1933 Act File No. 33-36729
1940 Act File No. 811-6165
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
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Pre-Effective Amendment No. ........................
Post-Effective Amendment No. 27 ....................... X
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and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 26 ...................................... X
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MUNICIPAL SECURITIES INCOME TRUST
(Exact Name of Registrant as Specified in Charter)
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, Pennsylvania 15237-7000
(Address of Principal Executive Offices)
(412) 288-1900
(Registrant's Telephone Number)
John W. McGonigle, Esquire,
Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779
(Name and Address of Agent for Service)
It is proposed that this filing will become effective:
_ immediately upon filing pursuant to paragraph (b) X on OCTOBER 31, 1998
pursuant to paragraph (b) _ 60 days after filing pursuant to paragraph (a)(i) _
on _________________ pursuant to paragraph (a)(i)
75 days after filing pursuant to paragraph (a)(ii) on _________________
pursuant to paragraph (a)(ii) of Rule 485.
If appropriate, check the following box:
This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Copies to:
Matthew G. Maloney, Esquire
Dickstein Shapiro Morin & Oshinsky, LLP
2101 L Street, N.W.
Washington, DC 20037
<PAGE>
CROSS-REFERENCE SHEET
This Amendment to the Registration Statement of MUNICIPAL SECURITIES
INCOME TRUST, which is comprised of five portfolios: (1) Federated Pennsylvania
Municipal Income Fund, (a) Class A Shares and (b) Class B Shares; (2) Federated
Ohio Municipal Income Fund, (a) Class F Shares; (3) Federated Michigan
Intermediate Municipal Trust; (4) Federated California Municipal Income Fund,
(a) Class A Shares (formerly, Class F Shares) and (b) Class B Shares; and (5)
Federated New York Municipal Income Fund, (a) Class A Shares (formerly, Class F
Shares), and is comprised of the following:
PART A. INFORMATION REQUIRED IN A PROSPECTUS.
Prospectus Heading
(RULE 404(C) CROSS REFERENCE)
Item 1. COVER PAGE....................(1-5) Cover Page.
Item 2. SYNOPSIS (1-5) Summary of Fund Expenses.
Item 3. CONDENSED FINANCIAL
INFORMATION (1(a),4(a),5) Financial Highlights -
Class A Shares; (1(b),4(b)) Financial
Highlights - Class B Shares; (2)
Financial Highlights - Class F Shares;
(3) Financial Highlights; (1-5)
Performance Information.
Item 4. GENERAL DESCRIPTION OF
INFORMATION (1-5) General Information;
(1-5) Investment Information;
(1-5) Investment Objective; (1-5)
Investment Policies;(1) Pennsylvania
Municipal Securities; (2) Ohio
Municipal Securities; (3) Michigan
Municipal Securities; (4) California
Municipal Securities; (5) New York
Municipal Securities; (1-5) Investment
Risks; (1-5) Non-Diversification;
(1-5) Investment Limitations.
Item 5. MANAGEMENT OF THE FUND (1-5) Trust
Information; (1-5) Management of the
Trust; (1,3-5) Distribution of Shares;
(2) Distribution of Class F Shares;
(1-5) Administration of the Fund.
Item 6. CAPITAL STOCK AND OTHER
SECURITIES (1-5) Account and Share Information;
(1-5) Dividends and Distributions;
(1-5) Accounts with Low Balances;
(1-5) Shareholder Information; (1-5)
Voting Rights; (1-5) Tax Information;
(1-5) Federal Income Tax; (1)
Pennsylvania Taxes; (2) State of Ohio
Income Taxes; (3) Michigan Taxes; (4)
California Income Taxes; (5) New York
Taxes; (1-5) State and Local Taxes.
<PAGE>
Item 7. PURCHASE OF SECURITIES
BEING OFFERED (1,4) Expenses of the Fund;
(1-5) Net Asset Value; (1-5) Investing
in the Fund; (1-5) Purchasing Shares;
(1-5) Purchase Shares Through a
Financial Intermediary;(1-5)
Purchasing Shares by Wire; (1-5)
Purchasing Shares by Check; (1-5)
Systematic Investment Program; (2)
Eliminating the Sales Charge; (1,3-5)
Reducing or Eliminating the Sales
Charge; (1-5) Confirmations and
Account Statements; (1,3-5)
Distribution of Shares.
Item 8. REDEMPTION OR REPURCHASE (1-5)
Redeeming and Exchanging Shares; (1-5)
Redeeming or Exchanging Shares Through
a Financial Intermediary; (1-5)
Redeeming or Exchanging Shares by
Telephone; (1-5) Redeeming or
Exchanging Shares by Mail; (1-5)
Requirements for Redemption; (1-5)
Requirements for Exchange; (1-5)
Systematic Withdrawal Program; (1-5)
Contingent Deferred Sales Charge;
(1-5) Eliminating the Contingent
Deferred Sales Charge; (1-5) Accounts
with Low Balances.
Item 9. PENDING LEGAL PROCEEDINGS None.
<PAGE>
PART B. INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION.
Item 10. COVER PAGE....................(1-5) Cover Page.
Item 11. TABLE OF CONTENTS (1-5) Table of Contents.
Item 12. GENERAL INFORMATION AND
HISTORY (1-5) General Information About the
Fund; (1-5) About Federated
Investors, Inc.
Item 13. INVESTMENT OBJECTIVES
AND POLICIES (1-5) Investment Objectives and
Policies.
Item 14. MANAGEMENT OF THE FUND (1-5) Municipal Securities Income
Trust Management.
Item 15. CONTROL PERSONS AND PRINCIPAL
HOLDERS OF SECURITIES (1-5) Municipal Securities Income
Trust Management.
Item 16. INVESTMENT ADVISORY AND OTHER
SERVICES (1-5) Investment Advisory Services;
(1-5) Other Services; (3) Shareholder
Services Agreement; (1,2,4,5)
Distribution Plan and Shareholder
Services Agreement.
Item 17. BROKERAGE ALLOCATION (1-5) Brokerage Transactions.
Item 18. CAPITAL STOCK AND OTHER
SECURITIES Not applicable.
Item 19. PURCHASE, REDEMPTION AND
PRICING OF SECURITIES
BEING OFFERED (1-5) Purchasing Shares;
(1-5) Determining Net Asset Value;
(1-5) Redeeming Shares.
Item 20. TAX STATUS (1-5) Tax Status.
Item 21. UNDERWRITERS Not applicable.
Item 22. CALCULATION OF PERFORMANCE
DATA (1-5) Total Return; (1-5) Yield;
(1-5) Tax-Equivalent Yield; (1-5) Performance Comparisons.
Item 23. FINANCIAL STATEMENTS..........(1-5) Filed in Part A.
Federated Pennsylvania Municipal Income Fund
(A Portfolio of Municipal Securities Income Trust)
Class A Shares, Class B Shares
PROSPECTUS
The shares of Federated Pennsylvania Municipal Income Fund (the "Fund")
offered by this prospectus represent interests in a non-diversified
portfolio of securities which is one of a series of investment portfolios in
Municipal Securities Income Trust (the "Trust"), an open-end management
investment company (a mutual fund). The investment objective of the Fund is
to provide current income which is exempt from federal regular income tax and
the personal income taxes imposed by the Commonwealth of Pennsylvania. The
Fund invests primarily in a portfolio of municipal securities which are
exempt from federal regular income tax and Pennsylvania state and local
income tax ("Pennsylvania Municipal Securities"). These securities include
those issued by or on behalf of the Commonwealth of Pennsylvania and
Pennsylvania municipalities, as well as those issued by states, territories,
and possessions of the United States which are exempt from federal regular
income tax and the personal income taxes imposed by the Commonwealth of
Pennsylvania and Pennsylvania municipalities.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF ANY
BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY
OTHER GOVERNMENT AGENCY. INVESTMENT IN CLASS A SHARES OR CLASS B SHARES
INVOLVES INVESTMENT RISKS INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in the Fund. Keep this prospectus for future reference.
The Fund has also filed a Statement of Additional Information, dated October
31, 1998, with the Securities and Exchange Commission ("SEC"). The
information contained in the Statement of Additional Information is
incorporated by reference into this prospectus. You may request a copy of the
Statement of Additional Information or a paper copy of this prospectus, if
you have received your prospectus electronically, free of charge by calling
1-800-341-7400. To obtain other information or to make inquiries about the
Fund, contact your financial institution. The Statement of Additional
Information, material incorporated by reference into this document, and
other information regarding the Fund is maintained electronically with the
SEC at Internet Web site (http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Prospectus dated October 31, 1998
TABLE OF CONTENTS
Summary of Fund Expenses 1
Financial Highlights -- Class A Shares 2
Financial Highlights -- Class B Shares 3
General Information 4
Calling the Fund 4
Year 2000 Statement 4
Investment Information 4
Investment Objective 4
Investment Policies 4
Pennsylvania Municipal Securities 7
Investment Risks 7
Reducing Risks of Lower-Rated Securities 8
Non-Diversification 8
Investment Limitations 8
Expenses of the Fund 8
Net Asset Value 9
Investing in the Fund 9
Purchasing Shares 10
Purchasing Shares Through a Financial Intermediary 10
Purchasing Shares by Wire 10
Purchasing Shares by Check 10
Systematic Investment Program 10
Class A Shares 10
Class B Shares 11
Redeeming and Exchanging Shares 11
Redeeming or Exchanging Shares Through a
Financial Intermediary 12
Redeeming or Exchanging
Shares by Telephone 12
Redeeming or Exchanging Shares by Mail 12
Requirements for Redemption 12
Requirements for Exchange 12
Systematic Withdrawal Program 13
Systematic Withdrawal Program ("SWP")
on Class B Shares 13
Contingent Deferred Sales Charge 13
Account and Share Information 14
Confirmations and Account Statements 14
Dividends and Distributions 14
Accounts with Low Balances 14
Trust Information 14
Management of the Trust 14
Distribution of Shares 15
Administration of the Fund 16
Shareholder Information 16
Voting Rights 16
Tax Information 16
Federal Income Tax 16
State and Local Taxes 17
Performance Information 17
Appendix 17
Financial Statements 21
Independent Auditors' Report 38
SUMMARY OF FUND EXPENSES
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
CLASS A CLASS B
<S> <C> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of
offering price) 4.50% None
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price) None None
Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable)(1). None 5.50%
Redemption Fee (as a percentage of amount redeemed, if applicable) None None
Exchange Fee None None
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver)(2) 0.32% 0.32%
12b-1 Fee(3) 0.00% 0.75%
Total Other Expenses (after expense reimbursement) 0.43% 0.46%
Shareholder Services Fee (after waiver)(4) 0.23% 0.25%
Total Operating Expenses(5)(6) 0.75% 1.53%
</TABLE>
(1) The contingent deferred sales charge for Class B Shares 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 management fee has been reduced to reflect the voluntary waiver of a
portion of the management fee. The adviser can terminate this voluntary waiver
at any time at its sole discretion. The maximum management fee is 0.40%
(3) The Class A Shares has no present intention of paying or accruing the 12b-1
fee during the fiscal year ended August 31, 1998. If the class were paying or
accruing the 12b-1 fee, the class would be able to pay up to 0.40% of its
average daily net assets for the 12b-1 fee. For more information, see "Trust
Information."
(4) The shareholder services fee has been reduced to reflect the voluntary
waiver of a portion of the shareholder services fee.The shareholder services
provider can terminate this voluntary waiver at any time at its sole discretion.
The maximum shareholder services fee is 0.25%
(5) The total operating expenses for Class A Shares and Class B Shares would
have been 0.85% and 1.61%, respectively, absent the voluntary waivers of
portions of the management fee for Class A Shares and Class B Shares and
shareholder services fee for Class A Shares.
(6) Class B Shares convert to Class A Shares (which pay lower ongoing
expenses) approximately eight years after purchase.
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of Class A Shares and Class B
Shares of the Trust 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>
CLASS B*
(ASSUMING NO
EXAMPLE CLASS A CLASS B REDEMPTION)
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.
<S> <C> <C> C>
1 Year $ 52 $ 72 $ 16
3 Years $ 68 $ 93 $ 48
5 Years $ 85 $107 $ 83
10 Years $134 $182 $182
</TABLE>
* You would pay the following expenses on the same investment assuming no
redemption.
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
FINANCIAL HIGHLIGHTS -- CLASS A SHARES
FEDERATED PENNSYLVANIA MUNICIPAL INCOME FUND
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Report of Independent Auditors' Report on page 38.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994 1993 1992 1991(A)
NET ASSET VALUE, BEGINNING OF PERIOD $11.71 $11.35 $11.23 $10.94 $11.68 $10.93 $10.44 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.62 0.62 0.65 0.65 0.60 0.60 0.627 0.588
Net realized and unrealized gain
(loss) on investments 0.43 0.39 0.12 0.27 (0.75) 0.75 0.493 0.456
Total from investment operations 1.05 1.01 0.77 0.92 (0.15) 1.35 1.120 1.044
LESS DISTRIBUTIONS
Distributions from net investment income (0.64) (0.65) (0.65) (0.63) (0.59) (0.60) (0.627) (0.588)
Distributions from net realized gain on investments (0.04) -- -- -- -- -- -- --
Distributions in excess of
net investment income -- -- -- -- -- -- (0.003)(b) (0.016)(b)
Total distributions (0.68) (0.65) (0.65) (0.63) (0.59) (0.60) (0.630) (0.604)
NET ASSET VALUE, END OF PERIOD $12.08 $11.71 $11.35 $11.23 $10.94 $11.68 $10.93 $10.44
TOTAL RETURN(C) 8.72% 9.12% 6.99% 8.76% (1.34%) 12.71% 11.06% 10.60%
RATIOS TO AVERAGE NET ASSETS
Expenses 0.75% 0.75% 0.75% 0.75% 0.75% 0.83% 0.73% 0.26%*
Net investment income 4.84% 5.34% 5.73% 5.92% 5.27% 5.33% 5.88% 6.45%*
Expense waiver/reimbursement(d) 0.10% 0.22% 0.25% 0.28% 0.45% 0.70% 0.97% 1.24%*
SUPPLEMENTAL DATA
Net assets, end of period
(000 omitted) $237,705 $212,792 $84,116 $83,722 $85,860 $69,947 $48,261 $31,067
Portfolio turnover 24% 30% 23% 59% 17 % 0% 0% 10%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from October 11, 1990 (date of initial
public investment) to August 31, 1991.
(b) Distributions are determined in accordance with income tax regulations
which may differ from generally accepted accounting principles. These
distributions do not represent a return of capital for federal income tax
purposes.
(c) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(d) 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)
FINANCIAL HIGHLIGHTS -- CLASS B SHARES
FEDERATED PENNSYLVANIA MUNICIPAL INCOME FUND
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Report of Independent Auditors' Reports on page 38.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
<S> <C> <C>
1998 1997(A)
NET ASSET VALUE, BEGINNING OF PERIOD $11.71 $11.52
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.54 0.30
Net realized and unrealized gain (loss) on investments 0.42 0.20
Total from investment operations 0.96 0.50
LESS DISTRIBUTIONS
Distributions from net investment income (0.55) (0.31)
Distributions from net realized gain on investments (0.04) --
Total distributions (0.59) (0.31)
NET ASSET VALUE, END OF PERIOD $12.08 $11.71
TOTAL RETURN(B) 7.92% 4.41%
RATIOS TO AVERAGE NET ASSETS
Expenses 1.53% 1.25%*
Net investment income 4.06% 4.62%*
Expense waiver/reimbursement(c) 0.08% 0.47%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $30,629 $7,906
Portfolio turnover 24% 30%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from March 4, 1997 (date of initial
public investment) to August 31, 1997.
(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)
GENERAL INFORMATION
The Trust was established as a Massachusetts business trust on August 6,
1990. 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
Pennsylvania Municipal Securities. The Fund is not likely to be a suitable
investment for non-Pennsylvania taxpayers or retirement plans since
Pennsylvania Municipal Securities are not likely to produce competitive
after-tax yields for such persons and entities when compared to other
investments.
The Fund's current net asset value and offering price may be found in the
mutual funds section of local newspapers under "Federated" and the
appropriate class designation listing.
CALLING THE FUND Call the Fund at 1-800-341-7400.
YEAR 2000 STATEMENT
Like other mutual funds and business organizations worldwide, the Fund's
service providers (among them, the adviser, distributor, administrator and
transfer agent) must ensure that their computer systems are adjusted to
properly process and calculate date-related information from and after
January 1, 2000. Many software programs and, to a lesser extent, the computer
hardware in use today cannot distinguish the year 2000 from the year 1900.
Such a design flaw could have a negative impact in the handling of securities
trades, pricing and accounting services. The Fund and its service providers
are actively working on necessary changes to computer systems to deal with
the year 2000 issue and believe that systems will be year 2000 compliant when
required. Analysis continues regarding the financial impact of instituting a
year 2000 compliant program on the Fund's operations.
INVESTMENT INFORMATION
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide current income which is
exempt from federal regular income tax (federal regular income tax does not
include the federal alternative minimum tax) and the personal income taxes
imposed by the Commonwealth of Pennsylvania. The investment objective cannot
be changed without approval of shareholders. While there is no assurance that
the Fund will achieve its investment objective, it endeavors to do so by
following the investment policies described in this prospectus.
The Fund invests its assets so at least 80% of its annual interest income is
exempt from federal regular income tax and the Commonwealth of Pennsylvania
personal income taxes. Interest income of the Fund that is exempt from the
income taxes described above retains its exempt status when distributed to
the Fund's shareholders. However, income distributed by the Fund may not
necessarily be exempt from state or municipal taxes in states other than
Pennsylvania.
The Fund may invest up to but not including 35% of its net assets in lower
quality bonds. These bonds will usually offer higher yields than higher-rated
bonds, but involve greater investment risk at the time of issue. (See
"Investment Risks.")
INVESTMENT POLICIES
The Fund pursues its investment objective by investing in a portfolio of
Pennsylvania Municipal Securities. Unless indicated otherwise, the
investment policies of the Fund may be changed by the Trustees without
approval of shareholders. Shareholders will be notified before any material
changes in these policies become effective.
ACCEPTABLE INVESTMENTS
The securities in which the Fund invests include:
* obligations issued by or on behalf of the Commonwealth of Pennsylvania, its
political subdivisions, or agencies;
* debt obligations of any state, territory, or possession of the United
States, or any political subdivision of any of these; and
* participation interests, as described below, in any of the above
obligations, the interest from which is, in the opinion of bond counsel for
the issuers or in the opinion of officers of the Fund and/or the investment
adviser to the Fund, exempt from both federal regular income tax and the
personal income taxes imposed by the Commonwealth of Pennsylvania. At least
80% of the value of the Fund's total assets will be invested in Pennsylvania
Municipal Securities.
The prices of fixed income securities fluctuate inversely to the direction of
interest rates.
CHARACTERISTICS
The Pennsylvania municipal securities which the Fund buys are both investment
grade and lower rated bonds. The Fund invests at least 65% of its assets in
bonds which have the same characteristics assigned by Moody's Investors
Service, Inc. ("Moody's"), Standard & Poor's ("S&P"), or Fitch IBCA, Inc.
("Fitch") to bonds of investment grade quality (rated Aaa, Aa, A, or Baa by
Moody's or AAA, AA, A, or BBB by S&P or Fitch). The Fund will limit its
purchases of bonds rated Ba or below by Moody's or BB or below by S&P or
Fitch (commonly known as "junk bonds" to up to but not including 35% of its
net assets. Changes in economic or other circumstances are more likely to
lead to a weakened capacity to make principal and interest payments than
higher rated bonds.
If a rated bond loses its rating or has its rating reduced after the Fund has
purchased it, the Fund is not required to drop the bond from the portfolio,
but will consider doing so. In certain cases, the Fund's adviser may choose
bonds which are unrated if it judges the bonds to have the same
characteristics as otherwise permissable bonds.
There is no limit to portfolio maturity. A description of the rating
categories is contained in the Appendix to this prospectus.
PARTICIPATION INTERESTS
The Fund may purchase participation interests from financial institutions
such as commercial banks, savings associations, and insurance companies.
These participation interests give the Fund an undivided interest in
Pennsylvania Municipal Securities. The financial institutions from which the
Fund purchases participation interests frequently provide or secure
irrevocable letters of credit or guarantees to assure that the participation
interests are of high quality. The Trustees will determine that participation
interests meet the prescribed quality standards for the Fund.
VARIABLE RATE MUNICIPAL SECURITIES
Some of the Pennsylvania Municipal Securities which the Fund purchases may
have variable interest rates. Variable interest rates are ordinarily based on
a published interest rate, interest rate index, or a similar standard, such
as the 91-day U.S. Treasury bill rate. Many variable rate municipal
securities are subject to payment of principal on demand by the Fund in not
more than seven days. All variable rate municipal securities will meet the
quality standards for the Fund. The Fund's investment adviser has been
instructed by the Trustees to monitor the pricing, quality, and liquidity of
the variable rate municipal securities, including participation interests
held by the Fund on the basis of published financial information and reports
of the rating agencies and other analytical services.
MUNICIPAL LEASES
Municipal leases are obligations issued by state and local governments or
authorities to finance the acquisition of equipment and facilities and may be
considered to be illiquid. They may take the form of a lease, an installment
purchase contract, a conditional sales contract or a participation
certificate on any of the above. Lease obligations may be subject to periodic
appropriation. If the entity does not appropriate funds for future lease
payments, the entity cannot be compelled to make such payments. In the event
of failure of appropriation, unless the participation interests are credit
enhanced, it is unlikely that the participants would be able to obtain an
acceptable substitute source of payment.
RESTRICTED AND ILLIQUID SECURITIES
As a matter of fundamental investment policy, the Fund may invest up to 10%
of its total assets in restricted securities. Restricted securities are any
securities in which the Fund may otherwise invest pursuant to its investment
objective and policies but which are subject to restriction upon resale under
federal securities laws. As a matter of non-fundamental investment policy,
the Fund will limit investments in illiquid securities, including certain
restricted securities not determined by the Trustees to be liquid, to 15% of
its net assets.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may purchase securities on a when-issued or delayed delivery basis.
These transactions are arrangements in which the Fund purchases securities
with payment and delivery scheduled for a future time. The seller's failure
to complete the transaction may cause the Fund to miss a price or yield
considered to be advantageous. Settlement dates may be a month or more after
entering into these transactions, and the market values of the securities
purchased may vary from the purchase prices.
The Fund may dispose of a commitment prior to settlement if the investment
adviser deems it appropriate to do so. In addition, the Fund may enter in
transactions to sell its purchase commitments to third parties at current
market values and simultaneously acquire other commitments to purchase
similar securities at later dates. The Fund may realize short-term profits or
losses upon the sale of such commitments.
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.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest its assets in securities of other investment companies as
an efficient means of carrying out its investment policies. It should be
noted that investment companies incur certain expenses, such as management
fees, and, therefore, any investment by the Fund in shares of other
investment companies may be subject to such duplicate expenses.
TEMPORARY INVESTMENTS
The Fund invests its assets so that at least 80% of its annual interest
income is exempt from federal regular income tax and the Commonwealth of
Pennsylvania personal income taxes. However, from time to time, when the
investment adviser determines that market conditions call for a temporary
defensive posture, the Fund may invest in short-term non-Pennsylvania
municipal tax-exempt obligations or taxable temporary investments. These
temporary investments include: notes issued by or on behalf of municipal or
corporate issuers; obligations issued or guaranteed by the U.S. government,
its agencies, or instrumentalities; other debt securities; commercial paper;
certificates of deposit of banks; and repurchase agreements (arrangements in
which the organization selling the Fund, a bond or temporary investment
agrees at the time of sale to repurchase it at a mutually agreed upon time
and price).
There are no rating requirements applicable to temporary investments.
However, the investment adviser will limit temporary investments to those
rated within the investment grade categories described under "Acceptable
Investments --Characteristics" (if rated) or those which the investment
adviser judges to have the same characteristics as such investment grade
securities (if unrated).
Although the Fund is permitted to make taxable, temporary investments, there
is no current intention of generating income subject to federal regular
income tax or the Commonwealth of Pennsylvania personal income taxes.
PENNSYLVANIA MUNICIPAL SECURITIES
Pennsylvania Municipal Securities are generally issued to finance public
works, such as airports, bridges, highways, housing, hospitals, mass
transportation projects, schools, streets, and water and sewer works. They
are also issued to repay outstanding obligations, to raise funds for general
operating expenses, and to make loans to other public institutions and
facilities.
Pennsylvania Municipal Securities include industrial development bonds
issued by or on behalf of public authorities to provide financing aid to
acquire sites or construct and equip facilities for privately or publicly
owned corporations. The availability of this financing encourages these
corporations to locate within the sponsoring communities and thereby
increases local employment.
The two principal classifications of municipal securities are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its full faith and credit and taxing power for the payment
of principal and interest. However, interest on and principal of revenue
bonds are payable only from the revenue generated by the facility financed by
the bond or other specified sources of revenue. Revenue bonds do not
represent a pledge of credit or create any debt of or charge against the
general revenues of a municipality or public authority. Industrial development
bonds are typically classified as revenue bonds.
INVESTMENT RISKS
The value of Shares will fluctuate. The amount of this fluctuation is
dependent upon the quality and maturity of the bonds in the Fund's portfolio
as well as on market conditions. Yields on Pennsylvania Municipal Securities
depend on a variety of factors, including, but not limited to: the general
conditions of the municipal bond market; the size of the particular
offering; the maturity of the obligations; and the rating of the issue.
Further, any adverse economic conditions or developments affecting the
Commonwealth of Pennsylvania or its municipalities could impact the Fund's
portfolio. The ability of the Fund to achieve its investment objective also
depends on the continuing ability of the issuers of Pennsylvania Municipal
Securities and participation interests, or the guarantors of either, to meet
their obligations for the payment of interest and principal when due.
Investing in Pennsylvania Municipal Securities which meet the Fund's quality
standards may not be possible if the Commonwealth of Pennsylvania or its
municipalities do not maintain their current credit ratings. In addition,
certain Pennsylvania constitutional amendments, legislative measures,
executive orders, administrative regulations, and voter initiatives could
result in adverse consequences affecting Pennsylvania Municipal Securities.
A further discussion of the risks of a portfolio which invests largely in
Pennsylvania Municipal Securities is contained in the Statement of
Additional Information.
The prices of longer term bonds fluctuate more widely in response to market
interest rate changes. Generally speaking, the lower quality, long-term
bonds in which the Fund invests have greater fluctuation in value than high
quality, shorter-term bonds.
Bond prices are interest rate sensitive, which means that their value varies
inversely with market interest rates. Thus, if market interest rates have
increased from the time a bond was purchased, the bond, if sold, might be
sold at a price less than its cost. Similarly, if market interest rates have
declined from the time a bond was purchased, the bond, if sold, might be sold
at a price greater than its cost. (In either instance, if the bond was held
to maturity, no loss or gain normally would be realized as a result of
interim market fluctuations.)
Prices of lower grade bonds also fluctuate with changes in the perceived
quality of the credit of their issuers. Consequently, Shares may not be
suitable for persons who cannot assume the somewhat greater risks of capital
depreciation associated with higher tax-exempt income yields. In addition,
bonds rated "BBB" and below by S&P or Fitch or "Baa" and below by Moody's
have speculative characteristics. Changes in economic conditions or other
circumstances are more likely to lead to weakened capacity to make principal
and interest payments than higher rated bonds.
A large portion of the Fund's portfolio may be invested in bonds whose
interest payments are from revenues of similar projects (such as housing or
hospitals) or where issuers share the same geographic location. As a result,
the Fund may be more susceptible to similar economic, political or regulatory
developments than would a portfolio of bonds with a greater geographic and
project variety. This susceptibility may result in greater fluctuations in
share price.
Many issuers of bonds which have characteristics of rated bonds choose not to
have their obligations rated. Unrated bonds may carry a greater risk and
higher yield than rated securities. Although unrated bonds are not
necessarily of lower quality, the market for them may not be as broad as that
for rated bonds since many investors rely solely on the major rating agencies
for credit appraisal.
Further, the lower-rated or unrated bonds which the Fund may purchase are
frequently traded only in markets where the number of potential purchasers
and sellers is limited. This consideration may have the effect of limiting
the availability of such bonds for the Fund to purchase and may also have the
effect of limiting the ability of the Fund to sell such bonds at their fair
market value either to meet redemption requests or to respond to changes in
the economy or the financial markets. The Fund will not invest more than 15%
of its total assets in securities which are not readily marketable.
REDUCING RISKS OF LOWER-RATED SECURITIES
The Fund's investment adviser believes that the risks of investing in lower-
rated securities can be reduced. The professional portfolio management
techniques used by the Fund to attempt to reduce these risks include:
CREDIT RESEARCH
When purchasing bonds, rated or unrated, the Fund's investment adviser
performs its own credit analysis in addition to using recognized rating
agencies. This credit analysis considers the economic feasibility of revenue
bond project financing and general purpose borrowings, the financial
condition of the issuer or guarantor with respect to liquidity, cash flow and
ability to meet anticipated debt service requirements, and political
developments that may affect credit quality.
DIVERSIFICATION
The Fund invests in securities of many different issuers to reduce portfolio
risks.
ECONOMIC ANALYSIS
The Fund's adviser also considers trends in the overall economy, in
geographic areas, in various industries, and in the financial markets.
NON-DIVERSIFICATION
The Fund is a non-diversified investment portfolio. As such, there is no
limit on the percentage of assets which can be invested in any single issuer.
An investment in the Fund, therefore, will entail greater risk than would
exist in a diversified portfolio of securities because the higher percentage
of investments among fewer issuers may result in greater fluctuation in the
total market value of the Fund's portfolio. Any economic, political, or
regulatory developments affecting the value of the securities in the Fund's
portfolio will have a greater impact on the total value of the portfolio than
would be the case if the portfolio were diversified among more issuers.
The Fund intends to comply with Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"). This undertaking requires that at the end of
each quarter of the taxable year: (a) with regard to at least 50% of the
Fund's total assets, no more than 5% of its total assets are invested in the
securities of a single issuer and (b) no more than 25% of its total assets
are invested in the securities of a single issuer.
INVESTMENT LIMITATIONS
The Fund will not borrow money directly or through reverse repurchase
agreements (arrangements in which the Fund sells a portfolio instrument for a
percentage of its cash value with an agreement to buy it back on a set date)
or pledge securities except, under certain circumstances, the Fund may borrow
up to one-third of the value of its total assets and pledge up to 10% of the
value of total assets to secure such borrowings.
The above investment limitations cannot be changed without shareholder
approval.
EXPENSES OF THE FUND
Holders of Shares pay their allocable portion of Trust and portfolio
expenses.
The Trust expenses for which holders of Shares pay their allocable portion
include, but are not limited to: the cost of organizing the Trust and
continuing its existence; registering the Trust with federal and state
securities authorities; Trustees' fees; auditors' fees; the cost of meetings
of Trustees; legal fees of the Trust; association membership dues; and such
non-recurring and extraordinary items as may arise from time to time.
The portfolio expenses for which holders of Shares pay their allocable
portion include, but are not limited to: registering the portfolio and Shares
of the portfolio; investment advisory services; taxes and commissions;
custodian fees; insurance premiums; auditors' fees; and such non-recurring
and extra-ordinary 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
Agreement, and the only expenses which are allocated specifically to Class B
Shares as a class are expenses under the Trust's Shareholder Services
Agreement 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 Agreement; 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 SEC and to state
securities commissions; expenses related to administrative personnel and
services as required to support holders of Shares; legal fees relating solely
to Shares; and Trustees' fees incurred as a result of issues relating solely
to Shares.
NET ASSET VALUE
The Fund's net asset value ("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.
INVESTING IN THE FUND
This prospectus offers two classes of Shares each with the characteristics
described below.
CLASS A CLASS B
Minimum and Subsequent
Investment Amounts $1500/$100 $1500/$100
Minimum and Subsequent Investment
Amount for Retirement Plans NA NA
Maximum Sales Charge 4.50%* None
Maximum Contingent Deferred
Sales Charge** None*** 5.50%+
Conversion Feature No Yes++
* Class A Shares are sold at NAV, plus a sales charge as follows:
DEALER
SALES CHARGE CONCESSION
AS A PERCENTAGE OF AS A
PERCENTAGE
PUBLIC NET OF PUBLIC
OFFERING AMOUNT OFFERING
AMOUNT OF TRANSACTION PRICE INVESTED PRICE
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% 0.75%****
** 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.
*** Applies only to Shares purchased where the dealer has received an advanced
commission.
**** See Dealer Concession.
+ The following contingent deferred sales charge schedule applies to
Class B Shares:
YEAR OF REDEMPTION CONTINGENT DEFERRED
AFTER PURCHASE SALES CHARGE
First 5.50%
Second 4.75%
Third 4.00%
Fourth 3.00%
Fifth 2.00%
Sixth 1.00%
Seventh and thereafter 0.00%
++ 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, Inc. ("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:
* through financial intermediaries that do not receive sales charge dealer
concessions;
* by Federated Life Members; or
* 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:
* purchasing Class A Shares in quantity;
* combining concurrent purchases of Class A Shares
* by you, your spouse, and your children under age 21, or;
* of two or more Federated Funds (other than money market funds);
* accumulating purchases (in calculating the sales charge on an additional
purchase of Class A Shares, you may count the current value of previous Class
A Share purchases still invested in the Fund);
* signing a letter of intent to purchase a specific dollar amount of Class A
Shares within 13 months; or
* using the reinvestment privilege within 120 days of redeeming Class A
Shares of an equal or lesser amount.
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, the distributor will normally offer to pay a
dealer 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.
Financial intermediaries purchasing Class A Shares for their customers in
amounts of $1 million or more are eligible to receive an advance commission
from the distributor based on the following breakpoints:
ADVANCE COMMISSION
AS A PERCENTAGE OF
TRANSACTION AMOUNT PUBLIC OFFERING PRICE
First $1 - $5 million 0.75%
Next $5 - $20 million 0.50%
Over $20 million 0.25%
For accounts with assets over $1 million, the dealer commission resets
annually to the first breakpoint on the anniversary of the first purchase.
Class A Share purchases under this program may be made by Letter of Intent or
by combining concurrent purchases. The above commission will be paid only on
those purchases that were not previously subject to a front-end sales charge
and dealer commission. Certain retirement accounts may not be eligible for
this program. Financial intermediaries must notify the Fund once an account
reaches $1 million in order to qualify for advance commissions.
A contingent deferred sales charge of 0.75% of the redemption amount applies
to Class A Shares redeemed up to 24 months after purchase if a financial
intermediary received an advance commission on the transaction.
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, Fund 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 of not less than $100. To
be eligible to participate in this program, a shareholder must have an
account value of at least $10,000. A shareholder may apply for participation
in this program through his financial 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.
SYSTEMATIC WITHDRAWAL PROGRAM ("SWP") ON CLASS B SHARES
A contingent deferred sales charge will not be charged on SWP redemptions of
Class B Shares if:
* shares redeemed are 12% or less of the account value in a single year;
* the account is at least one year old;
* all dividends and capital gains distributions are reinvested; and
* the account has at least a $10,000 balance when the SWP is established
(multiple Class B Share accounts cannot be aggregated to meet this minimum
balance).A contingent deferred sales charge will be charged on redemption
amounts that exceed the 12% annual limit. In measuring the redemption
percentage, the account is valued when the SWP is established and then
annually at calendar year-end. Redemptions can be made only at a rate of 1%
monthly, 3% quarterly, or 6% semi-annually.
CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge applies only to Shares purchased where
the dealer has received an advanced commission. 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:
* following the death or disability, as defined in Section 72(m)(7) of the
Internal Revenue Code of 1986, of the last surviving shareholder and any
designated beneficiaries;
* 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;
* which are involuntary redemptions of shareholder accounts that do not
comply with the minimum balance requirements;
* which are qualifying redemptions of Class B Shares under a Systematic
Withdrawal Program;
* which are reinvested in the Fund under the reinvestment privilege;
* 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
* 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 NAV 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. 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 Fund's 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, Inc. All of the Class A (voting) shares of
Federated Investors, Inc. are owned by a trust, the trustees of which are John
F. Donahue, Chairman and Director of Federated Investors, Inc., Mr. Donahue's
wife, and Mr. Donahue's son, J. Christopher Donahue, who is President and
Director of Federated Investors, Inc.
Federated Advisers and other subsidiaries of Federated Investors, Inc. 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 $120 billion invested across more
than 300 funds under management and/or administration by its subsidiaries, as
of December 31, 1997, Federated Investors, Inc. 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 4,000 financial
institutions nationwide.
J. Scott Albrecht has been a portfolio manager of the Fund since March 1995.
Mr. Albrecht joined Federated Investors, Inc. or its predecessor 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 a portfolio manager of the Fund since April 1997. Ms.
Ochson joined Federated Investors, Inc. or its predecessor 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, Inc.
The distributor will pay dealers an amount equal to 5.50% of the NAV of Class
B Shares purchased by their clients or customers. These payments will be made
directly by the distributor from its assets, and will not be made from the
assets of the Fund. Dealers may voluntarily waive receipt of all or any
portion of these payments. The distributor may pay a portion of the
distribution fee discussed below to financial institutions that waive all or
any portion of the advance payments.
DISTRIBUTION PLAN AND SHAREHOLDER SERVICES
Under a distribution plan adopted in accordance with Investment Company Act
Rule 12b-1 (the "Distribution Plan"), the Fund may pay to the distributor an
amount, computed at an annual rate of 0.40% of the average daily NAV of Class
A Shares and 0.75% of the average daily NAV 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 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, Inc.,
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 NAV of Class A
Shares purchased by their clients or customers under certain qualified
retirement plans as approved by Federated Securities Corp. (Such payments are
subject to a reclaim from the financial institution should the assets leave
the program within 12 months after purchase.)
Furthermore, with respect to both Class A Shares and Class B Shares, in
addition to payments made pursuant to the Distribution Plan and Shareholder
Services Agreement, Federated Securities Corp. and Federated Shareholder
Services, from their own assets, may pay financial institutions supplemental
fees for the performance of substantial sales services, distribution-related
support services, or shareholder services. The support may include sponsoring
sales, educational and training seminars for their employees, providing sales
literature, and engineering computer software programs that emphasize the
attributes of the Fund. Such assistance may be predicated upon the amount of
Shares the financial institution sells or may sell, and/or upon the type and
nature of sales or marketing support furnished by the financial institution.
Any payments made by the distributor may be reimbursed by the Adviser or its
affiliates.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES
Federated Services Company, a subsidiary of Federated Investors, Inc.,
provides administrative personnel and services (including certain legal and
financial reporting services) necessary to operate the Trust. Federated
Services Company provides these at an annual rate which relates to the
average aggregate daily net assets of all funds advised by affiliates of
Federated Investors, Inc. as specified below:
MAXIMUM AVERAGE AGGREGATE
FEE DAILY NET ASSETS
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
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of shares.
Federated Services Company may choose voluntarily to waive a portion of its
fee.
SHAREHOLDER INFORMATION
VOTING RIGHTS
Each Share of the Fund gives the shareholder one vote in Trustee elections
and other matters submitted to shareholders for vote. All shares of each
portfolio 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 outstanding Shares
of all series entitled to vote.
TAX INFORMATION
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet
requirements of the Code, as amended, applicable to regulated investment
companies and to receive the special tax treatment afforded to such
companies. The Fund will be treated as a single, separate entity for federal
income tax purposes so that income (including capital gains) and losses
realized by the Trust's other portfolios will not be combined for tax
purposes with those realized by the Fund.
Shareholders are not required to pay federal regular income tax on any
dividends received from the Fund that represent net interest on tax-exempt
municipal bonds, although tax-exempt interest will increase the taxable
income of certain recipients of social security benefits. However, under the
Tax Reform Act of 1986, dividends representing net interest earned on some
municipal bonds may be included in calculating the federal individual
alternative minimum tax or the federal alternative minimum tax for
corporations.
The alternative minimum tax, up to 28% of alternative minimum taxable income
for individuals and 20% for corporations, applies when it exceeds the regular
tax for the taxable year. Alternative minimum taxable income is equal to the
regular taxable income of the taxpayer increased by certain "tax preference"
items not included in regular taxable income and reduced by only a portion of
the deductions allowed in the calculation of the regular tax.
The Tax Reform Act of 1986 treats interest on certain "private activity"
bonds issued after August 7, 1986, as a tax preference item for both
individuals and corporations. Unlike traditional governmental purpose
municipal bonds, which finance roads, schools, libraries, prisons, and other
public facilities, private activity bonds provide benefits to private
parties. The Fund may purchase all types of municipal bonds, including
private activity bonds. Thus, should it purchase any such bonds, a portion
of the Fund's dividends may be treated as a tax preference item.
In addition, in the case of a corporate shareholder, dividends of the Fund
which represent interest on municipal bonds will become subject to the 20%
corporate alternative minimum tax because the dividends are included in a
corporation's "adjusted current earnings." The corporate alternative minimum
tax treats 75% of the excess of a taxpayer's pre-tax "adjusted current
earnings" over the taxpayer's alternative minimum taxable income as a tax
preference item. "Adjusted current earnings" is based upon the concept of a
corporation's "earnings and profits." Since "earnings and profits" generally
includes the full amount of any Fund dividend, and alternative minimum taxable
income does not include the portion of the Fund's dividend
attributable to municipal bonds which are not private activity bonds, the
difference will be included in the calculation of the corporation's
alternative minimum tax.
Dividends of the Fund representing net interest income earned on some
temporary investments and any realized net short-term gains are taxed as
ordinary income.
These tax consequences apply whether dividends are received in cash or as
additional shares. Information on the tax status of dividends and
distributions is provided annually.
STATE AND LOCAL TAXES
In the opinion of Houston, Donnelly & Meck, counsel to the Fund, Fund Shares
may be subject to personal property taxes imposed by counties,
municipalities, and school districts in Pennsylvania to the extent that the
portfolio securities in the Fund would be subject to such taxes if owned
directly by residents of those jurisdictions.
Shareholders are urged to consult their own tax advisers regarding the status
of their accounts under state and local tax laws.
PENNSYLVANIA TAXES
Under existing Pennsylvania laws, distributions made by the Fund derived from
interest on obligations free from state taxation in Pennsylvania are not
subject to Pennsylvania personal income taxes. Distributions made by the Fund
will be subject to Pennsylvania personal income taxes to the extent that they
are derived from gain realized by the Fund from the sale or exchange of
otherwise tax-exempt obligations.
PERFORMANCE INFORMATION
From time to time, the Fund advertises the total return, yield, and tax-
equivalent yield for each class of Shares.
Total return represents the change, over a specific period of time, in the
value of an investment in Shares after reinvesting all income and capital
gains distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.
The yield of Shares is calculated by dividing the net investment income per
Share (as defined by the SEC) earned by each class of Shares over a thirty-day
period by the maximum offering price per Share of each class of Shares on the
last day of the period. This number is then annualized using semi-annual
compounding. The tax-equivalent yield of each class of Shares is calculated
similarly to the yield, but is adjusted to reflect the taxable yield that each
class of Shares would have had to earn to equal its actual yield, assuming a
specific tax rate. The yield and the tax-equivalent yield do not necessarily
reflect income actually earned by each class of Shares and, therefore, may not
correlate to the dividends or other distributions paid to shareholders.
