund as described in the instructions under "Redeeming
or Exchanging Shares by Mail." Redemption proceeds will either be mailed in the
form of a check 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. The minimum amount for a wire transfer is $1,000.
Proceeds from redeemed Shares purchased by check or through ACH will not be
wired until that method of payment has cleared.
Telephone instructions will be recorded. If reasonable procedures are not
followed by the Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions. In the event of drastic economic or market
changes, a shareholder may experience difficulty in redeeming by telephone. If
this occurs, "Redeeming or Exchanging Shares By Mail" should be considered. The
telephone transaction privilege may be modified or terminated at any time.
Shareholders would be promptly notified.
REDEEMING OR EXCHANGING SHARES BY MAIL
Shares may be redeemed in any amount, or exchanged, by mailing a written request
to: Federated Shareholder Services Company, Fund Name, Share Class, P.O. Box
8600, Boston, MA 02266-8600. If share certificates have been issued, they must
accompany the written request. It is recommended that certificates be sent
unendorsed by registered or certified mail.
All written requests should state: Fund Name and the Share Class name; the
account name as registered with the Fund; the account number; and the number of
Shares to be redeemed or the dollar amount of the transaction. An exchange
request should also state the name of the Fund into which the exchange is to be
made. All owners of the account must sign the request exactly as the Shares are
registered. A check for redemption proceeds is normally 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 or exchange request is processed.
REQUIREMENTS FOR REDEMPTION
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.
REQUIREMENTS FOR EXCHANGE
Shareholders must exchange Shares having an NAV equal to the minimum investment
requirements of the fund into which the exchange is being made. Contact your
financial intermediary directly or the Fund for free information on, and
prospectuses for, the Federated Funds into which your Shares may be exchanged.
Before the exchange, the shareholder must receive a prospectus of the fund for
which the exchange is being made.
Upon receipt of proper instructions and required supporting documents, Shares
submitted for exchange are redeemed and proceeds invested in the same class of
shares of the other fund. Signature guarantees will be required to exchange
between fund accounts not having identical shareholder registrations. The
exchange privilege may be modified or terminated at any time. Shareholders will
be notified of the modification or termination of the exchange privilege.
SYSTEMATIC WITHDRAWAL PROGRAM
Under this program, Shares are redeemed to provide for periodic withdrawal
payments in an amount directed by the shareholder. To be eligible to participate
in this program, a shareholder must have an account value of at least $10,000,
other than retirement accounts subject to required minimum distributions. A
shareholder may apply for participation in this program through his financial
intermediary or by calling the Fund.
Because participation in this program may reduce, and eventually deplete the
shareholder's investment in the Fund,
payments under this program should not be considered as yield or income. It is
not advisable for shareholders to continue to purchase Class A Shares subject to
a sales charge while participating in this program. A contingent deferred sales
charge may be imposed on Class B Shares.
CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge will be deducted from the redemption
proceeds otherwise payable to the shareholder and will be retained by the
distributor. 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. The contingent deferred sales charge will not be imposed with respect to
Shares acquired through the reinvestment of dividends or distributions of
long-term capital gains. In determining the applicability of the contingent
deferred sales charge, the required holding period for your new Shares received
through an exchange will include the period for which your original Shares were
held.
ELIMINATING THE CONTINGENT DEFERRED SALES CHARGE
Upon written notification to Federated Securities Corp. or the transfer agent,
no contingent deferred sales charge will be imposed on redemptions:
N following the death or disability, as defined in Section 72(m)(7) of the
Internal Revenue Code of 1986, of the last surviving shareholder;
N 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;
N which are involuntary redemptions of shareholder accounts that do not comply
with the minimum balance requirements;
N which are qualifying redemptions of Class B Shares under a Systematic
Withdrawal Program;
N which are reinvested in the Fund under the reinvestment privilege;
N of Shares held by Trustees, employees and sales representatives of the Fund,
the distributor, or affiliates of the Fund or distributor, employees of any
financial intermediary that sells Shares of the Fund pursuant to a sales
agreement with the distributor, and their immediate family members to the
extent that no payments were advanced for purchases made by these persons; and
N of 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 intermediary, to the extent that no payments were advanced for
purchases made through such entities.
For more information regarding the elimination of the contingent deferred sales
charge through a Systematic Withdrawal Program, or any of the above provisions,
contact your financial intermediary or the Fund. The Fund reserves the right to
discontinue or modify these provisions. Shareholders will be notified of such
action.
------------------------------------------------------
ACCOUNT AND SHARE INFORMATION
CONFIRMATIONS AND ACCOUNT STATEMENTS
Shareholders will receive detailed confirmations of transactions (except for
systematic program transactions). In addition, shareholders will receive
periodic statements reporting all account activity, including dividends paid.
The Fund will not issue share certificates.
DIVIDENDS AND DISTRIBUTIONS
Dividends are declared and paid monthly to all shareholders invested in the Fund
on the record date. Net long-term capital gains realized by the Fund, if any,
will be distributed at least once every twelve months. Dividends and
distributions are automatically reinvested in additional Shares of the Fund on
payment dates at the ex-dividend date without a sales charge, unless
shareholders request cash payments on the new account form or by contacting the
transfer agent.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
close an account by redeeming all Shares and paying the proceeds to the
shareholder if the account balance falls below the applicable minimum investment
amount. Retirement plan accounts and accounts where the balance falls below the
minimum due to NAV changes will not be closed in this manner. Before an account
is closed, the shareholder will be notified and allowed 30 days to purchase
additional Shares to meet the minimum.
------------------------------------------------------
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 Trustees' responsibilities between meetings
of the Board.
INVESTMENT ADVISER
Pursuant to an investment advisory contract with the Trust, investment decisions
for the Fund are made by Federated Advisers, the Fund's investment adviser (the
"Adviser"), subject to direction by the Trustees. The Adviser continually
conducts investment research and supervision for the Fund and is responsible for
the purchase or sale of portfolio instruments, for which it receives an annual
fee from the Fund.
ADVISORY FEES
The Adviser receives an annual investment advisory fee equal to 0.40% 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. 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 more than 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 1994. From 1992 to 1994, Mr. Albrecht
served as an Assistant Vice President of the Fund's investment adviser. Mr.
Albrecht is a Chartered Financial Analyst and received his M.S. in Public
Management from Carnegie Mellon University.
Mary Jo Ochson has been the Fund's portfolio manager since April 1997. Ms.
Ochson joined Federated Investors in 1982 and has been a Senior Vice
President of the Fund's investment adviser since January 1996. From 1988
through 1995, Ms. Ochson served as a Vice President of the Fund's investment
adviser. Ms. Ochson is a Chartered Financial Analyst and received her M.B.A.
in Finance from the University of Pittsburgh.
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.
DISTRIBUTION OF SHARES
Federated Securities Corp. is the principal distributor for Shares of the Fund.
It is a Pennsylvania corporation organized
on November 14, 1969, and is the principal distributor for a number of
investment companies. Federated Securities Corp. is a subsidiary of Federated
Investors.
DISTRIBUTION AND SHAREHOLDER SERVICES PLANS
Under a distribution plan adopted in accordance with Investment Company Act Rule
12b-1 (the "Distribution Plan"), the Fund may pay to the distributor an amount,
computed at an annual rate of 0.25% of the average daily NAV 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 0.75% 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 Distribution Plan.