The performance information reflects the effect of the maximum sales charge
and other similar non-recurring charges, such as the contingent deferred
sales charge, which, if excluded, would increase the total return, yield, and
tax equivalent yield.
Total return and yield will be calculated separately for Class A Shares and
Class B Shares.
From time to time, advertisements for Class A Shares and Class B Shares of
the Fund may refer to ratings, rankings, and other information in certain
financial publications and/or compare the performance of Class A Shares and
Class B Shares to certain indices.
APPENDIX
STANDARD & POOR'S ("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.
BB--Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
The "BB" rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied "BBB" rating.
B--Debt rated "B" has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity of
willingness to pay interest and repay principal. The "B" rating cagegory is
also used for debt subordinated to senior debt that is assigned an actual or
implied "BBB" or "BB" rating.
CCC--Debt rated "CCC" has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions
to meet timely payment of interest and repayment of principal. In the event
of adverse business, financial, or economic conditions, it is not likely to
have the capacity to pay interest and repay principal. The "CCC" rating
category is also used for debt subordinated to senior debt that is assigned
an actual or implied "B" or "B-" rating.
CC--The rating "CC" typically is applied to debt subordinated to senior debt
that is assigned an actual or implied "CCC" debt rating.
C--The rating "C" typically is applied to debt subordinated to senior debt
which is assigned an actual or implied "CCC-" debt rating. The "C" rating may
be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
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. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
Aa--Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than
in Aaa securities.
A--Bonds which are rated "A" possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may
be present which suggest a susceptibility to impairment sometime in
the future.
Baa--Bonds which are rated "Baa" are considered as medium grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present, but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba--Bonds which are rated "Ba" are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B--Bonds which are rated "B" generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa--Bonds which are rated "Caa" are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
Ca--Bonds which are rated "Ca" represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C--Bonds which are rated "C" are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
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 IBCA, 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.
BB--Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified which could
assist the obligor in satisfying its debt service requirements.
B--Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued
timely payment of principal and interest reflects the limited margin of
safety and the need for reasonable business and economic activity throughout
the life of the issue.
CCC--Bonds have certain identifiable characteristics which, if not remedied,
may lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC--Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C--Bonds are in imminent default in payment of interest
or principal.
DDD, DD, and D--Bonds are in default on interest and/or principal payments.
Such bonds are extremely speculative and should be valued on the basis of
their ultimate recovery value in liquidation or reorganization of the
obligor. DDD represents the highest potential for recovery on these bonds,
and D represents the lowest potential for recovery.
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.
S&P 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 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 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.
S&P 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 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.
PORTFOLIO OF INVESTMENTS
FEDERATED PENNSYLVANIA MUNICIPAL INCOME FUND
AUGUST 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
LONG-TERM MUNICIPALS--97.2%
PENNSYLVANIA--96.3%
<S> <C> <C> <C>
$ 2,000,000 Allegheny County, PA, HDA, Health & Education Revenue Bonds,
7.00% (Rehabilitation Institute of Pittsburgh)/(United States
Treasury PRF)/(Original Issue Yield: 7.132%), 6/1/2002 (@102) BBB $ 2,246,940
1,500,000 Allegheny County, PA, HDA, Hospital Revenue Bonds, (Series 1997),
5.75% (St. Francis Medical Center, PA)/(Original Issue Yield:
6.00%), 5/15/2017 A3 1,576,380
2,000,000 Allegheny County, PA, HDA, Refunding Revenue Bonds (Series 1998A),
5.125% (South Hills Health System)/(Original Issue Yield: 5.34%),
5/1/2023 A2 1,980,520
1,500,000 Allegheny County, PA, HDA, Refunding Revenue Bonds (Series 1998A),
5.125% (South Hills Health System)/(Original Issue Yield: 5.40%),
5/1/2029 A2 1,474,830
4,000,000 Allegheny County, PA, HDA, Revenue Bonds (Series 1997B), 5.00%
(UPMC Health System)/(MBIA INS)/(Original Issue Yield: 5.43%), 7/1/
2016 AAA 4,004,720
300,000 Allegheny County, PA, HDA, Revenue Bonds (Series A), 5.90% (South
Hills Health System)/(Original Issue Yield: 6.00%), 5/1/2003 A2 322,638
300,000 Allegheny County, PA, HDA, Revenue Bonds (Series A), 6.00% (South
Hills Health System)/(Original Issue Yield: 6.10%), 5/1/2004 A2 325,935
1,500,000 Allegheny County, PA, HDA, Revenue Bonds, 5.30% (Children's
Hospital of Pittsburgh)/(MBIA INS)/(Original Issue Yield: 5.70%),
7/1/2026 AAA 1,526,925
1,500,000 Allegheny County, PA, HDA, Revenue Bonds, 5.375% (Ohio Valley
General Hospital, PA)/(Original Issue Yield: 5.50%), 1/1/2018 Baa1 1,501,140
4,000,000 Allegheny County, PA, HDA, Revenue Bonds, (Series 1997A), 5.60%
(UPMC Health System)/(MBIA INS)/(Original Issue Yield: 5.85%), 4/1/
2017 AAA 4,270,120
2,920,000 Allegheny County, PA, Housing Development Authority, Refunding
Revenue Bonds, 6.625% (Allegheny General Hospital), 7/1/2009 AAA 3,212,292
1,250,000 Allegheny County, PA, IDA, Environmental Improvement Refunding
Revenue Bonds (Series 1998), 5.60% (USX Corp.), 9/1/2030 BBB- 1,273,463
500,000 Allegheny County, PA, Institution District, GO UT Bonds, 7.30%
(MBIA INS)/(Original Issue Yield: 7.375%), 4/1/2009 AAA 527,015
395,000 Allegheny County, PA, Residential Finance Agency, SFM Revenue Bonds
(Series K), 7.75% (GNMA COL), 12/1/2022 Aaa 408,126
665,000 Allegheny County, PA, Residential Finance Agency, SFM Revenue Bonds
(Series Q), 7.40% (GNMA COL), 12/1/2022 Aaa 703,663
1,500,000 Allegheny County, PA, Residual Interest Tax-Exempt Securities
(Series 329B), 7.23096% (Pittsburgh International Airport), 1/1/
2011 NR 1,824,630
3,000,000 Allegheny County, PA, Residual Interest Tax-Exempt Securities
(Series 329C), 7.23096% (Pittsburgh International Airport), 1/1/
2014 NR 3,661,440
</TABLE>
FEDERATED PENNSYLVANIA MUNICIPAL INCOME FUND
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
LONG-TERM MUNICIPALS--CONTINUED
PENNSYLVANIA--CONTINUED
<S> <C> <C> <C>
$ 3,000,000 Allegheny County, PA, Residual Interest Tax-Exempt Securities
(Series PA 329A), 7.23096% (Pittsburgh International Airport), 1/1/
2010 NR $ 3,625,800
100,000 Allegheny County, PA, UT GO Bonds (Series C-39), 6.00% (AMBAC INS)/
(Original Issue Yield: 6.098%), 5/1/2012 AAA 108,142
2,060,000 Allentown, PA, Area Hospital Authority, Revenue Bonds (Series B),
6.75% (Sacred Heart Hospital of Allentown), 11/15/2015 BBB
2,257,575 100,000 Altoona, PA, City Authority, Water Revenue Bonds, 5.60%
(FGIC INS)/
(Original Issue Yield: 5.699%), 11/1/2004 AAA 108,463
6,000,000 Beaver County, PA, IDA, Exempt Facilities Revenue Bonds (Series
1998A), 5.375% (Shippingport Project)/(AMBAC INS), 6/1/2028 AAA 6,133,320
100,000 Berks County, PA, Municipal Authority, Hospital Revenue Bonds,
5.60% (Reading Hospital & Medical Center)/(MBIA INS)/(Original
Issue Yield: 5.65%), 10/1/2006 AAA 108,912
1,170,000 Bethlehem, PA, UT GO Bonds, 6.15% (MBIA INS LOC), 6/1/2002 AAA 1,262,161
4,250,000 Bradford County, PA, IDA, Solid Waste Disposal Revenue Bonds
(Series A), 6.60% (International Paper Co.), 3/1/2019 BBB+ 4,713,888
1,000,000 Bucks County, PA, Community College Authority, College Building
Revenue Bonds (Series 1996), 5.50% (Original Issue Yield: 5.70%),
6/15/2017 Aa2 1,044,170
100,000 Central Bucks, PA, School District, UT GO Bonds, 5.40% (FGIC INS),
5/15/2003 AAA 101,377
100,000 Central Bucks, PA, School District, UT GO Bonds, 6.00%, 11/15/2003 Aa3 109,579
2,120,000 Chartiers Valley, PA, Refunding Revenue Bonds, 6.15%, 3/1/2007 AAA 2,358,118
7,000,000 Chester County, PA, HEFA, Revenue Bonds, (Series B), 5.375%
(Jefferson Health System)/(Original Issue Yield: 5.63%), 5/15/2027 AA- 7,096,600
1,035,000 Chester County, PA, UT GO, 6.40%, 12/15/2001 Aa2 1,109,334
1,500,000 Clarion County, PA, Hospital Authority, Revenue Refunding Bonds
(Series 1997), 5.75% (Clarion County Hospital)/(Original Issue
Yield: 5.95%), 7/1/2017 BBB- 1,529,565
745,000 Cocalico Lancaster County, PA, School District, GO UT Bonds, 6.40%
(MBIA INS),3/1/2001 AAA 790,929
150,000 Dauphin County, PA, Revenue Bonds, 6.00% (MBIA INS), 6/1/2002 AAA 154,605
150,000 Dauphin County, PA, Revenue Bonds, 6.10% (MBIA INS), 6/1/2003 AAA 154,787
300,000 Delaware County Authority, PA, Hospital Revenue Bonds, 5.90%
(Riddle Memorial Hospital)/(Original Issue Yield: 6.10%), 1/1/2002 A- 316,788
1,000,000 Delaware County Authority, PA, Revenue Bonds (Series 1996), 5.50%
(Elwyn, Inc.)/(Connie Lee INS)/(Original Issue Yield: 5.69%), 6/1/
2020 AAA 1,049,370
2,900,000 Delaware County, PA, Authority, College Revenue Refunding Bonds
(Series 1998A), 5.375% (Neumann College)/(Original Issue Yield:
5.48%), 10/1/2018 BBB- 2,911,049
10,000,000 Delaware Valley, PA, Regional Finance Authority, Local Government
Revenue Bonds (Series 1997B), 5.60% (AMBAC INS), 7/1/2017 AAA 10,912,000
</TABLE>
FEDERATED PENNSYLVANIA MUNICIPAL INCOME FUND
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
LONG-TERM MUNICIPALS--CONTINUED
PENNSYLVANIA--CONTINUED
<S> <C> <C> <C>
$ 500,000 Erie County, PA, Prison Authority, Lease Revenue Bonds, 6.45% (MBIA
LOC)/(Original Issue Yield: 6.50%), 11/1/2001 AAA $ 540,000
2,890,000 Erie, PA, School District, Refunding GO Bonds (Series 1998), (FSA
INS)/(Original Issue Yield: 5.36%), 9/1/2021 AAA 905,293
5,780,000 Erie, PA, School District, Refunding GO Bonds (Series 1998), (FSA
INS)/(Original Issue Yield: 5.38%), 9/1/2023 AAA 1,635,162
1,380,000 Erie, PA, School District, Refunding GO Bonds (Series 1998), (FSA
INS)/(Original Issue Yield: 5.38%), 9/1/2025 AAA 352,521
1,000,000 Fayette County, PA, Hospital Authority, Healthcare Facility Revenue
Bonds (Series 1996A), 6.00% (Mount Macrina Manor)/(National City,
Pennsylvania LOC), 9/1/2018 Aa3 1,030,200
2,000,000 Fayette County, PA, Hospital Authority, Hospital Revenue Bonds
(Series 1996A), 5.75% (Uniontown Hospital)/(Connie Lee INS)/
(Original Issue Yield: 6.05%), 6/15/2015 AAA 2,129,960
2,975,000 Grove City Area Hospital Authority, Hospital Revenue Bonds (Series
1998), 5.25% (United Community Hospital)/(Original Issue Yield:
5.30%), 7/1/2012 BBB 3,037,802
2,750,000 Harrisburg, PA, Authority, Pooled Bond Program Revenue Bonds
(Series I), 5.625% (MBIA INS)/(Original Issue Yield: 5.98%), 4/1/
2015 AAA 2,947,643
750,000 Harrisburg, PA, Water Authority, Revenue Bonds, 6.65% (FGIC LOC),
7/15/2001 AAA 808,770
500,000 Indiana County, PA, Hospital Authority, Revenue Refunding Bonds
(Series B), 6.20% (Indiana Hospital, PA)/(Connie Lee INS)/(Original
Issue Yield: 6.30%), 7/1/2006 AAA 542,020
800,000 Jeannette Health Services Authority, PA, Hospital Revenue Bonds
(Series 1996A), 6.00% (Jeannette District Memorial Hospital)/
(Original Issue Yield: 6.15%), 11/1/2018 BBB+ 845,768
2,915,000 Jim Thorpe Area School District, PA, UT GO Bonds (Series A), 5.75%
(MBIA INS), 3/15/2017 AAA 3,132,692
1,000,000 Lackawanna Trail School District, PA, UT GO Refunding Bonds, 6.90%
(AMBAC INS), 3/15/2010 AAA 1,081,000
3,000,000 Lancaster, PA, School District, GO Bonds (Series 1997), 5.40% (FGIC
INS)/(Original Issue Yield: 5.50%), 2/15/2014 AAA 3,152,130
1,380,000 Latrobe, PA, Industrial Development Authority, College Revenue
Bonds, 6.75% (St. Vincent College, PA)/(Original Issue Yield:
7.00%), 5/1/2024 NR 1,585,454
1,500,000 Lebanon County, PA, Good Samaritan Hospital Authority, Hospital
Revenue Bonds, 6.00% (Good Samaritan Hospital)/(Original Issue
Yield: 6.10%), 11/15/2018 BBB+ 1,573,800
1,000,000 Lehigh County, PA, General Purpose Authority, Hospital Refunding
Revenue Bonds (Series 1996A), 5.75% (Muhlenberg Hospital Center)/
(Original Issue Yield: 5.85%), 7/15/2010 A 1,101,870
2,300,000 Lehigh County, PA, General Purpose Authority, Revenue Bonds, 5.625%
(Lehigh Valley Hospital Inc.)/(MBIA INS)/(Original Issue Yield:
5.775%), 7/1/2025 AAA 2,414,034
200,000 Lehigh County, PA General Purpose Authority, Revenue Bonds, 5.625%
(Lehigh Valley Hospital Inc.)/(MBIA INS)/(Original Issue Yield:
5.775%), 7/1/2025 AAA 221,226
</TABLE>
FEDERATED PENNSYLVANIA MUNICIPAL INCOME FUND
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
LONG-TERM MUNICIPALS--CONTINUED
PENNSYLVANIA--CONTINUED
<S> <C> <C> <C>
$ 325,000 Lower Dauphin, PA School District, UT GO Bonds, 5.75% (AMBAC INS)/
(United States Treasury PRF), 3/15/2002 (@100) AAA $ 335,449
1,000,000 Luzerne Co, PA, UT GO Bonds, 5.625% (FGIC INS)/(Original Issue
Yield: 5.78%), 12/15/2021 AAA 1,059,240
2,500,000 Luzerne County, PA, IDA, Revenue Refunding Bonds (Series A), 7.00%
(Pennsylvania Gas & Water Co.)/(AMBAC INS), 12/1/2017 AAA 2,868,200
4,000,000 Lycoming County PA, Authority, Hospital Lease Revenue Bonds (Series
B), 6.50% (Divine Providence Hospital, PA)/(Original Issue Yield:
6.70%), 7/1/2022 A- 4,355,520
1,000,000 Lycoming County PA, Authority, Hospital Revenue Bonds, 5.50%
(Divine Providence Hospital, PA)/(Connie Lee INS)/(Original Issue
Yield: 5.90%), 11/15/2022 AAA 1,046,590
1,000,000 Manheim, PA, Central School District, GO UT Bonds, 6.40% (FGIC
INS), 3/1/2001 AAA 1,062,140
1,000,000 McKeesport, PA, Area School District, GO UT Bonds, 6.25% accrual
(FSA INS)/(Original Issue Yield: 6.25%), 10/1/2016 AAA 415,960
2,360,000 Monroe County, PA, Hospital Authority, Hospital Revenue Bonds,
5.125% (Pocono Medical Center)/(AMBAC INS)/(Original Issue Yield:
5.40%), 7/1/2015 AAA 2,381,523
3,250,000 Montgomery County, PA, IDA, Retirement Community Revenue Bonds
(Series 1996B), 5.75% (Adult Communities Total Services, Inc)/
(Original Issue Yield: 5.98%), 11/15/2017 A- 3,396,445
1,000,000 Montgomery County, PA, IDA, Retirement Community Revenue Refunding
Bonds (Series 1996A), 5.875% (Adult Communities Total Services,
Inc)/(Original Issue Yield: 6.125%), 11/15/2022 A- 1,053,250
500,000 Mt. Pleasant Borough, PA, Business District Authority, Hospital
Revenue Bonds (Series 1997), 5.75% (Frick Hospital)/(Original Issue
Yield: 5.85%), 12/1/2017 BBB 513,715
1,300,000 Mt. Pleasant Borough, PA, Business District Authority, Hospital
Revenue Bonds (Series 1997), 5.75% (Frick Hospital)/(Original Issue
Yield: 5.90%), 12/1/2027 BBB 1,330,706
1,240,000 North Penn, PA, School District, Refunding Revenue Bonds, 6.20%, 3/
1/2007 AAA 1,390,040
110,000 North Penn, PA, Water Authority, Revenue Bonds, 6.10% (FGIC INS),
11/1/2003 AAA 121,208
500,000 Northeastern, PA, Hospital & Education Authority, Health Care
Revenue Bonds (Series 1994 A), 6.10% (Wyoming Valley Health Care,
PA)/(AMBAC INS)/(Original Issue Yield: 6.25%), 1/1/2003 AAA 540,845
500,000 Northern Cambria, PA, School District, GO UT Bonds, 7.10% (AMBAC
INS), 1/15/2007 (@100) AAA 523,325
500,000 Pennsylvania Convention Center Authority, Refunding Revenue Bonds
(Series A), 6.25%, 9/1/2004 BBB 537,305
1,000,000 Pennsylvania Convention Center Authority, Revenue Bonds, 6.70%
(FGIC INS)/(Original Issue Yield: 6.843%), 9/1/2016 AAA 1,215,900
4,000,000 Pennsylvania EDFA, Resource Recovery Revenue Bonds (Series A),
6.40% (Northampton Generating), 1/1/2009 NR 4,269,960
</TABLE>
FEDERATED PENNSYLVANIA MUNICIPAL INCOME FUND
<TABLE>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
LONG-TERM MUNICIPALS--CONTINUED
PENNSYLVANIA--CONTINUED
<S> <C> <C> <C>
$ 4,230,000 Pennsylvania EDFA, Revenue Bonds (Series 1998A), 5.25%
(Northwestern Human Services, Inc.)/(Original Issue Yield: 5.668%),
6/1/2028 BBB $ 4,072,644
800,000 Pennsylvania HFA, Refunding Revenue Bonds, 5.375% (FHA INS), 10/1/
2028 AA+ 826,312
1,000,000 Pennsylvania HFA, Revenue Bonds, 5.375%, 10/1/2016 AA+ 1,032,770
1,000,000 Pennsylvania HFA, Revenue Bonds, 5.40%, 10/1/2027 AA+ 1,030,050
575,000 Pennsylvania HFA, Revenue Bonds, 5.55% (FHA/VA mtgs GTD), 10/1/2012 AA+ 595,896
985,000 Pennsylvania HFA, Revenue Bonds, 5.65%, 4/1/2020 AA+ 1,025,543
1,000,000 Pennsylvania HFA, SFM Revenue Bond Bonds (Series 39B), 6.875%, 10/
1/2024 AA+ 1,085,080
570,000 Pennsylvania HFA, SFM Revenue Bonds (Series 33), 6.90%, 4/1/2017 AA+ 607,289
1,000,000 Pennsylvania HFA, SFM Revenue Bonds (Series 34-B), 7.00% (FHA GTD),
4/1/2024 AA+ 1,074,060
100,000 Pennsylvania HFA, SFM Revenue Bonds (Series 41-B), 5.90%, 10/1/2005 AA+ 105,059
100,000 Pennsylvania HFA, SFM Revenue Bonds (Series 42), 5.90%, 10/1/2004 AA+ 104,874
345,000 Pennsylvania HFA, SFM Revenue Bonds (Series 43), 6.35%, 4/1/2001 AA+ 356,702
3,415,000 Pennsylvania HFA, SFM Revenue Bonds (Series 28), 7.65% (FHA GTD),
10/1/2023 AA+ 3,584,623
1,425,000 Pennsylvania HFA, SFM Revenue Bonds, (Series 62A), 5.50%, 10/1/2022 AA+ 1,449,368
2,000,000 Pennsylvania Intergovernmental Coop Authority, Special Tax Revenue
Bonds, 5.625% (MBIA INS)/(Original Issue Yield: 97.245%), 6/15/2023 AAA 2,070,980
1,575,000 Pennsylvania State, GO UT Bonds, 6.00% (Original Issue Yield:
6.15%), 7/1/2007 AA- 1,780,459
5,500,000 Pennsylvania State Higher Education Facilities Authority, Health
Services Revenue Bonds (Series 1996A), 5.75% (University of
Pennsylvania Health Services)/(Original Issue Yield: 6.035%), 1/1/
2022 AA 5,845,950
2,000,000 Pennsylvania State Higher Education Facilities Authority, Revenue
Bonds (Series 1996), 7.20% (Thiel College), 5/15/2026 NR 2,214,000
4,000,000 Pennsylvania State Higher Education Facilities Authority, Revenue
Bonds (Series A), 7.375% (Medical College of Pennsylvania)/(United
States Treasury PRF)/(Original Issue Yield: 7.45%), 3/1/2021 AAA 4,411,800
200,000 Pennsylvania State Higher Education Facilities Authority, Revenue
Bonds (Series L), 5.50% (State System of Higher Education,
Commonwealth of PA)/(AMBAC INS)/(Original Issue Yield: 5.55%), 6/
15/2005 AAA 215,406
2,000,000 Pennsylvania State Higher Education Facilities Authority, Revenue
Bonds (Series N), 5.875% (MBIA INS)/(Original Issue Yield: 5.913%),
6/15/2021 AAA 2,140,200
2,000,000 Pennsylvania State Higher Education Facilities Authority, Revenue
Bonds, 6.375% (Drexel University)/(Original Issue Yield: 6.415%),
5/1/2017 A- 2,155,660
750,000 Pennsylvania State Higher Education Facilities Authority, Revenue
Bonds, 6.80% (MBIA LOC)/(Original Issue Yield: 6.85%), 6/15/2001 AAA 790,725
</TABLE>
FEDERATED PENNSYLVANIA MUNICIPAL INCOME FUND
<TABLE>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
LONG-TERM MUNICIPALS--CONTINUED
PENNSYLVANIA--CONTINUED
<S> <C> <C> <C>
$ 1,500,000 Pennsylvania State Higher Education Facilities Authority,
University Revenue Bonds (Series 1997), 5.45% (University of the
Arts)/(Asset Guaranty INS)/(Original Issue Yield: 5.58%), 3/15/2017 AA $ 1,534,800
500,000 Pennsylvania State IDA, Economic Development Revenue Bonds (Series
A), 6.80% (Original Issue Yield: 6.85%), 1/1/2001 AAA 533,445
2,000,000 Pennsylvania State Turnpike Commission, Oil Franchise Tax Senior
Revenue Bonds (Series 1998A), 5.00% (AMBAC INS)/(Original Issue
Yield: 5.20%), 12/1/2023 AAA 1,981,440
1,000,000 Pennsylvania State Turnpike Commission, Refunding Revenue Bonds
(Series L), 6.00% (MBIA INS)/(Original Issue Yield: 6.85%), 6/1/
2015 AAA 1,069,590
125,000 Perkiomen Valley School District, PA, UT GO Bonds, 5.50%, 2/1/2004 A1 132,591
300,000 Philadelphia, PA, Gas Works, Revenue Bonds (14th Series), 5.50%
(FSA INS)/(Original Issue Yield: 6.10%), 7/1/2004 AAA 321,174
1,500,000 Philadelphia, PA, Gas Works, Revenue Bonds, 5.80% (Original Issue
Yield: 5.90%), 7/1/2001 BBB 1,571,145
500,000 Philadelphia, PA, Gas Works, Revenue Bonds, 7.40%, 6/15/2000 BBB 529,950
2,565,000 Philadelphia, PA, Hospitals & Higher Education Facilities
Authority, Hospital Revenue Bonds (Series 1997), 5.50% (Temple
University Hospital)/(Original Issue Yield: 5.85%), 11/15/2015 A- 2,613,940
1,655,000 Philadelphia, PA, Hospitals & Higher Education Facilities
Authority, Hospital Revenue Bonds (Series 1997), 5.75% (Jeanes
Hospital, PA)/(Original Issue Yield: 5.80%), 7/1/2008 BBB 1,774,954
1,700,000 Philadelphia, PA, Hospitals & Higher Education Facilities
Authority, Hospital Revenue Bonds (Series 1997), 5.875% (Jeanes
Hospital, PA)/(Original Issue Yield: 6.10%), 7/1/2017 BBB 1,763,308
325,000 Philadelphia, PA, Hospitals & Higher Education Facilities
Authority, Refunding Revenue Bonds, 6.15% (Pennsylvania Hospital)/
(Original Issue Yield: 6.25%), 7/1/2005 Baa3 362,388
250,000 Philadelphia, PA, Hospitals & Higher Education Facilities
Authority, Revenue Bonds, 7.75% (Children's Seashore House, PA)/
(AMBAC INS), 8/15/2008 (@100) AAA 269,013
1,250,000 Philadelphia, PA, Redevelopment Authority, Multifamily Housing
Refunding Revenue Bonds (Series 1998), 5.45% (Woodstock Mutual
Homes, Inc.)/(FHA INS)/(Original Issue Yield: 5.468%), 2/1/2023 Aa2 1,259,650
1,000,000 Philadelphia, PA, Water & Sewer, Revenue Bonds, 7.40%, 8/1/1999 BBB 1,033,640
4,000,000 Philadelphia, PA, Airport Revenue Bonds, (Series 1995A), 6.10%
(Philadelphia, PA Airport System)/(AMBAC INS)/(Original Issue
Yield: 6.40%), 6/15/2025 AAA 4,349,800
9,500,000 Philadelphia, PA, Airport Revenue Bonds (Series 1997B), 5.50%
(Philadelphia, PA, Airport System)/(AMBAC INS)/(Original Issue
Yield: 5.65%), 6/15/2017 AAA 9,855,490
910,000 Philadelphia, PA, Revenue Bonds, 10.875%, 7/1/2008 (@100) Aaa 1,127,772
1,000,000 Pittsburgh, PA, Urban Redevelopment Authority, Mortgage Revenue
Bonds (Series 1997A), 6.15%, 10/1/2016 AAA 1,067,290
</TABLE>
FEDERATED PENNSYLVANIA MUNICIPAL INCOME FUND
<TABLE>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
LONG-TERM MUNICIPALS--CONTINUED
PENNSYLVANIA--CONTINUED
<S> <C> <C> <C>
$ 500,000 Pittsburgh, PA, Urban Redevelopment Authority, Mortgage Revenue
Bonds (Series 1997C), 5.35%, 10/1/2009 AAA $ 513,875
1,500,000 Pittsburgh, PA, Urban Redevelopment Authority, Mortgage Revenue
Bonds (Series 1997C), 5.90%, 10/1/2022 AAA 1,579,770
1,430,000 Pittsburgh, PA, Urban Redevelopment Authority, Revenue Bonds, 5.45%
(FGIC INS)/(PNC Bank, N.A. LOC), 6/1/2028 AAA 1,494,136
1,000,000 Pittsburgh, PA, Water & Sewer Authority, (Series A), Revenue Bonds,
6.50% (FGIC LOC)/(Original Issue Yield: 6.60%), 9/1/2001 AAA 1,077,490
2,000,000 Pittsburgh, PA, Water & Sewer Authority, Water & Sewer System
Revenue Bonds (Series C), 5.25% (FSA INS), 9/1/2022 AAA 2,039,720
4,950,000 Pottsville, PA, Hospital Authority, Hospital Revenue Bonds, 5.625%
(Pottsville Hospital and Warne Clinic)/(Original Issue Yield:
5.75%), 7/1/2024 BBB 4,986,729
1,000,000 Schuylkill, PA, Redevelopment Authority, Revenue Bonds, 6.75% (FGIC
LOC), 6/1/2002 AAA 1,091,680
2,500,000 Scranton-Lackawanna, PA, Health & Welfare Authority, Revenue Bonds
(Series 1994-A), 7.60% (Allied Services Rehabilitation Hospitals,
PA), 7/15/2020 NR 2,801,900
1,000,000 Seneca Valley, PA, School District, Refunding UT GO Bonds (Series
1998AA), 5.15% (FGIC INS)/(Original Issue Yield: 5.20%), 2/15/2020 AAA 1,004,810
2,090,000 Shaler, PA, School District Authority, GO UT Bonds, 6.25%, 4/15/
2008 AAA 2,279,688
2,650,000 Sharon, PA, General Hospital Authority, Hospital Revenue Bonds,
6.875% (Sharon Regional Health System), 12/1/2022 A- 3,004,703
125,000 Solanco, PA, School District, UT GO Bonds, 5.60% (FGIC INS), 2/15/
2004 AAA 134,745
2,000,000 Somerset County, PA, Hospital Authority, Hospital Refunding Revenue
Bonds (Series 1997B), 5.375% (Somerset Community Hospital)/(Asset
Guaranty INS)/(Original Issue Yield: 5.68%), 3/1/2017 AA 2,038,580
2,000,000 Southeastern, PA, Transportation Authority, Special Revenue Bonds,
5.375% (FGIC INS)/(Original Issue Yield: 5.70%), 3/1/2017 AAA 2,083,100
8,000,000 Southeastern, PA, Transportation Authority, Special Revenue Bonds,
5.375% (FGIC INS)/(Original Issue Yield: 5.75%), 3/1/2022 AAA 8,292,400
100,000 Spring Ford, PA, School District, UT GO Refunding Bonds (Series
AA), 5.80% (FGIC INS), 8/1/2005 AAA 103,108
500,000 State Public School Building Authority, PA, College Revenue Bonds,
6.50% (Harrisburg Area Community College-D)/(MBIA LOC), 4/1/2002 AAA 543,325
40,000 Swarthmore Boro Authority, PA, Refunded Revenue Bonds, 6.00%
(Original Issue Yield: 6.10%), 9/15/2006 AA+ 43,897
160,000 Swarthmore Boro Authority, PA, Unrefunded Revenue Bonds, 6.00%
(Original Issue Yield: 6.10%), 9/15/2006 AA+ 174,299
1,000,000 University of Pittsburgh, Higher Education Refunding Revenue Bonds
(Series A), 6.40% (MBIA INS), 4/1/2000 AAA 1,028,950
</TABLE>
FEDERATED PENNSYLVANIA MUNICIPAL INCOME FUND
<TABLE>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
LONG-TERM MUNICIPALS--CONTINUED
PENNSYLVANIA--CONTINUED
<S> <C> <C> <C>
$ 9,000,000 University of Pittsburgh, University Refunding Revenue Bonds
(Series 1997B), 5.00% (MBIA INS)/(Original Issue Yield: 5.287%), 6/
1/2017 AAA $ 9,025,290
1,000,000 Warren County, PA, Hospital Authority, Revenue Bonds (Series A),
7.00% (Warren General Hospital, PA)/(Original Issue Yield: 7.101%),
4/1/2019 BBB+ 1,103,520
185,000 Warren County, PA, School District, UT GO Bonds, 5.85% (FGIC INS),
9/1/2001 AAA 189,379
110,000 Warren County, PA, School District, UT GO Bonds, 6.10% (FGIC INS),
9/1/2003 AAA 112,872
680,000 Washington County, PA, Authority, Lease Revenue Bonds, 7.00% (AMBAC
INS), 6/15/2000 (@103) AAA 729,354
400,000 Washington County, PA, Authority, Lease Revenue Bonds, 7.875%, 12/
15/2018 AAA 552,824
1,000,000 West View, PA, Municipal Authority, Special Obligation Bonds,
9.50%, 11/15/2014 AAA 1,420,750
785,000 Westmoreland County, PA, Municipal Authority, Special Obligation
Bonds, 9.125%, 7/1/2010 AAA 941,317
Total 258,371,016
PUERTO RICO--0.9%
1,000,000 Puerto Rico Highway and Transportation Authority, Residual Interest
Tax-Exempt Securites (Series PA 331A), 7.01863% (AMBAC INS), 7/1/
2013 NR 1,205,420
1,000,000 Puerto Rico Highway and Transportation Authority, Residual Interest
Tax-Exempt Securities (Series PA 331B), 7.01863% (AMBAC INS), 7/1/
2014 NR 1,203,040
Total 2,408,460
VIRGIN ISLANDS--0.0%
75,000 Virgin Islands HFA, SFM Revenue Refunding Bonds (Series A), 5.80%
(GNMA COL), 3/1/2005 AAA 78,560
TOTAL LONG-TERM MUNICIPAL SECURITIES (IDENTIFIED COST $244,203,487) 260,858,036
SHORT-TERM MUNICIPAL SECURITIES--1.3%
PENNSYLVANIA--1.3%
3,300,000 New Castle, PA, Area Hospital Authority, (Series 1996), Weekly
VRDNs (Jameson Memorial Hospital)/(FSA INS)/(PNC Bank, N.A. LIQ) AAA 3,300,000
200,000 Philadelphia, PA, Hospitals & Higher Education Facilities
Authority, Hospital Revenue Bonds (Series 1996A) Daily VRDNs
(Children's Hospital of Philadelphia)/(Morgan Guaranty Trust Co.,
New York LIQ) AA 200,000
TOTAL SHORT-TERM MUNICIPAL SECURITIES (AT AMORTIZED COST) 3,500,000
TOTAL INVESTMENTS (IDENTIFIED COST $247,703,487)(A) $ 264,358,036
</TABLE>
* Please refer to the Appendix on page 17 of this prospectus for an
explanation ofthe credit ratings. Current credit ratings are unaudited.
Securities that are subject to Alternative Minimum Tax represents 18.2% of
the portfolio as calculated based upon total portfolio market value.
(a) The Cost of investment for federal tax puposes amounts to $247,703,487.
The net unrealized appreciation of investments on a federal tax basis amounts
to $16,654,549 which consists entirely of $16,654,549 appreciation, at
August 31, 1998.
Note: The categories of investments are shown as a percentage of net assets
($268,334,020) at August 31, 1998.
The following acronyms are used throughout this portfolio:
AMBAC --American Municipal Bond Assurance Corporation COL --Collateralized EDFA
- --Economic Development Financing Authority FGIC --Financial Guaranty Insurance
Company FHA --Federal Housing Administration FHA/VA--Federal Housing
Administration/Veterans Administration FSA --Financial Security Assurance GNMA
- --Government National Mortgage Association GO --General Obligation GTD
- --Guaranty HDA --Hospital Development Authority HEFA --Health and Education
Facilities Authority HFA --Housing Finance Authority IDA --Industrial
Development Authority INS --Insured LIQ --Liquidity Agreement LOC --Letter of
Credit MBIA --Municipal Bond Investors Assurance PRF --Prerefunded SFM --Single
Family Mortgage UT --Unlimited Tax VRDNs --Variable Rate Demand Notes UT
- --Unlimited
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF ASSETS AND LIABILITIES
FEDERATED PENNSYLVANIA MUNICIPAL INCOME FUND
AUGUST 31, 1998
<TABLE>
<S> <C> <C>
ASSETS:
Total investments in securities, at value (identified and tax cost
$247,703,487) $264,358,036
Cash 29,672
Income receivable 4,094,969
Receivable for investments sold 15,000
Receivable for shares sold 546,695
Total assets 269,044,372
LIABILITIES:
Payable for shares redeemed $186,240
Income distribution payable 440,841
Accrued expenses 83,271
Total liabilities 710,352
NET ASSETS for 22,217,195 shares outstanding $268,334,020
NET ASSETS CONSIST OF:
Paid in capital $250,039,006
Net unrealized appreciation of investments 16,654,549
Accumulated net realized gain on investments 1,998,590
Distributions in excess of net investment income (358,125)
Total Net Assets $268,334,020
NET ASSET VALUE, OFFERING PRICE, AND REDEMPTION PROCEEDS PER SHARE:
CLASS A SHARES:
Net asset value per share ($237,705,150 / 19,681,350 shares
outstanding) $12.08
Offering price per share (100/95.50 of $12.08)* $12.65
Redemptions proceeds per share $12.08
CLASS B SHARES:
Net asset value per share ($30,628,870 / 2,535,845 shares
outstanding) $12.08
Offering price per share $12.08
Redemptions proceeds per share (100/94.50 of $12.08)** $12.78
</TABLE>
* See "Investing in the Fund" in the Prospectus.
** See "Contingent Deferred Sales Charge" in the Prospectus.
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF OPERATIONS
FEDERATED PENNSYLVANIA MUNICIPAL INCOME FUND
YEAR ENDED AUGUST 31, 1998
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest $13,605,908 EXPENSES: Investment advisory fee $ 972,754 Administrative
personnel and services fee 183,420 Custodian fees 9,245 Transfer and dividend
disbursing agent fees and expenses 109,616 Directors'/Trustees' fees 4,784
Auditing fees 15,834 Legal fees 4,769 Portfolio accounting fees 95,723
Distribution services fee--Class B Shares 142,237 Shareholder services
fee--Class A Shares 560,075 Shareholder services fee--Class B Shares 47,412
Share registration costs 30,239 Printing and postage 32,809 Insurance premiums
3,964 Miscellaneous 6,407 Total expenses 2,219,288 Waivers -- Waiver of
investment advisory fee $(194,282) Waiver of shareholder services fee--Class A
Shares (44,806) Total Waivers (239,088) Net expenses 1,980,200 Net investment
income 11,625,708 REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net
realized gain on investments 2,643,156 Net change in unrealized appreciation of
investments 6,503,027 Net realized and unrealized gain on investments 9,146,183
Change in net assets resulting from operations $20,771,891 </TABLE>
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF CHANGES IN NET ASSETS
FEDERATED PENNSYLVANIA MUNICIPAL INCOME FUND
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1998 1997
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS--
Net investment income $ 11,625,708 $ 6,269,130
Net realized gain on investments ($2,643,156 and $2,211,019,
respectively, as computed for federal tax purposes) 2,643,156 2,211,019
Net change in unrealized appreciation 6,503,027 5,539,761
Change in net assets resulting from operations 20,771,891 14,019,910
NET EQUALIZATION CREDITS -- -- 126,956
DISTRIBUTIONS TO SHAREHOLDERS--
Distributions from net investment income
Class A Shares (11,176,550) (6,501,486)
Class B Shares (807,283) (91,906)
Distributions from net realized gains
Class A Shares (692,628) --
Class B Shares (44,936) --
Change in net assets resulting from distributions to shareholders (12,721,397) (6,593,392)
SHARE TRANSACTIONS--
Proceeds from sale of shares 53,698,762 29,680,851
Net asset value of shares issued to shareholders in payment of
distributions declared 7,262,803 4,035,972
Net asset value of shares issued in connection with the acquisition
of William Penn Interest Income PA Tax Free fund -- 115,985,657
Net asset value of the shares issued in connection with the
aquuisition of Federated Pennsylvania Intermediate Municipal Trust 20,752,947 --
Cost of shares redeemed (42,128,847) (20,673,623)
Change in net assets resulting from share transactions 39,585,665 129,028,857
Change in net assets 47,636,159 136,582,331
NET ASSETS:
Beginning of period 220,697,861 84,115,530
End of period $ 268,334,020 $220,697,861
</TABLE>
(See Notes which are an integral part of the Financial Statements)
NOTES TO FINANCIAL STATEMENTS
FEDERATED PENNSYLVANIA MUNICIPAL INCOME FUND
AUGUST 31, 1998
ORGANIZATION
Municipal Securities Income Trust (the "Trust") is registered under the
Investment Company Act of 1940, as amended (the "Act") as an open-end,
management investment company. The Trust consists of five portfolios. The
financial statements included herein are only those of Federated
Pennsylvania Municipal Income Fund (the "Fund"), a non-diversified
portfolio. The financial statements of the other portfolios are presented
separately. The assets of each portfolio are segregated and a shareholder's
interest is limited to the portfolio in which shares are held. The investment
objective of the Fund is to provide current income which is exempt from
federal regular income tax and the personal income taxes imposed by the
Commonwealth of Pennsylvania.
The Fund offers two classes of shares: Class A Shares and Class B Shares.
Effective March 4, 1997 the Fund added Class B Shares.
On June 2, 1997, the Fund acquired all the net assets of the William Penn
Interest Income PA Tax Free Fund ("Acquired Fund") pursuant to a plan of
reorganization approved by the Acquired Fund's shareholders. The acquisition
was accomplished by a tax-free exchange of 10,059,467 Class A Shares of the
Fund (valued at $115,985,657) for the 10,553,874 shares of the Acquired Fund
outstanding on June 2, 1997. The Acquired Fund's net assets of $115,986,881
which consisted of $113,185,261 of Paid in Capital and $2,906,467 of
unrealized appreciation, and $104,847 of net realized loss on investments at
that date were combined with those of the Fund. The aggregate net assets of
the Fund and the Acquired Fund immediately before the acquisition were
$93,222,578 and $115,986,881, respectively. Immediately after the
acquisition, the combined aggregate net assets of the Fund were $209,209,459.
On March 20, 1998, the Fund acquired all the net assets of the Federated
Pennsylvania Intermediate Municipal Trust ("Acquired Fund") pursuant to a
plan of reorganization approved by the Acquired Fund's shareholders. The
acquisition was accomplished by a tax-free exchange of $1,735,196 Shares of
the Fund (valued at $20,752,947) for the 1,988,867 Class A Shares of the
Acquired Fund outstanding on March 20, 1998. The Acquired Fund's net assets
of $20,771,587 which consist of $20,070,707 of Paid in Capital and $700,880
of unrealized appreciation, and $4,659 of net realized loss on investments
at that date were combined with those of the Fund. The aggregate net assets
of the Fund and the Acquired Fund immediately before the acquisition were
$239,150,801 and $20,111,587, respectively. Immediately after the
acquisition, the combined aggregate net assets of the Fund were $259,922,388.
<
SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS
Municipal bonds are valued by an independent pricing service, taking into
consideration yield, liquidity, risk, credit quality, coupon, maturity, type
of issue, and any other factors or market data the pricing service deems
relevant. Short-term securities are valued at the prices provided by an
independent pricing service. However, short-term securities with remaining
maturities of sixty days or less at the time of purchase may be valued at
amortized cost, which approximates fair market value.
INVESTMENT INCOME, EXPENSES, AND DISTRIBUTIONS
Interest income and expenses are accrued daily. Bond premium and discount, if
applicable, are amortized as required by the Internal Revenue Code, as
amended (the "Code"). Distributions to shareholders are recorded on the ex-
dividend date. These distributions from net investment income do not
represent a return of capital for federal tax purposes.