The Distribution Plan for Class A Shares is presently not paying or accruing
12b-1 fees.
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 NAV of both Class A
Shares and Class B Shares, computed at an annual rate, to obtain certain
personal services for shareholders and to maintain shareholder accounts. Under
the Shareholder Services Agreement, Federated Shareholder Services will either
perform shareholder services directly or will select financial institutions to
perform shareholder services. Financial institutions will receive fees based
upon Shares owned by their clients or customers. The schedules of such fees and
the basis upon which such fees will be paid will be determined from time to time
by the Fund and Federated Shareholder Services.
SUPPLEMENTAL PAYMENTS TO FINANCIAL INSTITUTIONS
Federated Securities Corp. may pay financial institutions, at the time of
purchase of Class A Shares, an amount equal to 0.50% 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 and Shareholder Services Plans,
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 will be predicated upon the amount of Shares the financial
institution sells or may sell and/or upon the type and nature of sales or
marketing support furnished by the financial institution. Any payments made by
the distributor may be reimbursed by the Adviser or its affiliates.
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 Fund. 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
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
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
or class in the Fund have equal voting rights, except that in matters affecting
only a particular portfolio or class, only Shares of that portfolio or class are
entitled to vote.
Trustees may be removed by the Trustees or shareholders at a special meeting. A
special meeting of shareholders shall be called by the Trustees upon the written
request of shareholders owning at least 10% of the Fund's outstanding Shares of
all series entitled to vote.
As of November 19, 1997, the following shareholder of record owned 25% or more
of the outstanding Class F Shares of the Fund: Merrill Lynch Pierce Fenner &
Smith (as record owner holding Class F Shares for its clients), Jacksonville,
Florida, owned approximately 1,018,898 Shares (46.92%) and, therefore, may, for
certain purposes, be deemed to control the Fund and be able to affect the
outcome of certain matters presented for a vote of shareholders.
------------------------------------------------------
TAX INFORMATION
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet requirements
of the Code applicable to regulated investment companies and to receive the
special tax treatment afforded to such companies. The Fund will be treated as a
single, separate entity for federal income tax purposes so that income
(including capital gains) and losses realized by the Trust's other portfolios
will not be combined for tax purposes with those realized by the Fund.
Shareholders are not required to pay federal regular income tax on any dividends
received from the Fund that represent net interest on tax-exempt municipal
bonds, although tax-exempt interest will increase the taxable income of certain
recipients of social security benefits. However, under the Tax Reform Act of
1986, dividends representing net interest income earned on some municipal bonds
may be included in calculating the federal individual alternative minimum tax or
the federal alternative minimum tax for corporations.
The alternative minimum tax, up to 28% of alternative minimum taxable income for
individuals and 20% for corporations, applies when it exceeds the regular tax
for the taxable year. Alternative minimum taxable income is equal to the regular
taxable income of the taxpayer increased by certain "tax preference" items not
included in regular taxable income and reduced by only a portion of the
deductions allowed in the calculation of the regular tax.
The Tax Reform Act of 1986 treats interest on certain "private activity" bonds
issued after August 7, 1986, as a tax preference item for both individuals and
corporations. Unlike traditional governmental purpose municipal bonds, which
finance roads, schools, libraries, prisons, and other public facilities, private
activity bonds provide benefits to private parties. The Fund may purchase all
types of municipal bonds, including private activity bonds. Thus, should it
purchase any such bonds, a portion of the Fund's dividends may be treated as a
tax preference item.
In addition, in the case of a corporate shareholder, dividends of the Fund which
represent interest on municipal bonds will become subject to the 20% corporate
alternative minimum tax because the dividends are included in a corporation's
"adjusted current earnings." The corporate alternative minimum tax treats 75% of
the excess of a taxpayer's pre-tax "adjusted current earnings" over the
taxpayer's alternative minimum taxable income as a tax preference item.
"Adjusted current earnings" is based upon the concept of a corporation's
"earnings and profits." Since "earnings and profits" generally includes the full
amount of any Fund dividend, and alternative minimum taxable income does not
include the portion of the Fund's dividend attributable to municipal bonds which
are not private activity bonds, the difference will
be included in the calculation of the corporation's alternative minimum tax.
Dividends of the Fund representing net interest income earned on some temporary
investments and any realized net short-term gains are taxed as ordinary income.
These tax consequences apply whether dividends are received in cash or as
additional Shares. Information on the tax status of dividends and distributions
is provided annually.
CALIFORNIA INCOME TAXES
Under existing California laws, distributions made by the Fund will not be
subject to California individual income taxes provided that such distributions
qualify as "exempt-interest dividends" under the California Revenue and Taxation
Code, and provided further that at the close of each quarter, at least 50
percent of the value of the total assets of the Fund consists of obligations the
interest on which is exempt from California taxation under either the
Constitution or laws of California or the Constitution or laws of the United
States. The Fund will furnish its shareholders with a written note designating
exempt-interest dividends within 60 days after the close of its taxable year.
Conversely, to the extent that distributions made by the Fund are derived from
other types of obligations, such distributions will be subject to California
individual income taxes.
Dividends of the Fund are not exempt from the California taxes payable by
corporations.
STATE AND LOCAL TAXES
Income from the Fund is not necessarily free from taxes in states other than
California. Shareholders are urged to consult their own tax advisers regarding
the status of their accounts under state and local tax laws.
------------------------------------------------------
PERFORMANCE INFORMATION
From time to time, the Fund advertises the total return, yield, and
tax-equivalent yield for 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.
FEDERATED CALIFORNIA
MUNICIPAL INCOME FUND
(A Portfolio of Municipal Securities Income Trust)
Class A Shares (Formerly, Class F Shares)
Class B Shares
Prospectus
December 1, 1997
A Non-Diversified Portfolio of Municipal Securities Income Trust,
An Open-End, Management Investment Company
FEDERATED CALIFORNIA MUNICIPAL INCOME FUND
CLASS A SHARES (FORMERLY, CLASS F SHARES)
CLASS B SHARE
Federated Investors Tower
Pittsburgh, PA 15222-3779
DISTRIBUTOR
Federated Securities Corp.
Federated Investors Tower
Pittsburgh, PA 15222-3779
INVESTMENT ADVISER
Federated Advisers
Federated Investors Tower
Pittsburgh, PA 15222-3779
CUSTODIAN
State Street Bank and
Trust Company
P.O. Box 8600
Boston, MA 02266-8600
TRANSFER AGENT
AND DIVIDEND
DISBURSING AGENT
Federated Shareholder
Services Company
P.O. Box 8600
Boston, MA 02266-8600
INDEPENDENT AUDITORS
Deloitte & Touche LLP
2500 One PPG Place
Pittsburgh, PA 15222-5401
Cusip 625922109
2092918A (12/97)
FEDERATED CALIFORNIA MUNICIPAL INCOME FUND
CLASS A SHARES (FORMERLY, CLASS F SHARES)
CLASS B SHARES
(A PORTFOLIO OF MUNICIPAL SECURITIES INCOME TRUST)
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the prospectus of
Federated California Municipal Income Fund (the "Fund"), a portfolio of
Municipal Securities Income Trust (the "Trust") dated December 1, 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 December 1, 1997
Cusip 625922109
2092918B (12/97)
<PAGE>
TABLE OF CONTENTS
GENERAL INFORMATION ABOUT THE FUND 1
INVESTMENT OBJECTIVE AND POLICIES 1
Acceptable Investments 1
When-Issued and Delayed
Delivery Transactions 2
Futures Transactions 2
Temporary Investments 3
Portfolio Turnover 3
INVESTMENT LIMITATIONS 3
California Investment Risks 5
MUNICIPAL SECURITIES INCOME
TRUST MANAGEMENT 7
Fund Ownership 10
Trustees' Compensation 11
Trustee Liability 11
INVESTMENT ADVISORY SERVICES 11
Adviser to the Fund 11
Advisory Fees 12
OTHER SERVICES 12
Fund Administration 12
Custodian and Portfolio Accountant 12
Transfer Agent 12
Independent Auditors 12
BROKERAGE TRANSACTIONS 13
PURCHASING SHARES 13
Quantity Discounta and
Accumulated Purchases 13
Concurrent Purchases 13
Letter of Intent 14
Reinvestment Privilege 14
Conversion of Class B Shares 14
Distribution and Shareholder
Services Plans 14
Conversion to Federal Funds 15
Purchases by Sales
Representatives, Fund
Trustees, and Employees 15
DETERMINING NET ASSET VALUE 15
Valuing Municipal Bonds 15
Use of Amortized Cost 15
REDEEMING SHARES 16
Redemption in Kind 16
Contingent Deferred Sales
Charge- Class B Shares 16
Massachusetts Partnership Law 16
TAX STATUS 17
The Fund's Tax Status 17
Shareholders' Tax Status 17
TOTAL RETURN 17
YIELD 18
TAX-EQUIVALENT YIELD 18
Tax-Equivalency Table 19
PERFORMANCE COMPARISONS 20
Economic and Market Information 20
ABOUT FEDERATED INVESTORS 20
Mutual Fund Market 21
Institutional Clients 21
Bank Marketing 21
Broker/Dealers and Bank Broker/Dealer
Subsidiaries 21
FINANCIAL STATEMENTS 21
APPENDIX 22
<PAGE>
GENERAL INFORMATION ABOUT THE FUND
The Fund is a portfolio of Municipal Securities Income Trust. The Trust was
established as a Massachusetts business trust under a Declaration of Trust dated
August 6, 1990. On March 31, 1996, the Trustees approved changing the name of
the Fund from California Municipal Income Fund to Federated California Municipal
Income Fund and also approved changed the name of the Fund's shares from
Fortress Shares to Class F Shares. On November 18, 1997, the Trustees approved
the name change of Class F Shares to Class A Shares and added an additional
class of shares called 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 exempt from federal
regular income tax (federal regular income tax does not include the federal
alternative minimum tax) and the personal income taxes imposed by the state of
California and California municipalities. The investment objective cannot be
changed without approval of shareholders.
ACCEPTABLE INVESTMENTS
The Fund invests primarily in California municipal securities.
CHARACTERISTICS
The California municipal securities in which the Fund invests have the
characteristics set forth in the prospectus. If ratings made by Moody's
Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings Services
("S&P") or Fitch Investors Service L.P. ("Fitch") change because of
changes in those organizations or in their rating systems, the Fund will
try to use comparable ratings as standards in accordance with the
investment policies described in the Fund's prospectus.
TYPES OF ACCEPTABLE INVESTMENTS
Examples of California municipal securities include: governmental lease
certificates of participation issued by state or municipal authorities
where payment is secured by installment payments for equipment, buildings,
or other facilities being leased by the state or municipality;
o municipal notes and tax-exempt commercial paper;
o serial bonds;
o tax anticipation notes sold to finance working capital needs of
municipalities in anticipation of receiving taxes;
o bond anticipation notes sold in anticipation of the issuance of long-term
bonds;
o pre-refunded municipal bonds whose timely payment of interest and principal
is ensured by an escrow of U.S. government obligations; and
o general obligation bonds.
PARTICIPATION INTERESTS
The financial institutions from which the Fund purchases participation
interests frequently provide or secure from another financial institution
irrevocable letters of credit or guarantees and give the Fund the right to
demand payment of the principal amounts of the participation interests
plus accrued interest on short notice (usually within seven days).
VARIABLE-RATE MUNICIPAL SECURITIES
Variable interest rates generally reduce changes in the market value of
municipal securities from their original purchase prices. Accordingly, as
interest rates decrease or increase, the potential for capital
appreciation or depreciation is less for variable rate municipal
securities than for fixed income obligations. Many municipal securities
with variable interest rates purchased by the Fund are subject to
repayment of principal (usually within seven days) on the Fund's demand.
The terms of these variable-rate demand instruments require payment of
principal and accrued interest from the issuer of the municipal
obligations, the issuer of the participation interests, or a guarantor of
either issuer.
MUNICIPAL LEASES
The Fund may purchase municipal securities in the form of participation
interests which represent undivided proportional interests in lease
payments by a governmental or non-profit entity. The lease payments and
other rights under the lease provide for and secure the payments on the
certificates. Lease obligations may be limited by municipal charter or the
nature of the appropriation for the lease. In particular, lease
obligations may be subject to periodic appropriation. If the entity does
not appropriate funds for future lease payments, the entity cannot be
compelled to make such payments. Furthermore, a lease may provide that the
certificate trustee cannot accelerate lease obligations upon default. The
trustee would only be able to enforce lease payments as they became due.
In the event of a default or failure of appropriation, it is unlikely that
the trustee would be able to obtain an acceptable substitute source of
payment. In determining the liquidity of municipal lease securities, the
investment adviser, under the authority delegated by the Trustees, will
base its determination on the following factors:
o whether the lease can be terminated by the lessee;
o the potential recovery, if any, from a sale of the leased property upon
termination of the lease;
o the lessee's general credit strength (e.g., its debt, administrative,
economic and financial characteristics and prospects);
o the likelihood that the lessee will discontinue appropriating funding
for the leased property because the property is no longer deemed
essential to its operations (e.g., the potential for an "event of
nonappropriation"); and
o any credit enhancement or legal recourse provided upon an event of
non-appropriation or other termination of the lease.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an advantageous
price or yield for the Fund. No fees or other expenses, other than normal
transaction costs, are incurred. However, liquid assets of the Fund sufficient
to make payment for the securities to be purchased are segregated on the Fund's
records at the trade date. These assets are marked to market daily and are
maintained until the transaction has been settled. The Fund does not intend to
engage in when-issued and delayed delivery transactions to an extent that would
cause the segregation of more than 20% of the total value of its assets.
FUTURES TRANSACTIONS
A futures contract is a firm commitment by two parties: the seller who agrees to
make delivery of the specific type of security called for in the contract
("going short") and the buyer who agrees to take delivery of the security
("going long") at a certain time in the future. In the fixed income securities
market, price moves inversely to interest rates. A rise in rates means a drop in
price. Conversely, a drop in rates means a rise in price. In order to hedge its
holdings of fixed income securities against a rise in market interest rates, the
Fund could enter into contracts to deliver securities at a predetermined price
(i.e., "go short") to protect itself against the possibility that the prices of
its fixed income securities may decline during the Fund's anticipated holding
period. The Fund would agree to purchase securities in the future at a
predetermined price (i.e., "go long") to hedge against a decline in market
interest rates.