FEDERAL TAXES
It is the Fund's policy to comply with the provisions of the Code applicable
to regulated investment companies and to distribute to shareholders each year
substantially all of its income. Accordingly, no provisions for federal tax
are necessary.
At August 31, 1998, the Fund, for federal tax purposes, had a capital loss
carryforward of $22,390, which will reduce the Fund's taxable income arising
from the future net realized gain on investments, if any, to the extent
permitted by the Code, and thus will reduce the amount of the distributions
to shareholders which would otherwise be necessary to relieve the Fund of
any liability for federal tax. Pursuant to the Code, such capital loss
carryforward will expire as follows:
EXPIRATION YEAR EXPIRATION AMOUNT
2003 $ 7,562
2004 $14,828
EQUALIZATION
Effective September 1, 1997, the Fund discontinued its use of equalization.
Equalization is an accounting practice whereby a portion of the proceeds of
sales and costs of redemptions of Fund shares is credited or charged to
undistributed net investment income on a per share basis, as determined on
the date of transaction. This change in accounting policy does not effect the
Fund's net assets, net asset value per share, or net investment income.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may engage in when-issued or delayed delivery transactions. The Fund
records when-issued securities on the trade date and maintains security
positions such that sufficient liquid assets will be available to make
payment for the securities purchased. Securities purchased on a when-issued
or delayed delivery basis are marked to market daily and begin earning
interest on the settlement date.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts of assets, liabilities, expenses and
revenues reported in the financial statements. Actual results could differ
from those estimated.
OTHER
Investment transactions are accounted for on the trade date.
SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value).
Transactions in shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1998 1997
<S> <C> <C> <C> <C>
CLASS A SHARES SHARES AMOUNT SHARES AMOUNT
Shares sold 2,592,539 $ 30,277,416 2,145,449 $ 21,789,555
Shares issued to shareholders in payment of
distributions declared 566,650 6,739,691 343,918 3,979,801
Shares issued in connection with the acquisition of William Penn
Interest Income PA Tax Free Fund -- -- 10,059,467 115,985,657
Shares issued in connection with the acquisition of Federated
Pennsylvania Intermediate Municipal Trust 1,735,196 20,752,947 -- --
Shares redeemed (3,391,170) (40,368,961) (1,779,292) (20,583,883)
Net change resulting from Class A Share transactions 1,503,215 $ 17,401,093 10,769,542 $121,171,130
YEAR ENDED PERIOD ENDED
AUGUST 31, 1998 AUGUST 31, 1997(A)
<S> <C> <C> <C> <C>
CLASS B SHARES SHARES AMOUNT SHARES AMOUNT
Shares sold 1,964,044 $ 23,421,346 678,264 $ 7,891,296
Shares issued to shareholders in payment of
distributions declared 43,929 523,112 4,825 56,171
Shares redeemed (147,500) (1,759,886) (7,717) (89,740)
Net change resulting from Class B Share transactions 1,860,473 $ 22,184,572 675,372 $ 7,857,727
Net change resulting from share transactions 3,363,688 $ 39,585,665 11,444,914 $129,028,857
</TABLE>
(a) For the period from March 4, 1997 (date of initial public offering) to
August 31, 1997.
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE
Federated Advisers, the Fund's investment adviser (the "Adviser"), receives
for its services an annual investment advisory fee equal to 0.40% of the
Fund's average daily net assets. The Adviser may voluntarily choose to waive
any portion of its fee. The Adviser can modify or terminate this voluntary
waiver at any time at its sole discretion.
ADMINISTRATIVE FEE
Federated Services Company ("FServ"), under the Administrative Services
Agreement, provides the Fund with administrative personnel and services. The
fee paid to FServ is based on the level of average aggregate daily net assets
of all funds advised by subsidiaries of Federated Investors, Inc. for the
period. The administrative fee received during the period of the
Administrative Services Agreement shall be at least $125,000 per portfolio
and $30,000 per each additional class of shares.
DISTRIBUTION SERVICES FEE
The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1
under the Act. Under the terms of the Plan, the Fund will compensate
Federated Securities Corp., ("FSC") the principal distributor, from the net
assets of the Fund to finance activities intended to result in the sale of
the Fund's Class A and Class B Shares. The Plan provides that the Fund may
incur distribution expenses according to the following schedule annually, to
compensate FSC.
PERCENTAGE OF
AVERAGE DAILY NET
SHARE CLASS NAME ASSETS OF CLASS
Class A Shares 0.40%
Class B Shares 0.75%
The distributor may voluntarily choose to waive any portion of its fee. The
distributor can modify or terminate this voluntary waiver at any time at its
sole discretion.
Class A did not incur a distribution services fee for the period ended
August 31, 1998, and has no present intention of paying or accruing a
distribution service fee.
SHAREHOLDER SERVICES FEE
Under the terms of a Shareholder Services Agreement with Federated
Shareholder Services ("FSS"), the Fund will pay FSS up to 0.25% of average
daily net assets of the Fund shares for the period. The fee paid FSS is used
to finance certain services for shareholders and to maintain shareholder
accounts. FSS may voluntarily choose to waive any portion of its fee. FSS can
modify or terminate this voluntary waiver at any time at its sole discretion.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES FServ, through its
subsidiary, Federated Shareholder Services Company
("FSSC") serves as transfer and dividend disbursing agent for the Fund. The
fee paid to FSSC is based on the size, type, and number of accounts and
transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES
FServ maintains the Fund's accounting records for which it receives a fee.
The fee is based on the level of the Fund's average daily net assets for the
period, plus out-of-pocket expenses.
INTERFUND TRANSACTIONS
During the year ended August 31, 1998, the Fund engaged in purchase and sale
transactions with funds that have a common investment adviser (or affiliated
investment advisers), common Directors/Trustees, and/or common Officers.
These purchase and sale transactions were made at current market value
pursuant to Rule 17a-7 under the Act amounting to $37,820,000 and
$41,215,000, respectively.
GENERAL
Certain of the Officers and Trustees of the Trust are Officers and Directors
or Trustees of the above companies.
INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended August 31, 1998, were as follows:
PURCHASES $75,979,207
SALES $58,277,002
CONCENTRATION OF CREDIT RISK
Since the Fund invests a substantial portion of its assets in issuers located
in one state, it will be more susceptible to factors adversely affecting
issuers of that state than would be a comparable tax-exempt mutual fund that
invests nationally. In order to reduce the credit risk associated with such
factors, at August 31, 1998, 48.1% of the securities in the portfolio of
investments are backed by letters of credit or bond insurance of various
financial institutions and financial guaranty assurance agencies. The
percentage of investments insured by or supported (backed) by a letter of
credit from any one institution or agency did not exceed 16.9% of total
investments.
YEAR 2000 (UNAUDITED)
Similar to other financial organizations, the Fund could be adversely
affected if the computer systems used by the Fund's service providers do not
properly process and calculate date-related information and data from and
after January 1, 2000. The Fund's Adviser and Administrator are taking
measures that they believe are reasonably designed to address the Year 2000
issue with respect to computer systems that they use and to obtain reasonable
assurances that comparable steps are being taken by each of the Fund's other
service providers. At this time, however, there can be no assurance that
these steps will be sufficient to avoid any adverse impact to the Fund.
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees and Shareholders of
MUNICIPAL SECURITIES INCOME TRUST
and Shareholders of
FEDERATED PENNSYLVANIA MUNICIPAL INCOME FUND:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Federated Pennsylvania Municipal
Income Fund as of August 31, 1998, the related statement of operations for
the year then ended, the statements of changes in net assets for the years
ended August 31, 1998 and 1997, and the financial highlights for the periods
presented. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of the
securities owned as of August 31, 1998, by correspondence with the custodian
and brokers; where replies were not received, we performed other auditing
procedures. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Federated
Pennsylvania Municipal Income Fund as of August 31, 1998, the results of its
operations, the changes in its net assets and its financial highlights for
the respective stated periods in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
October 9, 1998
FEDERATED PENNSYLVANIA MUNICIPAL INCOME FUND
(A Portfolio of Municipal Securities Income Trust)
Class A Shares, Class B Shares
PROSPECTUS
OCTOBER 31, 1998
A Non-Diversified Portfolio of Municipal Securities Income Trust, an Open-
End, Management Investment Company
FEDERATED PENNSYLVANIA
MUNICIPAL INCOME FUND
CLASS A SHARES
CLASS B SHARES
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
DISTRIBUTOR
Federated Securities Corp.
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
INVESTMENT ADVISER
Federated Advisers
Federated Investors Tower
1001 Liberty Avenue
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
Federated Securities Corp., Distributor
1-800-341-7400
www.federatedinvestors.com
Cusip 625922505
Cusip 625922836
G00577-02 (10/98)
[Graphic]
Federated Pennsylvania Municipal Income Fund
(A Portfolio of Municipal Securities Income Trust)
Class A Shares
Class B Shares
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the prospectus
of Federated Pennsylvania Municipal Income Fund (the "Fund"), a portfolio of
Municipal Securities Income Trust dated October 31, 1998. 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 PENNSYLVANIA MUNICIPAL INCOME FUND
FEDERATED INVESTORS FUNDS
5800 CORPORATE DRIVE
PITTSBURGH, PENNSYLVANIA 15237-7000
Statement dated October 31, 1998
[Graphic]
Federated Securities Corp., Distributor
Federated Investors, Inc.
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
1-800-341-7400
www.federatedinvestors.com
Cusip 625922505
Cusip 625922836
0090701B (10/98)
[Graphic]
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
Investing in Securities of Other Investment Companies 3
Temporary Investments 3
Portfolio Turnover 3
Investment Limitations 3
Pennsylvania Investment Risks 5
Municipal Securities Income Trust Management 6
Fund Ownership 9
Trustee Compensation 10
Trustee Liability 10
Investment Advisory Services 10
Adviser to the Fund 10
Advisory Fees 11
Other Services 11
Fund Administration 11
Custodian and Portfolio Accountant 11
Transfer Agent 11
Independent Auditors 11
Brokerage Transactions 11
Purchasing Shares 12
Quantity Discounts and Accumulated Purchases 12
Concurrent Purchases 12
Letter of Intent 12
Reinvestment Privilege 12
Distribution Plan and Shareholder Services Agreement 13
Conversion of Class B Shares 13
Purchases by Sales Representatives, Fund Trustees, and Employees 13
Determining Net Asset Value 14
Valuing Municipal Bonds 14
Use of Amortized Cost 14
Redeeming Shares 14
Redemption in Kind 14
Contingent Deferred Sales Charge -- Class B Shares 14
Massachusetts Partnership Law 14
Tax Status 15
The Fund's Tax Status 15
Shareholders' Tax Status 15
Total Return 15
Yield 15
Tax-Equivalent Yield 16
Tax-Equivalency Table 16
Performance Comparisons 17
Economic and Market Information 17
About Federated Investors, Inc. 17
Mutual Fund Market 18
Institutional Clients 18
Bank Marketing 18
Broker/Dealers and Bank Broker/Dealer Subsidaries 18
GENERAL INFORMATION ABOUT THE FUND
The Fund is a portfolio in Municipal Securities Income Trust (the "Trust").
The Trust was established as a Massachusetts business trust under a
Declaration of Trust dated August 6, 1990. On February 26, 1996 (effective
date March 31, 1996), the Board of Trustees ("Trustees") approved changing
the name of the Fund from Pennsylvania Municipal Income Fund to Federated
Pennsylvania Municipal Income Fund. Shares of the Fund are presently offered
in two classes known as Class A Shares and Class B Shares (individually and
collectively referred to as "Shares" as the context may require). This
Statement of Additional Information relates to both classes of Shares.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide current income which is exempt
from federal regular income tax and the personal income taxes imposed by the
Commonwealth of Pennsylvania. The investment objective cannot be changed
without approval of shareholders.
ACCEPTABLE INVESTMENTS
The Fund invests primarily in a portfolio of municipal securities which are
exempt from federal regular income tax and Pennsylvania state and local tax
("Pennsylvania Municipal Securities"). These securities include those issued
by or on behalf of the Commonwealth of Pennsylvania and Pennsylvania
municipalities, and those issued by states, territories and possessions of
the United States which are exempt from federal regular income tax and the
personal income taxes imposed by the Commonwealth of Pennsylvania and
Pennsylvania municipalities.
CHARACTERISTICS
The Pennsylvania Municipal Securities in which the Fund invests have the
characteristics set forth in the prospectus. If a rated bond loses its rating
or has its rating reduced after the Fund has purchased it, the Fund is not
required to drop the bond from the portfolio, but will consider doing so. If
ratings made by Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's
("S&P"), or Fitch IBCA, Inc. ("Fitch") change because of changes in those
organizations or in their rating systems, the Fund will try to use comparable
ratings as standards in accordance with the investment policies described in
the Fund's prospectus.
TYPES OF ACCEPTABLE INVESTMENTS
Examples of Pennsylvania Municipal Securities are:
* municipal notes and municipal commercial paper;
* serial bonds sold with differing maturity dates;
* tax anticipation notes sold to finance working capital
needs of municipalities;
* bond anticipation notes sold prior to the issuance of longer-term bonds;
* pre-refunded municipal bonds; and
* general obligation bonds secured by a municipality pledge of taxation.
PARTICIPATION INTERESTS
The financial institutions from which the Fund purchases participation
interests frequently provide or secure from another financial institution
irrevocable letters of credit or guarantees and give the Fund the right to
demand payment of the principal amounts of the participation interests plus
accrued interest on short notice (usually within seven days).
VARIABLE RATE MUNICIPAL SECURITIES
Variable interest rates generally reduce changes in the market value of
municipal securities from their original purchase prices. Accordingly, as
interest rates decrease or increase, the potential for capital appreciation or
depreciation is less for variable rate municipal securities than for fixed
income obligations. Many municipal securities with variable interest rates
purchased by the Fund are subject to repayment of principal (usually within
seven days) on the Fund's demand. The terms of these variable rate demand
instruments require payment of principal and accrued interest from the issuer
of the municipal obligations, the issuer of the participation interests, or a
guarantor of either issuer.
MUNICIPAL LEASES
The Fund may purchase municipal securities in the form of participation
interests which represent undivided proportional interests in lease payments
by a governmental or non-profit entity. The lease payments and other rights
under the lease provide for and secure the payments on the certificates.
Lease obligations may be limited by municipal charter or the nature of the
appropriation for the lease. In particular, lease obligations may be subject
to periodic appropriation. If the entity does not appropriate funds for
future lease payments, the entity cannot be compelled to make such payments.
Furthermore, a lease may provide that the certificate trustee cannot
accelerate lease obligations upon default. The trustee would only be able to
enforce lease payments as they became due. In the event of default or
failure of appropriation, it is unlikely that the trustee would be able to
obtain an acceptable substitute source of payment.
In determining the liquidity of municipal lease securities, the investment
adviser, under the authority delegated by the Trustees, will base its
determination on the following factors:
* whether the lease can be terminated by the lessee;
* the potential recovery, if any, from a sale of the leased property upon
termination of the lease;
* the lessee's general credit strength (e.g., its debt, administrative,
economic, and financial characteristics and prospects);
* the likelihood that the lessee will discontinue appropriating funding for the
leased property because the property is no longer deemed essential to its
operations (e.g., the potential for an "event of non-appropriation"); and
* 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.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest in the securities of affiliated money market funds as an
efficient means of managing the Fund's uninvested cash.
TEMPORARY INVESTMENTS
The Fund may also invest in temporary investments during times of unusual
market conditions for defensive purposes.
REPURCHASE AGREEMENTS
Repurchase agreements are arrangements in which banks, broker/dealers, and
other recognized financial institutions sell U.S. government securities or
certificates of deposit to the Fund and agree at the time of sale to repurchase
them at a mutually agreed upon time and price within one year from the date of
acquisition. The Fund or its custodian will take possession of the securities
subject to repurchase agreements. To the extent that the original seller does
not repurchase the securities from the Fund, the Fund could receive less than
the repurchase price on any sale of such securities. In the event that such a
defaulting seller filed for bankruptcy or became insolvent, disposition of such
securities by the Fund might be delayed pending court action. The Fund believes
that under the regular procedures normally in effect for custody of the Fund's
portfolio securities subject to repurchase agreements, a court of competent
jurisdiction would rule in favor of the Fund and allow retention or disposition
of such securities. The Fund will only enter into repurchase agreements with
banks and other recognized financial institutions, such as broker/dealers,
which are deemed by the Fund's investment adviser to be creditworthy pursuant to
guidelines established by the Trustees.
From time to time, such as when suitable Pennsylvania municipal bonds are not
available, the Fund may invest a portion of its assets in cash. Any portion
of the Fund's assets maintained in cash will reduce the amount of assets in
Pennsylvania municipal bonds and thereby reduce the Fund's yield.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements. This transaction
is similar to borrowing cash. In a reverse repurchase agreement the Fund
transfers possession of a portfolio instrument to another person, such as a
financial institution, broker, or dealer in return for a percentage of the
instrument's market value in cash and agrees that on a stipulated date in the
future the Fund will repurchase the portfolio instrument by remitting the
original consideration plus interest at an agreed upon rate. The use of
reverse repurchase agreements may enable the Fund to avoid selling portfolio
instruments at a time when a sale may be deemed to be disadvantageous, but
the ability to enter into reverse repurchase agreements does not ensure that
the Fund will be able to avoid selling portfolio instruments at a
disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. These securities are marked to market daily
and maintained until the transaction is settled.
PORTFOLIO TURNOVER
The Fund may trade or dispose of portfolio securities as considered necessary
to meet its investment objective. It is not anticipated that the portfolio
trading engaged in by the Fund will result in its annual rate of portfolio
turnover exceeding 100%. For the fiscal years ended August 31, 1998 and 1997,
the portfolio turnover rates were 24% and 30%, respectively.
INVESTMENT LIMITATIONS
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities on
margin but may obtain such short-term credits as may be necessary for
clearance of purchases and sales of securities.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities except that the Fund may borrow money
and engage in reverse repurchase agreements in amounts up to one-third of the
value of its total assets, including the amounts borrowed.
The Fund will not borrow money or engage in reverse repurchase agreements for
investment leverage, but rather as a temporary, extraordinary, or emergency
measure or to facilitate management of the portfolio by enabling the Fund to
meet redemption requests when the liquidation of portfolio securities is
deemed to be inconvenient or disadvantageous. The Fund will not purchase any
securities while borrowings in excess of 5% of its total assets are
outstanding. During the period any reverse repurchase agreements are
outstanding, but only to the extent necessary to assure completion of the
reverse repurchase agreements, the Fund will restrict the purchase of
portfolio instruments to money market instruments maturing on or before the
expiration date of the reverse repurchase agreements.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate its assets except to
secure permitted borrowings. In those cases, it may mortgage, pledge, or
hypothecate assets having a market value not exceeding 10% of the value of
its total assets at the time of the pledge.
UNDERWRITING
The Fund will not underwrite any issue of securities except as it may be
deemed to be an underwriter under the Securities Act of 1933 in connection
with the sale of securities in accordance with its investment objective,
policies, and limitations.
INVESTING IN REAL ESTATE
The Fund will not buy or sell real estate although it may invest in municipal
bonds secured by real estate or interests in real estate.
INVESTING IN COMMODITIES
The Fund will not buy or sell commodities, commodity contracts, or
commodities futures contracts.
INVESTING IN RESTRICTED SECURITIES
The Fund will not invest more than 10% of the value of its assets in
securities subject to restrictions on resale under the Securities Act of
1933.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets except that it may acquire publicly
or non-publicly issued municipal bonds or temporary investments or enter into
repurchase agreements in accordance with its investment objective, policies,
and limitations or its Declaration of Trust.
DEALING IN PUTS AND CALLS
The Fund will not buy or sell puts, calls, straddles, spreads, or any
combination of these.
CONCENTRATION OF INVESTMENTS
The Fund will not purchase securities if, as a result of such purchase, 25%
or more of the value of its total assets would be invested in any one
industry or in industrial development bonds or other securities, the interest
upon which is paid from revenues of similar types of projects. However, the
Fund may invest as temporary investments more than 25% of the value of its
assets in cash or cash items, securities issued or guaranteed by the
U.S. government, its agencies, or instrumentalities, or instruments secured
by these money market instruments, such as repurchase agreements.
The above investment limitations cannot be changed without shareholder
approval. The following limitation, 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 ILLIQUID SECURITIES
The Fund will not invest more than 15% of its net assets in illiquid
obligations, including certain restricted securities determined to be liquid
under criteria established by the Trustees and repurchase agreements providing
for settlement in more than seven days after notice, and certain restricted
securities.
Except with respect to borrowing money, if a percentage limitation is adhered
to at the time of investment, a later increase or decrease in percentage
resulting from any change in value or net assets will not result in a
violation of such restriction. The Fund did not borrow money or pledge
securities in excess of 5% of the value of its net assets during the last
fiscal year and has no present intent to do so in the current fiscal year.
For purposes of its policies and limitations, the Fund considers certificates
of deposit and demand and time deposits issued by a U.S. branch of a domestic
bank or savings association having capital, surplus, and undivided profits in
excess of $100,000,000 ("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.
PENNSYLVANIA INVESTMENT RISKS
The Fund invests in obligations of Pennsylvania issuers which result in the
Fund's performance being subject to risks associated with the overall
conditions present within the Commonwealth. The following information is a
brief summary of the prevailing economic and financial conditions of the
Commonwealth. The information is based on official statements relating to
securities and from other sources believed to be reliable. This should not be
considered a complete description of all relevant information.
Pennsylvania's economy performed below the national average and is expected to
continue this pattern over the next several years. While job growth has
improved since the early 1990's, it still continues to lag well behind the
national growth levels. Manufacturing is still an important industry in the
Commonwealth, but has been exceeded by employment in both services and trade.
Growth in personal income has also lagged behind the national growth rate, but
Pennsylvania per capita income exceeds the national average and ranks 19th
among the states. Despite the economic challenges, the Commonwealth's financial
position remained stable due to improved spending controls and strong fiscal
management. In addition, Pennsylvania continued to maintain a moderate debt
level.
The overall credit quality of the Commonwealth is demonstrated by its debt
ratings. Pennsylvania was recently upgraded to a Aa3 rating by Moody's. S&P
rates the Commonwealth AA-.
The Fund's concentration in securities issued by the Commonwealth and its
political subdivisions, provides a greater level of risk than a fund whose
assets are diversified across numerous states and municipalities.
The ability of the Commonwealth or its municipalities to meet their
obligations will depend on the availability of tax and other revenues,
economic, political, and demographic conditions within the Commonwealth, and
the underlying fiscal condition of the Commonwealth, its counties, and
municipalities.
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
Chief Executive Officer and Director or Trustee of the
Funds; Chairman and Director, Federated Investors, Inc.;
Chairman and Trustee, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director,
Federated Research Corp. and Federated Global Research
Corp.; Chairman, Passport Research, Ltd.; Mr. Donahue is the
father of J. Christopher Donahue, Executive Vice President
and Trustee of the Trust.
Thomas G. Bigley
15 Old Timber Trail
Pittsburgh, PA
Birthdate: February 3, 1934
Trustee
Director or Trustee of the Funds; Director, Member of Executive Committee,
Children's Hospital of Pittsburgh; formerly, Senior Partner, Ernst & Young LLP;
Director, ED 3000 Group, Inc.; Director, Member of Executive Committee,
University of Pittsburgh.
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
Director or Trustee of the Funds; 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.
Nicholas P. Constantakis
175 Woodshire Drive
Pittsburgh, PA
Birthdate: September 3, 1939
Trustee
Director or Trustee of the Funds; formerly, Partner,
Anderson Worldwide SC.
William J. Copeland
One PNC Plaza--23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Trustee
Director or Trustee of the Funds; 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, United Refinery;
Chairman, Pittsburgh Foundation; Director, Forbes Fund;
Chairman, Pittsburgh Civic Light Opera.
J. Christopher Donahue*
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
Executive Vice President and Trustee
President or Executive Vice President of the Funds;
President and Director, Federated Investors, Inc.; President
and Trustee, 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; Director or
Trustee of some of the Funds. Mr. Donahue is the son of John
F. Donahue, Chairman and Trustee of the Trust.
James E. Dowd, Esq.
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Trustee
Director or Trustee of the Funds; Attorney-at-law; Director,
The Emerging Germany Fund, Inc.; formerly, President, Boston
Stock Exchange, Inc.; Regional Administrator, United States
Securities and Exchange Commission.
Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Trustee
Director or Trustee of the Funds; Professor of Medicine, University of
Pittsburgh; Medical Director, University of Pittsburgh Medical Center--Downtown;
Hematologist, Oncologist, and Internist, Presbyterian and Montefiore Hospitals;
formerly, Member, National Board of Trustees, Leukemia Society of America.
Edward L. Flaherty, Jr., Esq.@
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: June 18, 1924
Trustee
Director or Trustee of the Funds; Attorney of Counsel, Miller, Ament, Henny &
Kochuba; Director, Eat'N Park Restaurants, Inc.; formerly, Counsel, Horizon
Financial, F.A., Western Region; Partner, Meyer and Flaherty.
Peter E. Madden
One Royal Palm Way
100 Royal Palm Way
Palm Beach, FL
Birthdate: March 16, 1942
Trustee
Director or Trustee of the Funds; formerly, Representative, Commonwealth of
Massachusetts General Court; President, State Street Bank and Trust Company and
State Street Corporation; Director, VISA USA and VISA International; Chairman
and Director, Massachusetts Banker Association; Director, Despository Trust
Corporation.
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Trustee
Director or Trustee of the Funds; President, Law Professor, Duquesne University;
Consulting Partner, Mollica & Murray; formerly, Dean and Professor of Law,
University of Pittsburgh School of Law; Dean and Professor of Law, Villanova
University School of Law.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Trustee
Director or Trustee of the Funds; President, World Society of Ekistics, Athens;
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; formerly, Professor, United States
Military Academy; Professor, United States Air Force Academy.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Trustee
Director or Trustee of the Funds; Public Relations/ Marketing/Conference
Planning; formerly, National Spokesperson, Aluminum Company of America; business
owner.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
President
President or Vice President of some of the Funds; Director or Trustee of some of
the Funds; Executive Vice President, Federated Investors, Inc.; Chairman and
Director, Federated Securities Corp.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
Executive Vice President
Trustee or Director of some of the Funds; President, Executive Vice President,
and Treasurer of some of the Funds; Vice Chairman, Federated Investors, Inc.;
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.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Executive Vice President, Secretary, and Treasurer
Executive Vice President and Secretary of the Funds; Treasurer of some of the
Funds; Executive Vice President, Secretary, and Director, Federated Investors,
Inc.; 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.
*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: Automated Government Money Trust; Blanchard Funds;
Blanchard Precious Metals Fund, Inc.; Cash Trust Series II; Cash Trust
Series, Inc.; CCB Funds; 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 Core
Trust; 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.; 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; Regions Funds; RIGGS 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; WCT Funds; and World Investment Series, Inc.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the outstanding Shares.
As of October 9, 1998, the following shareholder of record owned 5% or more
of the outstanding Class A Shares of the Fund: Merrill Lynch Pierce Fenner &
Smith (as record owner holding Class A Shares for its clients), Jacksonville,
Florida, owned approximately 1,656,250 Class A Shares (8.40%).
As of October 9, 1998, there were no shareholders of record who owned 5% or
more of the outstanding Class B Shares.
TRUSTEE COMPENSATION
<TABLE>
<CAPTION>
NAME, AGGREGATE
POSITION WITH COMPENSATION TOTAL COMPENSATION PAID
TRUST FROM TRUST*# FROM FUND COMPLEX+
<S> <C> <S>
John F. Donahue
Trustee and Chairman $0 $0 for the Trust and
56 other investment companies
in the Fund Complex
Thomas G. Bigley
Trustee $361.74 $111,222 for the Trust and
56 other investment companies
in the Fund Complex
John T. Conroy, Jr.
Trustee $397.96 $122,362 for the Trust and
56 other investment companies
in the Fund Complex
Nicholas P. Constantakis+
Trustee $271.98 $0 for the Trust and
34 other investment companies
in the Fund Complex
William J. Copeland
Trustee $397.96 $122,362 for the Trust and
56 other investment companies
in the Fund Complex
J. Christopher Donahue
President and Trustee $0 $0 for the Trust and
18 other investment companies
in the Fund Complex
James E. Dowd, Esq.
Trustee $397.96 $122,362 for the Trust and
56 other investment companies
in the Fund Complex
Lawrence D. Ellis, M.D.
Trustee $361.74 $111,222 for the Trust and
56 other investment companies
in the Fund Complex
Edward L. Flaherty, Jr., Esq.
Trustee $397.96 $122,362 for the Trust and
56 other investment companies
in the Fund Complex
Peter E. Madden
Trustee $361.74 $111,222 for the Trust and
56 other investment companies
in the Fund Complex
John E. Murray, Jr., J.D., S.J.D.
Trustee $361.74 $111,222 for the Trust and
56 other investment companies
in the Fund Complex
Wesley W. Posvar
Trustee $361.74 $111,222 for the Trust and
56 other investment companies
in the Fund Complex
Marjorie P. Smuts
Trustee $361.74 $111,222 for the Trust and
56 other investment companies
in the Fund Complex
</TABLE>
*Information is furnished for the fiscal year ended August 31, 1998.
#The aggregate compensation is provided for the Trust which is comprised of
five portfolios.
+The information is provided for the last calendar year.
++Mr. Constantakis became a member of the Board of Trustees on February 23,
1998. He did not earn any fees for serving the Fund Complex since these fees
are reported as of the end of 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, Inc. 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,
1998, 1997, and 1996, the Adviser earned $972,754, $470,040, and $341,175,
respectively, of which $194,282, $239,900, and $195,433, respectively, were
voluntarily waived.
OTHER SERVICES
FUND ADMINISTRATION
Federated Services Company, a subsidiary of Federated Investors, Inc.,
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, 1998, 1997, and 1996,
the Administrators collectively earned $183,420, $141,863, 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 that are
recognized dealers in specific portfolio instruments, except when a better
price and execution of the order can be obtained elsewhere. The Adviser makes
decisions on portfolio transactions and selects brokers and dealers subject to
review by the Trustees. The Adviser may select brokers and dealers who offer
brokerage and research services. These services may be furnished directly to
the Fund or to the Adviser and may include: advice as to the advisability of
investing in securities; security analysis and reports; economic studies;
industry studies; receipt of quotations for portfolio evaluations; and similar
services. Research services provided by brokers and dealers may be used by the
Adviser or by its affiliates in advising the Fund and other accounts. To the
extent that receipt of these services may supplant services for which the
Adviser or its affiliates might otherwise have paid, it would tend to reduce
their expenses. The Adviser and its affiliates exercise reasonable business
judgment in selecting brokers who offer brokerage and research services to
execute securities transactions. They determine in good faith that commissions
charged by such persons are reasonable in relationship to the value of the
brokerage and research services provided. During the fiscal years ended August
31, 1998, 1997, and 1996, 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 NAV (plus a sales charge, if applicable) 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." For further information on any of the programs listed below, please
contact your financial intermediary or Federated Securities Corp.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES
As described in the prospectus, larger purchases of the same Share class
reduce or eliminate the sales charge paid. For example, the Fund will
combine all Class A Share purchases 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 into the same Share class 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
Shareholders have the privilege of combining concurrent purchases of the same
Share class of two or more funds in the Federated Complex in calculating the
applicable sales charge.
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
A shareholder can sign a letter of intent committing to purchase a certain
amount of the same Share class within a 13-month period in order to combine
such purchases in calculating the applicable sales charge. The Fund's
custodian will hold Shares in escrow equal to the maximum applicable sales
charge. If the shareholder completes the commitment, the escrowed Shares will
be released to their account. If the commitment is not completed within 13
months, the custodian will redeem an appropriate number of escrowed Shares to
pay for the applicable 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
The reinvestment privilege is available for all Shares of the Fund within the
same Share class.
Class A shareholders who redeem from the Fund may reinvest the redemption
proceeds back into the same Share class at the next determined net asset
value without any sales charge. The original Shares must have been subject to
a sales charge and the reinvestment must be within 120 days.
Similarly, Class B Shares also may be reinvested within 120 days of
redemption, although such reinvestment will be made into Class A Shares.
Shareholders would not be entitled to a reimbursement of the contingent
deferred sales charge if paid at the time of redemption on any Share class.
However, reinvested Shares would not be subject to a contingent deferred
sales charge, if otherwise applicable, upon later redemption.
In addition, if 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, if otherwise
applicable. 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.
DISTRIBUTION PLAN AND SHAREHOLDER SERVICES AGREEMENT
These arrangements permit the payment of fees to financial institutions, the
distributor, and Federated Shareholder Services, to stimulate distribution
activities and to cause services to be provided to shareholders by a
representative who has knowledge of the shareholder's particular
circumstances and goals. These activities and services may include, but are
not limited to, marketing efforts; providing office space, equipment,
telephone facilities, and various clerical, supervisory, computer, and other
personnel as necessary or beneficial to establish and maintain shareholder
accounts and records; processing purchase and redemption transactions and
automatic investments of client account cash balances; answering routine
client inquiries; and assisting clients in changing dividend options,
account designations, and addresses.
By adopting the Distribution Plan, the Trustees expect that the Fund will be
able to achieve a more predictable flow of cash for investment purposes and
to meet redemptions. This will facilitate more efficient portfolio
management and assist the Fund in pursuing its investment objectives. By
identifying potential investors whose needs are served by the Fund's
objectives, and properly servicing these accounts, it may be possible to curb
sharp fluctuations in rates of redemptions and sales.
Other benefits, which may be realized under either arrangement, may include:
(1) providing personal services to shareholders; (2) investing shareholder
assets with a minimum of delay and administrative detail; (3) enhancing
shareholder recordkeeping systems; and (4) responding promptly to
shareholders' requests and inquiries concerning their accounts.
For the fiscal year ended August 31, 1998, payment in the amount of $142,237
was made by Class B Shares pursuant to the Distribution Plan, none of which
was waived. In addition, for the fiscal year ended August 31, 1998, the
Fund's Class A Shares and Class B Shares paid shareholder services fees in
the amount of $560,075 and 47,412, respectively, of which $44,806 and $0,
respectively, were waived.
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.
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:
* Trustees, employees, and sales representatives of the Fund, Federated
Advisers, and Federated Securities Corp. and its affiliates;
* Federated Life Members (Class A Shares only);
* 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;and
* 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 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.
NAV 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, Jr. 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 NAV after the Fund receives the
redemption request. Shareholder redemptions may be subject to a contingent
deferred sales charge. Redemption procedures are explained in the prospectus
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
Although the Fund intends to redeem Shares in cash, it reserves the right
under certain circumstances to pay the redemption price in whole or in part
by a distribution of securities from the Fund's portfolio.
Redemption in kind will be made in conformity with applicable SEC rules, taking
such securities at the same value employed in determining net asset value and
selecting the securities in a manner the Directors determine to be fair and
equitable.
The Corporation has elected to be governed by Rule 18f-1 of the Investment
Company Act of 1940 under which the Corporation is obligated to redeem Shares
for any shareholder in cash up to the lesser of $250,000 or 1% of the Fund's
net asset value during any 90-day period.
Redemption in kind is not as liquid as a cash redemption. If redemption is
made in kind, shareholders receiving their securities and selling them before
their maturity could receive less than the redemption value of their
securities and could incur certain transaction costs.
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.
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:
* derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;
* invest in securities within certain statutory limits; and
* distribute to its shareholders at least 90% of its net income earned during
the year.
SHAREHOLDERS' TAX STATUS
CAPITAL GAINS
Capital gains or losses may be realized by the Fund on the sale of portfolio
securities and as a result of discounts from par value on securities held to
maturity. Sales would generally be made because of:
* the availability of higher relative yields;
* differentials in market values;
* new investment opportunities;
* changes in creditworthiness of an issuer; or
* an attempt to preserve gains or limit losses.
Distributions of long-term capital gains are taxed as such, whether they are
taken in cash or reinvested, and regardless of the length of time the
shareholder has owned the Shares. Any loss by a shareholder on Fund Shares
held for less than six months and sold after a capital gains distribution
will be treated as a long-term capital loss to the extent of the capital
gains distribution.
TOTAL RETURN
The Fund's average annual total returns for Class A Shares for the one-year
and five-year periods ended August 31, 1998, and for the period from October
11, 1990 (date of initial public investment) to August 31, 1998, were 3.85%,
5.40%, and 7.75%, respectively.
The Fund's average annual total returns for Class B Shares for the one-year
period ended August 31, 1998, and for the period from March 4, 1997 (date of
initial public investment) to August 31, 1998 were 2.20% and 4.99%,
respectively.
The average annual total return for all classes 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,
less any applicable sales charge, adjusted over the period by any additional
Shares, assuming a reinvestment of all dividends and distributions. Any
applicable contingent deferred sales charge will be deducted from the ending
value of the investments based on the lesser of the original purchase price
or the offering price of Shares redeemed.
YIELD
The Fund's yields for Class A Shares and Class B Shares for the thirty-day
period ended August 31, 1998 were 4.40% and 3.63%, respectively.
The yield for all classes 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 any class of Shares 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 yields for Class A Shares and Class B Shares for
the thirty-day period ended August 31, 1998, were 6.36% and 5.25%,
respectively. The tax-equivalent yield of the Fund is calculated similarly to
the yield, but is adjusted to reflect the taxable yield that the Fund would
have had to earn to equal its actual yield, assuming a state and federal tax
rate of 30.80% and assuming that income is 100% tax-exempt.
TAX-EQUIVALENCY TABLE
The Fund may also use a tax-equivalency table in advertising and sales
literature. The interest earned by the municipal obligations in the Fund's
portfolio generally remains free from federal regular income tax* and is free
from the income taxes imposed by the state of Pennsylvania. As the table on
the next page indicates, a "tax-free" investment is an attractive choice for
investors, particularly in times of narrow spreads between "tax-free" and
taxable yields.
TAXABLE YIELD EQUIVALENT FOR 1998
STATE OF PENNSYLVANIA
COMBINED FEDERAL AND STATE INCOME TAX BRACKET:
17.80% 30.80% 33.80% 38.80% 42.40%
JOINT
RETURN $1- $42,351- $102,301- $155,951- over
42,350 102,300 155,950 278,450 $278,450
SINGLE
RETURN $1- $25,351- $61,401- $128,101- over
25,350 61,400 128,100 278,450 $278,450
TAX-EXEMPT
YIELD TAXABLE YIELD EQUIVALENT
1.50% 1.82% 2.17% 2.27% 2.45% 2.60%
2.00% 2.43% 2.89% 3.02% 3.27% 3.47%
2.50% 3.04% 3.61% 3.78% 4.08% 4.34%
3.00% 3.65% 4.34% 4.53% 4.90% 5.21%
3.50% 4.26% 5.06% 5.29% 5.72% 6.08%
4.00% 4.87% 5.78% 6.04% 6.54% 6.94%
4.50% 5.47% 6.50% 6.80% 7.35% 7.81%
5.00% 6.08% 7.23% 7.55% 8.17% 8.68%
5.50% 6.69% 7.95% 8.31% 8.99% 9.55%
6.00% 7.30% 8.67% 9.06% 9.80% 10.42%
Note: The maximum marginal tax rate for each bracket was used in calculating
the taxable yield equivalent. Furthermore, additional state and local taxes
paid on comparable taxable investments were not used to increase federal
deductions.
The chart above is for illustrative purposes only. It is not an indicator of
past or future performance of Shares.
*Some portion of the Fund's income may be subject to the federal alternative
minimum tax and state and local income taxes.
PERFORMANCE COMPARISONS
The performance of each class of Shares depends upon such variables as:
* portfolio quality;
* average portfolio maturity;
* type of instruments in which the portfolio is invested;
* changes in interest rates and market value of portfolio securities;
* changes in the Fund's class expenses; and
* various other factors.
The Fund's performance fluctuates on a daily basis largely because net
earnings and offering price per Share fluctuate daily. Both net earnings and
offering price per Share are factors in the computation of yield and total
return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance,
investors should consider all relevant factors such as the composition of any
index used, prevailing market conditions, portfolio compositions of other
funds, and methods used to value portfolio securities and compute offering
price. The financial publications and/or indices which the Fund uses in
advertising may include:
LEHMAN BROTHERS REVENUE BOND INDEX is a total return performance benchmark
for the long-term, investment grade, revenue bond market. Returns and
attributes for the index are calculated semi-monthly.
LIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes the
reinvestment of all capital gains distributions and income dividends and takes
into account any change in offering price over a specific period of time. From
time to time, the Fund will quote its Lipper ranking in the "general municipal
bond funds" category in advertising and sales literature.
MORNINGSTAR, INC., an independent rating service, is the publisher of the bi-
weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000 NASDAQ-
listed mutual funds of all types, according to their risk-adjusted returns.
The maximum rating is five stars, and ratings are effective for two weeks.
Advertisements and other sales literature for the Fund may quote total
returns which are calculated on non-standardized base periods. The total
returns represent the historic change in the value of an investment in the
Fund based on monthly reinvestment of dividends over a specific period of
time.
Advertisements may quote performance information which does not reflect the
effect of the sales 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, INC.
Federated Investors, Inc. 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, 1997, Federated Investors, Inc.
managed 11 bond funds with approximately $2.1 billion in assets and 22 money
market funds with approximately $10.9 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.
The Chief Investment Officers responsible for oversight of the various
investment sectors within Federated Investors, Inc. are: U.S. equity and high
yield--J. Thomas Madden; U.S. fixed income--William D. Dawson, III; and global
equities and fixed income--Henry A. Frantzen. The Chief Investment Officers are
Executive Vice Presidents of the Federated advisory companies.
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 $4.4 trillion to the more than 6,700 funds
available.*
Federated Investors, Inc., through it subsidiaries, distributes mutual funds
for a variety of investment applications. Specific markets include:
INSTITUTIONAL CLIENTS
Federated Investors, Inc. meets the needs of approximately 900 institutional
clients nationwide by managing and servicing separate accounts and mutual
funds for a variety of applications, including defined benefit and defined
contribution programs, cash management, and asset/liability management.
Institutional clients include corporations, pension funds, tax-exempt
entities, foundations/endowments, insurance companies, and investment and
financial advisors. The marketing effort to theses institutional clients is
headed by John B. Fisher, President, Institutional Sales Division.
BANK MARKETING
Other institutional clients include close relationships with more than 1,600
banks and trust organizations. Virtually all of the trust divisions of the
top 100 bank holding companies use Federated funds in their clients'
portfolios. The marketing effort to trust clients is headed by 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 rankings in several surveys
performed by DALBAR, Inc. DALBAR is recognized as the industry benchmark for
service quality measurement. The marketing effort to these firms is headed by
James F. Getz, President, Federated Securites Corp.
*Source: Investment Company Institute
Federated Ohio Municipal Income Fund
(A Portfolio of Municipal Securities Income Trust)
Class F Shares
PROSPECTUS
The Class F Shares of Federated Ohio Municipal Income Fund (the "Fund")
offered by this prospectus represent interests in a non-diversified
portfolio of securities which is one of a series of investment portfolios in
Municipal Securities Income Trust (the "Trust"), an open-end management
investment company (a mutual fund). The investment objective of the Fund is
to provide current income exempt from federal regular income tax and the
personal income taxes imposed by the state of Ohio and Ohio municipalities.