"MARGIN" IN FUTURES TRANSACTIONS
Unlike the purchase or sale of a security, the Fund does not pay or
receive money upon the purchase or sale of a futures contract. Rather, the
Fund is required to deposit an amount of "initial margin" in municipal
securities, cash or cash equivalents with its custodian (or the broker, if
legally permitted). The nature of initial margin in futures transactions
is different from that of margin in securities transactions in that
futures contract initial margin does not involve the borrowing of funds by
the Fund to finance the transactions. Initial margin is in the nature of a
performance bond or good faith deposit on the contract which is returned
to the Fund upon termination of the futures contract, assuming all
contractual obligations have been satisfied.
A futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund
pays or receives cash, called "variation margin," equal to the daily
change in value of the futures contract. This process is known as "marking
to market." Variation margin does not represent a borrowing or loan by the
Fund but is instead settlement between the Fund and the broker of the
amount one would owe the other if the futures contract expired. In
computing its daily net asset value ("NAV"), the Fund will mark-to-market
its open futures positions.
TEMPORARY INVESTMENTS
The Fund may also invest in temporary investments during times of unusual market
conditions for defensive purposes.
REPURCHASE AGREEMENTS
Repurchase agreements are arrangements in which banks, broker/dealers, and
other recognized financial institutions sell U.S. government securities or
certificates of deposit to the Fund and agree at the time of sale to
repurchase them at a mutually agreed upon time and price within one year
from the date of acquisition. The Fund or its custodian will take
possession of the securities subject to repurchase agreements. To the
extent that the original seller does not repurchase the securities from
the Fund, the Fund could receive less than the repurchase price on any
sale of such securities. In the event that such a defaulting seller filed
for bankruptcy or became insolvent, disposition of such securities by the
Fund might be delayed pending court action. The Fund believes that under
the regular procedures normally in effect for custody of the Fund's
portfolio securities subject to repurchase agreements, a court of
competent jurisdiction would rule in favor of the Fund and allow retention
or disposition of such securities. The Fund may only enter into repurchase
agreements with banks and other recognized financial institutions such as
broker/dealers which are found by the Fund's investment adviser to be
creditworthy pursuant to guidelines established by the Trustees.
From time to time, such as when suitable California municipal bonds are not
available, the Fund may invest a portion of its assets in cash. Any portion of
the Fund's assets maintained in cash will reduce the amount of assets in
California municipal bonds and thereby reduce the Fund's yield.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements. This
transaction is similar to borrowing cash. In a reverse repurchase
agreement the Fund transfers possession of a portfolio instrument to
another person, such as a financial institution, broker, or dealer, in
return for a percentage of the instrument's market value in cash, and
agrees that on a stipulated date in the future the Fund will repurchase
the portfolio instrument by remitting the original consideration plus
interest at an agreed upon rate. The use of reverse repurchase agreements
may enable the Fund to avoid selling portfolio instruments at a time when
a sale may be deemed to be disadvantageous, but the ability to enter into
reverse repurchase agreements does not ensure that the Fund will be able
to avoid selling portfolio instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund,
in a dollar amount sufficient to make payment for the obligations to be
purchased, are segregated on the Fund's records at the trade date. These
assets are marked to market daily and are maintained until the transaction
is settled.
PORTFOLIO TURNOVER
The Fund may trade or dispose of portfolio securities as considered necessary to
meet its investment objective. For the fiscal years ended August 31, 1997 and
1996, the Fund's portfolio turnover rates were 29% and 21%, respectively.
INVESTMENT LIMITATIONS
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities on
margin but may obtain such short-term credits as may be necessary for
clearance of purchases and sales of securities.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities except that the Fund may borrow
money and engage in reverse repurchase agreements in amounts up to
one-third of the value of its total assets, including the amounts
borrowed.
The Fund will not borrow money or engage in reverse repurchase agreements
for investment leverage, but rather as a temporary, extraordinary, or
emergency measure to facilitate management of the portfolio by enabling
the Fund to, for example, meet redemption requests when the liquidation of
portfolio securities is deemed to be inconvenient or disadvantageous. The
Fund will not purchase any securities while borrowings in excess of 5% of
its total assets are outstanding.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate its assets except to
secure permitted borrowings. In those cases, it may mortgage, pledge, or
hypothecate assets having a market value not exceeding 10% of the value of
its total assets at the time of the pledge.
UNDERWRITING
The Fund will not underwrite any issue of securities except as it may be
deemed to be an underwriter under the Securities Act of 1933 in connection
with the sale of securities in accordance with its investment objective,
policies, and limitations.
INVESTING IN REAL ESTATE
The Fund will not purchase or sell real estate although it may invest in
municipal bonds secured by real estate, including limited partnership
interests, or interests in real estate.
INVESTING IN COMMODITIES
The Fund will not buy or sell commodities, commodity contracts, or
commodities futures contracts.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets except that it may acquire
publicly or non-publicly issued municipal bonds or temporary investments
or enter into repurchase agreements in accordance with its investment
objective, policies, and limitations or its Declaration of Trust.
DEALING IN PUTS AND CALLS
The Fund will not buy or sell puts, calls, straddles, spreads, or any
combination of these.
CONCENTRATION OF INVESTMENTS
The Fund will not purchase securities if, as a result of such purchase,
25% or more of the value of its total assets would be invested in any one
industry or in industrial development bonds or other securities, the
interest upon which is paid from revenues of similar types of projects.
However, the Fund may invest as temporary investments more than 25% of the
value of its assets in cash or cash items, securities issued or guaranteed
by the U.S. government, its agencies or instrumentalities, or instruments
secured by these money market instruments, i.e., repurchase agreements.
The above investment limitations cannot be changed without shareholder approval.
The following limitations, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in these limitations becomes effective.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will not purchase securities of other investment companies except
as part of a merger, consolidation, or other acquisition.
INVESTING IN RESTRICTED SECURITIES
The Fund will not invest more than 10% of the value of its total assets in
securities subject to restrictions on resale under the Securities Act of
1933.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of its net assets in illiquid
obligations, including repurchase agreements providing for settlement in
more than seven days after notice, and certain restricted securities.
Except with respect to borrowing money, if a percentage limitation is adhered to
at the time of investment, a later increase or decrease in percentage resulting
from any change in value or net assets will not result in a violation of such
restriction. For purposes of its policies and limitations, the Fund considers
certificates of deposit and demand and time deposits issued by a U.S. branch of
a domestic bank or savings association having capital, surplus, and undivided
profits in excess of $100,000,000 ("bank cash items") at the time of investment
to be included in "cash items." However, the Fund does not intend to exceed its
concentration limitation with respect to bank cash items.
CALIFORNIA INVESTMENT RISKS
LIMITS ON TAXING AND SPENDING AUTHORITY
Developments in California which constrain the taxing and spending
authority of California governmental entities could adversely affect the
ability of such entities to meet their interest and/or principal payment
obligations on securities they have issued or will issue. The following
information constitutes only a brief summary and is not intended as a
complete description.
In 1978, a statewide referendum approved Proposition 13, an amendment to
the California Constitution limiting both the valuation of real property
for property tax purposes and the power of local taxing authorities to
increase real property tax revenues. To provide revenue to local
governments, legislation was enacted shortly thereafter providing for the
redistribution to local governments of the state's then existing surplus
in its General Fund, reallocation of revenues to local governments, and
assumption by the state of certain local government obligations. More
recent California legislation has, however, reduced state assistance
payments to local governments and reallocated a portion of such payments
to the state's General Fund.
There can be no assurance that any particular level of state aid to local
governments will be maintained in future years. The U.S. Supreme Court has
accepted for review a case challenging the constitutionality of certain
provisions of Proposition 13. The outcome of such litigation could
substantially impact local property tax collections and the ability of
state agencies, local governments and districts to make future payments on
outstanding debt obligations.
In 1979, California voters again amended the California Constitution, this
time imposing an appropriations limit on the spending authority of certain
state and local government entities. The state's appropriations limit is
based on its 1978-1979 fiscal year authorizations to expend proceeds of
taxes and is adjusted annually to reflect changes in cost of living and
population and transfer of financial responsibility from one governmental
unit to another. If a California governmental entity raises revenues
beyond its appropriations limit, the excess must be returned to the
entity's taxpayers within the two subsequent fiscal years, generally by a
tax credit, refund, or temporary suspension of tax rates or fee schedules.
These spending limitations do not, however, apply to the debt service on
obligations existing or legally authorized as of January 1, 1979, or on
bonded indebtedness thereafter approved by the voters. In 1986, California
voters approved an initiative statute known as Proposition 62. This
initiative (i) requires that any tax for general governmental purposes
imposed by local governments be approved by resolution or ordinance
adopted by a two-thirds vote of the governmental entity's legislative body
and by a majority vote of the electorate of the governmental entity, (ii)
requires that any special tax (defined as taxes levied for other than
general governmental purposes) imposed by a local governmental entity be
approved by a two- thirds vote of the voters within that jurisdiction,
(iii) restricts the use of revenues from a special tax to the purposes or
for the service for which the special tax was imposed, (iv) prohibits the
imposition of ad valorem taxes on real property by local governmental
entities except as permitted by the Proposition 13 amendment, (v)
prohibits the imposition of transaction taxes and sales taxes on the sale
of real property by local governments, (vi) requires that any tax imposed
by a local government on or after August 1, 1985, be ratified by a
majority vote of the electorate within two years of the adoption of the
initiative or be terminated by November 15, 1988, (vii) requires that, in
the event a local government fails to comply with the provisions of this
measure, a reduction in the amount of property tax revenue allocated to
such local government occurs in an amount equal to the revenues received
by such entity attributable to the tax levied in violation of the
initiative, and (viii) permits these provisions to be amended exclusively
by the voters of the state of California.
In September 1988, the California Court of Appeals in City of Westminster
v. County of Orange held that Proposition 62 is unconstitutional to the
extent that it requires a general tax by a general law city, enacted on or
after August 1, 1985, and prior to the effective date of Proposition 62,
to be subject to approval by a majority of voters. The Court held that the
California Constitution prohibits the imposition of a requirement that
local tax measures be submitted to the electorate by either referendum or
initiative. It is not possible to predict the impact of this decision on
charter cities, on special taxes or on new taxes imposed after the
effective date of Proposition 62.
In November 1988, California voters approved Proposition 98. This
initiative requires that (i) revenues in excess of amounts permitted to be
spent and which would otherwise be returned by revision of tax rates or
fee schedules, be transferred and allocated (up to a maximum of 4%) to the
State School Fund and be expended solely for purposes of instructional
improvement and accountability. No such transfer or allocation of funds
will be required if certain designated state officials determine that
annual student expenditures and class size meet certain criteria as set
forth in Proposition 98. Any funds allocated to the State School Fund
shall cause the appropriation limits to be annually increased for any such
allocation made in the prior year.
Proposition 98 also requires the state of California to provide a minimum
level of funding for public schools and community colleges. The initiative
permits the enactment of legislation, by a two-thirds vote, to suspend the
minimum funding requirement for one year. On September 28, 1995, the
California Supreme Court upheld the constitutionality of Proposition 62.
This referendum was approved by the State's voters in 1986, but not
enforced due to previous judicial decisions. Proposition 62 requires
two-thirds voter approval for special taxes and a new simple majority
approval for general taxes. Prior to the State Supreme Court's decision
upholding Proposition 62 (the Santa Clara decision) various court cases
interpreting Proposition 13 reaffirmed the power of cities to impose
taxes, other than property taxes, as long as those taxes were used for
general municipal purposes. The future effect of Proposition 62 on the
financial performance of California local governments and on note and debt
security is unclear. It is possible that court challenges, based on
Proposition 62, to taxes raised or imposed after 1986 may reduce general
municipal revenues available for financing municipal operations and
services, including the repayment of debt. The effect of these various
constitutional and statutory changes upon the ability of California
municipal securities issuers to pay interest and principal on their
obligations remains unclear. Furthermore, other measures affecting the
taxing or spending authority of California or its political subdivisions
may be approved or enacted in the future.
RECENT ECONOMIC DEVELOPMENTS
The California economy is in recovery. Statewide unemployment in August,
1997 was 6.1%, compared to 7.1% in August, 1996. Major sectors of
employment growth have been high tech industries and motion picture
production. Gains in these and other sectors have more than offset
continued job losses in the aerospace and financial services industries.
Other positive economic developments include greatly increased exports,
new home construction and retail sales.
As a result of the improvement in the economy, tax revenues have been
higher than budgeted. In the first quarter of fiscal year 1997, the
State's general (operating) fund revenues were $91 million (1.5%) above
the budget forecast and disbursements were $385 million (5.5%) less than
the budget forecast. In view of the improved economic climate and
resulting stronger financial results, Fitch Investors Service, Inc. raised
their rating of the State's general obligation bonds to A+ from A in July,
1996.
<PAGE>
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. Mr. Donahue is the
father of J. Christopher Donahue, Executive Vice President and Trustee of the
Company.
Thomas G. Bigley
15 Old Timber Trail
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.; Director, Member of
Executive Committee, 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.
<PAGE>
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.; Director or
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.
<PAGE>
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; 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 and U.S. Space Foundation; President
Emeritus, University of Pittsburgh; Founding Chairman, National Advisory Council
for Environmental Policy and Technology, Federal Emergency Management Advisory
Board and Czech Management Center, Prague; Director or Trustee of the Funds.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Trustee
Public relations/Marketing/Conference Planning; 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.
<PAGE>
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 Obligations Trust II; Money Market Trust;
Municipal Securities Income Trust; Newpoint Funds; RIMCO Monument Funds;
Targeted Duration Trust; Tax-Free Instruments Trust; The Planters Funds; 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; WesMark Funds; and World Investment Series, Inc.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the outstanding Shares.