The Fund invests primarily in a portfolio of Ohio municipal securities.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF ANY
BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY
OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in Class F Shares. Keep this prospectus for future reference.
The Fund has also filed a Statement of Additional Information for Class F
Shares dated October 31, 1998, with the Securities and Exchange Commission
("SEC"). The information contained in the Statement of Additional
Information is incorporated by reference into this prospectus. You may
request a copy of the Statement of Additional Information or a paper copy of
this prospectus, if you have received your prospectus electronically, free
of charge by calling 1-800-341-7400. To obtain other information, or to make
inquiries about the Fund, contact your financial institution. The Statement
of Additional Information, material incorporated by reference into this
document, and other information regarding the Fund is maintained
electronically with the SEC at Internet Web site (http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Prospectus dated October 31, 1998
TABLE OF CONTENTS
Summary of Fund Expenses 1
Financial Highlights 2
General Information 3
Calling the Fund 3
Year 2000 Statement 3
Investment Information 3
Investment Objective 3
Investment Policies 3
Ohio Municipal Securities 6
Investment Risks 6
Reducing Risks of Lower-Rated Securities 7
Non-Diversification 7
Investment Limitations 7
Net Asset Value 7
Investing in the Fund 8
Purchasing Shares 8
Purchasing Shares Through a
Financial Intermediary 8
Purchasing Shares by Wire 8
Purchasing Shares by Check 9
Systematic Investment Program 9
Eliminating the Sales Charge 9
Redeeming and Exchanging Shares 9
Redeeming or Exchanging Shares Through
a Financial Intermediary 10
Redeeming or Exchanging Shares by Telephone 10
Redeeming or Exchanging Shares by Mail 10
Requirements for Redemption 10
Requirements for Exchange 10
Systematic Withdrawal Program 11
Contingent Deferred Sales Charge 11
Account and Share Information 11
Confirmations and Account Statements 11
Dividends and Distributions 11
Accounts with Low Balances 12
Trust Information 12
Management of the Trust 12
Administration of the Fund 13
Administrative Services 13
Shareholder Information 14
Voting Rights 14
Tax Information 14
Federal Income Tax 14
State of Ohio Income Taxes 14
State and Local Taxes 15
Performance Information 15
Appendix 15
Financial Statements 19
Independent Auditors' Report 30
SUMMARY OF FUND EXPENSES
<TABLE>
<CAPTION>
CLASS F SHARES
SHAREHOLDER TRANSACTION EXPENSES
<S> <C> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of
offering price) 1.00%
Maximum Sales Charge Imposed on Reinvested Dividends (as a
percentage of offering price) None
Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable)(1) 1.00%
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
<CAPTION>
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
<S> <C> <C>
Management Fee (after waiver)(2) 0.14%
12b-1 Fee (after waiver)(3) 0.16%
Total Other Expenses (after expense reimbursement) 0.60%
Shareholder Services Fee (after waiver)(4) 0.24%
Total Operating Expenses(5) 0.90%
</TABLE>
(1) The contingent deferred sales charge is assessed 1.00% of the lesser of the
original purchase price or the net asset value of shares redeemed within four
years of their purchase date. For a more complete description see "Contingent
Deferred Sales Charge."
(2) The management fee has been reduced to reflect the voluntary waiver of a
portion of the management fee. The adviser can terminate this voluntary waiver
at any time at its sole discretion. The maximum management fee is 0.40%.
(3) The 12b-1 fee has been reduced to reflect the voluntary waiver of a portion
of the 12b-1 fee. The distributor can terminate this voluntary waiver at any
time at its sole discretion. The maximum 12b-1 fee is 0.40%.
(4) The shareholder services fee has been reduced to reflect the voluntary
waiver of a portion of the shareholder services fee. The shareholder services
provider can terminate this voluntary waiver at any time at its sole discretion.
The maximum shareholder services fee is 0.25%.
(5) The total operating expenses would have been 1.41% absent the voluntary
waivers of portions of the management fee, the 12b-1 fee, and the shareholder
services fee.
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder of Class F 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.
LONG-TERM SHAREHOLDERS MAY PAY MORE THAN THE ECONOMIC EQUIVALENT OF THE
MAXIMUM FRONT-END SALES CHARGE PERMITTED UNDER THE RULES OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC.
EXAMPLE
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.
1 Year $ 29
3 Years $ 50
5 Years $ 59
10 Years $120
You would pay the following expenses on the same investment,
assuming no redemption.
1 Year $ 19
3 Years $ 38
5 Years $ 59
10 Years $120
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
FINANCIAL HIGHLIGHTS
FEDERATED OHIO MUNICIPAL INCOME FUND
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 30.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED AUGUST 31,
1998 1997 1996 1995 1994 1993 1992 1991(A)
NET ASSET VALUE, BEGINNING OF PERIOD $11.53 $11.21 $11.22 $11.01 $11.65 $10.89 $10.40 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.56 0.59 0.60 0.60 0.56 0.57 0.61 0.57
Net realized and unrealized gain (loss)
on investments 0.40 0.32 (0.01) 0.20 (0.64) 0.77 0.49 0.41
Total from investment operations 0.96 0.91 0.59 0.80 (0.08) 1.34 1.10 0.98
LESS DISTRIBUTIONS
Distributions from net investment income (0.56) (0.59) (0.60) (0.59) (0.56) (0.57) (0.61) (0.57)
Distributions from net realized gain on investments (0.02) -- -- -- -- (0.01)(b) -- (0.01)(b)
Total distributions (0.58) (0.59) (0.60) (0.59) (0.56) (0.58) (0.61) (0.58)
NET ASSET VALUE, END OF PERIOD $11.91 $11.53 $11.21 $11.22 $11.01 $11.65 $10.89 $10.40
TOTAL RETURN(C) 8.56% 8.34% 5.34% 7.65% (0.72%) 12.69% 10.91% 10.01%
RATIOS TO AVERAGE NET ASSETS
Expenses 0.90% 0.90% 0.90% 0.90% 0.90% 0.87% 0.73% 0.28%*
Net investment income 4.80% 5.19% 5.28% 5.53% 5.02% 5.13% 5.79% 6.35%*
Expense waiver/reimbursement(d) 0.51% 0.58% 0.58% 0.60% 0.55% 0.83% 1.35% 1.66%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $80,274 $75,506 $70,568 $70,532 $81,566 $73,973 $28,924 $19,840
Portfolio turnover 23% 38% 11% 33% 20% 0% 0% 11%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from October 12, 1990 (date of initial
public investment) to August 31, 1991.
(b) Distributions are determined in accordance with income tax regulations
which may differ from generally accepted accounting principles. These
distributions do not represent a return of capital for federal income tax
purposes.
(c) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(d) 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)
GENERAL INFORMATION
The Trust was established as a Massachusetts business trust on August 6, 1990.
Class F 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 investing primarily in
Ohio municipal securities. The Fund is not likely to be a suitable investment
for non-Ohio taxpayers or retirement plans since Ohio municipal securities
are not likely to produce competitive after-tax yields for such persons and
entities when compared to other investments.
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.
YEAR 2000 STATEMENT
Like other mutual funds and business organizations worldwide, the Fund's
service providers (among them, the adviser, distributor, administrator and
transfer agent) must ensure that their computer systems are adjusted to
properly process and calculate date-related information from and after
January 1, 2000. Many software programs, and to a lesser extent, the computer
hardware in use today cannot distinguish the securities of trades, pricing
and accounting services. The Fund and its service providers are actively
working on necessary changes to computer systems to deal with the year 2000
issue and believe that systems will be year 2000 compliant when required.
Analysis continues regarding the financial impact of instituting a year 2000
compliant program on the Fund's operations.
INVESTMENT INFORMATION
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide current income exempt from
federal regular income tax (federal regular income tax does not include the
federal alternative minimum tax) and the personal income taxes imposed by the
state of Ohio and Ohio municipalities. The investment objective cannot be
changed without approval of shareholders. While there is no assurance that
the Fund will achieve its investment objective, it endeavors to do so by
following the investment policies described in this prospectus.
The Fund invests its assets so that at least 80% of its annual interest
income is exempt from federal regular income tax and the personal income
taxes imposed by the state of Ohio and Ohio municipalities. Interest income
of the Fund that is exempt from the income taxes described above retains its
exempt status when distributed to the Fund's shareholders. Income
distributed by the Fund may not necessarily be exempt from state or municipal
taxes in states other than Ohio.
The Fund may invest up to but not including 35% of its net assets in lower
quality bonds. These bonds will usually offer higher yields than higher-rated
bonds, but involve greater investment risk at the time of issue. (See
"Investment Risks.")
INVESTMENT POLICIES
The Fund pursues its investment objective by investing primarily in Ohio
municipal securities. Unless indicated otherwise, the investment policies of
the Fund may be changed by the Trustees without approval of shareholders.
Shareholders will be notified before any material changes in these policies
become effective.
ACCEPTABLE INVESTMENTS
The securities in which the Fund invests include:
* obligations issued by or on behalf of the state of Ohio, its political
subdivisions, or agencies;
* debt obligations of any state, territory, or possession of the United
States, including the District of Columbia, or any political subdivision of
any of these; and
* participation interests, as described below, in any of the above
obligations, the interest from which is, in the opinion of bond counsel for
the issuers or in the opinion of officers of the Fund and/or the investment
adviser to the Fund, exempt from both federal regular income tax and the
personal income tax imposed by the state of Ohio and Ohio municipalities
("Ohio municipal securities"). At least 80% of the value of the Fund's total
assets will be invested in Ohio municipal securities.
The prices of fixed income securities fluctuate inversely to the direction of
interest rates.
CHARACTERISTICS
The Ohio municipal securities which the Fund buys are both investment grade
and lower rated bonds. The Fund invests at least 65% of its assets in bonds
which have the same characteristics assigned by Moody's Investors Service,
Inc. ("Moody's"), Standard & Poor's ("S&P") or Fitch IBCA, Inc. ("Fitch") to
bonds of investment grade quality (rated Aaa, Aa, A, or Baa by Moody's or
AAA, AA, A, or BBB by S&P or Fitch). The Fund will limit its purchases of
bonds rated Ba or below by Moody's or BB or below by S&P or Fitch (commonly
known as "junk bonds") to up to but not including 35% of its net assets.
Changes in economic or other circumstances are more likely to lead to
weakened capacity to make principal and interest payments than higher rated
bonds.
If a rated bond loses its rating or has its rating reduced after the Fund has
purchase it, the Fund is not required to drop the bond from the portfolio,
but will consider doing so. In certain cases, the Fund's adviser may choose
bonds which are unrated if it judges the bonds to have the same
characteristics as otherwise permissible bonds.
There is no limit to portfolio maturity. A description of the rating
categories is contained in the Appendix to this prospectus.
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 Ohio
municipal securities. The financial institutions from which the Fund
purchases participation interests frequently provide or secure irrevocable
letters of credit or guarantees to assure that the participation interests
are of high quality. The Trustees will determine that participation interests
meet the prescribed quality standards for the Fund.
VARIABLE RATE MUNICIPAL SECURITIES
Some of the Ohio municipal securities which the Fund purchases may have
variable interest rates. Variable interest rates are ordinarily based on a
published interest rate, interest rate index, or a similar standard, such as
the 91-day U.S. Treasury bill rate. Many variable rate municipal securities
are subject to payment of principal on demand by the Fund in not more than
seven days. All variable rate municipal securities will meet the quality
standards for the Fund. The Fund's investment adviser has been instructed by
the Trustees to monitor the pricing, quality, and liquidity of the variable
rate municipal securities, including participation interests held by the
Fund on the basis of published financial information and reports of the
rating agencies and other analytical services.
MUNICIPAL LEASES
Municipal leases are obligations issued by state and local governments or
authorities to finance the acquisition of equipment and facilities and may be
considered to be illiquid. They may take the form of a lease, an installment
purchase contract, a conditional sales contract or a participation
certificate on any of the above. Lease obligations may be subject to periodic
appropriation. If the entity does not appropriate funds for future lease
payments, the entity cannot be compelled to make such payments. In the event
of failure of appropriation, unless the participation interests are credit
enhanced, it is unlikely that the participants would be able to obtain an
acceptable substitute source of payment.
RESTRICTED AND ILLIQUID SECURITIES
As a matter of fundamental investment policy, the Fund may invest up to 10%
of its net assets in restricted securities. Restricted securities are any
securities in which the Fund may otherwise invest pursuant to its investment
objective and policies but which are subject to restriction upon resale under
federal securities laws. As a matter of non-fundamental investment policy,
the Fund will limit investments in illiquid securities, including certain
restricted securities not determined by the Trustees to be liquid, to 15% of
its net assets.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may purchase securities on a when-issued or delayed delivery basis.
These transactions are arrangements in which the Fund purchases securities
with payment and delivery scheduled for a future time. The seller's failure
to complete these transactions may cause the Fund to miss a price or yield
considered to be advantageous. Settlement dates may be a month or more after
entering into these transactions, and the market values of the securities
purchased may vary from the purchase prices.
The Fund may dispose of a commitment prior to settlement if the investment
adviser deems it appropriate to do so. In addition, the Fund may enter in
transactions to sell its purchase commitments to third parties at current
market values and simultaneously acquire other commitments to purchase
similar securities at later dates. The Fund may realize short-term profits or
losses upon the sale of such commitments.
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.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest its assets in securities of other investment companies as
an efficient means of carrying out its investment policies. It should be
noted that investment companies incur certain expenses, such as management
fees, and, therefore, any investment by the Fund in shares of other
investment companies may be subject to such duplicate expenses.
TEMPORARY INVESTMENTS
The Fund invests its assets so that at least 80% of its annual interest
income is exempt from federal regular income tax and the personal income
taxes imposed by the state of Ohio and Ohio municipalities. However, from
time to time, when the investment adviser determines that market conditions
call for a temporary defensive posture, the Fund may invest in short-term
non-Ohio municipal tax-exempt obligations or taxable temporary investments.
These temporary investments include: notes issued by or on behalf of
municipal or corporate issuers; obligations issued or guaranteed by the
U.S. government, its agencies, or instrumentalities; other debt securities;
commercial paper; certificates of deposit of banks; and repurchase
agreements (arrangements in which the organization selling the Fund, a bond,
or temporary investment agrees at the time of sale to repurchase it at a
mutually agreed upon time and price).
There are no rating requirements applicable to temporary investments.
However, the investment adviser will limit temporary investments to those
rated within the investment grade categories described under "Acceptable
Investments--Characteristics" (if rated) or (if unrated) those which the
investment adviser judges to have the same characteristics as such investment
grade securities.
Although the Fund is permitted to make taxable, temporary investments, there
is no current intention of generating income subject to federal regular
income tax or personal income taxes imposed by the state of Ohio or Ohio
municipalities.
OHIO MUNICIPAL SECURITIES
Ohio municipal securities are generally issued to finance public works, such
as airports, bridges, highways, housing, hospitals, mass transportation
projects, schools, streets, and water and sewer works. They are also issued
to repay outstanding obligations, to raise funds for general operating
expenses, and to make loans to other public institutions and facilities.
Ohio municipal securities include industrial development bonds issued by or
on behalf of public authorities to provide financing aid to acquire sites or
construct and equip facilities for privately or publicly owned corporations.
The availability of this financing encourages these corporations to locate
within the sponsoring communities and thereby increases local employment.
The two principal classifications of municipal securities are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its full faith and credit and taxing power for the payment
of principal and interest. However, interest on and principal of revenue
bonds are payable only from the revenue generated by the facility financed by
the bond or other specified sources of revenue. Revenue bonds do not
represent a pledge of credit or create any debt of or charge against the
general revenues of a municipality or public authority. Industrial
development bonds are typically classified as revenue bonds.
INVESTMENT RISKS
The value of Shares will fluctuate. The amount of this fluctuation is
dependent upon the quality and maturity of the bonds in the Fund's portfolio
as well as on market conditions. Yields on Ohio municipal securities depend
on a variety of factors, including, but not limited to: the general
conditions of the municipal bond market; the size of the particular
offering; the maturity of the obligations; and the rating of the issue.
Further, any adverse economic conditions or developments affecting the state
of Ohio or its municipalities could impact the Fund's portfolio. The ability
of the Fund to achieve its investment objective also depends on the
continuing ability of the issuers of Ohio municipal securities and
participation interests, or the guarantors of either, to meet their
obligations for the payment of interest and principal when due. Investing in
Ohio municipal securities which meet the Fund's quality standards may not be
possible if the state of Ohio or its municipalities do not maintain their
current credit ratings. In addition, certain Ohio constitutional amendments,
legislative measures, executive orders, administrative regulations, and
voter initiatives could result in adverse consequences affecting Ohio
municipal securities.
A further discussion of the risks of a portfolio which invests largely in
Ohio municipal securities is contained in the Statement of Additional
Information.
The prices of longer term bonds fluctuate more widely in response to market
interest rate changes. Generally speaking, the lower quality, long-term bonds
in which the Fund invests have greater fluctuation in value than high quality,
shorter-term bonds.
Bond prices are interest rate sensitive, which means that their value varies
inversely with market interest rates. Thus, if market interest rates have
increased from the time a bond was purchased, the bond, if sold, might be
sold at a price less than its cost. Similarly, if market interest rates have
declined from the time a bond was purchased, the bond, if sold, might be sold
at a price greater than its cost. (In either instance, if the bond was held
to maturity, no loss or gain normally would be realized as a result of
interim market fluctuations.)
Prices of lower grade bonds also fluctuate with changes in the perceived
quality of the credit of their issuers. Consequently, Shares may not be
suitable for persons who cannot assume the somewhat greater risks of capital
depreciation associated with higher tax-exempt income yields. In addition,
bonds rated "BBB" and below by S&P or Fitch or "Baa" and below by Moody's
have speculative characteristics. Changes in economic conditions or other
circumstances are more likely to lead to weakened capacity to make principal
and interest payments than higher rated bonds.
A large portion of the Fund's portfolio may be invested in bonds whose
interest payments are from revenues of similar projects (such as housing or
hospitals) or where issuers share the same geographic location. As a result,
the Fund may be more susceptible to similar economic, political or regulatory
developments than would a portfolio of bonds with a greater geographic and
project variety. This susceptibility may result in greater fluctuations in
share price.
Many issuers of bonds which have characteristics of rated bonds choose not to
have their obligations rated. Unrated bonds may carry a greater risk and
higher yield than rated securities. Although unrated bonds are not
necessarily of lower quality, the market for them may not be as broad as that
for rated bonds since many investors rely solely on the major rating agencies
for credit appraisal.
Further, the lower-rated or unrated bonds which the Fund may purchase are
frequently traded only in markets where the number of potential purchasers
and sellers is limited. This consideration may have the effect of limiting
the availability of such bonds for the Fund to purchase and may also have the
effect of limiting the ability of the Fund to sell such bonds at their fair
market value either to meet redemption requests or to respond to changes in
the economy or the financial markets. The Fund will not invest more than 15%
of its total assets in securities which are not readily marketable.
REDUCING RISKS OF LOWER-RATED SECURITIES
The Fund's investment adviser believes that the risks of investing in lower-
rated securities can be reduced. The professional portfolio management
techniques used by the Fund to attempt to reduce these risks include:
CREDIT RESEARCH
When purchasing bonds, rated or unrated, the Fund's investment adviser
performs its own credit analysis in addition to using recognized rating
agencies. This credit analysis considers the economic feasibility of revenue
bond project financing and general purpose borrowings, the financial
condition of the issuer or guarantor with respect to liquidity, cash flow and
ability to meet anticipated debt service requirements, and political
developments that may affect credit quality.
DIVERSIFICATION
The Fund invests in securities of many different issuers to reduce portfolio
risks.
ECONOMIC ANALYSIS
The Fund's adviser also considers trends in the overall economy, in
geographic areas, in various industries, and in the financial markets.
NON-DIVERSIFICATION
The Fund is a non-diversified investment portfolio. As such, there is no
limit on the percentage of assets which can be invested in any single issuer.
An investment in the Fund, therefore, will entail greater risk than would
exist in a diversified portfolio of securities because the higher percentage
of investments among fewer issuers may result in greater fluctuation in the
total market value of the Fund's portfolio. Any economic, political, or
regulatory developments affecting the value of the securities in the Fund's
portfolio will have a greater impact on the total value of the portfolio than
would be the case if the portfolio were diversified among more issuers.
The Fund intends to comply with Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"). This undertaking requires that at the end of
each quarter of the taxable year: (a) with regard to at least 50% of the
Fund's total assets, no more than 5% of its total assets are invested in the
securities of a single issuer and (b) no more than 25% of its total assets
are invested in the securities of a single issuer.
INVESTMENT LIMITATIONS
The Fund will not borrow money directly or through reverse repurchase
agreements (arrangements in which the Fund sells a portfolio instrument for a
percentage of its cash value with an agreement to buy it back on a set date)
or pledge securities except, under certain circumstances, the Fund may borrow
up to one-third of the value of its total assets and pledge up to 10% of the
value of those assets to secure such borrowings.
The above investment limitation cannot be changed without shareholder
approval.
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.
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.
INVESTING IN THE FUND
This prospectus offers Class F Shares with the characteristics described
below.
CLASS F
Minimum and Subsequent Investment Amount $1500/$100
Minimum and Subsequent Investment Amount
for Retirement Plans NA
Maximum Sales Charge 1.00%*
Maximum Sales Charge as a Percentage of the
Net Amount Invested 1.01%
Maximum Contingent Deferred Sales Charge** 1.00%**
* There is no sales charge for purchases of $1 million or more. In addition,
no sales charge is imposed for Shares purchased through certain entities or
programs. Please see the section entitled "Reducing or Eliminating the
Sales Charge."
** 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 F
Shares:
CONTINGENT
DEFERRED
SALES
AMOUNT OF PURCHASE SHARES HELD CHARGE
Up to $1,999,999 Four years or less 1.00%
$2,000,000 to $4,999,999 Two years or less 0.50%
$5,000,000 or more One year or less 0.25%
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 Class F Shares of certain other funds advised
and distributed by affiliates of Federated Investors, Inc. ("Federated
Funds") may exchange their Shares for Class F Shares 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 F
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 in a minimum amount of $50 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.
ELIMINATING THE SALES CHARGE
Class F Shares are sold at NAV, plus a sales charge. However:
NO SALES CHARGE IS IMPOSED FOR CLASS F SHARES PURCHASED:
* through bank trust departments or investment advisers registered under the
Investment Advisers Act of 1940 purchasing on behalf of their clients;
* by sales representatives, Trustees, and employees of the Fund, Federated
Advisers, Federated Securities Corp. or their affiliates and their immediate
family members;
* by any investment dealer who has a sales agreement with Federated
Securities Corp. and their immediate family members, or by any trusts or
pension or profit-sharing plans for these persons or retirement plans where
the third party administrator has entered into certain arrangements with
Federated Securities Corp.
IN ADDITION, THE SALES CHARGE ON CLASS F SHARES CAN BE ELIMINATED BY:
* purchasing Class F Shares in quantity;
* combining concurrent purchases of Class F Shares
* by you, your spouse, and your children under age 21, or;
* of two or more Federated Funds (other than money market funds);
* accumulating purchases (in calculating the sales charge on an additional
purchase of Class F Shares, you may count the current value of previous
Class F Share purchases still invested in the Fund);
* signing a letter of intent to purchase a specific dollar amount of Class F
Shares within 13 months; or
* using the reinvestment privilege within 120 days of redeeming Class F
Shares of an equal or lesser amount.
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 Shares, a dealer will normally receive up to 100% 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. 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 Shares.
REDEEMING AND EXCHANGING SHARES
Shares of the Fund may be redeemed for cash or exchanged for shares of Ohio
Municipal Cash Trust or Class F Shares 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 Share
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 share- holder'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 of not less than $100. To
be eligible to participate in this program, a shareholder must have an
account value of at least $10,000. A shareholder may apply for participation
in this program through his financial 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 F Shares subject to a sales charge while
participating in this program. A contingent deferred sales charge will be
imposed on Shares redeemed through this program within four years of their
purchase dates.
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:
* following the death or disability, as defined in Section 72(m)(7) of the
Internal Revenue Code of 1986, of the last surviving shareholder and any
designated beneficiaries;
* representing a total or partial distribution from an Individual Retirement
Account, Keogh Plan, or a custodial account to a shareholder who has attained
the age of 701/2;
* representing a total or partial distribution from a qualified plan, other
than an Individual Retirement Account, Keogh Plan, or a custodial account
following retirement;
* which are involuntary redemptions of shareholder accounts that do not
comply with the minimum balance requirements;
* which are reinvested in the Fund under the reinvestment privilege;
* 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
* 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 contingent deferred sales charge 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 NAV 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. 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 Fund's 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 at 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, Inc. All of the Class A
(voting) shares of Federated Investors, Inc. are owned by a trust, the
trustees of which are John F. Donahue, Chairman and Director of Federated
Investors, Inc., Mr. Donahue's wife, and Mr. Donahue's son, J. Christopher
Donahue, who is President and Director of Federated Investors, Inc.
Federated Advisers and other subsidiaries of Federated Investors, Inc.
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 $120 billion
invested across more than 300 funds under management and/or administration
by its subsidiaries, as of December 31, 1997, Federated Investors, Inc. 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 4,000 financial institutions nationwide.
J. Scott Albrecht has been a portfolio manager of the Fund since March 1995.
Mr. Albrecht joined Federated Investors, Inc. or its predecessor 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 a portfolio manager of the Fund since April 1997.
Ms. Ochson joined Federated Investors, Inc. or its predecessor 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 Fund 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 CLASS F 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, Inc.
DISTRIBUTION PLAN AND SHAREHOLDER SERVICES
Under a distribution plan adopted in accordance with Investment Company Act
Rule 12b-1 (the "Distribution Plan"), the Fund may pay to the distributor an
amount, computed at an annual rate of 0.40% of the average daily NAV of the
Shares to finance any activity which is principally intended to result in the
sale of Shares subject to the Distribution Plan. The distributor may select
financial institutions such as banks, fiduciaries, custodians for public
funds, investment advisers, and broker/dealers to provide sales services or
distribution related support services as agents for their clients or
customers.
The Distribution Plan is a compensation-type plan. As such, the Fund makes no
payments to the distributor except as described above. Therefore, the Fund
does not pay for unreimbursed expenses of the distributor, including amounts
expended by the distributor in excess of amounts received by it from the
Fund, interest, carrying, or other financing charges in connection with
excess amounts expended, or the distributor's overhead expenses. However,
the distributor may be able to recover such amount or may earn a profit from
future payments made by the Fund under the Distribution Plan.
In addition, the Fund has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, Inc.,
under which the Fund may make payments up to 0.25% of the average daily NAV
of its 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. will pay financial institutions, for distribution
and/or administrative services, an amount equal to 1.00% of the offering
price of the Shares acquired by their clients or customers on purchases up to
$1,999,999, 0.50% of the offering price on purchases of $2,000,000 to
$4,999,999, and 0.25% of the offering price on purchases of $5,000,000 or
more. (This fee is in addition to the 1.00% sales charge on purchases of less
than $1 million.)
Furthermore, in addition to payments made pursuant to the Distribution Plan
and Shareholder Services Agreement, Federated Securities Corp. and Federated
Shareholder Services, from their own assets, may pay financial institutions
supplemental fees for the performance of substantial sales services,
distribution related support services, or shareholder services. The support
may include sponsoring sales, educational and training seminars for their
employees at recreational-type facilities, providing sales literature, and
engineering computer software programs that emphasize the attributes of the
Fund. Such assistance will be predicated upon the amount of Shares the
financial institution sells or may sell and/or upon the type and nature of
sales or marketing support furnished by the financial institution. Any
payments made by the distributor may be reimbursed by the Fund's Adviser or
its affiliates, and not the Fund.
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:
MAXIMUM AVERAGE AGGREGATE
FEE DAILY NET ASSETS
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
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of shares.
Federated Services Company may choose voluntarily to waive a portion of its
fee.
SHAREHOLDER INFORMATION
VOTING RIGHTS
Each Share of the Fund gives the shareholder one vote in Trustee elections
and other matters submitted to shareholders for vote. All shares of each
portfolio or class in the Trust 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 by 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 Trust's
outstanding shares of all series entitled to vote.
As of October 9, 1998, the following shareholder of record owned 25% or more
of the outstanding Shares of the Fund: Merrill Lynch Pierce Fenner & Smith,
Jacksonville, FL (as record owner holding Shares for its clients), owned
approximately 2,028,646 Shares (29.95%) 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 does not expect to pay federal income tax because it expects to meet
requirements of the Code, as amended, applicable to regulated investment
companies and to receive the special tax treatment afforded to such
companies. The Fund will be treated as a single, separate entity for federal
income tax purposes so that income (including capital gains) and losses
realized by the Trust's other portfolios will not be combined for tax
purposes with those realized by the Fund.
Shareholders are not required to pay federal regular income tax on any
dividends received from the Fund that represent net interest on tax-exempt
municipal bonds, although tax exempt interest will increase the taxable
income of certain recipients of social security benefits. However, under the
Tax Reform Act of 1986, dividends representing net interest income earned on
some municipal bonds may be included in calculating the federal individual
alternative minimum tax or the federal alternative minimum tax for
corporations.
The alternative minimum tax, up to 28% of alternative minimum taxable income
for individuals and 20% for corporations, applies when it exceeds the regular
tax for the taxable year. Alternative minimum taxable income is equal to the
regular taxable income of the taxpayer increased by certain "tax preference"
items not included in regular taxable income and reduced by only a portion of
the deductions allowed in the calculation of the regular tax.
The Tax Reform Act of 1986 treats interest on certain "private activity"
bonds issued after August 7, 1986, as a tax preference item for both
individuals and corporations. Unlike traditional governmental purpose
municipal bonds, which finance roads, schools, libraries, prisons, and other
public facilities, private activity bonds provide benefits to private
parties. The Fund may purchase all types of municipal bonds, including
private activity bonds. Thus, should it purchase any such bonds, a portion of
the Fund's dividends may be treated as a tax preference item.
In addition, in the case of a corporate shareholder, dividends of the Fund
which represent interest on municipal bonds will become subject to the 20%
corporate alternative minimum tax because the dividends are included in a
corporation's "adjusted current earnings." The corporate alternative minimum
tax treats 75% of the excess of a taxpayer's pre-tax "adjusted current
earnings" over the taxpayer's alternative minimum taxable income as a tax
preference item. "Adjusted current earnings" is based upon the concept of a
corporation's "earnings and profits." Since "earnings and profits" generally
includes the full amount of any Fund dividend, and alternative minimum
taxable income does not include the portion of the Fund's dividend
attributable to municipal bonds which are not private activity bonds, the
difference will be included in the calculation of the corporation's
alternative minimum tax.
Dividends of the Fund representing net interest income earned on some
temporary investments and any realized net short-term gains are taxed as
ordinary income.
These tax consequences apply whether dividends are received in cash or as
additional shares. Information on the tax status of dividends and
distributions is provided annually.
STATE OF OHIO INCOME TAXES
Under existing Ohio laws, distributions made by the Fund will not be subject
to Ohio individual income taxes to the extent that such distributions qualify
as "exempt-interest dividends" under the Code and represent (i) interest from
obligations of Ohio or its subdivisions which is exempt from federal income
tax; or (ii) interest or dividends from obligations issued by the United
States and its territories or possessions or by any authority, commission, or
instrumentality of the United States, which are exempt from state income tax
under federal laws. Conversely, to the extent that distributions made by the
Fund are derived from other types of obligations, such distributions will be
subject to Ohio individual income taxes.
Distributions made by the Fund will not be subject to Ohio corporate
franchise tax to the extent that such distributions qualify as "exempt-
interest dividends" under the Code and represent (i) interest from
obligations of Ohio or its subdivisions which is exempt from federal income
tax; or (ii) net interest income from obligations issued by the United
States and its territories or possessions or by any authority, commission,
or instrumentality of the United States, which is included in federal
taxable income and which is exempt from state income tax under federal laws.
Exempt-interest dividends that represent interest from obligations held by
the Fund which are issued by Ohio or its political subdivisions will be
exempt from any Ohio municipal income tax (even if the municipality is
permitted under Ohio law to levy a tax on intangible income).
STATE AND LOCAL TAXES
Income from the Fund is not necessarily free from taxes in states other than
Ohio. Shareholders are urged to consult their own tax advisers regarding the
status of their accounts under state and local tax laws.
PERFORMANCE INFORMATION
From time to time, the Fund advertises the total return, yield, and tax-
equivalent yield for Shares.
Total return represents the change, over a specific period of time, in the
value of an investment in Shares after reinvesting all income and capital
gains distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.
The yield of Shares is calculated by dividing the net investment income per
Share (as defined by the SEC) earned by Shares over a thirty-day period by
the maximum offering price per Share of Shares on the last day of the period.
This number is then annualized using semi-annual compounding. The tax-
equivalent yield of Shares is calculated similarly to the yield, but is
adjusted to reflect the taxable yield that Shares would have had to earn to
equal its actual yield, assuming a specific tax rate. The yield and the tax-
equivalent yield do not necessarily reflect income actually earned by Shares
and, therefore, may not correlate to the dividends or other distributions
paid to shareholders.
The performance information reflects the effect of the maximum sales charge
and other similar non-recurring charges, such as the contingent deferred
sales charge, which, if excluded, would increase the total return, yield, and
tax-equivalent yield.
From time to time, advertisements for the Fund may refer to ratings,
rankings and other information in certain financial publications and/or
compare the Fund's performance to certain indices.
APPENDIX
STANDARD & POOR'S ("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.
BB--Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
The "BB" rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied "BBB" rating.
B--Debt rated "B" has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity of
willingness to pay interest and repay principal. The "B" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "BBB" or "BB" rating.
CCC--Debt rated "CCC" has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic conditions
to meet timely payment of interest and repayment of principal. In the event
of adverse business, financial, or economic conditions, it is not likely to
have the capacity to pay interest and repay principal. The "CCC" rating
category is also used for debt subordinated to senior debt that is assigned
an actual or implied "B" or "B-" rating.
CC--The rating "CC" typically is applied to debt subordinated to senior debt
that is assigned an actual or implied "CCC" debt rating.
C--The rating "C" typically is applied to debt subordinated to senior debt
which is assigned an actual or implied "CCC-" debt rating. The "C" rating may
be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
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. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
AA--Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in "Aaa" securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long-term risks appear somewhat
larger than in "Aaa" securities.
A--Bonds which are rated "A" possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may
be present which suggest a susceptibility to impairment sometime in the
future.
BAA--Bonds which are rated "Baa" are considered as medium grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present, but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
BA--Bonds which are rated "Ba" are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B--Bonds which are rated "B" generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA--Bonds which are rated "Caa" are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
CA--Bonds which are rated "Ca" represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C--Bonds which are rated "C" are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
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 IBCA, 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.
BB--Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified which could
assist the obligor in satisfying its debt service requirements.
B--Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued
timely payment of principal and interest reflects the limited margin of
safety and the need for reasonable business and economic activity throughout
the life of the issue.
CCC--Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC--Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C--Bonds are in imminent default in payment of interest
or principal.
DDD, DD, AND D--Bonds are in default on interest and/or principal payments.
Such bonds are extremely speculative and should be valued on the basis of
their ultimate recovery value in liquidation or reorganization of the
obligor. DDD represents the highest potential for recovery on these bonds,
and D represents the lowest potential for recovery.
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.
S&P 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 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 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.
S&P 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 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.
PORTFOLIO OF INVESTMENTS
FEDERATED OHIO MUNICIPAL INCOME FUND
AUGUST 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
<C> <S> <C> <C>
LONG-TERM MUNICIPALS--98.4%
OHIO--92.7%
$ 1,000,000 Barberton, OH, City School District, UT GO Bonds (Series 1998),
5.00% (FGIC INS)/(Original Issue Yield: 5.23%), 11/1/2015 AAA $ 1,013,140
300,000 Bellefontaine, OH, Storm Water Utility LT GO Bonds, 7.05%, 6/1/2011 A 323,703
2,000,000 Brecksville-Broadview Heights City School District, OH, UT GO
Bonds, 5.25% (FGIC INS)/(Original Issue Yield: 5.825%), 12/1/2021 AAA 2,035,540
500,000 Brunswick, OH, UT GO Bonds, 7.35% (Original Issue Yield: 7.446%),
12/1/2010 A2 545,065
1,000,000 Clermont County, OH, Hospital Facilities Refunding & Revenue Bonds
(Series B), 5.625% (Mercy Health Systems)/(AMBAC INS)/(Original
Issue Yield: 5.80%), 9/1/2021 AAA 1,060,650
1,000,000 Cleveland, OH, Airport System, Revenue Bonds (Series 1997A), 5.125%
(FSA INS)/(Original Issue Yield: 5.41%), 1/1/2022 AAA 991,860
2,500,000 Cleveland, OH, Airport System, Revenue Bonds (Series A), 6.00%
(FGIC INS)/(Original Issue Yield: 6.378%), 1/1/2024 AAA 2,689,975
2,000,000 Cleveland, OH, Public Power System, Revenue Bonds, First Mortgage
(Series A), 7.00% (MBIA INS)/(United States Treasury PRF)/(Original
Issue Yield: 7.15%), 11/15/2024 AAA 2,358,580
2,600,000 Columbus, OH, Municipal Airport Authority, Improvement Revenue
Bonds, 6.25% (Port Columbus International Airport)/(MBIA INS)/
(Original Issue Yield: 6.35%), 1/1/2024 AAA 2,840,812
1,500,000 Cuyahoga County, OH, Hospital Authority, Improvement & Refunding
Revenue Bonds (Series A), 5.625% (University Hospitals Health
System, Inc.)/(MBIA Insurance Corporation LOC)/(Original Issue
Yield: 5.90%), 1/15/2026 AAA 1,580,280
1,500,000 Cuyahoga County, OH, Hospital Authority, Revenue Bonds, 6.25%
(Meridia Health System)/(Original Issue Yield: 6.80%), 8/15/2024 AAA 1,720,470
500,000 Cuyahoga County, OH, Health Care Facilities Refunding Revenue
Bonds, 5.50% (Benjamin Rose Institute)/(Original Issue Yield:
5.75%), 12/1/2028 NR 494,500
2,000,000 Forest Hills, OH, Local School District, UT GO Bonds, 5.70% (MBIA
INS), 12/1/2016 AAA 2,172,320
1,500,000 Franklin County, OH, Health Care Facilities, Revenue Refunding
Bonds, 5.50% (Ohio Presbyterian Retirement Services)/(Original
Issue Yield: 5.69%), 7/1/2021 NR 1,502,460
500,000 Franklin County, OH, Hospital Facility Authority, Hospital Revenue
Refunding & Improvement Bonds, 7.25% (Riverside United Methodist
Hospital)/(MBIA INS)/(Original Issue Yield: 7.29%), 5/15/2020 AAA 538,780
2,000,000 Franklin County, OH, Hospital Facility Authority, Revenue Refunding
Bonds (Series A), 5.75% (Riverside United Methodist Hospital)/
(Original Issue Yield: 6.10%), 5/15/2020 Aa3 2,086,140
1,300,000 Hamilton County, OH, Health System, Revenue Refunding Bonds,
Providence Hospital, 6.875% (Franciscan Sisters of Christian
Charity HealthCare Ministry, Inc.)/(Original Issue Yield: 7.05%),
7/1/2015 BBB 1,405,950
</TABLE>
<TABLE>
<CAPTION>
FEDERATED OHIO MUNICIPAL INCOME FUND
<C> <S> <C> <C>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
LONG-TERM MUNICIPALS--CONTINUED
OHIO--CONTINUED
$ 700,000 Hamilton County, OH, Hospital Facilities Authority, Revenue
Refunding & Improvement Bonds, 7.00% (Deaconess Hospital)/(Original
Issue Yield: 7.046%), 1/1/2012 A- $ 768,180
2,000,000 Hamilton County, OH, Hospital Facilities Authority, Revenue
Refunding Bonds (Series A), 6.25% (Bethesda Hospital, OH,)/
(Original Issue Yield: 6.55%), 1/1/2012 A 2,171,300
1,000,000 Hamilton County, OH, Sales Tax Bonds (Series 1998A), 4.75%
(Hamilton County, OH, Football Project)/(MBIA INS)/(Original Issue
Yield: 4.93%), 12/1/2017 AAA 977,110
1,580,000 Hancock County, OH, LT GO Bonds (Series 1997), 5.45%, 12/1/2017 AA- 1,654,007
440,000 Lakewood, OH, Hospital Improvement Authority, Revenue Refunding
Bonds (Series One), 6.00% (Lakewood Hospital, OH,)/(MBIA INS)/
(Original Issue Yield: 6.90%), 2/15/2010 AAA 444,576
1,500,000 Lorain County, OH, Health Care Facilities Revenue Refunding Bonds
(Series 1998A), 5.25% (Kendal at Oberlin)/(Original Issue Yield:
5.53%), 2/1/2021 BBB 1,469,925
3,000,000 Lorain County, OH, Hospital Facilities Revenue Bonds (Series
1997B), 5.625% (Catholic Healthcare Partners)/(MBIA INS)/(Original
Issue Yield: 5.825%), 9/1/2016 AAA 3,229,560
1,000,000 Mahoning County, OH, Hospital Facilities, Revenue Bonds, 5.50%
(Western Reserve Care System)/(MBIA INS)/(Original Issue Yield:
5.75%), 10/15/2025 AAA 1,094,000
1,000,000 Marion County, OH, Hospital Authority, Hospital Refunding &
Improvement Revenue Bonds (Series 1996), 6.375% (Community
Hospital of Springfield)/(Original Issue Yield: 6.52%), 5/15/2011 BBB+ 1,102,310
420,000 Marysville, OH, LT Sewer System GO Bonds, 7.15%, 12/1/2011 A 460,975
1,000,000 Mason, OH, County School District, UT GO Bonds, 5.30%, 12/1/2017
Aa3 1,044,980 1,000,000 Miami County, OH, Hospital Facilities Revenue
Refunding &
Improvement Bonds (Series 1996A), 6.375% (Upper Valley Medical
Center, OH,)/(Original Issue Yield: 6.62%), 5/15/2026 BBB 1,076,720
1,500,000 Montgomery County, OH, Health System Revenue Bonds (Series 1997),
5.50% (Franciscan Medical Center-Dayton Campus)/(Original Issue
Yield: 5.551%), 7/1/2018 BBB 1,518,180
1,000,000 Moraine, OH, Solid Waste Disposal Authority, Revenue Bonds, 6.75%
(General Motors Corp.)/(Original Issue Yield: 6.80%), 7/1/2014 A 1,221,360
10,195,000 Ohio HFA, Residential Mortgage Revenue Bonds (Series B-2), 6.70%
(GNMA COL), 3/1/2025 AAA 11,003,770
1,700,000 Ohio HFA, SFM Revenue Bonds (Series A), 7.65% (GNMA COL)/(Original
Issue Yield: 7.669%), 3/1/2029 AAA 1,775,684
165,000 Ohio HFA, SFM Revenue Bonds (Series A), 7.80% (GNMA COL), 3/1/2030
AAA 172,268 500,000 Ohio State, Air Quality Development Authority, PCR
Refunding Bonds
(Series A), 7.45% (Ohio Edison Co.)/(FGIC INS), 3/1/2016 AAA 534,045
</TABLE>
<TABLE>
<CAPTION>
FEDERATED OHIO MUNICIPAL INCOME FUND
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
<C> <S> <C> <C>
LONG-TERM MUNICIPALS--CONTINUED
OHIO--CONTINUED
$ 3,000,000 Ohio State, Air Quality Development Authority, Revenue Refunding
Bonds, 6.375% (JMG Funding Limited Partnership)/(AMBAC INS)/
(Original Issue Yield: 6.493%), 1/1/2029 AAA $ 3,324,300
2,000,000 Ohio State, Turnpike Commission, Revenue Bonds, Series A, 5.75%,
2/15/2024 AA- 2,134,520
1,500,000 Ohio State, Education Loan Revenue Bonds (Series 1997A), 5.85%
(AMBAC INS),
12/1/2019 AAA 1,566,180
1,500,000 Ohio State, Solid Waste Disposal Revenue Bonds, 5.60% (USG Corp.),
8/1/2032 BBB- 1,520,610
2,000,000 Olentangy, OH, Local School District, UT GO Bonds, 5.25% (Original
Issue Yield: 5.46%), 12/1/2017 AA- 2,052,160
1,000,000 Parma, OH, Hospital Improvement and Refunding Revenue Bonds, 5.375%
(Parma Community General Hospital Association)/(Original Issue
Yield: 5.45%), 11/1/2029 A- 1,011,960
730,000 Reynoldsburg, OH, City School District, UT GO Capital Appreciation
Refunding Bonds (FGIC INS)/(Original Issue Yield: 5.30%), 12/1/2011 AAA 393,945
500,000 Tiffin, OH, LT GO Bonds, 7.10%, 12/1/2011 A 545,300
2,000,000 Toledo-Lucas County, OH, Port Authority, Port Facilities Revenue
Refunding Bonds, 5.90% (Cargill, Inc.)/(Original Issue Yield:
5.981%), 12/1/2015 Aa3 2,124,660
1,500,000 University of Cincinnati, OH, General Receipts Revenue Bonds
(Series 1998AA), 5.00% (Original Issue Yield: 5.15%), 6/1/2018 AA 1,493,355
1,115,000 Warren County, OH, Special Assessment UT GO Bonds, 5.50%, 12/1/2017 Aa2 1,165,108
Total 74,411,273
PUERTO RICO--4.7%
1,200,000 Puerto Rico Electric Power Authority, Revenue Bonds (Series T),
6.375% (Original Issue Yield: 6.58%), 7/1/2024 BBB+ 1,369,656
1,000,000 Puerto Rico Highway and Transportation Authority, Residual Interest
Tax-Exempt Securites (Series PA 331A), 7.01863% (AMBAC INS),
7/1/2013 NR 1,205,420
1,000,000 Puerto Rico Highway and Transportation Authority, Residual Interest
Tax-Exempt Securities (Series PA 331B), 7.01863% (AMBAC INS),
7/1/2014 NR 1,203,040
Total 3,778,116
VIRGIN ISLANDS--1.0%
750,000 Virgin Islands HFA, SFM Revenue Refunding Bonds (Series A), 6.50%
(GNMA COL)/(Original Issue Yield: 6.522%), 3/1/2025 AAA 801,960
TOTAL LONG-TERM MUNICIPALS (IDENTIFIED COST $72,927,160) 78,991,349
</TABLE>
<TABLE>
<CAPTION>
FEDERATED OHIO MUNICIPAL INCOME FUND
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
<C> <S> <C> <C>
SHORT-TERM MUNICIPALS--0.2%
PUERTO RICO--0.2%
$ 200,000 Puerto Rico Government Development Bank Weekly VRDNs (MBIA INS)/
(Credit Suisse First Boston LIQ) AA $ 200,000
TOTAL INVESTMENTS (IDENTIFIED COST $73,127,160)(A) $79,191,349
</TABLE>
Securities that are subject to Alternative Minimum Tax represent 35.2% of
the portfolio as calculated based upon total portfolio market value.