As of November 19, 1997, the following shareholder of record owned 5% or
more of the outstanding Shares of the Fund: Merrill Lynch Pierce Fenner & Smith,
Jacksonville, Florida, owned approximately 1,018,898 Shares (46.92%).
<PAGE>
TRUSTEES COMPENSATION
<TABLE>
<CAPTION>
AGGREGATE
NAME, COMPENSATION
POSITION WITH FROM TOTAL COMPENSATION PAID
TRUST TRUST*# FROM FUND COMPLEX+
<S> <C> <C>
John F. Donahue $ -0- $ -0- for the Trust and
Trustee and Chairman 56 other investment companies in the Fund Complex
Thomas G. Bigley $1,217 $108,725 for the Trust and
Trustee 56 other investment companies in the Fund Complex
John T. Conroy $1,341 $119,615 for the Trust and
Trustee 56 other investment companies in the Fund Complex
William J. Copeland $1,341 $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 $1,341 $119,615 for the Trust and
Trustee 56 other investment companies in the Fund Complex
Lawrence D. Ellis, M.D. $1,217 $108,725 for the Trust and
Trustee 56 other investment companies in the Fund Complex
Edward L. Flaherty, Jr. $1,341 $119,615 for the Trust and
Trustee 56 other investment companies in the Fund Complex
Peter E. Madden $1,217 $108,725 for the Trust and
Trustee 56 other investment companies in the Fund Complex
John E. Murray, Jr. $1,217 $108,725 for the Trust and
Trustee 56 other investment companies in the Fund Complex
Wesley W. Posvar $1,217 $108,725 for the Trust and
Trustee 56 other investment companies in the Fund Complex
Marjorie P. Smuts $1,217 $108,725 for the Trust and
Trustee 56 other investment companies in the Fund Complex
</TABLE>
* Information is furnished for the fiscal year ended August 31, 1997.
# The aggregate compensation is provided for the Trust which is comprised of
five portfolios.
The information is provided for the last calendar year.
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that the Trustees will not be liable
for errors of judgment or mistakes of fact or law. However, they are not
protected against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICES
ADVISER TO THE FUND
The Fund's investment adviser is Federated Advisers (the "Adviser"). It is
a subsidiary of Federated Investors. All the voting securities of Federated
Investors are owned by a trust, the trustees of which are John F. Donahue, his
wife and his son, J. Christopher Donahue.
The Adviser shall not be liable to the Trust, the Fund or any shareholder of the
Fund for any losses that may be sustained in the purchase, holding, or sale of
any security, or for anything done or omitted by it, except acts or omissions
involving willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties imposed upon it by its contract with the Trust.
ADVISORY FEES
For its advisory services, the Adviser receives an annual investment advisory
fee as described in the prospectus. For the fiscal years ended August 31, 1997,
1996 and 1995, the Adviser earned advisory fees of $76,824, $62,691, and $56,899
respectively, all of which 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, a subsidiary of Federated Investors, served as the Fund's
Administrator. For purposes of this Statement of Additional Information,
Federated Services Company and Federated Administrative Services, may
hereinafter collectively be referred to as the "Administrators." For the fiscal
years ended August 31, 1997, 1996, and 1995, the Administrators collectively
earned $125,002, $125,000, and $125,000 respectively.
CUSTODIAN AND PORTFOLIO ACCOUNTANT
State Street Bank and Trust Company ("State Street Bank"), Boston, MA, is
custodian for the securities and cash of the Fund. Federated Services Company,
Pittsburgh, PA, provides certain accounting and recordkeeping services with
respect to the Fund's portfolio investments. The fee paid for this service is
based upon the level of the Fund's average net assets for the period plus
out-of-pocket expenses.
TRANSFER AGENT
Federated Services Company, through it registered transfer agent, Federated
Shareholder Services Company, 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, PA.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally use those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. The Adviser makes
decisions on portfolio transactions and selects brokers and dealers subject to
review by the Trustees. The Adviser may select brokers and dealers who offer
brokerage and research services. These services may be furnished directly to the
Fund or to the Adviser and may include: advice as to the advisability of
investing in securities; security analysis and reports; economic studies;
industry studies; receipt of quotations for portfolio evaluations; and similar
services. 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. The y 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, 1997, 1996, and 1995, 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 "Investing in the Fund" and
"Purchasing Shares."
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES
As described in the prospectus, larger purchases reduce or eliminate the sales
charge paid. The Fund will combine purchases of Class A Shares made on the same
day by the investor, the investor's spouse, and the investor's children under
age 21 when it calculates the sales charge. In addition, the sales charge, if
applicable, is reduced for purchases made at one time by a trustee or fiduciary
for a single trust estate or a single fiduciary account.
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 intermediary at the
time the purchase is made that Class A Shares are already owned or that
purchases are being combined. The Fund will reduce or eliminate the sales charge
after it confirms the purchases.
CONCURRENT PURCHASES
For purposes of qualifying for a sales charge reduction or 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 adviser and principal underwriter (the "Federated Funds"), the
purchase prices of which include a sales charge. For example, if a shareholder
concurrently invested $80,000 in the Class A Shares of one of the other
Federated Funds with a sales charge, and $20,000 in this Fund, the sales charge
would be reduced.
To receive this sales charge reduction or elimination, Federated Securities
Corp. must be notified by the shareholder in writing or by his financial
intermediary at the time the concurrent purchases are made. The Fund will reduce
or eliminate the sales charge after it confirms the purchases.
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 of Class A Shares of Federated Funds (excluding
money market funds) over the next 13 months, the sales charge may be reduced by
signing a letter of intent to that effect. This letter of intent includes a
provision for a sales charge adjustment depending on the amount actually
purchased within the 13-month period and a provision for the custodian to hold
up to 4.50% of the total amount intended to be purchased in escrow (in Class A
Shares) until such purchase is completed.
The Shares held in escrow in the shareholder's account will be released upon
fulfillment of the letter of intent or the end of the 13-month period, whichever
comes first. If the amount specified in the letter of intent is not purchased,
an appropriate number of escrowed Shares may be redeemed in order to realize the
sales charge.
While this letter of intent will not obligate the shareholder to purchase Class
A Shares, each purchase during the period will be at the sales charge applicable
to the total amount intended to be purchased. At the time a letter of intent is
established, current balances in accounts in any Class A Shares of any Federated
Funds, excluding money market accounts, will be aggregated to provide a purchase
credit towards fulfillment of the letter of intent. The letter may be dated as
of a prior date to include any purchase made within the past 90 days. Prior
trade prices will not be adjusted.
REINVESTMENT PRIVILEGE
If Class A Shares in the Fund have been redeemed, the shareholder has the
privilege, within 120 days, to reinvest the redemption proceeds at the
next-determined net asset value without any sales charge. Similarly,
shareholders who redeem Class B Shares may be reinvested in the same Share class
within 120 days but would not be entitled to a reimbursement of the contingent
deferred sales charge if paid at the time of redemption. However, such
reinvested shares would not be subject to a contingent deferred sales charge
upon later redemption. In addition, if the Class B Shares were reinvested
through a financial intermediary, the financial intermediary would not be
entitled to an advanced payment from Federated Securities Corp. on the
reinvested Shares. Federated Securities Corp. must be notified by the
shareholder in writing or by his financial intermediary of the reinvestment in
order to eliminate a sales charge or a contingent deferred sales charge. If the
shareholder redeems Shares in the Fund, there may be tax consequences.
CONVERSION OF CLASS B SHARES
Class B Shares will automatically convert into Class A Shares on or around the
15th of the month eight full years from the purchase date and will no longer be
subject to a fee under the distribution plan. 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 a 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.
DISTRIBUTION AND SHAREHOLDER SERVICES PLANS
These arrangements permit the payment of fees to financial institutions, the
distributor, and Federated Shareholder Services, to stimulate distribution
activities and to cause services to be provided to shareholders by a
representative who has knowledge of the shareholder's particular circumstances
and goals. These activities and services may include, but are not limited to,
marketing efforts; providing office space, equipment, telephone facilities, and
various clerical, supervisory, computer, and other personnel as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries; and assisting
clients in changing dividend options, account designations, and addresses.
By adopting the Distribution Plan, the Trustees expect that the Fund will be
able to achieve a more predictable flow of cash for investment purposes and to
meet redemptions. This will facilitate more efficient portfolio management and
assist the Fund in pursuing its investment objectives. By identifying potential
investors whose needs are served by the Fund's objectives, and properly
servicing these accounts, it may be possible to curb sharp fluctuations in rates
of redemptions and sales.
Other benefits, which may be realized under either arrangement, may include: (1)
providing personal services to shareholders; (2) investing shareholder assets
with a minimum of delay and administrative detail; (3) enhancing shareholder
recordkeeping systems; and (4) responding promptly to shareholders' requests and
inquiries concerning their accounts.
For the fiscal years ended August 31, 1997, 1996, and 1995, payments in the
amount of $96,030, $78,364, and $71,122, respectively, were made by Class A
Shares pursuant to the Distribution Plan, of which $92,188, $75,229, and
$68,277, respectively, were waived. In addition, for the fiscal year ended
August 31, 1997, the Fund's Class A Shares paid shareholder service fees in the
amount of $48,015, of which $3,841 were waived.
CONVERSION TO FEDERAL FUNDS
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be in
federal funds or be converted into federal funds before shareholders begin to
earn dividends. State Street Bank acts as the shareholder's agent in depositing
checks and converting them to federal funds.
PURCHASES BY SALES REPRESENTATIVES, FUND TRUSTEES, AND EMPLOYEES
The following individuals and their immediate family members may buy Class A
Shares at net asset value without a sales charge:
o Trustees, employees, and sales representatives of the Fund, Federated
Advisers, and Federated Securities Corp. and its affiliates;
o Federated Life Members; and
o any associated person of an investment dealer who has a sales agreement
with Federated Securities Corp. Shares may also be sold without a sales
charge to trusts, pensions, or profit-sharing plans for these individuals.
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
The Fund's net asset value per Share fluctuates and is based on the market value
of all securities and other assets of the Fund. The net asset value for each
class of Shares may differ due to the variance in daily net income realized by
each class.
Net asset value is not determined 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, Martin Luther King Day, President's Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
VALUING MUNICIPAL BONDS
The Trustees use an independent pricing service to determine the market value of
municipal bonds. The independent pricing service takes into consideration yield,
stability, risk, quality, coupon rate, maturity, type of issue, trading
characteristics, special circumstances of a security or trading market, and any
other factors or market data it considers relevant in determining valuations for
normal institutional size trading units of debt securities, and does not rely
exclusively on quoted prices.
USE OF AMORTIZED COST
The Trustees have decided that the fair value of debt securities authorized to
be purchased by the Fund with remaining maturities of 60 days or less at the
time of purchase, shall be their amortized cost value, unless the particular
circumstances of the security indicate otherwise. Under this method, portfolio
instruments and assets are valued at the acquisition cost as adjusted for
amortization of premium or accumulation of discount rather than at current
market value. The Executive Committee continually assesses this method of
valuation and recommends changes where necessary to assure that the Fund's
portfolio instruments are valued at their fair value as determined in good faith
by the Trustees.
REDEEMING SHARES
The Fund redeems Shares at the next computed net asset value after the Fund
receives the redemption request. Shareholder redemptions may be subject to a
contingent deferred sales charge. Redemption procedures are explained in the
respective prospectuses under "Redeeming and Exchanging Shares." Although the
transfer agent does not charge for telephone redemptions, it reserves the right
to charge a fee for the cost of wire-transferred redemptions of less than
$5,000.
REDEMPTION IN KIND
The Trust is obligated to redeem Shares solely in cash up to $250,000 or 1% of
the respective class's net asset value, whichever is less, for any one
shareholder within a 90-day period.
Any redemption beyond this amount will also be in cash unless the Trustees
determine that further cash payments will have a material adverse effect on
remaining shareholders. In such a case, the Fund will pay all or a portion of
the remainder of the redemption in portfolio instruments, valued in the same way
that NAV 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.
CONTINGENT DEFERRED SALES CHARGE -- CLASS B SHARES
In computing the amount of the applicable Contingent Deferred Sales Charge,
redemptions are deemed to have occurred in the following order: (1) Shares
acquired through the reinvestment of dividends and long-term capital gains; (2)
Shares held for more than six full years from the date of purchase; (3) Shares
held for fewer than six years on a first-in, first-out basis.
ELIMINATION OF THE CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES
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 an account 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. 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 Shares for Class B
Shares of other Federated Funds, the time for which the exchanged-for
Shares are to be held will be added to the time for which exchanged-from
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 be not be aggregated. Any
Shares purchased prior to the termination of this program would have the
contingent deferred sales charge eliminated as provided in the Fund's
prospectus at the time of the purchase of the Shares.
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:
o derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income earned during
the year.
SHAREHOLDERS' TAX STATUS
CAPITAL GAINS
Capital gains or losses may be realized by the Fund on the sale of
portfolio securities and as a result of discounts from par value on
securities held to maturity. Sales would generally be made because of:
o the availability of higher relative yields;
o differentials in market values;
o new investment opportunities;
o changes in creditworthiness of an issuer; or
o an attempt to preserve gains or limit losses.
Distributions of long-term capital gains are taxed as such, whether they are
taken in cash or reinvested, and regardless of the length of time the
shareholder has owned Shares. Any loss by a shareholder on Shares held for less
than six months and sold after a capital gains distribution will be treated as a
long-term capital loss to the extent of the capital gains distribution.
TOTAL RETURN
The Fund's average annual total return for Class A Shares for the fiscal year
ended August 31, 1997, and for the period from December 2, 1992 (date of initial
public investment) to August 31, 1997, were 8.03% and 7.13%, respectively.
The Fund's Class B Shares was not effective until December 1997.
The average annual total return for each class of shares of the Fund is the
average compounded rate of return for a given period that would equate a $1,000
initial investment to the ending redeemable value of that investment. The ending
redeemable value is computed by multiplying the number of Shares owned at the
end of the period by the offering price per Share at the end of the period. The
number of Shares owned at the end of the period is based on the number of Shares
purchased at the beginning of the period with $1,000, adjusted over the period
by any additional Shares, assuming the monthly reinvestment of all dividends and
distributions. Any applicable contingent deferred sales charge is deducted from
the ending value of the investment based on the lesser of the original purchase
price per Share or the offering price per Share of Shares redeemed.