* Please refer to the Appendix on page 15 of this prospectus for an
explanation of the credit ratings. Current credit ratings are unaudited.
(a) The cost of investments for federal tax purposes amounts to $73,127,160.
The net unrealized appreciation of investments on a federal tax basis amounts
to $6,064,189 which is comprised of $6,064,800 appreciation and $611
depreciation at August 31, 1998.
Note: The categories of investments are shown as a percentage of net assets
($80,274,405) at August 31, 1998.
The following acronyms are used throughout this portfolio:
AMBAC--American Municipal Bond Assurance Corporation COL --Collateralized CSD
- --Central School District FGIC --Financial Guaranty Insurance Company FSA
- --Financial Security Assurance GNMA --Government National Mortgage Association
GO --General Obligation HFA --Housing Finance Authority INS --Insured LIQ
- --Liquidity Agreement LOC --Letter of Credit LT --Limited Tax MBIA --Municipal
Bond Investors Assurance PCR --Pollution Control Revenue PRF --Prerefunded SFM
- --Single Family Mortgage UT --Unlimited Tax VRDNs--Variable Rate Demand Notes
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF ASSETS AND LIABILITIES
FEDERATED OHIO MUNICIPAL INCOME FUND
AUGUST 31, 1998
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS:
Total investments in securities, at value (identified and tax cost
$73,127,160) $79,191,349
Cash 27,304
Income receivable 1,242,528
Receivable for investments sold 30,000
Receivable for shares sold 82,803
Total assets 80,573,984
LIABILITIES:
Payable for shares redeemed $118,074
Income distribution payable 141,094
Accrued expenses 40,411
Total liabilities 299,579
NET ASSETS for 6,740,781 shares outstanding $80,274,405
NET ASSETS CONSIST OF:
Paid in capital $73,720,686
Net unrealized appreciation of investments 6,064,189
Accumulated net realized gain on investments 484,220
Undistributed net investment income 5,310
Total Net Assets $80,274,405
NET ASSET VALUE, OFFERING PRICE, AND REDEMPTION PROCEEDS PER SHARE:
Net Asset Value Per Share ($80,274,405 / 6,740,781 shares
outstanding) $11.91
Offering Price Per Share (100/99.00 of $11.91)* $12.03
Redemption Proceeds Per Share (99.00/100 of $11.91)** $11.79
</TABLE>
* See "Investing in the Fund" in the Prospectus.
** See "Contingent Deferred Sales Charge" in the Prospectus.
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF OPERATIONS
FEDERATED OHIO MUNICIPAL INCOME FUND
YEAR ENDED AUGUST 31, 1998
<TABLE>
<CAPTION>
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest $4,366,372 EXPENSES: Investment advisory fee $ 306,125 Administrative
personnel and services fee 125,002 Custodian fees 6,515 Transfer and dividend
disbursing agent fees and expenses 39,022 Directors'/Trustees' fees 4,548
Auditing fees 13,156 Legal fees 2,317 Portfolio accounting fees 52,290
Distribution services fee 306,125 Shareholder services fee 191,328 Share
registration costs 16,740 Printing and postage 14,099 Insurance premiums 2,686
Miscellaneous 486 Total expenses 1,080,439 Waivers and reimbursements-- Waiver
of investment advisory fee $(196,943) Waiver of distribution services fee
(183,675) Waiver of shareholder services fee (7,653) Total waivers (388,271) Net
expenses 692,168 Net investment income 3,674,204 REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS: Net realized gain on investments 780,248 Net change in
unrealized appreciation of investments 1,810,941 Net realized and unrealized
gain on investments 2,591,189 Change in net assets resulting from operations
$6,265,393
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF CHANGES IN NET ASSETS
FEDERATED OHIO MUNICIPAL INCOME FUND
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1998 1997
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS--
Net investment income $ 3,674,204 $ 3,589,790
Net realized gain on investments ($780,245 and $627,060,
respectively, as computed for federal tax purposes) 780,248 627,060
Net change in unrealized appreciation 1,810,941 1,642,169
Change in net assets resulting from operations 6,265,393 5,859,019
NET EQUALIZATION CREDITS -- -- 13,748
DISTRIBUTIONS TO SHAREHOLDERS--
Distributions from net investment income (3,668,894) (3,614,135)
Distributions from net realized gains (134,059) --
Change in net assets resulting from distributions to shareholders (3,802,953) (3,614,135)
SHARE TRANSACTIONS--
Proceeds from sale of shares 13,003,558 4,590,738
Proceeds from shares issued in connection with the acquisition -- 9,320,692(a)
Net asset value of shares issued to shareholders in payment of
distributions declared 2,205,539 2,243,948
Cost of shares redeemed (12,903,472) (13,475,385
Change in net assets resulting from share transactions 2,305,625 2,679,993
Change in net assets 4,768,065 4,938,625
NET ASSETS:
Beginning of period 75,506,340 70,567,715
End of period (including undistributed net investment income of
$5,310 and $4,634, respectively) $ 80,274,405 $ 75,506,340
</TABLE>
(a) Includes $384,016 of unrealized appreciation.
(See Notes which are an integral part of the Financial Statements)
NOTES TO FINANCIAL STATEMENTS
FEDERATED OHIO MUNICIPAL INCOME FUND
AUGUST 31, 1998
ORGANIZATION
Municipal Securities Income Trust (the "Trust") is registered under the
Investment Company Act of 1940, as amended (the "Act") as an open-end,
management investment company. The Trust consists of five portfolios. The
financial statements included herein are only those of Federated Ohio
Municipal Income Fund (the "Fund"), a non-diversified portfolio. The
financial statements of the other portfolios are presented separately. The
assets of each portfolio are segregated and a shareholder's interest is
limited to the portfolio in which shares are held. The investment objective
of the Fund is to provide current income exempt from federal regular income
tax and the personal income taxes imposed by the state of Ohio and Ohio
municipalities.
On July 14, 1997, the Fund acquired all the net assets of Federated Ohio
Intermediate Municipal Trust ("Acquired Fund") pursuant to a plan of
reorganization approved by the Acquired Fund's shareholders. The acquisition
was accomplished by a tax-free exchange of 804,896 shares of the Fund (valued
at $9,320,692) for the 928,818 shares of the Acquired Fund outstanding on
July 14, 1997. The Acquired Fund's net assets of $9,320,894 which consisted
of $9,163,409 of Paid in Capital, $384,016 of Unrealized Appreciation on
investments, and $226,531 of Net Realized Loss on investments at that date
were combined with those of the Fund. The aggregate net assets of the Fund
and the Acquired Fund immediately before the acquisition were $66,554,852 and
$9,320,894, respectively.
SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS
Municipal bonds are valued by an independent pricing service, taking into
consideration yield, liquidity, risk, credit quality, coupon, maturity, type
of issue, and any other factors or market data the pricing service deems
relevant. Short-term securities are valued at the prices provided by an
independent pricing service. However, short-term securities with remaining
maturities of sixty days or less at the time of purchase may be valued at
amortized cost, which approximates fair market value.
INVESTMENT INCOME, EXPENSES, AND DISTRIBUTIONS
Interest income and expenses are accrued daily. Bond premium and discount, if
applicable, are amortized as required by the Internal Revenue Code, as
amended (the "Code"). Distributions to shareholders are recorded on the ex-
dividend date. These distributions from net investment income do not
represent a return of capital for federal tax purposes.
Income and capital gain distributions are determined in accordance with
income tax regulations which may differ from generally accepted accounting
principles. These differences are primarily due to differing treatments for
capital loss carryforwards acquired through a merger and accumulated
equalization. The following reclassifications have been made to the
financial statements.
UNDISTRIBUTED
NET INVESTMENT
INCOME/ACCUMULATED
ACCUMULATED DISTRIBUTIONS IN
NET REALIZED EXCESS OF NET
PAID-IN CAPITAL GAIN/LOSS INVESTMENT INCOME
$4,637 ($3) ($4,634)
Net investment income, net realized gains/losses, and net assets were not
affected by this reclassification.
FEDERAL TAXES
It is the Fund's policy to comply with the provisions of the Code applicable
to regulated investment companies and to distribute to shareholders each year
substantially all of its income. Accordingly, no provisions for federal tax
are necessary.
EQUALIZATION
Effective September 1, 1997, the Trust discontinued its use of equalization.
Equalization is an accounting practice whereby a portion of the proceeds of
sales and costs of redemptions of Trust shares is credited or charged to
undistributed net investment income on a per share basis, as determined on
the date of transaction. This change in accounting policy does not effect the
Trust's net assets, net asset value per share, or net investment income. The
financial statements included herein reflect the following reclass entry to
close out accumulated equalization credits as of August 31, 1998.
INCREASE (DECREASE)
UNDISTRIBUTED NET
PAID IN CAPITAL INVESTMENT INCOME
$48 $(48)
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may engage in when-issued or delayed delivery transactions. The Fund
records when-issued securities on the trade date and maintains security
positions such that sufficient liquid assets will be available to make
payment for the securities purchased. Securities purchased on a when-issued
or delayed delivery basis are marked to market daily and begin earning
interest on the settlement date.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts of assets, liabilities, expenses and
revenues reported in the financial statements. Actual results could differ
from those estimated.
OTHER
Investment transactions are accounted for on the trade date.
SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value).
Transactions in shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1998 1997
<S> <C> <C>
Shares sold 1,105,266 438,606
Shares issued in connection with the acquistion -- 804,896
Shares issued to shareholders in payment of distributions declared 187,876 197,577
Shares redeemed (1,101,260) (1,187,600)
Net change resulting from share transactions 191,882 253,479
</TABLE>
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE
Federated Advisers, the Fund's investment adviser (the "Adviser"), receives
for its services an annual investment advisory fee equal to 0.40% of the
Fund's average daily net assets. The Adviser may voluntarily choose to waive
any portion of its fee. The Adviser can modify or terminate this voluntary
waiver at any time at its sole discretion.
ADMINISTRATIVE FEE
Federated Services Company ("FServ"), under the Administrative Services
Agreement, provides the Fund with administrative personnel and services. The
fee paid to FServ is based on the level of average aggregate daily net assets
of all funds advised by subsidiaries of Federated Investors, Inc. for the
period. The administrative fee received during the period of the
Administrative Services Agreement shall be at least $125,000 per portfolio
and $30,000 per each additional class of shares.
DISTRIBUTION SERVICES FEE
The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1
under the Act. Under the terms of the Plan, the Fund will compensate
Federated Securities Corp., ("FSC") the principal distributor, from the net
assets of the Fund to finance activities intended to result in the sale of
the Fund's shares. The Plan provides that the Fund may incur distribution
expenses up to 0.40% of the average daily net assets of the Fund, annually,
to compensate FSC. The distributor may voluntarily choose to waive any
portion of its fee. The distributor can modify or terminate this voluntary
waiver at any time at its sole discretion.
SHAREHOLDER SERVICES FEE
Under the terms of a Shareholder Services Agreement with Federated
Shareholder Services, ("FSS"), the Fund will pay FSS up to 0.25% of average
daily net assets of the Fund for the period. The fee paid to FSS is used to
finance certain services for shareholders and to maintain shareholder
accounts. FSS may voluntarily choose to waive any portion of its fee. FSS can
modify or terminate this voluntary waiver at any time at its sole discretion.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES
FServ, through its subsidiary, Federated Shareholder Services Company
("FSSC") serves as transfer and dividend disbursing agent for the Fund. The
fee paid to FSSC is based on the size, type, and number of accounts and
transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES
FServ maintains the Fund's accounting records for which it receives a fee.
The fee is based on the level of the Fund's average daily net assets for the
period, plus out-of-pocket expenses.
INTERFUND TRANSACTIONS
During the year ended August 31, 1998, the Fund engaged in purchase and
sale transactions with funds that have a common investment adviser (or
affiliated investment advisers), common Directors/Trustees, and/or common
Officers. These purchase and sale transactions were made at current market
value pursuant to Rule 17a-7 under the Act amounting to $14,200,000 and
$14,400,000, respectively.
GENERAL
Certain of the Officers and Trustees of the Trust are Officers and Directors
or Trustees of the above companies.
INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended August 31, 1998, were as follows:
PURCHASES $18,369,770
SALES $17,024,359
CONCENTRATION OF CREDIT RISK
Since the Fund invests a substantial portion of its assets in issuers located
in one state, it will be more susceptible to factors adversely affecting
issuers of that state than would be a comparable tax-exempt mutual fund that
invests nationally. In order to reduce the credit risk associated with such
factors, at August 31, 1998, 38.2% of the securities in the portfolio of
investments are backed by letters of credit or bond insurance of various
financial institutions and financial guaranty assurance agencies. The value
of investments insured by or supported (backed) by a letter of credit from
any one institution or agency did not exceed 19.2% of total investments.
YEAR 2000 (UNAUDITED)
Similar to other financial organizations, the Fund could be adversely
affected if the computer systems used by the Fund's service providers do not
properly process and calculate date-related information and data from and
after January 1, 2000. The Fund's Adviser and Administrator are taking
measures that they believe are reasonably designed to address the Year 2000
issue with respect to computer systems that they use and to obtain reasonable
assurances that comparable steps are being taken by each of the Fund's other
service providers. At this time, however, there can be no assurance that
these steps will be sufficient to avoid any adverse impact to the Fund.
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees of
MUNICIPAL SECURITIES INCOME TRUST
and Shareholders of
FEDERATED OHIO MUNICIPAL INCOME FUND:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments of Federated Ohio Municipal Income
Fund as of August 31, 1998, the related statement of operations for the year
ended, the statements of changes in net assets for the years, ended
August 31, 1998 and 1997, and the financial highlights for the periods
presented. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of the
securities owned at August 31, 1998, by correspondence with the custodian and
brokers; where replies were not received, we performed other auditing
procedures. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Federated Ohio
Municipal Income Fund as of August 31, 1998, the results of its operations,
the changes in its net assets and its financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
October 9, 1998
Federated Ohio Municipal Income Fund
(A Portfolio of Municipal Securities Income Trust)
Class F Shares
PROSPECTUS
OCTOBER 31, 1998
A Non-Diversified Portfolio of Municipal Securities Income Trust, an Open-
End, Management Investment Company
FEDERATED OHIO MUNICIPAL INCOME FUND
CLASS F SHARES
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
DISTRIBUTOR
Federated Securities Corp.
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
INVESTMENT ADVISER
Federated Advisers
Federated Investors Tower
1001 Liberty Avenue
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 625922307
0090702A-F (10/98)
Federated Ohio Municipal Income Fund
(A Portfolio of Municipal Securities Income Trust)
Class F Shares
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the prospectus
of Federated Ohio Municipal Income Fund (the "Fund"), a portfolio of
Municipal Securities Income Trust dated October 31, 1998. 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 OHIO MUNICIPAL INCOME FUND
FEDERATED INVESTORS FUNDS
5800 CORPORATE DRIVE
PITTSBURGH, PENNSYLVANIA 15237-7000
Statement dated October 31, 1998
[Graphic]
FEDERATED INVESTORS
Federated Securities Corp., Distributor
Federated Investors, Inc.
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, Pa 15222-3779
1-800-341-7400
www.federatedinvestors.com
Cusip 625922307
0090702B (10/98)
[Graphic]
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
Investing in Securities of Other
Investment Companies 2
Temporary Investments 2
Portfolio Turnover 3
Investment Limitations 3
Ohio Investment Risks 4
Municipal Securities Income Trust Management 6
Fund Ownership 8
Trustees Compensation 9
Trustee Liability 9
Investment Advisory Services 9
Adviser to the Fund 9
Advisory Fees 10
Other Services 10
Fund Administration 10
Custodian and Portfolio Accountant 10
Transfer Agent 10
Independent Auditors 10
Brokerage Transactions 10
Purchasing Shares 11
Quantity Discounts and Accumulated Purchases 11
Concurrent Purchases 11
Letter of Intent 11
Reinvestment Privilege 11
Distribution Plan and Shareholder
Services Agreement 12
Purchases by Sales Representatives,
Fund Trustees, and Employees 12
Determining Net Asset Value 12
Valuing Municipal Bonds 12
Use of Amortized Cost 13
Redeeming Shares 13
Redemption in Kind 13
Contingent Deferred Sales Charge 13
Massachusetts Partnership Law 13
Tax Status 14
The Fund's Tax Status 14
Shareholders' Tax Status 14
Total Return 14
Yield 14
Tax-Equivalent Yield 15
Tax-Equivalency Table 15
Performance Comparisons 16
Economic and Market Information 17
About Federated Investors, Inc. 17
Mutual Fund Market 17
Institutional Clients 17
Bank Marketing 17
Broker/Dealers and Bank
Broker/Dealer Subsidiaries 17
GENERAL INFORMATION ABOUT THE FUND
The Fund is a portfolio of Municipal Securities Income Trust (the "Trust").
The Trust was established as a Massachusetts business trust under a
Declaration of Trust dated August 6, 1990. On February 26, 1996 (effective
date March 31, 1996), the Board of Trustees ("Trustees") approved changing
the name of the Fund from Ohio Municipal Income Fund to Federated Ohio
Municipal Income Fund and also approved changing the name of the Fund's
presently offered shares from Fortress Shares to Class F Shares ("Shares").
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide current income exempt from
federal regular income and the personal income taxes imposed by the state of
Ohio and Ohio municipalities. The investment objective cannot be changed
without approval of shareholders.
ACCEPTABLE INVESTMENTS
The Fund invests primarily in Ohio municipal securities.
CHARACTERISTICS
The Ohio municipal securities in which the Fund invests have the
characteristics set forth in the prospectus. If a rated bond loses its
rating or has its rating reduced after the Fund has purchased it, the Fund is
not required to drop the bond from the portfolio, but will consider doing
so. If ratings made by Moody's Investors Service, Inc. ("Moody's"), Standard
& Poor's ("S&P") or Fitch IBCA, Inc. ("Fitch") change because of changes in
those organizations or in their rating systems, the Fund will try to use
comparable ratings as standards in accordance with the investment policies
described in the Fund's prospectus.
TYPES OF ACCEPTABLE INVESTMENTS
Examples of Ohio municipal securities are: governmental lease certificates
of participation issued by state or municipal authorities where payment is
secured by installment payments for equipment, buildings, or other
facilities being leased by the state or municipality. Government lease
certificates purchased by the Fund will not contain non-appropriation
clauses; municipal notes and tax-exempt commercial paper; serial bonds; tax
anticipation notes sold to finance working capital needs of municipalities;
bond anticipation notes sold in anticipation of the issuance of long-term
bonds; pre-refunded municipal bonds whose timely payment of interest and
principal is ensured by an escrow of U.S. government obligations; and
general obligation bonds.
PARTICIPATION INTERESTS
The financial institutions from which the Fund purchases participation
interests frequently provide or secure from another financial institution
irrevocable letters of credit or guarantees and give the Fund the right to
demand payment of the principal amounts of the participation interests plus
accrued interest on short notice (usually within seven days).
VARIABLE RATE MUNICIPAL SECURITIES
Variable interest rates generally reduce changes in the market value of
municipal securities from their original purchase prices. Accordingly, as
interest rates decrease or increase, the potential for capital appreciation
or depreciation is less for variable rate municipal securities than for
fixed income obligations. Many municipal securities with variable interest
rates purchased by the Fund are subject to repayment of principal (usually
within seven days) on the Fund's demand. The terms of these variable rate
demand instruments require payment of principal and accrued interest from
the issuer of the municipal obligations, the issuer of the participation
interests, or a guarantor of either issuer.
MUNICIPAL LEASES
The Fund may purchase municipal securities in the form of participation
interests which represent undivided proportional interests in lease payments
by a governmental or non-profit entity. The lease payments and other rights
under the lease provide for and secure the payments on the certificates.
Lease obligations may be limited by municipal charter or the nature of the
appropriation for the lease. In particular, lease obligations may be subject
to periodic appropriation. If the entity does not appropriate funds for
future lease payments, the entity cannot be compelled to make such payments.
Furthermore, a lease may provide that the certificate trustee cannot
accelerate lease obligations upon default. The trustee would only be able to
enforce lease payments as they became due. In the event of a default or
failure of appropriation, it is unlikely that the trustee would be able to
obtain an acceptable substitute source of payment. In determining the
liquidity of municipal lease securities, the investment adviser, under the
authority delegated by the Trustees, will base its determination on the
following factors:
* whether the lease can be terminated by the lessee:
* the potential recovery, if any, from a sale of the leased property upon
termination of the lease;
* the lessee's general credit strength (e.g., its debt, administrative,
economic and financial characteristics and prospects);
* the likelihood that the lessee will discontinue appropriating funding for the
leased property because the property is no longer deemed essential to its
operations (e.g., the potential for an "event of non-appropriation"); and
* 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.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest in the securities of affiliated money market funds as an
efficient means of managing the Fund's uninvested cash.
TEMPORARY INVESTMENTS
The Fund may also invest in temporary investments during times of unusual
market conditions for defensive purposes.
REPURCHASE AGREEMENTS
Repurchase agreements are arrangements in which banks, broker/dealers, and
other recognized financial institutions sell U.S. government securities or
certificates of deposit to the Fund and agree at the time of sale to
repurchase them at a mutually agreed upon time and price within one year
from the date of acquisition. The Fund or its custodian will take possession
of the securities subject to repurchase agreements. To the extent that the
original seller does not repurchase the securities from the Fund, the Fund
could receive less than the repurchase price on any sale of such securities.
In the event that such a defaulting seller filed for bankruptcy or became
insolvent, disposition of such securities by the Fund might be delayed
pending court action. The Fund believes that under the regular procedures
normally in effect for custody of the Fund's portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in favor
of the Fund and allow retention or disposition of such securities. The Fund
may only enter into repurchase agreements with banks and other recognized
financial institutions such as broker/dealers which are found by the Fund's
investment adviser to be creditworthy pursuant to guidelines established by
the Trustees.
From time to time, such as when suitable Ohio municipal bonds are not
available, the Fund may invest a portion of its assets in cash. Any portion
of the Fund's assets maintained in cash will reduce the amount of assets in
Ohio municipal bonds and thereby reduce the Fund's yield.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements. This transaction
is similar to borrowing cash. In a reverse repurchase agreement the Fund
transfers possession of a portfolio instrument to another person, such as a
financial institution, broker, or dealer, in return for a percentage of the
instrument's market value in cash, and agrees that on a stipulated date in
the future the Fund will repurchase the portfolio instrument by remitting
the original consideration plus interest at an agreed upon rate. The use of
reverse repurchase agreements may enable the Fund to avoid selling portfolio
instruments at a time when a sale may be deemed to be disadvantageous, but
the ability to enter into reverse repurchase agreements does not ensure that
the Fund will be able to avoid selling portfolio instruments at a
disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund, in
a dollar amount sufficient to make payment for the obligations to be
purchased, are segregated on the Fund's records at the trade date. These
assets are marked to market daily and are maintained until the transaction
is settled.
PORTFOLIO TURNOVER
The Fund may trade or dispose of portfolio securities as considered
necessary to meet its investment objective. It is not anticipated that the
portfolio trading engaged in by the Fund will result in its annual portfolio
turnover rate exceeding 100%. For the fiscal years ended August 31, 1998 and
1997, the portfolio turnover rates were 23% and 38%, respectively.
INVESTMENT LIMITATIONS
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities on
margin but may obtain such short-term credits as may be necessary for
clearance of purchases and sales of securities.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities except that the Fund may borrow
money and engage in reverse repurchase agreements in amounts up to one-third
of the value of its total assets, including the amounts borrowed.
The Fund will not borrow money or engage in reverse repurchase agreements
for investment leverage, but rather as a temporary, extraordinary, or
emergency measure or to facilitate management of the portfolio by enabling
the Fund to meet redemption requests when the liquidation of portfolio
securities is deemed to be inconvenient or disadvantageous. The Fund will
not purchase any securities while borrowings in excess of 5% of its total
assets are outstanding. During the period any reverse repurchase agreements
are outstanding, but only to the extent necessary to assure completion of
the reverse repurchase agreements, the Fund will restrict the purchase of
portfolio instruments to money market instruments maturing on or before the
expiration date of the reverse repurchase agreements.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate its assets except to
secure permitted borrowings. In those cases, it may mortgage, pledge, or
hypothecate assets having a market value not exceeding 10% of the value of
its total assets at the time of the pledge.
UNDERWRITING
The Fund will not underwrite any issue of securities except as it may be
deemed to be an underwriter under the Securities Act of 1933 in connection
with the sale of securities in accordance with its investment objective,
policies, and limitations.
INVESTING IN REAL ESTATE
The Fund will not buy or sell real estate although it may invest in municipal
bonds secured by real estate or interests in real estate.
INVESTING IN COMMODITIES
The Fund will not buy or sell commodities, commodity contracts, or
commodities futures contracts.
INVESTING IN RESTRICTED SECURITIES
The Fund will not invest more than 10% of the value of its net assets in
securities subject to restrictions on resale under the Securities Act of
1933.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets except that it may acquire publicly
or non-publicly issued municipal bonds or temporary investments or enter
into repurchase agreements in accordance with its investment objective,
policies, and limitations or its Declaration of Trust.
DEALING IN PUTS AND CALLS
The Fund will not buy or sell puts, calls, straddles, spreads, or any
combination of these.
CONCENTRATION OF INVESTMENTS
The Fund will not purchase securities if, as a result of such purchase, 25%
or more of the value of its total assets would be invested in any one
industry or in industrial development bonds or other securities, the
interest upon which is paid from revenues of similar types of projects.
However, the Fund may invest as temporary investments more than 25% of the
value of its assets in cash or cash items, securities issued or guaranteed
by the U.S. government, its agencies or instrumentalities, or instruments
secured by these money market instruments, such as repurchase agreements.
The above investment limitations cannot be changed without shareholder
approval. The following limitation, 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 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 restrictions.
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.
OHIO INVESTMENT RISKS
The economy of the state of Ohio is reliant in part on durable goods
manufacturing, largely concentrated in motor vehicles and equipment, steel,
rubber products and household appliances. During the past decade,
competition in various industries in the state of Ohio has changed from
being domestic to international in nature. In addition, these industries may
be characterized as having excess capacity in particular product segments.
The steel industry, in particular, and the automobile industry, to a lesser
extent, share these characteristics. Because the state of Ohio and certain
underlying municipalities have large exposure to these industries and their
respective aftermarkets, trends in these industries may, over the long term,
impact the demographic and financial position of the state of Ohio and its
municipalities. To the degree that domestic manufacturers in industries to
which Ohio municipalities have exposure fail to make competitive
adjustments, employment statistics and disposable income of residents in
Ohio may deteriorate, possibly leading to population declines and erosion of
municipality tax bases. Both the economic trends above and the political
climate in various municipalities may have contributed to the decisions of
various businesses and individuals to relocate outside the state. A
municipality's political climate, in particular, may affect its own credit
standing. For both the state of Ohio and underlying Ohio municipalities,
adjustment of credit ratings by the rating agencies may affect the ability
to issue securities and thereby affect the supply of obligations meeting the
quality standards for investment by the Fund. The state has a history of
promptly addressing revenue shortfalls with cuts in appropriations.. As a
result of prudent financial management, the state's general Fund balance is
over $2 billion. The state has relatively modest debt outstanding as
compared to its economic base. Economic restructuring continues as the
state's traditional manufacturing sectors are gradually replaced by trade
and service sectors. This transformation will reduce the state's sensitivity
to economic cycles. The state has established procedures for municipal
fiscal emergencies under which joint state/local commissions are established
to monitor the fiscal affairs of a financially troubled municipality. When
these procedures are invoked, the municipality must develop a financial plan
to eliminate deficits and cure any defaults. Since their adoption in 1979,
these procedures have been applied to approximately twenty-one cities and
villages, including the City of Cleveland; in sixteen of these communities,
the fiscal situation has been resolved and the procedures terminated. The
foregoing discussion only highlights some of the significant financial
trends and problems affecting the state of Ohio and underlying
municipalities.
MUNICIPAL SECURITIES INCOME TRUST MANAGEMENT
Officers and Trustees are listed with their addresses, 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
Chief Executive Officer and Director or Trustee of the
Funds; Chairman and Director, Federated Investors, Inc.;
Chairman and Trustee, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director,
Federated Research Corp. and Federated Global Research
Corp.; Chairman, Passport Research, Ltd.; Mr. Donahue is the
father of J. Christopher Donahue, Executive Vice President
and Trustee of the Trust.
Thomas G. Bigley
15 Old Timber Trail
Pittsburgh, PA
Birthdate: February 3, 1934
Trustee
Director or Trustee of the Funds; Director, Member of Executive Committee,
Children's Hospital of Pittsburgh; formerly, Senior Partner, Ernst & Young LLP;
Director, MED 3000 Group, Inc.; Director, Member of Executive Committee,
University of Pittsburgh.
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
Director or Trustee of the Funds; 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.
Nicholas P. Constantakis
175 Woodshire Drive
Pittsburgh, PA
Birthdate: September 3, 1939
Trustee
Director or Trustee of the Funds; formerly, Partner,
Anderson Worldwide SC.
William J. Copeland
One PNC Plaza--23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Trustee
Director or Trustee of the Funds; 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, United Refinery;
Chairman, Pittsburgh Foundation; Director, Forbes Fund;
Chairman, Pittsburgh Civic Light Opera.
J. Christopher Donahue*
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
Executive Vice President and Trustee
President or Executive Vice President of the Funds;
President and Director, Federated Investors, Inc.; President
and Trustee, 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; Director or
Trustee of some of the Funds. Mr. Donahue is the son of John
F. Donahue, Chairman and Trustee of the Trust.
James E. Dowd, Esq.
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Trustee
Director or Trustee of the Funds; Attorney-at-law; Director,
The Emerging Germany Fund, Inc.; formerly, President, Boston
Stock Exchange, Inc.; Regional Administrator, United States
Securities and Exchange Commission.
Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Trustee
Director or Trustee of the Funds; Professor of Medicine, University of
Pittsburgh; Medical Director, University of Pittsburgh Medical Center -
Downtown; Hematologist, Oncologist, and Internist, Presbyterian and Montefiore
Hospitals; formerly, Member, National Board of Trustees, Leukemia Society of
America.
Edward L. Flaherty, Jr., Esq.@
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: June 18, 1924
Trustee
Director or Trustee of the Funds; Attorney, of Counsel, Miller, Ament, Henny &
Kochuba; Director, Eat'N Park Restaurants, Inc.; formerly, Counsel, Horizon
Financial, F.A., Western Region; Partner, Meyer and Flaherty.
Peter E. Madden
One Royal Palm Way
100 Royal Palm Way
Palm Beach, FL
Birthdate: March 16, 1942
Trustee
Director or Trustee of the Funds; formerly, Representative, Commonwealth of
Massachusetts General Court; President, State Street Bank and Trust Company and
State Street Corporation; Director, VISA USA and VISA International; Chairman
and Director, Massachusetts Banker Association; Director, Depository Trust
Corporation.
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Trustee
Director or Trustee of the Funds; President, Law Professor, Duquesne University;
Consulting Partner, Mollica & Murray; formerly, Dean and Professor of Law,
University of Pittsburgh School of Law; Dean and Professor of Law, Villanova
University School of Law.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Trustee
Director or Trustee of the Funds; President, World Society of Ekistics, Athens;
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; formerly, Professor, United States
Military Academy; Professor, United States Air Force Academy.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Trustee
Director or Trustee of the Funds; Public relations/ Marketing/Conference
Planning; formerly, National Spokesperson, Aluminum Company of America; business
owner.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
President
President or Vice President of some of the Funds; Director or Trustee of some of
the Funds; Executive Vice President, Federated Investors, Inc.; Chairman and
Director, Federated Securities Corp.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
Executive Vice President
Trustee or Director of some of the Funds; President, Executive Vice President
and Treasurer of some of the Funds; Vice Chairman, Federated Investors, Inc.;
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.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Executive Vice President, Secretary and Treasurer Executive Vice President and
Secretary of the Funds; Treasurer of some of the Funds; Executive Vice
President, Secretary, and Director, Federated Investors, Inc.; 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.
*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: Automated Government Money Trust; Blanchard Funds;
Blanchard Precious Metals Fund, Inc.; Cash Trust Series II; Cash Trust
Series, Inc.; CCB Funds; 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 Core
Trust; 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.; 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; Regions Funds; RIGGS 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; WCT Funds; and World Investment Series, Inc.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the outstanding Shares.
As of October 9, 1998, the following shareholder of record owned 5% or more
of the outstanding Shares of the Fund: Parcol & Co., c/o SEI Trust Company,
Oaks, Pennsylvania, owned approximately 506,344 Shares (7.48%) and Merrill
Lynch Pierce Fenner & Smith (as record owner holding Shares for its clients),
Jacksonville, Florida, owned approximately 2,028,646 Shares (29.95%).
TRUSTEE COMPENSATION
<TABLE>
<CAPTION>
NAME, AGGREGATE
POSITION WITH COMPENSATION TOTAL COMPENSATION PAID
TRUST FROM TRUST*# FROM FUND COMPLEX+
<S> <C> <C>
John F. Donahue
Trustee and Chairman $0 $0 for the Trust and
56 other investment companies in the Fund Complex
Thomas G. Bigley
Trustee $254.34 $111,222 for the Trust and
56 other investment companies in the Fund Complex
John T. Conroy, Jr.
Trustee $279.83 $122,362 for the Trust and
56 other investment companies in the Fund Complex
Nicholas P. Constantakis+
Trustee $192.16 $0 for the Trust and
36 other investment companies in the Fund Complex
William J. Copeland
Trustee $279.83 $122,362 for the Trust and
56 other investment companies in the Fund Complex
J. Christopher Donahue
Trustee and Executive Vice
President $0 $0 for the Trust and
18 other investment companies in the Fund Complex
James E. Dowd, Esq.
Trustee $279.83 $122,362 for the Trust and
56 other investment companies in the Fund Complex
Lawrence D. Ellis, M.D.
Trustee $254.34 $111,222 for the Trust and
56 other investment companies in the Fund Complex
Edward L. Flaherty, Jr., Esq.
Trustee $279.83 $122,362 for the Trust and
56 other investment companies in the Fund Complex
Peter E. Madden
Trustee $254.34 $111,222 for the Trust and
56 other investment companies in the Fund Complex
John E. Murray, Jr., J.D., S.J.D.
Trustee $254.34 $111,222 for the Trust and
56 other investment companies in the Fund Complex
Wesley W. Posvar
Trustee $254.34 $111,222 for the Trust and
56 other investment companies in the Fund Complex
Marjorie P. Smuts
Trustee $254.34 $111,222 for the Trust and
56 other investment companies in the Fund Complex
</TABLE>
*Information is furnished for the fiscal year ended August 31, 1998.
#The aggregate compensation is provided for the Trust which is comprised of
five portfolios.
+The information is provided for the last calendar year.
++Mr. Constantakis became a member of the Board of Trustees on February 23,
1998. He did not earn any fees for serving the Fund Complex since these fees
are reported as of the end of 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, Inc. 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,
1998, 1997, and 1996, the Adviser earned $306,125, $277,606, and $285,381,
respectively, of which $196,943, $230,268, and $233,662, were voluntarily
waived.
OTHER SERVICES
FUND ADMINISTRATION
Federated Services Company, a subsidiary of Federated Investors, Inc.,
provides administrative personnel and services to the Fund for a fee as
described in the prospectus. From March 1, 1994, to March 1, 1996, Federated
Administrative Services served as the Fund's Administrator. 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, 1998, 1997,
and 1996 he 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. They determine in good faith that commissions charged by such
persons are reasonable in relationship to the value of the brokerage and
research services provided. During the fiscal years ended August 31, 1998,
1997, and 1996 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 NAV plus a sales charge on days the New York Stock Exchange is
open for business. The procedure for purchasing Shares is explained in the
prospectus under "Investing in the Fund" and "Purchasing Shares." For
further information on any of the programs listed below, please contact your
financial intermediary or Federated Securities Corp.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES
As described in the prospectus, larger purchases of the same Share class
reduce or eliminate the sales charge paid. For example, the Fund will
combine all Class F Share purchases 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 Shares is made, the Fund will consider the
previous purchases still invested in the Fund. For example, if a shareholder
already owns Shares having a current value at the public offering price of
$900,000 and purchases $100,000 more at the current public offering price,
there will be no sales charge on the additional purchase.
In addition, the Fund will also combine purchases for the purpose of reducing
the contingent deferred sales charge imposed on Share redemptions. For
example, if a shareholder already owns Class F Shares having current value at
the public offering price of $1 million and he purchases an additional
$1 million at the current public offering price, the applicable contingent
deferred sales charge would be reduced to 0.50% of those additional Class F
Shares.
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 F Shares are already owned or that
purchases are being combined. The Fund will eliminate the sales charge after
it confirms the purchases.
CONCURRENT PURCHASES
Shareholders have the privilege of combining concurrent purchases of the same
Share class of two or more funds in the Federated Complex in calculating the
applicable sales charge.
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
A shareholder can sign a letter of intent committing to purchase a certain
amount of the same Share class within a 13-month period in order to combine
such purchases in calculating the applicable sales charge. The Fund's
custodian will hold Shares in escrow equal to the maximum applicable sales
charge. If the shareholder completes the commitment, the escrowed Shares will
be released to their account. If the commitment is not completed within 13
months, the custodian will redeem an appropriate number of escrowed Shares to
pay for the applicable sales charge.
The letter of intent for Class F Shares also includes a provision for
reductions in the contingent deferred sales charge and holding period
depending on the amount actually purchased within the 13-month period.
While this letter of intent will not obligate the shareholder to purchase
Class F 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 F 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
The reinvestment privilege is available for all Shares of the Fund within the
same Share class.
Class F shareholders who redeem from the Fund may reinvest the redemption
proceeds back into the same Share class at the next determined net asset
value without any sales charge. The original Shares must have been subject to
a sales charge and the reinvestment must be within 120 days.
Similarly, Class F shareholders who redeem may reinvest their redemption
proceeds in the same Share class within 120 days. Shareholders would not be
entitled to a reimbursement of the contingent deferred sales charge if paid
at the time of redemption on any Share class. However, reinvested Shares
would not be subject to a contingent deferred sales charge, if otherwise
applicable, upon later redemption.
In addition, if 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, if otherwise
applicable. 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.
DISTRIBUTION PLAN AND SHAREHOLDER SERVICES AGREEMENT
These arrangements permit the payment of fees to financial institutions, the
distributor, and Federated Shareholder Services, to stimulate distribution
activities and to cause services to be provided to shareholders by a
representative who has knowledge of the shareholder's particular
circumstances and goals. These activities and services may include, but are
not limited to, marketing efforts; providing office space, equipment,
telephone facilities, and various clerical, supervisory, computer, and other
personnel as necessary or beneficial to establish and maintain shareholder
accounts and records; processing purchase and redemption transactions and
automatic investments of client account cash balances; answering routine
client inquiries; and assisting clients in changing dividend options,
account designations, and addresses.
By adopting the Distribution Plan, the Trustees expect that the Fund will be
able to achieve a more predictable flow of cash for investment purposes and
to meet redemptions. This will facilitate more efficient portfolio
management and assist the Fund in pursuing its investment objectives. By
identifying potential investors whose needs are served by the Fund's
objectives, and properly servicing these accounts, it may be possible to curb
sharp fluctuations in rates of redemptions and sales.
Other benefits, which may be realized under either arrangement, may include:
(1) providing personal services to shareholders; (2) investing shareholder
assets with a minimum of delay and administrative detail; (3) enhancing
shareholder recordkeeping systems; and (4) responding promptly to
shareholders' requests and inquiries concerning their accounts.