<PAGE>
YIELD
The Fund's yield for Class A Shares for the thirty-day period ended August 31,
1997 was 4.62%.
The Fund's Class B Shares was not effective until December 1997.
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, 1997 was 9.04%.
The Fund's Class B Shares was not effective until December 1997.
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 combined
federal and state tax rate of 48.9%.
TAX-EQUIVALENCY TABLE
The Fund may also use a tax-equivalency table in advertising and sales
literature. The interest earned by the municipal obligations in the Fund's
portfolio generally remains free from federal regular income tax*, and the
income taxes imposed by the state of California. As the table below indicates, a
"tax-free" investment is an attractive choice for investors, particularly in
times of narrow spreads between tax-free and taxable yields.
<PAGE>
<TABLE>
<CAPTION>
TAXABLE YIELD EQUIVALENT FOR 1997
STATE OF CALIFORNIA
COMBINED FEDERAL AND STATE INCOME TAX BRACKET:
23.00% 37.30% 40.30% 45.30% 48.90%
SINGLE $1 - $24,651 - $59,751 - $124,651 - OVER
RETURN 24,650 59,750 124,650 271,050 $271,050
<S> <C> <C> <C> <C> <C> <C>
TAX-EXEMPT
YIELD TAXABLE YIELD EQUIVALENT
1.50% 1.95% 2.39% 2.51% 2.74% 2.94%
2.00% 2.60% 3.19% 3.35% 3.66% 3.91%
2.50% 3.25% 3.99% 4.19% 4.57% 4.89%
3.00% 3.90% 4.78% 5.03% 5.48% 5.87%
3.50% 4.55% 5.58% 5.86% 6.40% 6.85%
4.00% 5.19% 6.38% 6.70% 7.31% 7.83%
4.50% 5.84% 7.18% 7.54% 8.23% 8.81%
5.00% 6.49% 7.97% 8.38% 9.14% 9.78%
5.50% 7.14% 8.77% 9.21% 10.05% 10.76%
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.
TAXABLE YIELD EQUIVALENT FOR 1997
STATE OF CALIFORNIA
COMBINED FEDERAL AND STATE INCOME TAX BRACKET:
21.00% 37.30% 40.30% 45.30% 48.90% 48.90%
JOINT $1 - $41,201 - $99,601 - $151,751 - $271,051 OVER
RETURN 41,200 99,600 151,750 271,050 439,744 $439,744
TAX-EXEMPT
YIELD TAXABLE YIELD EQUIVALENT
1.50% 1.90% 2.39% 2.51% 2.74% 2.94% 2.94%
2.00% 2.53% 3.19% 3.35% 3.66% 3.91% 3.91%
2.50% 3.16% 3.99% 4.19% 4.57% 4.89% 4.89%
3.00% 3.80% 4.78% 5.03% 5.48% 5.87% 5.87%
3.50% 4.43% 5.58% 5.86% 6.40% 6.85% 6.85%
4.00% 5.06% 6.38% 6.70% 7.31% 7.83% 7.83%
4.50% 5.70% 7.18% 7.54% 8.23% 8.81% 8.81%
5.00% 6.33% 7.97% 8.38% 9.14% 9.78% 9.78%
5.50% 6.96% 8.77% 9.21% 10.05% 10.76% 10.76%
</TABLE>
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:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio securities;
o changes in the Fund's class expenses; and
o various other factors.
Either class of Shares' performance fluctuates on a daily basis largely because
net earnings and offering price per Share fluctuate daily. Both net earnings and
offering price per Share are factors in the computation of yield and total
return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute offering price. The financial
publications and/or indices which the Fund uses in advertising may include:
o LEHMAN BROTHERS REVENUE BOND INDEX is a total return performance benchmark
for the long-term, investment grade, revenue bond market. Returns and
attributes for the index are calculated semi-monthly.
o LIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes the
reinvestment of all capital gains distributions and income dividends and
takes into account any change in NAV over a specific period of time. From
time to time, the Fund will quote its Lipper ranking in the "general
municipal bond funds" category in advertising and sales literature.
o MORNINGSTAR, INC,., an independent rating service, is the publisher of the
bi-weekly MUTUAL FUND VALUES. MUTUAL FUND VALUES rates more than 1,000
NASDAQ-listed mutual funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and ratings are effective for two
weeks.
Advertisements and other sales literature for the Fund may quote total returns
which are calculated on non-standardized base periods. the total returns
represent the historic change in the value of an investment in either class of
shares based on monthly reinvestment of dividends over a specified period of
time. Advertisements for Class A Shares 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 Investors' equity
and high yield corporate bond management while William D. Dawson, Executive Vice
President, oversees Federated Investors' domestic fixed income management. Henry
A. Frantzen, Executive Vice President, oversees the management of Federated
Investors' international and global 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 its subsidiaries, distributes mutual funds for a
variety of investment applications. Specific markets include:
INSTITUTIONAL CLIENTS
Federated Investors 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 these 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 Timothy C. Pillion, Senior Vice
President, Bank Marketing & Sales.
BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES
Federated 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 ratings 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, President, Federated Securities Corp.
* source: Investment Company Institute
FINANCIAL STATEMENTS
The financial statements for the fiscal year ended August 31, 1997, are
incorporated herein by reference to the Fund's Annual Report dated August 31,
1997. The unaudited Semi-Annual Report of the Fund, dated February 28, 1997, is
incorporated herein by reference. A copy of the Annual Report and/or Semi-Annual
Report for the Fund may be obtained without charge by contacting the Fund at the
address located on the back cover of the Fund's Prospectus or by calling
1-800-341-7400.
<PAGE>
APPENDIX
STANDARD & POOR'S SERVICES 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, L.P. ("MOODY'S") MUNICIPAL BOND RATINGS
Aaa--Bonds which are rated Aaa are judged to be of the best quality. The y 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. The y are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
NR--Not rated by Moody's.
Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its generic rating category; the modifier 1
indicates that the security ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
FITCH INVESTORS SERVICE, INC. ("FITCH") LONG-TERM DEBT RATINGS
AAA--Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated "AAA." Because bonds rated in the "AAA" and
""AA" categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated F-1+.
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore, impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
NR--NR indicates that Fitch does not rate the specific issue.
PLUS (+) OR MINUS (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "AAA" category.
STANDARD & POOR'S RATINGS SERVICES 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. The re 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, L.P. 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 SERVICES COMMERCIAL PAPER RATINGS DEFINITIONS
A-1--This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus (+) sign designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1."
MOODY'S INVESTORS SERVICE, INC., COMMERCIAL PAPER RATINGS
P-1--Issuers rated PRIME-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations.
PRIME-1 repayment capacity will normally be evidenced by the following
characteristics: Leading market positions in well established industries; high
rates of return on funds employed; conservative capitalization structures with
moderate reliance on debt and ample asset protection; broad margins in earning
coverage of fixed financial charges and high internal cash generation; and well
established access to a range of financial markets and assured sources of
alternate liquidity.
P-2--Issuers rated PRIME-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above, but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