For the fiscal year ended August 31, 1998, payment in the amount of $306,125
was made pursuant to the Distribution Plan, of which $183,675 was waived. In
addition, for the fiscal year ended August 31, 1998, the Fund paid
shareholder services fees in the amount of $191,328, of which $7,653 was
waived.
PURCHASES BY SALES REPRESENTATIVES, FUND TRUSTEES, AND EMPLOYEES
* The following individuals and their immediate family members may buy Class F
Shares at net asset value without a sales charge:
* Trustees, employees, and sales representatives of the Fund, Federated
Advisers, and Federated Securities Corp. and its affiliates;
* any associated person of an investment dealer who has a sales agreement with
Federated Securities Corp.; and
* 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 NAV per Share fluctuates and is based on the market value of all
securities and other assets of the Fund.
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, Jr. 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 NAV after the Fund receives the
redemption request. Shareholder redemptions may be subject to a contingent
deferred sales charge. Redemption procedures are explained in the prospectus
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
Although the Fund intends to redeem Shares in cash, it reserves the right
under certain circumstances to pay the redemption price in whole or in part
by a distribution of securities from the Fund's portfolio.
Redemption in kind will be made in conformity with applicable SEC rules, taking
such securities at the same value employed in determining net asset value and
selecting the securities in a manner the Directors determine to be fair and
equitable.
The Corporation has elected to be governed by Rule 18f-1 of the Investment
Company Act of 1940 under which the Corporation is obligated to redeem Shares
for any shareholder in cash up to the lesser of $250,000 or 1% of the Fund's
net asset value during any 90-day period.
Redemption in kind is not as liquid as a cash redemption. If redemption is
made in kind, shareholders receiving their securities and selling them before
their maturity could receive less than the redemption value of their
securities and could incur certain transaction costs.
CONTINGENT DEFERRED SALES CHARGE
In computing the amount of the applicable Contingent Deferred Sales Charge,
redemptions are deemed to have occurred in the following order: (1) Shares
acquired through the reinvestment of dividends and long-term capital gains;
and (2) Shares held for more than four full years from the date of purchase
on a first-in, first-out basis.
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:
* derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;
* invest in securities within certain statutory limits; and
* distribute to its shareholders at least 90% of its net income earned during
the year.
SHAREHOLDERS' TAX STATUS
CAPITAL GAINS
Capital gains or losses may be realized by the Fund on the sale of portfolio
securities and as a result of discounts from par value on securities held to
maturity. Sales would generally be made because of:
* the availability of higher relative yields;
* differentials in market values;
* new investment opportunities;
* changes in creditworthiness of an issuer; or
* an attempt to preserve gains or limit losses.
Distributions of long-term capital gains are taxed as such, whether they are
taken in cash or reinvested, and regardless of the length of time the
shareholder has owned Shares. Any loss by a shareholder on Shares held for
less than six months and sold after a capital gains distribution will be
treated as a long-term capital loss to the extent of the capital gains
distribution.
TOTAL RETURN
The Fund's average annual total returns for the one-year and five-year
periods ended August 31, 1998, and for the period from October 12, 1990
(date of initial public investment) to August 31, 1998, were 6.36%, 5.56%,
and 7.76%, respectively.
The average annual total return for the Shares of the Fund is the average
compounded rate of return for a given period that would equate a $1,000
initial investment to the ending redeemable value of that investment. The
ending redeemable value is computed by multiplying the number of shares owned
at the end of the period by the offering price per Share at the end of the
period. The number of Shares owned at the end of the period is based on the
number of Shares purchased at the beginning of the period with $1,000, less
any applicable sales charge, adjusted over the period by any additional
Shares, assuming a reinvestment of all dividends and distributions. Any
applicable contingent deferred sales charge will be deducted from the ending
value of the investment based on the lesser of the original purchase price or
the offering price of Shares redeemed.
YIELD
The Fund's yield for the 30-day period ended August 31, 1998 was 4.16%.
The yield for Shares of the Fund is determined by dividing the net investment
income per Share (as defined by the Securities and Exchange Commission)
earned by the Fund over a thirty-day period by the maximum offering price per
Share of Shares of the Fund on the last day of the period. This value is then
annualized using semi-annual compounding. This means that the amount of
income generated during the thirty day period is assumed to be generated each
month over a twelve-month period and is reinvested every six months. The
yield does not necessarily reflect income actually earned by 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 the
Fund, the performance will be reduced for those shareholders paying those
fees.
TAX-EQUIVALENT YIELD
The Fund's tax-equivalent yield for the 30-day period ended August 31, 1998
was 5.78%.
The tax-equivalent yield of the Fund is calculated similarly to the yield,
but is adjusted to reflect the taxable yield that either class would have had
to earn to equal its actual yield, assuming a 28% tax rate (the maximum
effective federal rate for individuals) and assuming that income is 100% tax-
exempt.
TAX-EQUIVALENCY TABLE
The Fund may also use a tax-equivalency table in advertising and sales
literature. The interest earned by the municipal obligations in the Fund's
portfolio generally remains free from federal regular income tax* and is free
from the income taxes imposed by the state of Ohio. As the following tables
indicate, a "tax-free" investment is an attractive choice for investors,
particularly in times of narrow spreads between "tax-free" and taxable
yields.
<TABLE>
<CAPTION>
TAXABLE YIELD EQUIVALENT FOR 1998
STATE OF OHIO
<S> <C> <C> <C> <C> <C>
FEDERAL TAX BRACKET:
15.00% 28.00% 31.00% 36.00% 39.60%
COMBINED FEDERAL AND STATE INCOME TAX BRACKET:
19.279% 32.933% 37.624% 43.201% 46.801%
SINGLE $1- $25,351- $61,401- $128,101- OVER
RETURN 25,350 61,400 128,100 278,450 $278,450
TAX-EXEMPT
YIELD TAXABLE YIELD EQUIVALENT
1.50% 1.86% 2.24% 2.40% 2.64% 2.82%
2.00% 2.48% 2.98% 3.21% 3.522% 3.76%
2.50% 3.10% 3.73% 4.01% 4.40% 4.70%
3.00% 3.72% 4.47% 4.81% 5.28% 5.64%
3.50% 4.34% 5.22% 5.61% 6.16% 6.58%
4.00% 4.96% 5.96% 6.41% 7.04% 7.52%
4.50% 5.57% 6.71% 7.21% 7.92% 8.46%
5.00% 6.19% 7.46% 8.02% 8.80% 9.40%
5.50% 6.81% 8.20% 8.82% 9.68% 10.34%
6.00% 7.43% 8.95% 9.62% 10.56% 11.28%
</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.
<TABLE>
<CAPTION>
TAXABLE YIELD EQUIVALENT FOR 1998
STATE OF OHIO
<S> <C> <C> <C> <C> <C>
FEDERAL TAX BRACKET:
15.00% 28.00% 31.00% 36.00% 39.60%
COMBINED FEDERAL AND STATE INCOME TAX BRACKET:
19.279% 32.933% 37.624% 43.201% 46.801%
JOINT $1- $25,351- $61,401- $128,101- OVER
RETURN 25,350 61,400 128,100 278,450 $278,450
TAX-EXEMPT
YIELD TAXABLE YIELD EQUIVALENT
1.50% 1.87% 2.29% 2.40% 2.63% 2.81%
2.00% 2.50% 3.05% 3.20% 3.51% 3.75%
2.50% 3.12% 3.81% 4.00% 4.39% 4.68%
3.00% 3.74% 4.58% 4.80% 5.26% 5.62%
3.50% 4.37% 5.34% 5.59% 6.14% 6.55%
4.00% 4.99% 6.10% 6.39% 7.02% 7.49%
4.50% 5.61% 6.86% 7.19% 7.90% 8.43%
5.00% 6.24% 7.63% 7.99% 8.77% 9.36%
5.50% 6.86% 8.39% 8.79% 9.65% 10.30%
6.00% 7.49% 9.15% 9.59% 10.53% 11.24%
</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.
These charts above are for illustrative purposes only. They are not indicators
of past or future performance of Fund Shares.
*SOME PORTION OF THE FUND'S INCOME MAY BE SUBJECT TO THE FEDERAL ALTERNATIVE
MINIMUM TAX AND STATE AND LOCAL INCOME TAXES.
PERFORMANCE COMPARISONS
The performance of Shares depends upon such variables as:
* portfolio quality;
* average portfolio maturity;
* type of instruments in which the portfolio is invested;
* changes in interest rates and market value of portfolio securities;
* changes in the Fund's expenses; and
* various other factors.
The Fund's performance fluctuates on a daily basis largely because net
earnings and offering price per share fluctuate daily. Both net earnings and
offering price per share are factors in the computation of yield and total
return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance,
investors should consider all relevant factors such as the composition of any
index used, prevailing market conditions, portfolio compositions of other
funds, and methods used to value portfolio securities and compute offering
price. The financial publications and/or indices which the Fund uses in
advertising may include:
LEHMAN BROTHERS REVENUE BOND INDEX is a total return performance benchmark
for the long-term, investment grade, revenue bond market. Returns and
attributes for the index are calculated semi-monthly.
LIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes the
reinvestment of all capital gains distributions and income dividends and
takes into account any change in offering price over a specific period of
time. From time to time, the Fund will quote its Lipper ranking in the
"general municipal bond funds" category in advertising and sales
literature.
MORNINGSTAR, INC., an independent rating service, is the publisher of the bi-
weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000 NASDAQ-
listed mutual funds of all types, according to their risk-adjusted returns.
The maximum rating is five stars, and ratings are effective for two weeks.
Advertisements and other sales literature for the Fund may quote total
returns which are calculated on non-standardized base periods. These total
returns represent the historic change in the value of an investment in shares
based on monthly reinvestment of dividends over a specified period of time.
Advertisements may quote performance information which does not reflect the
effect of the sales charge.
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, INC.
Federated Investors, Inc. 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, 1997, Federated Investors, Inc.
managed 11 bond funds with approximately $2.1 billion in assets and 22 money
market funds with approximately $10.9 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.
The Chief Investment Officers responsible for oversight of the various
sectors within Federated Investors, Inc. are: U.S. equity and high yield--
J. Thomas Madden; U.S. fixed income--William D. Dawson, III; and global
equities and fixed income--Henry A. Frantzen. The Chief Investment Officers
are Executive Vice Presidents of the Federated advisory companies.
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 $4.4 trillion to the more than 6,700 funds
available.*
Federated Investors, Inc., through it subsidiaries, distributes mutual funds
for a variety of investment applications. Specific markets include:
INSTITUTIONAL CLIENTS
Federated Investors, Inc. meets the needs of approximately 900 institutional
clients nationwide by managing and servicing separate accounts and mutual
funds for a variety of applications, including defined benefit and defined
contribution programs, cash management, and asset/liability management.
Institutional clients include corporations, pension funds, tax-exempt
entities, foundations/endowments, insurance companies, and investment and
financial advisors. The marketing effort to theses institutional clients is
headed by John B. Fisher, President, Institutional Sales Division.
BANK MARKETING
Other institutional clients include close relationships with more than 1,600
banks and trust organizations. Virtually all of the trust divisions of the
top 100 bank holding companies use Federated funds in their clients'
portfolios. The marketing effort to trust clients is headed by Timothy C.
Pillion, Senior Vice President, Bank Marketing & Sales.
* Source: Investment Company InstituteBroker/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 rankings in several surveys
performed by DALBAR, Inc. DALBAR is recognized as the industry benchmark for
service quality measurement. The marketing effort to these firms is headed by
James F. Getz, President, Federated Securities Corp.
Federated Michigan Intermediate Municipal Trust
(A Portfolio of Municipal Securities Income Trust)
PROSPECTUS
The shares of Federated Michigan Intermediate Municipal Trust (the "Fund")
offered by this prospectus represent interests in a non-diversified portfolio of
securities which is one of a series of investment portfolios in Municipal
Securities Income Trust (the "Trust"), an open-end management investment company
(a mutual fund). The investment objective of the Fund is to provide current
income exempt from federal regular income tax and the personal income taxes
imposed by the state of Michigan and Michigan municipalities. The Fund invests
primarily in a portfolio of Michigan municipal securities.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF ANY
BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in the Fund. Keep this prospectus for future reference.
The Fund has also filed a Statement of Additional Information dated October 31,
1998, 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 October 31, 1998
TABLE OF CONTENTS
Summary of Fund Expenses 1
Financial Highlights 2
General Information 3
Calling the Fund 3
Year 2000 Statement 3
Investment Information 3
Investment Objective 3
Investment Policies 3
Acceptable Investments 3
Michigan Municipal Securities 6
Investment Risks 6
Non-Diversification 6
Investment Limitations 6
Net Asset Value 6
Investing in the Fund 7
Purchasing Shares 7
Purchasing Shares Through a Financial Intermediary 7
Purchasing Shares by Wire 7
Purchasing Shares by Check 7
Systematic Investment Program 8
Reducing or Eliminating the Sales Charge 8
Redeeming and Exchanging Shares 8
Redeeming or Exchanging Shares Through a
Financial Intermediary 9
Redeeming or Exchanging Shares by Telephone 9
Redeeming or Exchanging Shares by Mail 9
Requirements for Redemption 9
Requirements for Exchange 9
Systematic Withdrawal Program 10
Contingent Deferred Sales Charge 10
Account and Share Information 10
Confirmations and Account Statements 10
Dividends and Distributions 10
Accounts with Low Balances 10
Trust Information 10
Management of the Trust 10
Distribution of Shares 11
Administration of the Fund 11
Shareholder Information 12
Tax Information 12
Federal Income Tax 12
Michigan Taxes 13
State and Local Taxes 13
Performance Information 13
Financial Statements 14
Independent Auditors' Report 26
SUMMARY OF FUND EXPENSES
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
<S> <C> Maximum Sales Charge Imposed on Purchases (as a percentage of offering
price) 3.00% Maximum Sales Charge Imposed on Reinvested Dividends (as a
percentage of offering price) None Contingent Deferred Sales Charge (as a
percentage of original purchase price or redemption proceeds, as applicable)
None Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None <CAPTION> ANNUAL OPERATING EXPENSES (As a percentage of
average net assets) <S> <C> <C> Management Fee (after waiver)(1) 0.03% 12b-1 Fee
None Total Other Expenses (after waiver)(2) 0.47% Shareholder Services Fee
(after waiver)(2) 0.07% Total Operating Expenses (after waivers)(3) 0.50%
</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 shareholder services fee has been reduced to reflect the voluntary
waiver of a portion of the shareholder services fee. The shareholder services
provider can terminate this voluntary waiver at any time at its sole discretion.
The maximum shareholder services fee is 0.25%
(3) The total operating expenses would have been 1.05% absent the voluntary
waivers of portions of the management fee and shareholder services fee.
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder of the Fund will bear, either directly or
indirectly. For more complete descriptions of the various costs and expenses,
see "Investing in the Fund" and "Trust Information." Wire- transferred
redemptions of less than $5,000 may be subject to additional fees. EXAMPLE 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. 1 Year $35 3 Years $46 5 Years $57 10 Years $91
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
FINANCIAL HIGHLIGHTS
FEDERATED MICHIGAN INTERMEDIATE MUNICIPAL TRUST
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 26.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1998 1997 1996 1995 1994 1993 1992(A)
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.85 $10.70 $10.80 $10.59 $11.02 $10.38 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.53 0.54 0.36 0.54 0.53 0.55 0.56
Net realized and unrealized gain (loss) on investments 0.24 0.15 (0.10) 0.21 (0.43) 0.64 0.38
Total from investment operations 0.77 0.69 0.26 0.75 0.10 1.19 0.94
LESS DISTRIBUTIONS
Distributions from net investment income (0.53) (0.54) (0.36) (0.54) (0.53) (0.55) (0.56)
NET ASSET VALUE, END OF PERIOD $11.09 $10.85 $10.70 $10.80 $10.59 $11.02 $10.38
TOTAL RETURN(B) 7.27% 6.59% 4.13% 7.39% 0.88 % 11.73 % 9.60%
RATIOS TO AVERAGE NET ASSETS
Expenses 0.50% 0.50% 0.50% 0.50% 0.50 % 0.37 % 0.07%*
Net investment income 4.85% 5.00% 4.99% 5.19% 4.87 % 5.11 % 5.66%*
Expense waiver(c) 0.55% 0.59% 0.63% 0.65% 0.57 % 1.06 % 1.26%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $77,731 $67,592 $62,785 $60,621 $58,480 $50,625 $29,998
Portfolio turnover 15% 12% 7% 23% 13 % 3 % 26%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from September 18, 1991 (date of initial
public investment) to August 31, 1992.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) 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)
GENERAL INFORMATION
The Trust was established as a Massachusetts business trust on August 6, 1990.
Shares of the Fund ("Shares") are designed for customers of financial
institutions such as banks, fiduciaries, investment advisers and broker/ dealers
as a convenient means of accumulating an interest in a professionally managed,
non-diversified portfolio investing primarily in Michigan municipal securities.
The Fund is not likely to be a suitable investment for non- Michigan taxpayers
or retirement plans since Michigan municipal securities are not likely to
produce competitive after-tax yields for such persons and entities when compared
to other investments.
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.
YEAR 2000 STATEMENT
Like other mutual funds and business organizations worldwide, the Fund's service
providers (among them, the adviser, distributor, administrator and transfer
agent) must ensure that their computer systems are adjusted to properly process
and calculate date-related information from and after January 1, 2000. Many
software programs and, to a lesser extent, the computer hardware in use today
cannot distinguish the year 2000 from the year 1900. Such a design flaw could
have a negative impact in the handling of securities trades, pricing and
accounting services. The Fund and its service providers are actively working on
necessary changes to computer systems to deal with the year 2000 issue and
believe that systems will be year 2000 compliant when required. Analysis
continues regarding the financial impact of instituting a year 2000 compliant
program on the Fund's operations.
INVESTMENT INFORMATION
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide current income exempt from
federal regular income tax and the personal income taxes imposed by the state of
Michigan and Michigan municipalities. The investment objective cannot be changed
without approval of shareholders. While there is no assurance that the Fund will
achieve its investment objective, it endeavors to do so by following the
investment policies described in this prospectus.
Interest income of the Fund that is exempt from the income taxes described above
retains its exempt status when distributed to the Fund's shareholders. However,
income distributed by the Fund may not necessarily be exempt from state or
municipal taxes in states other than Michigan.
INVESTMENT POLICIES
The Fund pursues its investment objective by investing primarily in a portfolio
of Michigan municipal securities. Under normal market conditions, the
dollar-weighted average portfolio maturity of the Fund will be between three and
ten years, and the Fund's average-weight duration will be between three and
seven years. Unless indicated otherwise, the investment policies of the Fund may
be changed by the Board of Trustees ("Trustees") without approval of
shareholders. Shareholders will be notified before any material changes in these
policies become effective.
ACCEPTABLE INVESTMENTS
The securities in which the Fund invests include:
* obligations issued by or on behalf of the state of Michigan, its political
subdivisions, or agencies;
* debt obligations of any state, territory, or possession of the United
States, or any political subdivision of any of these; and
* participation interests, as described below, in any of the above obligations,
the interest from which is, in the opinion of bond counsel for the issuers or in
the opinion of officers of the Fund and/or the investment adviser to the Fund,
exempt from both federal regular income tax and the personal income tax imposed
by the state of Michigan.
*
The prices of fixed income securities fluctuate inversely to the direction of
interest rates.
CHARACTERISTICS
The Michigan municipal securities which the Fund buys are:
* rated within the four highest ratings for municipal securities by Moody's
Investors Service, Inc. ("Moody's") (Aaa, Aa, A, or Baa) or by Standard & Poor's
("S&P") and Fitch IBCA, Inc. ("Fitch") (AAA, AA, A, or BBB) securities rated
"Baa" by Moody's or "BBB" by S&P or Fitch have speculative characteristics;
* guaranteed at the time of purchase by the U.S. government as to the payment
of principal and interest;
* fully collateralized by an escrow of U.S. government securities or other
securities acceptable to the Fund's investment adviser;
* rated at the time of purchase within Moody's highest short-term municipal
obligation rating (MIG1/VMIG1) or Moody's highest municipal commercial paper
rating (PRIME-1), or S&P's highest municipal commercial paper rating (SP- 1); or
* unrated if determined to be of equivalent quality to one of the foregoing
rating categories by the Fund's investment adviser.
Changes in economic or other circumstances are more likely to lead to weakened
capacity to make principal and interest payments than higher rated securities.
Downgraded securities will be evaluated on a case by case basis by the
investment adviser. The investment adviser will determine whether or not the
security continues to be an acceptable investment. If not, the security will be
sold.
A description of the ratings categories is contained in the Appendix to the
Statement of Additional Information.
PARTICIPATION INTERESTS
The Fund may purchase participation interests from financial institutions such
as commercial banks, savings associations, and insurance companies. These
participation interests give the Fund an undivided interest in Michigan
municipal securities. The financial institutions from which the Fund purchases
participation interests frequently provide or secure irrevocable letters of
credit or guarantees to assure that the participation interests are of high
quality. The Trustees will determine that participation interests meet the
prescribed quality standards for the Fund.
VARIABLE RATE MUNICIPAL SECURITIES
Some of the Michigan municipal securities which the Fund purchases may have
variable interest rates. Variable interest rates are ordinarily based on a
published interest rate, interest rate index, or a similar standard, such as the
91-day U.S. Treasury bill rate. Many variable rate municipal securities are
subject to payment of principal on demand by the Fund in not more than seven
days. All variable rate municipal securities will meet the quality standards for
the Fund. The Fund's investment adviser has been instructed by the Trustees to
monitor the pricing, quality, and liquidity of the variable rate municipal
securities, including participation interests held by the Fund on the basis of
published financial information and reports of the rating agencies and other
analytical services.
MUNICIPAL LEASES
Municipal leases are obligations issued by state and local governments or
authorities to finance the acquisition of equipment and facilities and may be
considered to be illiquid. They may take the form of a lease, an installment
purchase contract, a conditional sales contract or a participation certificate
on any of the above. Lease obligations may be subject to periodic appropriation.
If the entity does not appropriate funds for future lease payments, the entity
cannot be compelled to make such payments. In the event of failure of
appropriation, unless the participation interests are credit enhanced, it is
unlikely that the participants would be able to obtain an acceptable substitute
source of payment.
RESTRICTED SECURITIES
As a matter of fundamental investment policy, the Fund may invest up to 10% of
its net assets in restricted securities. Restricted securities are any
securities in which the Fund may otherwise invest pursuant to its investment
objective and policies but which are subject to restriction upon resale under
federal securities laws. As a matter of fundamental investment policy, the Fund
will limit investments in illiquid securities, including certain restricted
securities not determined by the Trustees to be liquid, to 15% of its net
assets.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may purchase securities on a when-issued or delayed delivery basis.
These transactions are arrangements in which the Fund purchases securities with
payment and delivery scheduled for a future time. The seller's failure to
complete these transactions may cause the Fund to miss a price or yield
considered to be advantageous. Settlement dates may be a month or more after
entering into these transactions, and the market values of the securities
purchased may vary from the purchase prices.
The Fund may dispose of a commitment prior to settlement if the adviser deems it
appropriate to do so. In addition, the Fund may enter into transactions to sell
its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Fund may realize short-term profits or losses upon the sale of such
commitments.
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.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest its assets in securities of other investment companies as an
efficient means of carrying out its investment policies. It should be noted that
investment companies incur certain expenses, such as management fees, and,
therefore, any investment by the Fund in shares of other investment companies
may be subject to such duplicate expenses.
TEMPORARY INVESTMENTS
The Fund invests its assets so that at least 80% of its annual interest income
is exempt from federal regular income tax and the state of Michigan and Michigan
municipalities personal income taxes. However, from time to time when the
investment adviser determines that market conditions call for a temporary
defensive posture, the Fund may invest in short-term, non-Michigan municipal
tax-exempt obligations or taxable temporary investments. These temporary
investments include: notes issued by or on behalf of municipal or corporate
issuers; obligations issued or guaranteed by the U.S. government, its agencies,
or instrumentalities; other debt securities; commercial paper; certificates of
deposit of banks; and repurchase agreements (arrangements in which the
organization selling the Fund, a bond, or temporary investment agrees at the
time of sale to repurchase it at a mutually agreed upon time and price).
There are no rating requirements applicable to temporary investments. However,
the investment adviser will limit temporary investments to those rated within
the investment grade categories described under "Acceptable
Investments-Characteristics" (if rated) or (if unrated) those which the
investment adviser judges to have the same characteristics as such investment
grade securities.
Although the Fund is permitted to make taxable, temporary investments, there is
no current intention of generating income subject to federal regular income tax
or personal income taxes imposed by the state of Michigan or Michigan
municipalities.
MICHIGAN MUNICIPAL SECURITIES
Michigan municipal securities are generally issued to finance public works, such
as airports, bridges, highways, housing, hospitals, mass transportation
projects, schools, streets, and water and sewer works. They are also issued to
repay outstanding obligations, to raise funds for general operating expenses,
and to make loans to other public institutions and facilities.
Michigan municipal securities include industrial development bonds issued by or
on behalf of public authorities to provide financing aid to acquire sites or
construct and equip facilities for privately or publicly owned corporations. The
availability of this financing encourages these corporations to locate within
the sponsoring communities and thereby increases local employment.
The two principal classifications of municipal securities are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its full faith and credit and taxing power for the payment of
principal and interest. However, interest on and principal of revenue bonds, are
payable only from the revenue generated by the facility financed by the bond or
other specified sources of revenue. Revenue bonds do not represent a pledge of
credit or create any debt of or charge against the general revenues of a
municipality or public authority. Industrial development bonds are typically
classified as revenue bonds.
INVESTMENT RISKS
Yields on Michigan municipal securities depend on a variety of factors,
including: the general conditions of the municipal bond market; the size of the
particular offering; the maturity of the obligations; and the rating of the
issue. Further, any adverse economic conditions or developments affecting the
state of Michigan or its municipalities could impact the Fund's portfolio. The
ability of the Fund to achieve its investment objective also depends on the
continuing ability of the issuers of Michigan municipal securities and
participation interests, or the guarantors of either, to meet their obligations
for the payment of interest and principal when due. Investing in Michigan
municipal securities which meet the Fund's quality standards may not be possible
if the state of Michigan or its municipalities do not maintain their current
credit ratings. In addition, any Michigan constitutional amendments, legislative
measures, executive orders, administrative regulations, and voter initiatives
could result in adverse consequences affecting Michigan municipal securities.
A further discussion of the risks of a portfolio which invests largely in
Michigan municipal securities is contained in the Statement of Additional
Information.
NON-DIVERSIFICATION
The Fund is a non-diversified investment portfolio. As such, there is no limit
on the percentage of assets which can be invested in any single issuer. An
investment in the Fund, therefore, will entail greater risk than would exist in
a diversified portfolio of securities because the higher percentage of
investments among fewer issuers may result in greater fluctuation in the total
market value of the Fund's portfolio. Any economic, political, or regulatory
developments affecting the value of the securities in the Fund's portfolio will
have a greater impact on the total value of the portfolio than would be the case
if the portfolio were diversified among more issuers.
The Fund intends to comply with Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"). This undertaking requires that at the end of each
quarter of the taxable year: (a) with regard to at least 50% of the Fund's total
assets, no more than 5% of its total assets are invested in the securities of a
single issuer, and (b) beyond that, no more than 25% of its total assets are
invested in the securities of a single issuer.
INVESTMENT LIMITATIONS
The Fund will not borrow money directly or through reverse repurchase agreements
(arrangements in which the Fund sells a portfolio instrument for a percentage of
its cash value with an agreement to buy it back on a set date) or pledge
securities except, under certain circumstances, the Fund may borrow up to
one-third of the value of its total assets and pledge up to 10% of the value of
those assets to secure such borrowings.
The above investment limitation cannot be changed without shareholder approval.
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.
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.
INVESTING IN THE FUND
The characteristics of the Fund are described below.
Minimum and Subsequent
Investment Amounts $1,500/ $100
Minimum and Subsequent
Investment Amount
for Retirement Plans NA
Maximum Sales Charge 3.00%*
Maximum Contingent Deferred
Sales Charge None**
Conversion Feature No
* Shares are sold at NAV, plus a sales charge as follows:
SALES CHARGE AS
A PERCENTAGE OF
PUBLIC NET
OFFERING AMOUNT
AMOUNT OF TRANSACTION PRICE INVESTED
Less than $50,000 3.00% 3.09%
$50,000 but less than $100,000 2.50% 2.56%
$100,000 but less than $250,000 2.00% 2.04%
$250,000 but less than $500,000 1.50% 1.52%
$500,000 but less than $1 million 1.00% 1.01%
$1 million or greater 0.00% 0.00%
** Applies only to Shares purchased where the dealer has received an advanced
commission.
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, Inc. ("Federated Funds") may exchange their
shares for Shares 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.
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 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 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.
REDUCING OR ELIMINATING THE SALES CHARGE
Shares are sold at NAV, plus a sales charge. However:
NO SALES CHARGE IS IMPOSED FOR SHARES PURCHASED:
* through financial intermediaries that do not receive sales charge dealer
concessions;
* by Federated Life Members; or
* 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:
* purchasing Shares in quantity;
* combining concurrent purchases of Shares
* by you, your spouse, and your children under age 21, or;
* of two or more Federated Funds(other than money market funds);
*accumulating purchases (in calculating the sales charge on an additional
purchase of Shares, you may count the current value of previous Share purchases
still invested in the Fund);
* signing a letter of intent to purchase a specific quantity of Shares within
13 months; or
* using the reinvestment privilege within 120 days of redeeming Shares of an
equal or lesser amount.
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 Shares, the distributor will normally offer to pay dealers up to
100% of the sales charge retained by it. Financial intermediaries purchasing
Class A Shares for their customers in amounts of $1 million or more are eligible
to receive an advance commission from the distributor based on the following
breakpoints:
ADVANCE COMMISSION
AS A PERCENTAGE OF
TRANSACTION AMOUNT PUBLIC OFFERING PRICE
First $1 - $5 million 0.75%
Next $5 - $20 million 0.50%
Over $20 million 0.25%
For accounts with assets over $1 million, the dealer commission resets annually
to the first breakpoint on the anniversary of the first purchase.
Class A Share purchases under this program may be made by Letter of Intent or by
combining concurrent purchases. The above commission will be paid only on those
purchases that were not previously subject to a front-end sales charge and
dealer commission. Certain retirement accounts may not be eligible for this
program. Financial intermediaries must notify the Fund once an account reaches
$1 million in order to qualify for advance commissions.
A contingent deferred sales charge of 0.75% of the redemption amount applies to
Class A Shares redeemed up to 24 months after purchase if a financial
intermediary received an advance commission on the transaction.
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 Shares.
REDEEMING AND EXCHANGING SHARES
Shares of the Fund may be redeemed for cash or exchanged for Class A Shares of
other Federated Funds on days on which the Fund computes its NAV. Redemptions
and exchanges are made at NAV. Shareholders who desire to automatically exchange
Shares for Class A Shares 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 of not less than $100. To be
eligible to participate in this program, a shareholder must have an account
value of at least $10,000. A shareholder may apply for participation in this
program through his financial 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 Shares subject to a sales charge while participating in this
program.
CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge applies only to Shares purchased where the
dealer has received an advanced commission. 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:
* following the death or disability, as defined in Section 72(m)(7) of the
Internal Revenue Code of 1986, of the last surviving shareholder and any
designated beneficiaries; and
* which are reinvested in the Fund under the reinvestment privilege.For more
information regarding the elimination of the contingent deferred sales charge,
contact your financial intermediary or the Fund. The Fund reserves the right to
discontinue or modify these provisions. Shareholder 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 daily 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 NAV 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. 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, Inc. All of the Class A (voting)
Shares of Federated Investors, Inc. are owned by a trust, the trustees of
which are John F. Donahue, Chairman and Director of Federated Investors,
Inc., Mr. Donahue's wife, and Mr. Donahue's son, J. Christopher Donahue, who
is President and Director of Federated Investors, Inc.
Federated Advisers and other subsidiaries of Federated Investors, Inc. 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 $120 billion invested across more than 300 funds
under management and/or administration by its subsidiaries, as of December 31,
1997, Federated Investors, Inc. 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 4,000 financial institutions
nationwide.
J. Scott Albrecht has been a portfolio manager of the Fund since March 1995.
Mr. Albrecht joined Federated Investors, Inc. or its predecessor 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.
Lee R. Cunningham II has been a portfolio manager of the Fund since May 1998.
Mr. Cunningham joined Federated Investors, Inc. or its predecessor in 1995 as
an Investment Analyst and was named an Assistant Vice President of the Fund's
investment adviser in January 1998. From 1986 through 1994, Mr. Cunningham
was a Project Engineer with Pennsylvania Power and Light Company.
Mr. Cunningham received his M.B.A. with concentrations in finance and
operations 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, Inc.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES
Federated Services Company, a subsidiary of Federated Investors, Inc., 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, Inc. as
specified below:
MAXIMUM AVERAGE AGGREGATE
FEE DAILY NET ASSETS
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
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 SERVICES
The Fund has entered into a Shareholder Services Agreement with Federated
Shareholder Services, a subsidiary of Federated Investors, Inc., under which the
Fund may make payments up to 0.25% of the average daily NAV of the Shares,
computed at an annual rate, to obtain certain personal services for shareholders
and provide the maintenance of shareholder accounts. From time to time and for
such periods as deemed appropriate, the amount stated above may be reduced
voluntarily under the Shareholder Services Agreement. Federated Shareholder
Services will either perform shareholder services directly or will receive fees
based upon Shares owned by their clients or customers. The schedules of such
fees and the basis upon which such fees will be paid will be determined from
time to time by the Fund and Federated Shareholder Services.
SUPPLEMENTAL PAYMENTS TO FINANCIAL INSTITUTIONS
In addition to periodic payments to financial institutions under the Shareholder
Services Agreement, the distributor may offer to pay a fee from its own assets
to financial institutions as financial assistance for providing substantial
marketing and sales support. The support may include participating in sales,
educational and training seminars at recreational- type facilities, providing
sales literature, and engineering computer software programs that emphasize the
attributes of the Fund. Such assistance will be predicated upon the amount of
Shares the financial institution sells or may sell and/or upon the type and
nature of sales or marketing support furnished by the financial institution. Any
payments made by the distributor may be reimbursed by the Adviser or its
affiliates.
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 Trust 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 Trust's outstanding shares of
all series entitled to vote.
As of October 9, 1998, the following shareholder of record owned 25% or more of
the outstanding Shares of the Fund: Enbanco (as record owner holding Shares for
its clients), Traverse City, MI, owned approximately 2,567,719 Shares (36.27%)
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.
In general, shareholders are not required to pay federal regular income tax on
any dividends received from the Fund that represent net interest on tax-exempt
municipal bonds, although tax exempt interest will increase the taxable income
of certain recipients of social security benefits. However, under the Tax Reform
Act of 1986, dividends representing net interest income earned on some municipal
bonds may be included in calculating the federal individual alternative minimum
tax or the federal alternative minimum tax for corporations.
The alternative minimum tax, up to 28% of alternative minimum taxable income for
individuals and 20% for corporations, applies when it exceeds the regular tax
for the taxable year. Alternative minimum taxable income is equal to the regular
taxable income of the taxpayer increased by certain "tax preference" items not
included in regular taxable income and reduced by only a portion of the
deductions allowed in the calculation of the regular tax.
The Tax Reform Act of 1986 treats interest on certain "private activity" bonds
issued after August 7, 1986, as a tax preference item for both individuals and
corporations. Unlike traditional governmental purpose municipal bonds, which
finance roads, schools, libraries, prisons, and other public facilities, private
activity bonds provide benefits to private parties. The Fund may purchase all
types of municipal bonds, including private activity bonds. Thus, should it
purchase any such bonds, a portion of the Fund's dividends may be treated as a
tax preference item.
In addition, in the case of a corporate shareholder, dividends of the Fund which
represent interest on municipal bonds will become subject to the 20% corporate
alternative minimum tax because the dividends are included in a corporation's
"adjusted current earnings." The corporate alternative minimum tax treats 75% of
the excess of the taxpayer's "adjusted current earnings" over the taxpayer's
alternative minimum taxable income as a tax preference item. "Adjusted current
earnings" is based upon the concept of a corporation's "earnings and profits."
Since "earnings and profits" generally includes the full amount of any Fund
dividend, and alternative minimum taxable income does not include the portion of
the Fund's dividend attributable to municipal bonds which are not private
activity bonds, the difference will be included in the calculation of the
corporation's alternative minimum tax.
Dividends of the Fund representing net interest income earned on some temporary
investments and any realized net short-term gains are taxed as ordinary income.
These tax consequences apply whether dividends are received in cash or as
additional Shares. Information on the tax status of dividends and distributions
is provided annually.
MICHIGAN TAXES
Under existing Michigan laws, distributions made by the Fund will not be subject
to Michigan personal income taxes to the extent that such distributions qualify
as "exempt-interest dividends" under the Code and represent (i) income and
dividends from obligations of Michigan, which obligations are excluded from
federal adjusted gross income; or (ii) income from obligations of the United
States government which Michigan is prohibited by law from subjecting to a net
income tax.
Distributions by the Fund are not subject to the Michigan Single Business Tax to
the extent that such distributions are derived from interest on obligations that
would be exempt if owned directly by the shareholder, such as obligations of
Michigan and the United States government.
Certain municipalities in Michigan also impose an income tax on individuals and
corporations. However, to the extent that the dividends from the Funds are
exempt from federal regular income taxes, such dividends also will be exempt
from Michigan municipal income taxes.
STATE AND LOCAL TAXES
Income from the Fund is not necessarily free from taxes in states other than
Michigan. Shareholders are urged to consult their own tax advisers regarding the
status of their accounts under state and local tax laws.
PERFORMANCE INFORMATION
From time to time, the Fund advertises the total return, yield, and tax-
equivalent yield.
Total return represents the change, over a specific period of time, in the value
of an investment in the Fund after reinvesting all income and capital gains
distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.
The yield of the Fund is calculated by dividing the net investment income per
Share (as defined by the SEC) earned by the Fund over a thirty-day period by the
offering price per Share of the Fund on the last day of the period. This number
is then annualized using semi-annual compounding. The tax-equivalent yield of
the Fund is calculated similarly to the yield, but is adjusted to reflect the
taxable yield that the Fund would have had to earn to equal its actual yield,
assuming a specific tax rate. The yield and the tax-equivalent yield do not
necessarily reflect income actually earned by the Fund and, therefore, may not
correlate to the dividends or other distributions paid to shareholders.
The performance information reflects the effect of the maximum sales charge and
other similar non-recurring charges, such as the contingent deferred sales
charge, which, if excluded, would increase the total return, yield, and
tax-equivalent yield.
From time to time, advertisements for the Fund may refer to ratings, rankings
and other information in certain financial publications and/or compare the
Fund's performance to certain indices.
PORTFOLIO OF INVESTMENTS
FEDERATED MICHIGAN INTERMEDIATE MUNICIPAL TRUST
AUGUST 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--97.1%
MICHIGAN--97.1%
$1,000,000 Anchor Bay, MI, School District, UT GO Bonds, 5.30% (MBIA INS)/
(Original Issue Yield: 5.35%), 5/1/2008 AAA $ 1,070,530
500,000 Avondale, MI, School District, UT GO Refunding Bonds, 6.75%
(Michigan State GTD)/(Original Issue Yield: 6.95%), 5/1/2014 AA 537,930
500,000 Battle Creek, MI, Building Authority, Revenue Bonds, 6.00%, 4/1/
2002 A+ 527,145
500,000 Battle Creek, MI, Building Authority, Revenue Bonds, 6.10%, 4/1/
2003 A+ 527,905
2,000,000 Battle Creek, MI, Downtown Development Authority, Refunding Bonds,
5.10% (MBIA INS)/(Original Issue Yield: 5.20%), 5/1/2010 AAA 2,089,440
1,010,000 Belding Area Schools, MI, Refunding UT GO Bonds, 4.90% (Michigan
State GTD)/(AMBAC INS)/(Original Issue Yield: 5.00%), 5/1/2013 AAA 1,019,928
1,060,000 Belding Area Schools, MI, Refunding UT GO Bonds, 4.95% (Michigan
State GTD)/(AMBAC INS)/(Original Issue Yield: 5.05%), 5/1/2014 AAA 1,069,741
1,000,000 Cedar Springs Public Schools, MI, Refunding UT GO Bonds (Series
1998), 5.00% (Michigan State GTD)/(FSA INS)/(Original Issue Yield:
5.13%), 5/1/2017 AAA 1,001,830
460,000 Detroit, MI, Economic Development Corp., Resource Recovery Revenue
Bonds (Series A), 6.875% (FSA INS)/(Original Issue Yield: 7.00%),
5/1/2009 AAA 497,600
3,000,000 Detroit, MI, Water Supply System, Revenue Refunding Bonds, 6.00%
(FGIC INS)/(Original Issue Yield: 6.10%), 7/1/2002 AAA 3,225,990
1,000,000 Detroit/Wayne County, MI, Stadium Authority, Revenue Bonds, 5.25%
(FGIC INS)/(Original Issue Yield: 5.55%), 2/1/2011 AAA 1,056,250
1,000,000 Eastern Michigan University, Revenue Bonds, 6.10% (AMBAC INS)/
(Original Issue Yield: 6.15%), 6/1/2004 AAA 1,079,660
200,000 Farmington Hills, MI, Hospital Finance Authority, Hospital Revenue
Refunding Bonds (Series A), 6.60% (Botsford General Hospital)/(MBIA
INS), 2/15/2000 AAA 208,402
425,000 Forest Hills, MI, Public School, UT GO Bonds, 7.375% (United States
Treasury PRF)/(Original Issue Yield: 7.397%), 5/1/2000 (@101) AA 454,325
250,000 Garden City, MI, School District, UT GO Refunding Bonds, 5.90% (FSA
INS), 5/1/2005 AAA 274,985
565,000 Garden City, MI, School District, UT GO Refunding Bonds, 6.00% (FSA
INS), 5/1/2006 AAA 620,839
515,000 Garden City, MI, School District, UT GO Refunding Bonds, 6.10% (FSA
INS), 5/1/2007 AAA 568,472
150,000 Huron Valley, MI, School District, UT GO Bonds, 6.50% (Michigan
State GTD)/(United States Treasury PRF), 5/1/2001 (@102) NR 162,783
360,000 Ingham County, MI, Sewer Authority, Revenue Bonds, Project #4,
Delhi Charter Township, 5.80%, 11/1/2004 AA- 381,971
465,000 Ingham County, MI, Sewer Authority, Revenue Bonds, Project #4,
Delhi Charter Township, 5.90%, 11/1/2005 AA- 493,895
</TABLE>
FEDERATED MICHIGAN INTERMEDIATE MUNICIPAL TRUST
<TABLE>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
MICHIGAN--CONTINUED
$1,850,000 Jenison Public Schools, UT GO School Building and Site Refunding
Bonds (Series 1996), 5.30% (FGIC INS)/(Original Issue Yield:
5.40%), 5/1/2007 AAA $ 1,992,395
1,590,000 Kent County, MI, Building Authority, LT GO Bonds, 5.00% (Original
Issue Yield: 5.05%),
6/1/2014 AAA 1,611,322
265,000 Kent Hospital Finance Authority, MI, Hospital Revenue Refunding
Bonds, 6.30% (Pine Rest Christian Hospital, MI)/(FGIC INS)/
(Original Issue Yield: 6.40%), 11/1/2003 AAA 288,113
415,000 Kent Hospital Finance Authority, MI, Hospital Revenue Refunding
Bonds, 6.30% (Pine Rest Christian Hospital, MI)/(FGIC INS)/
(Original Issue Yield: 6.45%), 11/1/2004 AAA 451,196
500,000 Lake Orion, MI, School District, UT GO Refunding Bonds, 5.90%
(Michigan State GTD)/(AMBAC INS), 5/1/2001 AAA 527,075
2,000,000 Lake Orion, MI, School District, UT GO Refunding Bonds, 6.05%
(AMBAC INS)/(Michigan State LOC), 5/1/2002 AAA 2,149,220
500,000 Lansing, MI, Sewer Disposal System, Revenue Refunding Bonds, 5.50%
(FGIC INS)/(Original Issue Yield: 5.60%), 5/1/2007 AAA 539,690
1,380,000 Lincoln Park, MI, School District, UT GO Refunding Bonds, 5.10%
(FGIC INS)/(Q-SBLF LOC)/(Original Issue Yield: 5.15%), 5/1/2013 AAA 1,419,482
750,000 Livonia, MI, Public School District, UT GO Bonds (Series I), 6.00%,
5/1/2001 AA 792,495
1,710,000 Marquette, MI, Hospital Finance Authority, Hospital Revenue
Refunding Bonds (Series 1996D), 5.30% (Marquette General Hospital,
MI)/(FSA INS), 4/1/2005 AAA 1,821,697
1,290,000 Marquette, MI, Hospital Finance Authority, Hospital Revenue
Refunding Bonds (Series 1996D), 5.40% (Marquette General Hospital,
MI)/(FSA INS), 4/1/2006 AAA 1,384,660
1,350,000 Michigan Higher Education Student Loan Authority, Student Loan
Revenue Bonds, (Series XVII-A), 5.65% (AMBAC LOC), 6/1/2010 AAA 1,445,351
1,500,000 Michigan Municipal Bond Authority, Revenue Refunding Q-SBLF Bonds,
6.00% (Michigan State)/(Michigan State GTD)/(Original Issue Yield:
6.10%), 5/1/2002 AA 1,608,420
3,000,000 Michigan Public Power Agency, Revenue Refunding Bonds (Series A)
Belle River Project, 5.70% (Original Issue Yield: 5.80%), 1/1/2003 AA- 3,207,660
1,000,000 Michigan State Comprehensive Transportation Board, Revenue
Refunding Bonds (Series B), 5.50% (Michigan State)/(Original Issue
Yield: 5.60%), 5/15/2002 AA- 1,058,010
1,000,000 Michigan State Comprehensive Transportation Board, Revenue
Refunding Bonds (Series B), 6.00% (Michigan State)/(Original Issue
Yield: 6.05%), 5/15/2007 AA- 1,082,020
500,000 Michigan State Hospital Finance Authority, Hospital Revenue &
Refunding Bonds (Series 1998A), 5.30% (Hackley Hospital Obligated
Group), 5/1/2013 NR 508,105
2,000,000 Michigan State Hospital Finance Authority, Refunding Revenue Bonds
(Series 1998A), 4.90% (St. John Hospital, MI)/(AMBAC INS)/(Original
Issue Yield: 5.05%), 5/15/2013 AAA 2,010,300
1,000,000 Michigan State Hospital Finance Authority, Revenue & Refunding
Bonds (Series 1998A), 5.10% (McLaren Health Care Corp.)/(Original
Issue Yield: 5.15%), 6/1/2013 NR 1,016,470
1,325,000 Michigan State Hospital Finance Authority, Revenue Bonds (Series
1997W), 5.00% (Mercy Health Services)/(Original Issue Yield:
5.26%), 8/15/2011 AA- 1,355,846
</TABLE>
FEDERATED MICHIGAN INTERMEDIATE MUNICIPAL TRUST
<TABLE>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
MICHIGAN--CONTINUED
$ 415,000 Michigan State Hospital Finance Authority, Revenue Bonds (Series
A), 6.15% (Crittenton Hospital, MI), 3/1/2001 A+ $ 437,422
440,000 Michigan State Hospital Finance Authority, Revenue Bonds (Series
A), 6.25% (Crittenton Hospital, MI), 3/1/2002 A+ 472,705
1,000,000 Michigan State Hospital Finance Authority, Revenue Bonds, 5.25%
(St. John Hospital, MI)/(AMBAC INS)/(Original Issue Yield: 5.65%),
5/15/2026 AAA 1,013,200
500,000 Michigan State Hospital Finance Authority, Revenue Bonds,
Providence Hospital, 7.00% (Daughters of Charity)/(Original Issue
Yield: 7.04%), 11/1/2021 AA 556,075
1,500,000 Michigan State Hospital Finance Authority, Revenue Refunding Bonds
(Series A), 5.50% (St. John Hospital, MI)/(Original Issue Yield:
5.80%), 5/15/2001 A+ 1,562,340
800,000 Michigan State Hospital Finance Authority, Revenue Refunding Bonds,
5.95% (Oakwood Obligated Group)/(FGIC INS)/(Original Issue Yield:
6.05%), 5/1/2002 AAA 854,608
575,000 Michigan State Hospital Finance Authority, Revenue Refunding Bonds,
6.30% (Sparrow Obligated Group, MI)/(MBIA INS), 11/15/2003 AAA 624,416
375,000 Michigan State Hospital Finance Authority, Revenue Refunding Bonds,
6.85% (Oakland General Hospital, MI)/(AMBAC INS), 7/1/2000 AAA 391,875
1,000,000 Michigan State Housing Development Authority, (Series A), Rental
Housing Revenue Bonds, 5.55% (MBIA INS), 4/1/2004 AAA 1,045,720
500,000 Michigan State Housing Development Authority, Revenue Bonds (Series
A), 5.90%, 12/1/2005 AA+ 533,585
430,000 Michigan State Housing Development Authority, Revenue Bonds (Series
A), 6.25%, 6/1/2002 AA+ 453,538
200,000 Michigan State Housing Development Authority, Revenue Bonds (Series
A), 7.00%, 12/1/2005 AA+ 211,036
280,000 Michigan State Housing Development Authority, Revenue Bonds (Series
B), 6.30%, 12/1/2003 AA+ 297,632
1,000,000 Michigan State Housing Development Authority, Revenue Bonds (Series
E), 5.55%, 12/1/2007 AA+ 1,051,980
160,000 Michigan State Housing Development Authority, Single Family
Mortgage Revenue Bonds (Series B), 6.95%, 12/1/2020 AA+ 169,386
1,000,000 Michigan State, UT GO Recreation Program Bonds, 5.75% (Original
Issue Yield: 5.80%), 11/1/2001 AA 1,060,520
250,000 Michigan Strategic Fund, LT Obligation Revenue Refunding Bonds
(Series A), 7.10% (Ford Motor Co.)/(Original Issue Yield: 7.127%),
2/1/2006 A+ 294,613
500,000 Michigan Strategic Fund, Limited Obligation Revenue Bonds (Series
1998), 5.30% (Porter Hills Presbyterian Village, Inc.)/(Original
Issue Yield: 5.422%), 7/1/2018 A 506,340
1,000,000 Michigan Strategic Fund, Limited Obligation Revenue Refunding Bonds
(Series A), 5.55% (Detroit Edison Co.)/(MBIA INS), 9/1/2029 AAA 1,001,680
</TABLE>
FEDERATED MICHIGAN INTERMEDIATE MUNICIPAL TRUST
<TABLE>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
MICHIGAN--CONTINUED
$ 4,250,000 Monroe County, MI, Pollution Control Authority, PCR Revenue Bonds
(Series A), 6.35% (Detroit Edison Co.)/(AMBAC INS), 12/1/2004 AAA $ 4,740,195
1,000,000 Novi, MI, Community School District, UT GO Bonds, Q-SBLF, 5.45%
(Original Issue Yield: 5.50%), 5/1/2003 AA 1,061,330
300,000 Oakland & Washtenaw Counties, MI, Revenue Bonds, 6.65% (Oakland
Community College District, MI)/(Original Issue Yield: 6.743%),
5/1/2011 AA- 331,761
1,765,000 Oakland County, MI, EDC, Limited Obligation Revenue Bonds (Series
1997), 5.50% (Lutheran Social Services of Michigan)/(First of
America Bank, N.A. LOC), 6/1/2014 NR 1,824,939
250,000 Oakland County, MI, LT GO Bonds, Evergreen-Farmington Sewer
Disposal, 6.30%, 5/1/2005 AA+ 265,908
610,000 Okemos, MI, Public School District, UT GO Refunding Bonds, Q-SBLF,
6.00% (Michigan State GTD), 5/1/2002 AA 654,304
140,000 Ottawa County, MI, LT GO Bonds, Northwest Ottawa Water Supply
System, 6.50% (Original Issue Yield: 6.55%), 10/1/2002 AA- 143,143
100,000 Ottawa County, MI, LT GO Bonds, Northwest Ottawa Water System,
6.85%, 5/1/2000 AA- 101,526
220,000 Ottawa County, MI, LT GO Bonds,Northwest Ottawa Water Supply
System, 6.50%, 10/1/2001 AA- 224,939
1,000,000 Petoskey, MI, Hospital Finance Authority, Limited Obligation
Revenue & Refunding Bonds, 5.00% (Northern Michigan Hospital
Obligated Group)/(MBIA INS)/(Original Issue Yield: 5.22%),
11/15/2018 AAA 989,270
400,000 Plymouth-Canton, MI, Community School District, UT GO Bonds (Series
C), Q-SBLF, 6.00% (Michigan State GTD)/(Original Issue Yield:
6.10%), 5/1/2003 AA 434,700
500,000 Plymouth-Canton, MI, Community School District, UT GO Refunding
Bonds (Series B), Q-SBLF, 6.80% (Michigan State GTD)/(United States
Treasury PRF)/(Original Issue Yield: 6.90%), 5/1/2001 (@101) AA 542,650
570,000 Riverview, MI, Community School District, UT GO Bonds, 6.20% (FGIC
INS)/(United States Treasury PRF), 5/1/2002 (@101.5) AAA 623,312
615,000 Riverview, MI, Community School District, UT GO Bonds, 6.20% (FGIC
INS)/(United States Treasury PRF), 5/1/2002 (@101.5) AAA 672,521
350,000 Rochester, MI, Community School District, UT GO Bonds, 6.50%
(Michigan State GTD)/(United States Treasury PRF)/(Original Issue
Yield: 6.60%), 5/1/2002 (@100) AA 381,350
250,000 Rochester, MI, Community School District, UT GO Bonds, 6.50%
(Michigan State GTD)/(United States Treasury PRF)/(Original Issue
Yield: 6.75%), 5/1/2002 (@100) AA 272,393
270,000 Shelby Charter Townships, MI, Building Authority, Revenue Bonds,
6.25% (AMBAC INS)/(Original Issue Yield: 6.45%), 11/1/2006 AAA 294,889
230,000 Shelby Charter Townships, MI, Building Authority, Revenue Bonds,
6.25% (AMBAC INS)/(Original Issue Yield: 6.50%), 11/1/2007 AAA 251,201
250,000 University of Michigan, Hospital Revenue Bonds, 7.00% (United
States Treasury PRF)/(Original Issue Yield: 7.25%), 12/1/2000
(@102) AA 271,785
</TABLE>
FEDERATED MICHIGAN INTERMEDIATE MUNICIPAL TRUST
<TABLE>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
MICHIGAN--CONTINUED
$ 1,500,000 University of Michigan, Hospital Revenue Refunding Bonds (Series
A), 5.70% (Original Issue Yield: 5.80%), 12/1/2004 AA $ 1,622,475
1,000,000 Walled Lake, MI, Consolidated School District, UT GO Refunding
Bonds, 5.30% (MBIA INS)/(Original Issue Yield: 5.35%), 5/1/2008 AAA 1,069,040
1,000,000 Wayne County, MI, Building Authority, LT GO Capital Improvement
Bonds, 5.35% (MBIA INS)/(Original Issue Yield: 5.40%), 6/1/2009 AAA 1,074,020
885,000 Wyandotte, MI, Electric Authority, Revenue Refunding Bonds, 6.10%
(MBIA INS), 10/1/2002 AAA 959,579
1,000,000 Yale, MI, Public Schools District, UT GO Bonds, 5.25% (Michigan
State GTD)/(FSA INS)/(Original Issue Yield: 5.30%), 5/1/2017 NR 1,024,760
Total 75,509,809
TOTAL LONG-TERM MUNICIPALS (IDENTIFIED COST $71,100,955) 75,509,809
SHORT-TERM MUNICIPAL NOTES--4.9%
MICHIGAN--3.5%
1,500,000 Michigan Strategic Fund, Limited Obligation PCR Bonds (Series
1993), Weekly VRDNs (Allied-Signal, Inc.) A 1,500,000
1,200,000 Michigan Strategic Fund, Refunding Revenue Bond, (Series 1995CC),
Daily VRDNs (Detroit Edison Co.)/(Barclays Bank PLC, London LOC) NR 1,200,000
Total 2,700,000
PUERTO RICO--1.4%
1,100,000 Government Development Bank for Puerto Rico (GDB) Weekly VRDNs
(MBIA INS)/(Credit Suisse First Boston LIQ) (AT AMORTIZED COST) AA 1,100,000
TOTAL SHORT-TERM MUNICIPALS (AT AMORTIZED COST) 3,800,000
TOTAL INVESTMENTS (IDENTIFIED COST $74,900,955)(A) $79,309,809
</TABLE>
Securities that are subject to alternative minimum tax represent 6.9% of the
Fund's portfolio as calculated based upon total market value.
* Please refer to the Appendix of the Statement of Additional Information for
an explanation of the credit ratings. Current credit ratings are unaudited.
(a) The cost of investments for federal tax purposes amounts to $74,900,955.
The net unrealized appreciation of investments on a federal tax basis amounts to
$4,408,854 which consists entirely of $4,408,854 appreciation at August 31,
1998.
Note: The categories of investments are shown as a percentage of net assets
($77,731,117) at August 31, 1998.
The following acronyms are used throughout this portfolio:
AMBAC --American Municipal Bond Assurance Corporation EDC --Economic Development
Commission FGIC --Financial Guaranty Insurance Company FSA --Financial Security
Assurance GO --General Obligation GTD --Guaranty INS --Insured LIQ --Liquidity
Agreement LOC --Letter of Credit LT --Limited Tax MBIA --Municipal Bond
Investors Assurance PCR --Pollution Control Revenue PLC --Public Limited Company
PRF --Prerefunded Q-SBLF--Qualified State Bond Loan Fund UT --Unlimited Tax
VRDNs --Variable Rate Demand Notes
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF ASSETS AND LIABILITIES
FEDERATED MICHIGAN INTERMEDIATE MUNICIPAL TRUST
AUGUST 31, 1998
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS:
Total investments in securities, at value (identified and tax
cost $74,900,955) $79,309,809
Income receivable 1,156,658
Receivable for investments sold 102,000
Receivable for shares sold 35,135
Total assets 80,603,602
LIABILITIES:
Payable for investments purchased $2,590,442
Payable for shares redeemed 18,472
Income distribution payable 237,293
Payable to Bank 3,791
Accrued expenses 22,487
Total liabilities 2,872,485
NET ASSETS for 7,007,520 shares outstanding $77,731,117
NET ASSETS CONSIST OF:
Paid in capital $74,088,919
Net unrealized appreciation of investments 4,408,854
Accumulated net realized loss on investments (766,656)
Total Net Assets $77,731,117
NET ASSET VALUE, OFFERING PRICE, AND REDEMPTION PROCEEDS PER SHARE:
Net Assets Value Per Share ($77,731,117 / 7,007,520 shares
outstanding) $11.09
Offering Price Per Share (100/97.00 of $11.09)* $11.43
Redemption Proceeds Per Share (100/100 of $11.09)** $11.09
</TABLE>
* See "Investing in the Fund" in the Prospectus.
** See "Contingent Deferred Sales Charge" in the Prospectus.
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF OPERATIONS
FEDERATED MICHIGAN INTERMEDIATE MUNICIPAL TRUST
YEAR ENDED AUGUST 31, 1998
<TABLE>
<CAPTION>
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest $3,845,566
EXPENSES:
Investment advisory fee $ 287,452 Administrative personnel and services fee
125,002 Custodian fees 8,603 Transfer and dividend disbursing agent fees and
expenses 40,196 Directors'/Trustees' fees 2,932 Auditing fees 13,156 Legal fees
2,067 Portfolio accounting fees 55,857 Shareholder services fee 179,636 Share
registration costs 17,466 Printing and postage 18,895 Insurance premiums 2,640
Miscellaneous 2,092 Total expenses 755,994 Waivers and reimbursements-- Waiver
of investment advisory fee $(264,185) Waiver of shareholder services fee
(129,338) Total waivers (393,523) Net expenses 362,471 Net investment income
3,483,095 REALIZED AND UNREALIZED GAIN ON INVESTMENTS: Net realized gain on
investments 359,864 Net change in unrealized appreciation of investments
1,226,386 Net realized and unrealized gain on investments 1,586,250 Change in
net assets resulting from operations $5,069,345 </TABLE>
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF CHANGES IN NET ASSETS
FEDERATED MICHIGAN INTERMEDIATE MUNICIPAL TRUST
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1998 1997
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS--
Net investment income $ 3,483,095 $ 3,217,659
Net realized gain on investments ($359,864 and $133,935,
respectively, as computed for federal tax purposes) 359,864 149,867
Net change in unrealized appreciation 1,226,386 767,866
Change in net assets resulting from operations 5,069,345 4,135,392
DISTRIBUTIONS TO SHAREHOLDERS--
Distributions from net investment income (3,483,095) (3,217,659)
SHARE TRANSACTIONS--
Proceeds from sale of shares 25,850,735 16,338,296
Net asset value of shares issued to shareholders in payment of
distributions declared 712,814 615,490
Cost of shares redeemed (18,010,272) (13,065,032)
Change in net assets resulting from share transactions 8,553,277 3,888,754
Change in net assets 10,139,527 4,806,487
NET ASSETS:
Beginning of period 67,591,590 62,785,103
End of period $ 77,731,117 $ 67,591,590
</TABLE>
(See Notes which are an integral part of the Financial Statements)
NOTES TO FINANCIAL STATEMENTS
FEDERATED MICHIGAN INTERMEDIATE MUNICIPAL TRUST
AUGUST 31, 1998
ORGANIZATION
Municipal Securites Income Trust (the "Trust") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as an open-end,
management investment company. The Trust consists of five portfolios. The
financial statements included herein are only those of Federated Michigan
Intermediate Municipal Trust (the "Fund"), a non-diversified portfolio. The
financial statements of the other portfolios are presented seperately. The
assets of each portfolio are segregated and a shareholder's interest is limited
to the portfolio in which shares are held. The investment objective of the Fund
is to provide current income which is exempt from federal regular income tax and
the personal income taxed imposed by the state of Michigan and Michigan
municipalities.
SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS
Municipal bonds are valued by an independent pricing service, taking into
consideration yield, liquidity, risk, credit quality, coupon, maturity, type of
issue, and any other factors or market data the pricing service deems relevant.
Short-term securities are valued at the prices provided by an independent
pricing service. However, short-term securities with remaining maturities of
sixty days or less at the time of purchase may be valued at amortized cost,
which approximates fair market value.
INVESTMENT INCOME, EXPENSES, AND DISTRIBUTIONS
Interest income and expenses are accrued daily. Bond premium and discount, if
applicable, are amortized as required by the Internal Revenue Code, as amended
(the "Code"). Distributions to shareholders are recorded on the ex- dividend
date.
FEDERAL TAXES
It is the Fund's policy to comply with the provisions of the Code applicable to
regulated investment companies and to distribute to shareholders each year
substantially all of its income. Accordingly, no provisions for federal tax are
necessary.
At August 31, 1998, the Fund, for Federal tax purposes, had a capital loss
carryforward of $766,656, which will reduce the taxable incoming arising from
future net realized gain on investments, if any, to the extent permitted by the
Code, and thus will reduce the amount of the distributions to shareholders which
would otherwise be necessary to relieve the Fund of any liability for federal
tax. Pursuant to the Code, such capital loss carryforward will expire as
follows:
EXPIRATION YEAR EXPIRATION AMOUNT
2004 $766,656
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may engage in when-issued or delayed delivery transactions. The Fund
records when-issued securities on the trade date and maintains security
positions such that sufficient liquid assets will be available to make payment
for the securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts of assets, liabilities, expenses and revenues reported in the
financial statements. Actual results could differ from those estimated.
OTHER
Investment transactions are accounted for on the trade date.
SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value).
Transactions in shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1998 1997
<S> <C> <C>
Shares sold 2,352,166 1,512,481
Shares issued to shareholders in payment of distributions declared 64,867 56,959
Shares redeemed (1,639,057) (1,209,574)
Net change resulting from share transactions 777,976 359,866
</TABLE>
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE
Federated Advisers, the Fund's investment adviser (the "Adviser"), receives for
its services an annual investment advisory fee equal to 0.40% of the Fund's
average daily net assets. The Adviser may voluntarily choose to waive any
portion of its fee and reimburse certain operating expenses of the Fund. The
Adviser can modify or terminate this voluntary waiver at any time at its sole
discretion.
ADMINISTRATIVE FEE
Federated Services Company ("FServ"), under the Administrative Services
Agreement, provides the Trust with administrative personnel and services. The
fee paid to FServ is based on the level of average aggregate daily net assets of
all funds advised by subsidiaries of Federated Investors, Inc. for the period.
The administrative fee received during the period of the Administrative Services
Agreement shall be at least $125,000 per portfolio and $30,000 per each
additional class of shares.
SHAREHOLDER SERVICES FEE
Under the terms of a Shareholder Services Agreement with Federated Shareholder
Services ("FSS"), the Fund will pay FSS up to 0.25% of average daily net assets
of the Fund for the period. The fee paid to FSS is used to finance certain
services for shareholders and to maintain shareholder accounts. FSS may
voluntarily choose to waive any portion of its fee. FSS can modify or terminate
this voluntary waiver at any time at its sole discretion.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES
FServ, through its subsidiary, Federated Shareholder Services Company ("FSSC")
serves as transfer and dividend disbursing agent for the Fund. The fee paid to
FSSC is based on the size, type, and number of accounts and transactions made by
shareholders.
PORTFOLIO ACCOUNTING FEES
FServ maintains the Fund's accounting records for which it receives a fee. The
fee is based on the level of the Fund's average daily net assets for the period,
plus out-of-pocket expenses.
INTERFUND TRANSACTIONS
During the period ended August 31, 1998, the Fund engaged in purchase and sale
transactions with funds that have a common investment adviser (or affiliated
investment advisers), common Directors/Trustees, and/or common Officers. These
purchase and sale transactions were made at current market value pursuant to
Rule 17a-7 under the Act amounting to $27,000,000 and $22,500,000, respectively.
GENERAL
Certain of the Officers and Trustees of the Trust are Officers and Directors or
Trustees of the above companies.
INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities (and in-kind
contributions), for the period ended August 31, 1998, were as follows:
PURCHASES $18,949,663
SALES $10,979,151
CONCENTRATION OF CREDIT RISK
Since the Fund invests a substantial portion of its assets in issuers located in
one state, it will be more susceptible to factors adversely affecting issuers of
that state than would be a comparable tax-exempt mutual fund that invests
nationally. In order to reduce the credit risk associated with such factors, at
August 31, 1998, 67.03% of the securities in the portfolio of investments are
backed by letters of credit or bond insurance of various financial institutions
and financial guaranty assurance agencies. The percentage of investments insured
by or supported (backed) by a letter of credit from any one institution or
agency did not exceed 20.16% of total investments.
YEAR 2000 (UNAUDITED)
Similar to other financial organizations, the Trust could be adversely affected
if the computer systems used by the Trust's service providers do not properly
process and calculate date-related information and data from and after January
1, 2000. The Trust's Adviser and Administrator are taking measures that they
believe are reasonably designed to address the Year 2000 issue with respect to
computer systems that they use and to obtain reasonable assurances that
comparable steps are being taken by each of the Trust's other service providers.
At this time, however, there can be no assurance that these steps will be
sufficient to avoid any adverse impact to the Trust.
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees of
MUNICIPAL SECURITIES INCOME TRUST
and Shareholders of
FEDERATED MICHIGAN INTERMEDIATE MUNICIPAL TRUST:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Federated Michigan Intermediate Municipal Trust
as of August 31, 1998, the related statement of operations for the year then
ended, the statements of changes in net assets for the years ended August 31,
1998, and 1997, and the financial highlights for the periods presented. These
financial statements and financial highlights are the responsibility of the
Trust's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
August 31, 1998, by correspondence with the custodian and brokers; where replies
were not received, we performed other auditing procedures. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Federated Michigan
Intermediate Municipal Trust as of August 31, 1998, the results of its
operations, the changes in its net assets and its financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
October 9, 1998
[Graphic]
Federated Michigan Intermediate Municipal Trust
(A Portfolio of Municipal
Securities Income Trust)
PROSPECTUS
OCTOBER 31, 1998
A Non-Diversified Portfolio of Municipal Securities Income Trust, an Open-
End, Management Investment Company
FEDERATED MICHIGAN
INTERMEDIATE MUNICIPAL TRUST
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
DISTRIBUTOR
Federated Securities Corp.
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
INVESTMENT ADVISER
Federated Advisers
Federated Investors Tower
1001 Liberty Avenue
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
[Graphic]
Federated Securities Corp., Distributor
1-800-341-7400
www.federatedinvestors.com
Cusip 625922703
G01389-01 (10/98)
[Graphic]
FEDERATED MICHIGAN INTERMEDIATE MUNICIPAL TRUST
(A PORTFOLIO OF MUNICIPAL SECURITIES INCOME TRUST)
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the prospectus of
Federated Michigan Intermediate Municipal Trust (the "Fund"), a portfolio of
Municipal Securities Income Trust dated October 31, 1998. 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 MICHIGAN INTERMEDIATE MUNICIPAL TRUST
FEDERATED INVESTORS FUNDS
5800 CORPORATE DRIVE
PITTSBURGH, PENNSYLVANIA 15237-7000
Statement dated October 31, 1998
[Graphic]
Federated Investors
Federated Securities Corp., Distributor
Federated Investors, Inc.
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
1-800-341-7400
www.federatedinvestors.com
Cusip 625922703
1041202B (10/98)
[Graphic]
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
Investing in Securities of Other
Investment Companies 2
Temporary Investments 2
Portfolio Turnover 3
Investment Limitations 3
Investing in Illiquid Securities 4
Michigan Investment Risks 4
MUNICIPAL SECURITIES INCOME TRUST MANAGEMENT 5
Fund Ownership 8
Trustees Compensation 9
Trustee Liability 9
INVESTMENT ADVISORY SERVICES 9
Adviser to the Fund 9
Advisory Fees 10
OTHER SERVICES 10
Fund Administration 10
Custodian and Portfolio Accountant 10
Transfer Agent 10
Independent Auditors 10
SHAREHOLDER SERVICES AGREEMENT 10
BROKERAGE TRANSACTIONS 10
PURCHASING SHARES 11
Quantity Discounts and Accumulated Purchases 11
Concurrent Purchases 11
Letter of Intent 11
Reinvestment Privilege 12
Conversion to Federal Funds 12
Purchases by Sales Representatives,
Fund Directors, and Employees 12 DETERMINING NET ASSET VALUE 12 Valuing
Municipal Bonds 12 Use of Amortized Cost 12 REDEEMING SHARES 13 Redemption in
Kind 13 Massachusetts Partnership Law 13 TAX STATUS 13 The Fund's Tax Status 13
Shareholders' Tax Status 14 TOTAL RETURN 14 YIELD 14 TAX-EQUIVALENT YIELD 14
Tax-Equivalency Table 15 PERFORMANCE COMPARISONS 15 Economic and Market
Information 16 ABOUT FEDERATED INVESTORS, INC. 16 Mutual Fund Market 17
Institutional Clients 17 Bank Marketing 17 Broker/Dealers and Bank
Broker/Dealer Subsidiaries 17
APPENDIX 18
GENERAL INFORMATION ABOUT THE FUND
The Fund is a portfolio in Municipal Securities Income Trust. The Trust was
established as a Massachusetts business trust under a Declaration of Trust dated
August 6, 1990. On June 1, 1994, Michigan Municipal Income Fund changed its name
to Michigan Intermediate Municipal Trust. On February 26, 1996 (effective date
March 31, 1996), the Trustees approved changing the name of the Fund from
Michigan Intermediate Municipal Trust to Federated Michigan Intermediate
Municipal Trust. The shares of the Fund are hereafter referred to as "Shares."
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide current income exempt from federal
regular income tax and the personal income taxes imposed by the state of
Michigan and Michigan municipalities. The investment objective cannot be changed
without approval of shareholders.
ACCEPTABLE INVESTMENTS
The Fund invests primarily in a portfolio of municipal securities, which are
exempt from federal regular income tax and Michigan state and local tax
("Michigan Municipal Securities"). These securities include those issued by or
on behalf of the state of Michigan and Michigan municipalities, and those issued
by states, territories, and possessions of the United States which are exempt
from federal regular income tax and the personal income tax imposed by the state
of Michigan and Michigan municipalities.
CHARACTERISTICS
The Michigan Municipal Securities in which the Fund invests have the
characteristics set forth in the prospectus. If a rated bond loses its rating or
has its rating reduced after the Fund has purchased it, the Fund is not required
to drop the bond from the portfolio, but will consider doing so. If ratings made
by Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's ("S&P"), or
Fitch IBCA, Inc. ("Fitch") change because of changes in those organizations or
in their rating systems, the Fund will try to use comparable ratings as
standards in accordance with the investment policies described in the Fund's
prospectus.
TYPES OF ACCEPTABLE INVESTMENTS
Examples of Michigan Municipal Securities are:
* municipal notes and municipal commercial paper;
* serial bonds sold with differing maturity dates;
* tax anticipation notes sold to finance working capital needs of
municipalities;
* bond anticipation notes sold prior to the issuance of longer-term bonds;
* pre-refunded municipal bonds; and
* general obligation bonds secured by a municipality pledge of taxation.
PARTICIPATION INTERESTS
The financial institutions from which the Fund purchases participation interests
frequently provide or secure from another financial institution irrevocable
letters of credit or guarantees and give the Fund the right to demand payment of
the principal amounts of the participation interests plus accrued interest on
short notice (usually within seven days).
VARIABLE RATE MUNICIPAL SECURITIES
Variable interest rates generally reduce changes in the market value of
municipal securities from their original purchase prices. Accordingly, as
interest rates decrease or increase, the potential for capital appreciation or
depreciation is less for variable rate municipal securities than for fixed
income obligations. The terms of these variable rate demand instruments require
payment of principal and accrued interest from the issuer of the municipal
obligations, the issuer of the participation interests, or a guarantor of either
issuer.
MUNICIPAL LEASES
The Fund may purchase municipal securities in the form of participation
interests which represent undivided proportional interests in lease payments by
a governmental or non-profit entity. The lease payments and other rights under
the lease provide for and secure the payments on the certificates. Lease
obligations may be limited by municipal charter or the nature of the
appropriation for the lease. In particular, lease obligations may be subject to
periodic appropriation. If the entity does not appropriate funds for future
lease payments, the entity cannot be compelled to make such payments.
Furthermore, a lease may provide that the certificate trustee cannot accelerate
lease obligations upon default. The trustee would only be able to enforce lease
payments as they became due. In the event of default or failure of
appropriation, it is unlikely that the trustee would be able to obtain an
acceptable substitute source of payment.
In determining the liquidity of municipal lease securities, the investment
adviser, under the authority delegated by the Trustees, will base its
determination on the following factors:
* whether the lease can be terminated by the lessee;
* the potential recovery, if any, from a sale of the leased property upon
termination of the lease;
* the lessee's general credit strength (e.g., its debt, administrative,
economic, and financial characteristics and prospects);
* the likelihood that the lessee will discontinue appropriating funding for the
leased property because the property is no longer deemed essential to its
operations (e.g., the potential for an "event of non-appropriation");
* any credit enhancement or legal recourse provided upon an event of non-
appropriation or other termination of the lease.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an advantageous
price or yield for the Fund. 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.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest in the securities of affiliated money market funds as an
efficient means of managing the Fund's uninvested cash.
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 Michigan municipal bonds are not
available, the Fund may invest a portion of its assets in cash. Any portion of
the Fund's assets maintained in cash will reduce the amount of assets in
Michigan municipal bonds and thereby reduce the Fund's yield.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements. This transaction is
similar to borrowing cash. In a reverse repurchase agreement the Fund transfers
possession of a portfolio instrument to another person, such as a financial
institution, broker, or dealer, in return for a percentage of the instrument's
market value in cash, and agrees that on a stipulated date in the future the
Fund will repurchase the portfolio instrument by remitting the original
consideration plus interest at an agreed upon rate. The use of reverse
repurchase agreements may enable the Fund to avoid selling portfolio instruments
at a time when a sale may be deemed to be disadvantageous, but the ability to
enter into reverse repurchase agreements does not ensure that the Fund will be
able to avoid selling portfolio instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. These securities are marked to market daily
and maintained until the transaction is settled.
PORTFOLIO TURNOVER
The Fund may trade or dispose of portfolio securities as considered necessary to
meet its investment objective. It is not anticipated that the portfolio trading
engaged in by the Fund will result in its annual rate of portfolio turnover
exceeding 100%. For the fiscal years ended August 31, 1998 and 1997, the Fund's
portfolio turnover rates were 15% and 12%, respectively.
INVESTMENT LIMITATIONS
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities on margin
but may obtain such short-term credits as may be necessary for clearance of
purchases and sales of securities.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities except that the Fund may borrow money
and engage in reverse repurchase agreements in amounts up to one-third of the
value of its total assets, including the amounts borrowed.
The Fund will not borrow money or engage in reverse repurchase agreements for
investment leverage, but rather as a temporary, extraordinary, or emergency
measure or to facilitate management of the portfolio by enabling the Fund to
meet redemption requests when the liquidation of portfolio securities is deemed
to be inconvenient or disadvantageous. The Fund will not purchase any securities
while borrowings in excess of 5% of its total assets are outstanding. During the
period any reverse repurchase agreements are outstanding, but only to the extent
necessary to assure completion of the reverse repurchase agreements, the Fund
will restrict the purchase of portfolio instruments to money market instruments
maturing on or before the expiration date of the reverse repurchase agreements.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate its assets except to secure
permitted borrowings. In those cases, it may mortgage, pledge, or hypothecate
assets having a market value not exceeding 10% of the value of its total assets
at the time of the pledge.
UNDERWRITING
The Fund will not underwrite any issue of securities except as it may be deemed
to be an underwriter under the Securities Act of 1933 in connection with the
sale of securities in accordance with its investment objective, policies, and
limitations.
INVESTING IN REAL ESTATE
The Fund will not buy or sell real estate, although it may invest in municipal
bonds secured by real estate or interests in real estate.
INVESTING IN COMMODITIES
The Fund will not buy or sell commodities, commodity contracts, or commodities
futures contracts.
INVESTING IN RESTRICTED SECURITIES
The Fund will not invest more than 10% of the value of its net assets in
securities subject to restrictions on resale under the Securities Act of 1933.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets except that it may acquire publicly or
non-publicly issued municipal bonds or temporary investments or enter into
repurchase agreements in accordance with its investment objective, policies, and
limitations or its Declaration of Trust.
DEALING IN PUTS AND CALLS
The Fund will not buy or sell puts, calls, straddles, spreads, or any
combination of these.
CONCENTRATION OF INVESTMENTS
The Fund will not purchase securities if, as a result of such purchase, 25% or
more of the value of its total assets would be invested in any one industry or
in industrial development bonds or other securities, the interest upon which is
paid from revenues of similar types of projects. However, the Fund may invest as
temporary investments more than 25% of the value of its assets in cash or cash
items, securities issued or guaranteed by the U.S. government, its agencies, or
instrumentalities, or instruments secured by these money market instruments,
such as repurchase agreements.
The above investment limitations cannot be changed without shareholder approval.
The following limitation, 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 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.
The Fund does not expect to borrow money or pledge securities or invest in
repurchase agreements in excess of 5% of the value of its net assets during the
coming fiscal year.
For purposes of its policies and limitations, the Fund considers certificates of
deposit and demand and time deposits issued by a U.S. branch of a domestic bank
or savings 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.
MICHIGAN INVESTMENT RISKS
Michigan continues to benefit from the prolonged national economic expansion.
Durable goods orders have remained strong and the auto industry has restructured
and reinvested to improve its competitive position. In addition, the state
continues to diversify its economic base away from manufacturing to trade and
services. All of these factors have stabilized Michigan's traditionally cyclical
economy resulting in historically low unemployment figures and strong growth in
per capita income.
Michigan's fiscal position has been prudently managed. The state has
demonstrated an ability to achieve balanced budgets, high reserves, and low debt
levels. Spending controls and higher than budgeted revenues have resulted in a
budget stabilization fund of greater than $1 billion. These reserve funds are at
their highest level in the state's history. The enduring effectiveness of state
financial management will ultimately be tested by the next economic downturn.
The state's fiscal and economic health are reflected in its current credit
ratings. Michigan is rated Aa2 and AA by Moody's and S&P, respectively.
MUNICIPAL SECURITIES INCOME TRUST MANAGEMENT
Officers and Trustees are listed with their addresses, birthdates, present
positions with Municipal Securities Income Trust, and principal occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924
Chairman and Trustee
Chief Executive Officer and Director or Trustee of the
Funds; Chairman and Director, Federated Investors, Inc.;
Chairman and Trustee, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director,
Federated Research Corp. and Federated Global Research
Corp.; Chairman, Passport Research, Ltd.; Mr. Donahue is the
father of J. Christopher Donahue, Executive Vice President
and Trustee of the Trust.
Thomas G. Bigley
15 Old Timber Trail
Pittsburgh, PA
Birthdate: February 3, 1934
Trustee
Director or Trustee of the Funds; Director, Member of Executive Committee,
Children's Hospital of Pittsburgh; formerly, Senior Partner, Ernst & Young LLP;
Director, MED 3000 Group, Inc.; Director, Member of Executive Committee,
University of Pittsburgh.
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
Director or Trustee of the Funds; 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.
Nicholas P. Constantakis
175 Woodshire Drive
Pittsburgh, PA
Birthdate: September 3, 1939
Trustee
Director or Trustee of the Funds; formerly, Partner,
Anderson Worldwide SC.
William J. Copeland
One PNC Plaza--23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Trustee
Director or Trustee of the Funds; 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, United Refinery;
Chairman, Pittsburgh Foundation; Director, Forbes Fund;
Chairman, Pittsburgh Civic Light Opera.
J. Christopher Donahue*
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
Executive Vice President and Trustee
President or Executive Vice President of the Funds;
President and Director, Federated Investors, Inc.; President
and Trustee, 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; Director or
Trustee of some of the Funds. Mr. Donahue is the son of John
F. Donahue, Chairman and Trustee of the Trust.
James E. Dowd, Esq.
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Trustee
Director or Trustee of the Funds; Attorney-at-law; Director,
The Emerging Germany Fund, Inc.; formerly, President, Boston
Stock Exchange, Inc.; Regional Administrator, United States
Securities and Exchange Commission.
Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Trustee
Director or Trustee of the Funds; Professor of Medicine, University of
Pittsburgh; Medical Director, University of Pittsburgh Medical Center--Downtown;
Hematologist, Oncologist, and Internist, Presbyterian and Montefiore Hospitals;
formerly, Member, National Board of Trustees, Leukemia Society of America.
Edward L. Flaherty, Jr., Esq.@
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: June 18, 1924
Trustee
Director or Trustee of the Funds; Attorney of Counsel, Miller, Ament, Henny &
Kochuba; Director, Eat'N Park Restaurants, Inc.; formerly, Counsel, Horizon
Financial, F.A., Western Region; Partner, Meyer and Flaherty.
Peter E. Madden
One Royal Palm Way
100 Royal Palm Way
Palm Beach, FL
Birthdate: March 16, 1942
Trustee
Director or Trustee of the Funds; formerly, Representative, Commonwealth of
Massachusetts General Court; President, State Street Bank and Trust Company and
State Street Corporation; Director, VISA USA and VISA International; Chairman
and Director, Massachusetts Banker Association; Director, Depository Trust
Corporation.
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Trustee
Director or Trustee of the Funds; President, Law Professor, Duquesne University;
Consulting Partner, Mollica & Murray; formerly, Dean and Professor of Law,
University of Pittsburgh School of Law; Dean and Professor of Law, Villanova
University School of Law.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Trustee
Director or Trustee of the Funds; President, World Society of Ekistics, Athens;
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; formerly, Professor, United States
Military Academy; Professor, United States Air Force Academy.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Trustee
Director or Trustee of the Funds; Public Relations/ Marketing/Conference
Planning; formerly, National Spokesperson, Aluminum Company of America; business
owner.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
President
President or Vice President of some of the Funds; Director or Trustee of some of
the Funds; Executive Vice President, Federated Investors, Inc.; Chairman and
Director, Federated Securities Corp.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
Executive Vice President
Trustee or Director of some of the Funds; President, Executive Vice President,
and Treasurer of some of the Funds; Vice Chairman, Federated Investors, Inc.;
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.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Executive Vice President, Secretary, and Treasurer Executive Vice President
and Secretary of the Funds; Treasurer of some of the Funds; Executive Vice
President, Secretary, and Director, Federated Investors, Inc.; 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.
*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: Automated Government Money Trust; Blanchard Funds;
Blanchard Precious Metals Fund, Inc.; Cash Trust Series II; Cash Trust Series,
Inc.; CCB Funds; 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 Core Trust; 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.; 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; Regions Funds; RIGGS 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;
WCT Funds; and World Investment Series, Inc.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the outstanding Shares.
As of October 9, 1998, the following shareholders of record owned 5% or more of
the outstanding Shares of the Fund: Enbanco, Traverse City, MI, owned
approximately 2,567,719 Shares (36.27%); First Mar & Co., Marquette, Michigan,
owned approximately 928,740 Shares (13.11%); Shoreline Co., South Haven,
Michigan, owned approximately 547,123 Shares (7.72%); and Charles Schwab & Co.,
Inc., San Francisco, California, owned approximately 500,124 Shares (7.06%).
TRUSTEE COMPENSATION
<TABLE>
<CAPTION>
NAME, AGGREGATE
POSITION WITH COMPENSATION TOTAL COMPENSATION PAID
TRUST FROM TRUST*# FROM FUND COMPLEX+
<S> <C> <S>
John F. Donahue
Trustee and Chairman $0 for the Trust and
56 other investment companies in the Fund Complex
Thomas G. Bigley
Trustee $251.69 $111,222 for the Trust and
56 other investment companies in the Fund Complex
John T. Conroy, Jr.
Trustee $276.91 $122,362 for the Trust and
56 other investment companies in the Fund Complex
Nicholas P. Constantakis+
Trustee $189.35 $0 for the Trust and
34 other investment companies in the Fund Complex
William J. Copeland
Trustee $276.91 $122,362 for the Trust and
56 other investment companies in the Fund Complex
J. Christopher Donahue
Trustee and Executive Vice Presi $0 $0 for the Trust and
18 other investment companies in the Fund Complex
James E. Dowd, Esq.
Trustee $276.91 $122,362 for the Trust and
56 other investment companies in the Fund Complex
Lawrence D. Ellis, M.D.
Trustee $251.69 $111,222 for the Trust and
56 other investment companies in the Fund Complex
Edward L. Flaherty, Jr., Esq.
Trustee $276.91 $122,362 for the Trust and
56 other investment companies in the Fund Complex
Peter E. Madden
Trustee $251.69 $111,222 for the Trust and
56 other investment companies in the Fund Complex
John E. Murray, Jr., J.D., S.J.D.
Trustee $251.69 $111,222 for the Trust and
56 other investment companies in the Fund Complex
Wesley W. Posvar
Trustee $251.69 $111,222 for the Trust and
56 other investment companies in the Fund Complex
Marjorie P. Smuts
Trustee $251.69 $111,222 for the Trust and
56 other investment companies in the Fund Complex
</TABLE>
* Information is furnished for the fiscal year ended August 31, 1998.
# The aggregate compensation is provided for the Trust which is comprised of
five portfolios.
+ The information is provided for the last calendar year.
++ Mr. Constantakis became a member of the Board of trustees on February 23,
1998. He did not earn any fees for serving the Fund Complex since these fees
reported as of the end of 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, Inc. 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, 1998,
1997, and 1996, the Adviser earned advisory fees of $287,452, $257,217, and
$248,517, respectively, of which $264,185, $257,217, and $248,517, respectively,
were voluntarily waived.
OTHER SERVICES
FUND ADMINISTRATION
Federated Services Company, a subsidiary of Federated Investors, Inc., 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, Federated Services Company and
Federated Administrative Services may hereinafter collectively be referred to as
the "Administrators." For the fiscal years ended August 31, 1998, 1997, and
1996, the Administrators 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.
SHAREHOLDER SERVICES AGREEMENT
This arrangement permits the payment of fees to Federated Shareholder Services
and financial institutions to cause services to be provided which are necessary
for the maintenance of shareholder accounts and to encourage personal services
to shareholders by a representative who has knowledge of the shareholder's
particular circumstances and goals. These activities and services may include,
but are not limited to, providing office space, equipment, telephone facilities,
and various clerical, supervisory, computer, and other personnel as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries; and assisting
clients in changing dividend options, account designations, and addresses. By
adopting the Shareholder Services Agreement, the Trustees expect that the Fund
will benefit by: (1) providing personal services to shareholders; (2) investing
shareholder assets with a minimum of delay and administrative detail; (3)
enhancing shareholder record-keeping systems; and (4) responding promptly to
shareholder's requests and inquiries concerning their accounts. For the fiscal
year ended August 31, 1998, the Fund paid shareholder services fees in the
amount of $179,636, of which $129,338 were voluntarily waived.
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. They determine in good faith that commissions
charged by such persons are reasonable in relationship to the value of the
brokerage and research services provided. During the fiscal years ended August
31, 1998, 1997, and 1996, 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 NAV plus a sales charge on days the New York Stock Exchange is open for
business. The procedure for purchasing Shares is explained in the prospectus
under "Investing in the Fund" and "Purchasing Shares." For further information
on any of the programs listed below, please contact your financial intermediary
or Federated Securities Corp.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES
As described in the prospectus, larger purchases of the same Share class reduce
or eliminate the sales charge paid. For example, the Fund will combine all Class
A Share purchases 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 the same Share class is made, the Fund will
consider the previous purchases still invested in the Fund. For example, if a
shareholder already owns Shares having a current value at the public offering
price of $40,000 and he purchases $10,000 more at the current public offering
price, the sales charge on the additional purchase according to the schedule now
in effect would be 2.50%, not 3.00%.
To receive the sales charge reduction, Federated Securities Corp. must be
notified by the shareholder in writing or by his financial intermediary at the
time the purchase is made that 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
Shareholders have the privilege of combining concurrent purchases of the same
Share class of two or more funds in the Federated Complex in calculating the
applicable sales charge.
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
A shareholder can sign a letter of intent committing to purchase a certain
amount of the same Share class within a 13-month period in order to combine such
purchases in calculating the applicable sales charge. The Fund's custodian will
hold Shares in escrow equal to the maximum applicable sales charge. If the
shareholder completes the commitment, the escrowed Shares will be released to
their account. If the commitment is not completed within 13 months, the
custodian will redeem an appropriate number of escrowed Shares to pay for the
applicable sales charge.
While this letter of intent will not obligate the shareholder to purchase
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
The reinvestment privilege is available for Shares of the Fund within the same
Share class.
Shareholders who redeem from the Fund may reinvest the redemption proceeds back
into the same Share class at the next determined net asset value without any
sales charge. The original Shares must have been subject to a sales charge and
the reinvestment must be within 120 days.
In addition, if 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, if otherwise applicable.
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 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 DIRECTORS, AND EMPLOYEES
The following individuals and their immediate family members may buy Shares at
net asset value without a sales charge:
* Directors, employees, and sales representatives of the Fund, Federated
Advisers, and Federated Securities Corp. and its affiliates;
* Federated Life Members;
* any associated person of an investment dealer who has a sales agreement with
Federated Securities Corp.; and
* 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 NAV per Share fluctuates and is based on the market value of all
securities and other assets of the Fund.
NAV is not determined on (i) days on which there are not sufficient changes in
the value of the Fund's portfolio securities that its NAV 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, Jr. 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 value municipal bonds. The
independent pricing service takes into consideration yield, stability, risk,
quality, coupon rate, maturity, type of issue, trading characteristics, special
circumstances of a security or trading market, and any other factors or market
data it considers relevant in determining valuations for normal institutional
size trading units of debt securities, and does not rely exclusively on quoted
prices.
USE OF AMORTIZED COST
The Trustees have decided that the fair value of debt securities authorized to
be purchased by the Fund with remaining maturities of 60 days or less at the
time of purchase, shall be their amortized cost value, unless the particular
circumstances of the security indicate otherwise. Under this method, portfolio
instruments and assets are valued at the acquisition cost as adjusted for
amortization of premium or accumulation of discount rather than at current
market value. The Executive Committee continually assesses this method of
valuation and recommends changes where necessary to assure that the Fund's
portfolio instruments are valued at their fair value as determined in good faith
by the Trustees.
REDEEMING SHARES
The Fund redeems Shares at the next computed NAV after the Fund receives the
redemption request. Redemption procedures are explained in the prospectus 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
Although the Fund intends to redeem Shares in cash, it reserves the right under
certain circumstances to pay the redemption price in whole or in part by a
distribution of securities from the Fund's portfolio.
Redemption in kind will be made in conformity with applicable SEC rules, taking
such securities at the same value employed in determining net asset value and
selecting the securities in a manner the Directors determine to be fair and
equitable.
The Corporation has elected to be governed by Rule 18f-1 of the Investment
Company Act of 1940 under which the Corporation is obligated to redeem Shares
for any shareholder in cash up to the lesser of $250,000 or 1% of the Fund's net
asset value during any 90-day period.
Redemption in kind is not as liquid as a cash redemption. If redemption is made
in kind, shareholders receiving their securities and selling them before their
maturity could receive less than the redemption value of their securities and
could incur certain transaction costs.
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:
* derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;
* invest in securities within certain statutory limits; and
* distribute to its shareholders at least 90% of its net income earned during
the year.
SHAREHOLDERS' TAX STATUS
CAPITAL GAINS
Capital gains or losses may be realized by the Fund on the sale of portfolio
securities and as a result of discounts from par value on securities held to
maturity. Sales would generally be made because of:
* the availability of higher relative yields;
* differentials in market values;
* new investment opportunities;
* changes in creditworthiness of an issuer; or
* an attempt to preserve gains or limit losses.Distribution of long-term capital
gains are taxed as such, whether they are taken in cash or reinvested, and
regardless of the length of time the shareholder has owned the Shares. Any loss
by a shareholder on Fund Shares held for less than six months and sold after a
capital gains distribution will be treated as a long-term capital loss to the
extent of the capital gains distribution.
TOTAL RETURN
The Fund's average annual total returns for the one-year and five-year periods
ended August 31, 1998, and for the period from September 18, 1991 (date of
initial public investment) to August 31, 1998, were 4.01%, 4.58%, and 6.33%,
respectively.
The average annual total return for Shares of the Fund is the average compounded
rate of return for a given period of time that would equate a $1,000 initial
investment to the ending redeemable value of that investment. The ending
redeemable value is computed by multiplying the number of Shares owned at the
end of the period by the offering price per Share at the end of the period. The
number of Shares owned at the end of the period is based on the number of Shares
purchased at the beginning of the period with $1,000 less any applicable sales
charge, adjusted over the period by any additional Shares, assuming a
reinvestment of all dividends and distributions. Any applicable contingent
deferred sales charge is deducted from the ending value of the investment based
on the lesser of the original purchase price or the offering price of Shares
redeemed.
YIELD
The Fund's yield for the thirty-day period ended August 31, 1998, was 3.96%.
The yield for Shares of the Fund is determined by dividing the net investment
income per Share (as defined by the Securities and Exchange Commission) earned
by the Fund over a thirty-day period by the maximum offering price per Share of
Shares 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 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 the Fund,
performance will be reduced for those shareholders paying those fees.
TAX-EQUIVALENT YIELD
The Fund's tax-equivalent yield for the thirty-day period ended August 31, 1998,
was 5.50%.
The tax-equivalent yield of the Fund is calculated similarly to the yield, but
is adjusted to reflect the taxable yield that the Fund would have had to earn to
equal its actual yield, assuming a 28% tax rate (the maximum effective federal
rate for individuals) and assuming that income is 100% tax-exempt.
TAX-EQUIVALENCY TABLE
The Fund may also use a tax-equivalency table in advertising and sales
literature. The interest earned by the municipal obligations in the Fund's
portfolio generally remains free from federal regular income tax* and the income
taxes imposed by the state of Michigan. As the table below indicates, a
"tax-free" investment is an attractive choice for investors, particularly in
times of narrow spreads between "tax-free" and taxable yields.
<TABLE>
<CAPTION>
TAXABLE YIELD EQUIVALENT FOR 1998
STATE OF MICHIGAN
COMBINED FEDERAL AND STATE INCOME TAX BRACKET:
<S> <C> <C> <C> <C> <C>
19.40% 32.40% 35.40% 40.40% 44.00%
JOINT $1- $42,351 $102,301 $155,951 over
RETURN 42,350 102,300 155,950 278,450 $278,450
SINGLE $1- $25,351- $61,401 $128,101 over
RETURN 25,350 61,400 128,100 278,450 $278,450
TAX-EXEMPT
YIELD TAXABLE YIELD EQUIVALENT
1.50% 1.86% 2.22% 2.32% 2.52% 2.68%
2.00% 2.48% 2.96% 3.10% 3.36% 3.57%
2.50% 3.10% 3.70% 3.87% 4.19% 4.46%
3.00% 3.72% 4.44% 4.64% 5.03% 5.36%
3.50% 4.34% 5.18% 5.42% 5.87% 6.25%
4.00% 4.96% 5.92% 6.19% 6.71% 7.14%
4.50% 5.58% 6.66% 6.97% 7.55% 8.04%
5.00% 6.20% 7.40% 7.74% 8.39% 8.93%
5.50% 6.82% 8.14% 8.51% 9.23% 9.82%
6.00% 7.44% 8.88% 9.29% 10.07% 10.71%
</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 Fund Shares.
*Some portion of the Fund's income may be subject to the federal alternative
minimum tax and state and local income taxes.
PERFORMANCE COMPARISONS
The Fund's performance depends upon such variables as:
* portfolio quality;
* average portfolio maturity;
* type of instruments in which the portfolio is invested;
* changes in interest rates and market value of portfolio securities;
* changes in the Fund's expenses; and
* various other factors.The Fund's performance fluctuates on a daily basis
largely because net earnings and offering price per Share fluctuate daily. Both
net earnings and offering price per Share are factors in the computation of
yield and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute offering price. The financial
publications and/or indices which the Fund uses in advertising may include:
* LEHMAN BROTHERS SEVEN YEAR STATE GENERAL OBLIGATION BOND INDEX is an index of
general obligation bonds rated A or better with 6-8 years to maturity.
* LIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes the
reinvestment of all capital gains distributions and income dividends and takes
into account any change in offering price over a specific period of time. From
time to time, the Fund will quote its Lipper ranking in the "general municipal
bond funds" category in advertising and sales literature.
* MORNINGSTAR, INC. an independent rating service, is the publisher of the
bi-weekly MUTUAL FUND VALUES. MUTUAL FUND VALUES rates more than 1,000 NASDAQ
listed mutual funds of all types, according to their risk-adjusted returns. The
maximum rating is five stars, and ratings are effective for two
weeks.Advertisements and other sales literature for the Fund may quote total
returns which are calculated on non-standardized base periods. The total returns
represent the historic change in the value of an investment in Shares based on
monthly reinvestment of dividends over a specific period of time.
Advertisements may quote performance information which does not reflect the
effect of the sales charge.
Advertising and other promotional literature may include charts, graphs, and
other illustrations using the Fund's returns, or returns in general, that
demonstrate basic investment concepts such as tax-deferred compounding,
dollar-cost averaging, and systematic investment. In addition, the Fund can
compare its performance, or performance for the types of securities in which it
invests, to a variety of other investments, such as bank savings accounts,
certificates of deposit, and Treasury bills.
ECONOMIC AND MARKET INFORMATION
Advertising and sales literature for the Fund may include discussions of
economic, financial, and political developments and their effect on the
securities market. Such discussions may take the form of commentary on these
developments by Fund portfolio managers and their views and analysis on how such
developments could affect the Funds. In addition, advertising and sales
literature may quote statistics and give general information about the mutual
fund industry, including the growth of the industry, from sources such as the
Investment Company Institute.
ABOUT FEDERATED INVESTORS, INC.
Federated Investors, Inc. 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, 1997, Federated Investors, Inc.
managed 11 bond funds with approximately $2.1 billion in assets and 22 money
market funds with approximately $10.9 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.
The Chief Investment Officers responsible for oversight of the various
sectors within Federated Investors, Inc. are: U.S. equity and high yield-
J. Thomas Madden; U.S. fixed income-William D. Dawson, III; and global
equities and fixed income-Henry A. Frantzen. The Chief Investment Officers
are Executive Vice Presidents of the Federated advisory companies.
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 $4.4 trillion to the more than 6,700 funds available.*
Federated Investors, Inc.,through its subsidiaries, distributes mutual funds for
a variety of investment applications. Specific markets include:
INSTITUTIONAL CLIENTS
Federated Investors, Inc. meets the needs of approximately 900 institutional
clients nationwide by managing and servicing separate accounts and mutual funds
for a variety of applications, including defined benefit and defined
contribution programs, cash management, and asset/liability management.
Institutional clients include corporations, pension funds, tax-exempt entities,
foundations/endowments, insurance companies, and investment and financial
advisors. The marketing effort to theses institutional clients is headed by John
B. Fisher, President, Institutional Sales Division.
BANK MARKETING
Other institutional clients include close relationships with more than 1,600
banks and trust organizations. Virtually all of the trust divisions of the top
100 bank holding companies use Federated funds in their clients' portfolios. The
marketing effort to trust clients is headed by 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, Federated Securities Corp.
*Source: Investment Company Institute
APPENDIX
STANDARD & POOR'S RATINGS SERVICES MUNICIPAL BOND RATINGS
AAA-Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA-Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A-Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB-Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
NR-Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
PLUS (+) OR MINUS (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
MOODY'S INVESTORS SERVICE, INC. MUNICIPAL BOND RATINGS
AAA-Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA-Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best because margins of protection may not
be as large as in Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa securities.
A-Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
BAA-Bonds which are rated Baa are considered as medium grade obligations, (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
NR-Not rated by Moody's.
Moody's applies numerical modifiers, 1, 2, and 3 in each generic rating
classification from Aa through B in its corporate or municipal bond rating
system. The modifier 1 indicates that the security ranks in the higher end of
its generic rating category; the modifier 2 indicates a mid-range ranking; and
the modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.
FITCH INVESTORS SERVICE, L.P. LONG-TERM DEBT RATINGS
AAA-Bonds considered to be investment grade and of very high quality. The
obligor has an exceptionally strong ability to pay interest and repay principal,
which is unlikely to be affected by reasonably foreseeable events.
AA-Bonds considered to be investment grade and of very high quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AA
categories are not significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated F-1+.
A-Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB-Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore, impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
NR-NR indicates that Fitch does not rate the specific issue.
PLUS (+) OR MINUS (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the AAA category.
STANDARD & POOR'S RATINGS 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
A-1-This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus (+) sign designation.
A-2-Capacity for timely payment on issues with this designation is satisfactory.
However, the relative degree of safety is not as high for issues designated A-1.
MOODY'S INVESTORS SERVICE, INC. COMMERCIAL PAPER RATINGS
P-1-Issuers rated PRIME-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations.
PRIME-1 repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well established industries; high
rates of return on funds employed; conservative capitalization structures with
moderate reliance on debt and ample asset protection; broad margins in earning
coverage of fixed financial charges and high internal cash generation; and well
established access to a range of financial markets and assured sources of
alternate liquidity.
P-2-Issuers rated PRIME-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Federated California Municipal Income Fund
(A Portfolio of Municipal Securities Income Trust)
Class A 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 October 31,
1998, 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 October 31, 1998
TABLE OF CONTENTS
Summary of Fund Expenses 1
Financial Highlights--Class A Shares 2
Financial Highlights--Class B Shares 3
General Information 4
Calling the Fund 4
Year 2000 Statement 4
Investment Information 4
Investment Objective 4
Investment Policies 4
California Municipal Securities 7
Investment Risks 7
Reducing Risks of Lower-Rated Securities 8
Non-Diversification 8
Investment Limitations 8
Expenses of the Fund 8
Net Asset Value 9
Investing in the Fund 9
Purchasing Shares 10
Purchasing Shares Through a Financial Intermediary 10
Purchasing Shares by Wire 10
Purchasing Shares by Check 10
Systematic Investment Program 10
Class A Shares 10
Class B Shares 11
Redeeming and Exchanging Shares 11
Redeeming or Exchanging Shares Through
a Financial Intermediary 12
Redeeming or Exchanging Shares by Telephone 12
Redeeming or Exchanging Shares by Mail 12
Requirements for Redemption 12
Requirements for Exchange 12
Systematic Withdrawal Program 13
Systematic Withdrawal Program ("SWP")
on Class B Shares 13
Contingent Deferred Sales Charge 13
Account and Share Information 14
Confirmations and Account Statements 14
Dividends and Distributions 14
Accounts with Low Balances 14
Trust Information 14
Management of the Trust 14
Distribution of Shares 15
Administration of the Fund 16
Shareholder Information 16
Tax Information 16
Federal Income Tax 16
California Income Taxes 17
State and Local Taxes 17
Performance Information 17
Appendix 18
Financial Statements 21
Independent Auditors' Report 32
SUMMARY OF FUND EXPENSES
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
CLASS A CLASS B
<S> <C> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of
offering price) 4.50% None
Maximum Sales Charge Imposed on Reinvested Dividends (as a
percentage of offering price) None None
Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable)(1) None 5.50%
Redemption Fee (as a percentage of amount redeemed, if applicable) None None
Exchange Fee None None
<CAPTION>
ANNUAL OPERATING EXPENSES
(As a percentage of projected average net assets)*
<S> <C> <C> <C> <C>
Management Fee (after waiver)(2) 0.00% 0.00%
12b-1 Fee (3) 0.00% 0.75%
Total Other Expenses (after reimbursement)(4) 0.69% 0.65%
Shareholder Services Fee 0.25% 0.25%
Total Operating Expenses (after waiver/reimbursement)(5)(6) 0.69% 1.40%
</TABLE>
* Total operating expenses are estimated based on average expenses expected to
be incurred during the period ending August 31, 1999. During the course of this
period, expenses may be more or less than the average amount shown.
(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 management fee has been reduced to reflect the voluntary waiver of the
management fee. The adviser can terminate this voluntary waiver at any time at
its sole discretion. The maximum management fee is 0.40%
(3) The Class A Shares have no present intention of paying the 12b-1 fee during
fiscal year ending August 31, 1999. If the Class A Shares were paying the 12b-1
fee, Class A Shares would be able to pay up to 0.25% of their average daily net
assets for the 12b-1 fee. "See Trust Information."
(4) Total other operating expenses has been reduced to reflect the voluntary
reimbursement of other operating expenses by the Adviser. The Adviser can
terminate this voluntary reimbursement of other operating expenses at any time
at its sole discretion. Total other operating expenses for Class A Shares and
Class B Shares were 0.69% and 0.65%, respectively, and would have been 2.11% and
2.56%, absent the voluntary reimbursement of certain other operating expenses.
(5) Total operating expenses for Class B Shares were 1.40% and would have been
2.56% absent the voluntary waiver and reimbursement of the management fee and
certain other operating expenses by the Adviser for the fiscal year ended August
31, 1998. Total operating expenses for Class B Shares are estimated to be 2.56%
absent the anticipated voluntary waiver of the management fee and the
anticipated voluntary reimbursement of certain other operating expenses by the
Adviser.
(6) Class B Shares convert to Class A Shares (which pay lower ongoing expenses)
approximately eight years after purchase.
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder of Class A and 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 CLASS A CLASS B
<S> <C> <C>
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end of each
time period and (3) payment of the maximum sales charge.
1 Year $ 52 $71
3 Years $ 66 $89
5 Years $ 82 N/A
10 Years $127 N/A
You would pay the following expenses on the same investment,
assuming no redemption.
1 Year $14
3 Years $44
</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 AND CLASS B SHARES FISCAL
YEARS ENDING AUGUST 31, 1999.
FINANCIAL HIGHLIGHTS--CLASS A SHARES
FEDERATED CALIFORNIA MUNICIPAL INCOME FUND
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 32.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1998 1997 1996 1995 1994 1993(A)
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.73 $10.27 $10.13 $10.01 $10.92 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.53 0.55 0.58 0.59 0.59 0.44
Net realized and unrealized gain (loss) on investments 0.40 0.46 0.14 0.12 (0.91) 0.92
Total from investment operations 0.93 1.01 0.72 0.71 (0.32) 1.36
LESS DISTRIBUTIONS
Distributions from net investment income (0.53) (0.55) (0.58) (0.59) (0.59) (0.44)
NET ASSET VALUE, END OF PERIOD $11.13 $10.73 $10.27 $10.13 $10.01 $10.92
TOTAL RETURN(B) 8.84% 10.11% 7.21% 7.48% (3.04%) 14.08%
RATIOS TO AVERAGE NET ASSETS
Expenses 0.69% 0.66% 0.60% 0.55% 0.25% 0.25%*
Net investment income 4.84% 5.25% 5.61% 6.04% 5.61% 5.58%*
Expense waiver/reimbursement(c) 1.42% 1.97% 2.38% 2.41% 2.86% 1.98%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $28,792 $22,000 $17,148 $14,400 $15,059 $11,513
Portfolio turnover 6.0% 29% 21% 63% 63% 0%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from December 2, 1992 (date of initial
public investment) to August 31, 1993.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
FINANCIAL HIGHLIGHTS--CLASS B SHARES
FEDERATED CALIFORNIA MUNICIPAL INCOME FUND
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 32.
<TABLE>
<CAPTION>
PERIOD ENDED
AUGUST 31,
1998(A)
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.87
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.33
Net realized and unrealized gain (loss) on investments 0.26
Total from investment operations 0.59
LESS DISTRIBUTIONS
Distributions from net investment income (0.33)
NET ASSET VALUE, END OF PERIOD $11.13
TOTAL RETURN(B) 5.53%
RATIOS TO AVERAGE NET ASSETS
Expenses 1.40%*
Net investment income 4.14%*
Expense waiver/reimbursement(c) 1.16%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $10,020
Portfolio turnover 6.0%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from December 1, 1997 (date of initial
public investment) to August 31, 1998.
(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)
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.
YEAR 2000 STATEMENT
Like other mutual funds and business organizations worldwide, the Fund's service
providers (among them, the adviser, distributor, administrator, and transfer
agent) must ensure that their computer systems are adjusted to properly process
and calculate date-related information from and after January 1, 2000. Many
software programs and, to a lesser extent, the computer hardware in use today
cannot distinguish the year 2000 from the year 1900. Such a design flaw could
have a negative impact in the handling of securities trades, pricing, and
accounting services. The Fund and its service providers are actively working on
necessary changes to computer systems to deal with the year 2000 issue and
believe that systems will be year 2000 compliant when required. Analysis
continues regarding the financial impact of instituting a year 2000 compliant
program on the Fund's operations.
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.
The Fund may invest up to but not including 35% of its net assets in lower
quality bonds. These bonds will usually offer higher yields than higher-rated
bonds, but involve greater investment risk at the time of issue. (See
"Investment Risks.")
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:
* obligations issued by or on behalf of the state of California, its
political subdivisions, or agencies;
* debt obligations of any state, territory, or possession of the United States,
including the District of Columbia, or any political subdivision of any of
these; and
* participation interests, as described below, in any of the above obligations,
the interest from which is, in the opinion of bond counsel for the issuers or in
the opinion of officers of the Fund and/or the investment adviser to the Fund,
exempt from both federal regular income tax and the personal income tax imposed
by the state of California and California municipalities ("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 both investment
grade and lower rated bonds. The Fund invests at least 65% of its assets in
bonds which have the same characteristics assigned by Moody's Investors Service,
Inc. ("Moody's"), Standard & Poor's ("S&P"), or Fitch IBCA, Inc. ("Fitch") to
bonds of investment grade quality (rated Aaa, Aa, A, or Baa by Moody's or AAA,
AA, A, or BBB by S&P or Fitch). The Fund will limit its purchases of bonds rated
Ba or below by Moody's, or BB or below by S&P or Fitch (commonly known as "junk
bonds") to up to but not including 35% of its net assets. Changes in economic or
other circumstances are more likely to lead to weakened capacity to make
principal and interest payments than higher rated bonds.
If a rated bond loses its rating or has its rating reduced after the Fund has
purchased it, the Fund is not required to drop the bond from the portfolio, but
will consider doing so. In certain cases, the Fund's adviser may choose bonds
which are unrated if it judges the bonds to have the same characteristics as
otherwise permissable bonds.
There is no limit to portfolio maturity. A description of the rating categories
is contained in the Appendix to this prospectus.
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.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest its assets in securities of other investment companies as an
efficient means of carrying out its investment policies. It should be noted that
investment companies incur certain expenses, such as management fees, and,
therefore, any investment by the Fund in shares of other investment companies
may be subject to such duplicate expenses.
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
The value of Shares will fluctuate. The amount of this fluctuation is dependent
upon the quality and maturity of the bonds in the Fund's portfolio as well as on
market conditions. 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.
The prices of longer term bonds fluctuate more widely in response to market
interest rate changes. Generally speaking, the lower quality, long-term bonds in
which the Fund invests have greater fluctuation in value than high quality,
shorter-term bonds.
Bond prices are interest rate sensitive, which means that their value varies
inversely with market interest rates. Thus, if market interest rates have
increased from the time a bond was purchased, the bond, if sold, might be sold
at a price less than its cost. Similarly, if market interest rates have declined
from the time a bond was purchased, the bond, if sold, might be sold at a price
greater than its cost. (In either instance, if the bond was held to maturity, no
loss or gain normally would be realized as a result of interim market
fluctuations.)
Prices of lower grade bonds also fluctuate with changes in the perceived quality
of the credit of their issuers. Consequently, Shares may not be suitable for
persons who cannot assume the somewhat greater risks of capital depreciation
associated with higher tax-exempt income yields. In addition, bonds rated "BBB"
and below by S&P or Fitch or "Baa" and below by Moody's have speculative
characteristics. Changes in economic conditions or other circumstances are more
likely to lead to weakened capacity to make principal and interest payments than
higher rated bonds.
A large portion of the Fund's portfolio may be invested in bonds whose interest
payments are from revenues of similar projects (such as housing or hospitals) or
where issuers share the same geographic location. As a result, the Fund may be
more susceptible to similar economic, political, or regulatory developments than
would a portfolio of bonds with a greater geographic and project variety. This
susceptibility may result in greater fluctuations in share price.
Many issuers of bonds which have characteristics of rated bonds choose not to
have their obligations rated. Unrated bonds may carry a greater risk and higher
yield than rated securities. Although unrated bonds are not necessarily of lower
quality, the market for them may not be as broad as that for rated bonds since
many investors rely solely on the major rating agencies for credit appraisal.
Further, the lower-rated or unrated bonds which the Fund may purchase are
frequently traded only in markets where the number of potential purchasers and
sellers is limited. This consideration may have the effect of limiting the
availability of such bonds for the Fund to purchase and may also have the effect
of limiting the ability of the Fund to sell such bonds at their fair market
value either to meet redemption requests or to respond to changes in the economy
or the financial markets. The Fund will not invest more than 15% of its total
assets in securities which are not readily marketable.
REDUCING RISKS OF LOWER-RATED SECURITIES
The Fund's investment adviser believes that the risks of investing in lower-
rated securities can be reduced. The professional portfolio management
techniques used by the Fund to attempt to reduce these risks include:
CREDIT RESEARCH
When purchasing bonds, rated or unrated, the Fund's investment adviser performs
its own credit analysis in addition to using recognized rating agencies. This
credit analysis considers the economic feasibility of revenue bond project
financing and general purpose borrowings, the financial condition of the issuer
or guarantor with respect to liquidity, cash flow, and ability to meet
anticipated debt service requirements, and political developments that may
affect credit quality.
DIVERSIFICATION
The Fund invests in securities of many different issuers to reduce portfolio
risks.
ECONOMIC ANALYSIS
The Fund's adviser also considers trends in the overall economy, in geographic
areas, in various industries, and in the financial markets.
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.
EXPENSES OF THE FUND
Holders of Shares pay their allocable portion of Trust and portfolio expenses.
The Trust expenses for which holders of Shares pay their allocable portion
include, but are not limited to: the cost of organizing the Trust and continuing
its existence; registering the Trust with federal and state securities
authorities; Trustees' fees; auditors' fees; the cost of meetings of Trustees;
legal fees of the Trust; association membership dues; and such non-recurring and
extraordinary items as may arise from time to time.
The portfolio expenses for which holders of Shares pay their allocable portion
include, but are not limited to: registering the portfolio and Shares of the
portfolio; investment advisory services; taxes and commissions; custodian fees;
insurance premiums; auditors' fees; and such non-recurring and extraordinary
items as may arise from time to time.
At present, the only expenses which are allocated specifically to Class A Shares
as a class are expenses under the Trust's Shareholder Services Plan, and the
only expenses which are allocated specifically to Class B Shares as a class are
expenses under the Trust's Shareholder Services Plan and Distribution Plan.
However, the Trustees reserve the right to allocate certain other expenses to
holders of Shares as they deem appropriate ("Class Expenses"). In any case,
Class Expenses would be limited to: distribution fees; transfer agent fees as
identified by the transfer agent as attributable to holders of Shares; fees
under the Trust's Shareholder Services Plan; printing and postage expenses
related to preparing and distributing materials such as shareholder reports,
prospectuses and proxies to current shareholders; registration fees paid to the
Securities and Exchange Commission and to state securities commissions; expenses
related to administrative personnel and services as required to support holders
of Shares; legal fees relating solely to Shares; and Trustees' fees incurred as
a result of issues relating solely to Shares.
NET ASSET VALUE
The Fund's net asset value ("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.
INVESTING IN THE FUND
This prospectus offers two classes of Shares each with the characteristics
described below.
CLASS A CLASS B
Minimum and Subsequent
Investment Amounts $1500/$100 $1500/$100
Minimum and Subsequent
Investment Amount
for Retirement Plans NA NA
Maximum Sales Charge 4.50%* None
Maximum Contingent Deferred
Sales Charge** None*** 5.50+
Conversion Feature No Yes++
* Class A Shares are sold at NAV, plus a sales charge as follows:
SALES CHARGE AS A DEALER
PERCENTAGE OF CONCESSION AS
PUBLIC NET A PERCENTAGE
OFFERING AMOUNT OF PUBLIC
AMOUNT OF TRANSACTION PRICE INVESTED OFFERING PRICE
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% 0.75%****
** 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.
*** Applies only to Shares purchased where the dealer has received an advanced
commission.
**** See Dealer Concession.
+ The following contingent deferred sales charge schedule applies to Class B
Shares:
YEAR OF REDEMPTION CONTINGENT DEFERRED
AFTER PURCHASE SALES CHARGE
First 5.50%
Second 4.75%
Third 4.00%
Fourth 3.00%
Fifth 2.00%
Sixth 1.00%
Seventh and thereafter 0.00%
++ 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, Inc. ("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:
* through financial intermediaries that do not receive sales charge dealer
concessions;
* by Federated Life Members; or
* 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:
* purchasing Class A Shares in quantity;
* combining concurrent purchases of Class A Shares
* by you, your spouse, and your children under age 21, or;
* of two or more Federated Funds (other than money market funds);
* accumulating purchases (in calculating the sales charge on an additional
purchase of Class A Shares, you may count the current value of previous Class A
Share purchases still invested in the Fund);
* signing a letter of intent to purchase a specific dollar amount of Class A
Shares within 13 months; or
* using the reinvestment privilege within 120 days of redeeming Class A Shares
of an equal or lesser amount.
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 Shares. Financial intermediaries
purchasing Class A Shares for their customers in amounts of $1 million or more
are eligible to receive an advance commission from the distributor based on the
following breakpoints:
ADVANCE COMMISSION
AS A PERCENTAGE OF
TRANSACTION AMOUNT PUBLIC OFFERING PRICE
First $1 - $5 million 0.75%
Next $5 - $20 million 0.50%
Over $20 million 0.25%
For accounts with assets over $1 million, the dealer commission resets annually
to the first breakpoint on the anniversary of the first purchase.
Class A Share purchases under this program may be made by Letter of Intent or by
combining concurrent purchases. The above commission will be paid only on those
purchases that were not previously subject to a front-end sales charge and
dealer commission. Certain retirement accounts may not be eligible for this
program. Financial intermediaries must notify the Fund once an account reaches
$1 million in order to qualify for advance commissions.
A contingent deferred sales charge of 0.75% of the redemption amount applies to
Class A Shares redeemed up to 24 months after purchase if a financial
intermediary received an advance commission on the transaction.
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, Fund 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 of not less than $100. 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.
SYSTEMATIC WITHDRAWAL PROGRAM ("SWP") ON CLASS B SHARES
A contingent deferred sales charge will not be charged on SWP redemptions of
Class B Shares if:
* shares redeemed are 12% or less of the account value in a single year;
* the account is at least one year old;
* all dividends and capital gains distributions are reinvested; and
* the account has at least a $10,000 balance when the SWP is established
(multiple Class B Share accounts cannot be aggregated to meet this minimum
balance).
A contingent deferred sales charge will be charged on redemption amounts that
exceed the 12% annual limit. In measuring the redemption percentage, the account
is valued when the SWP is established and then annually at calendar year-end.
Redemptions can be made only at a rate of 1% monthly, 3% quarterly, or 6%
semi-annually.
CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge applies to Shares purchased where the
dealer has received an advanced commission. 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:
* following the death or disability, as defined in Section 72(m)(7) of the
Internal Revenue Code of 1986, of the last surviving shareholder and any
designated beneficiaries;
* 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;
* which are involuntary redemptions of shareholder accounts that do not
comply with the minimum balance requirements;
* which are qualifying redemptions of Class B Shares under a Systematic
Withdrawal Program;
* which are reinvested in the Fund under the reinvestment privilege;
* 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
* 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 NAV 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. 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, Inc. All of the Class A (voting) shares of
Federated Investors, Inc. are owned by a trust, the trustees of which are John
F. Donahue, Chairman and Director of Federated Investors, Inc., Mr. Donahue's
wife, and Mr. Donahue's son, J. Christopher Donahue, who is President and
Director of Federated Investors, Inc.
Federated Advisers and other subsidiaries of Federated Investors, Inc. 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 $120 billion invested across more than 300 funds
under management and/or administration by its subsidiaries, as of December 31,
1997, Federated Investors, Inc. 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 4,000 financial institutions
nationwide.
J. Scott Albrecht has been the Fund's portfolio manager since March 1995.
Mr. Albrecht joined Federated Investors, Inc. or its predecessor 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.
Lee R. Cunningham II has been a portfolio manager of the Fund since May 1998.
Mr. Cunningham joined Federated Investors, Inc. or its predecessor in 1995 as
an Investment Analyst and was named an Assistant Vice President of the Fund's
investment adviser in January 1998. From 1986 through 1994, Mr. Cunningham
was a Project Engineer with Pennsylvania Power and Light Company.
Mr. Cunningham received his M.B.A. with concentrations in finance and
operations from the University of Pittsburgh.
Mary Jo Ochson has been the Fund's portfolio manager since April 1997.
Ms. Ochson joined Federated Investors, Inc. or its predecessor 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, Inc.
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, Inc., 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, Inc. as
specified below:
MAXIMUM AVERAGE AGGREGATE
FEE DAILY NET ASSETS
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
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 October 9, 1998, the following shareholder of record owned 25% or more of
the outstanding Class A Shares of the Fund: Merrill Lynch Pierce Fenner & Smith
(as record owner holding Class A Shares for its clients), Jacksonville, Florida,
owned approximately 948,040 Shares (38.31%) 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.
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.
APPENDIX
STANDARD & POOR'S ("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.
BB--Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB" rating.
B--Debt rated "B" has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity of willingness to
pay interest and repay principal. The "B" rating cagegory is also used for debt
subordinated to senior debt that is assigned an actual or implied "BBB" or "BB"
rating.
CCC--Debt rated "CCC" has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "CCC" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"B" or "B-" rating.
CC--The rating "CC" typically is applied to debt subordinated to senior debt
that is assigned an actual or implied "CCC" debt rating.
C--The rating "C" typically is applied to debt subordinated to senior debt which
is assigned an actual or implied "CCC-" debt rating. The "C" rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
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. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in "Aaa"
securities.
A--Bonds which are rated "A" possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
BAA--Bonds which are rated "Baa" are considered as medium grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA--Bonds which are rated "Ba" are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B--Bonds which are rated "B" generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA--Bonds which are rated "Caa" are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
CA--Bonds which are rated "Ca" represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C--Bonds which are rated "C" are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
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 IBCA, 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.
BB--Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B--Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the limited margin of safety and the
need for reasonable business and economic activity throughout the life of the
issue.
CCC--Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC--Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C--Bonds are in imminent default in payment of interest or principal.
DDD, DD, AND D--Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. "DDD"
represents the highest potential for recovery on these bonds, and "D" represents
the lowest potential for recovery.
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.
S&P 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 SHORT-TERM LOAN RATINGS
MIG1/VMIG1--This designation denotes best quality. There is a present strong
protection by established cash flows, superior liquidity support, or
demonstrated broad based access to the market for refinancing.
MIG2/VMIG2--This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
FITCH 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.
S&P 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 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.
PORTFOLIO OF INVESTMENTS
FEDERATED CALIFORNIA MUNICIPAL INCOME FUND
AUGUST 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
<C> <S> <S> <C>
LONG-TERM MUNICIPALS--90.4%
CALIFORNIA--88.3%
$ 500,000 Association of Bay Area Government Finance Authority for Non-Profit
Corporations, Refunding Revenue Certificates of Participation,
5.125% (Episcopal Homes Foundation)/(Original Issue Yield: 5.35%),
7/1/2018 A- $ 495,665
500,000 Anaheim, CA, Public Financing Authority, Lease Revenue Bonds
(Series 1997C), 6.00% (Anaheim Public Improvements Project)/
(FSA INS), 9/1/2010 AAA 575,485
500,000 Anaheim, CA, Public Financing Authority, Lease Revenue Bonds
(Series 1997C), 6.00% (Anaheim Public Improvements Project)/
(FSA INS), 9/1/2016 AAA 576,050
1,000,000 Beverly Hills, CA, Public Finance Authority, Lease Revenue Bonds
(Series 1998A), 5.25%, 6/1/2028 AA- 1,020,590
605,000 Blythe, CA, Financing Authority, Sewer Revenue Bonds (Series 1998),
5.75%, 4/1/2028 NR 615,466
625,000 California Educational Facilities Authority, Revenue Bonds (Series
B), 6.60% (Loyola Marymount University), 10/1/2002 NR 702,194
1,000,000 California Educational Facilities Authority, Revenue Bonds (Series
N), 5.35% (Stanford University)/(Original Issue Yield: 5.43%),
6/1/2027 AAA 1,032,180
600,000 California Educational Facilities Authority, Revenue Bonds, 6.70%
(Southwestern University)/(Original Issue Yield: 6.838%), 11/1/2024 NR 676,518
500,000 California Educational Facilities Authority, Student Loan Revenue
Bonds (Series 1998), 5.55% (AMBAC INS), 4/1/2028 AAA 513,525
680,000 California HFA, SFM Revenue Bonds (Series C), 6.75%, 2/1/2025 AA- 728,695
1,290,000 California HFA, SFM Revenue Bonds (Series F-1), 7.00%, 8/1/2026 AA- 1,402,798
1,000,000 California Health Facilities Financing Authority, Insured Health
Facilities Refunding Revenue Bonds (Series 1997), 5.50% (Valley
Care Hospital Corp.)/(California Mortgage Insurance INS)/(Original
Issue Yield: 5.737%), 5/1/2020 A+ 1,044,660
500,000 California Health Facilities Financing Authority, Insured Health
Facility Revenue Bonds (Series 1998A), 5.25% (Casa De Las
Campanas)/(California Mortgage Insurance INS)/(Original Issue
Yield: 5.35%), 8/1/2020 A+ 504,015
1,000,000 California Health Facilities Financing Authority, Revenue Bonds
(Series 1998), 5.40% (Northern California Presbyterian Homes,
Inc.)/(Original Issue Yield: 5.417%), 7/1/2028 A- 1,013,250
1,000,000 California Health Facilities Financing Authority, Revenue Bonds
(Series 1998A), 5.00% (UCSF-Stanford Health Care)/(FSA INS)/
(Original Issue Yield: 5.23%), 11/15/2028 AAA 986,880
400,000 California Health Facilities Financing Authority, Revenue Bonds
(Series A), 6.50% (Kaiser Permanente Medical Care Program)/
(Original Issue Yield: 7.097%), 12/1/2020 A 426,620
700,000 California Health Facilities Financing Authority, Revenue Refunding
Bonds (Series 1996A), 6.00% (Catholic Health Care West)/(MBIA INS)/
(Original Issue Yield: 6.15%), 7/1/2017 AAA 768,978
</TABLE>
FEDERATED CALIFORNIA MUNICIPAL INCOME FUND
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
<C> <S> <S> <C>
LONG-TERM MUNICIPALS--CONTINUED
CALIFORNIA--CONTINUED
$ 900,000 California PCFA, Exempt Facilities Revenue Bonds (Series 1996),
5.50% (Mobil Corp.)/(Original Issue Yield: 5.72%), 12/1/2029 AA $ 927,297
500,000 California PCFA, PCR Revenue Bonds (Series B), 6.40% (Southern
California Edison Co.)/(Original Issue Yield: 6.55%), 12/1/2024 A+ 541,675
900,000 California PCFA, Sewer & Solid Waste Disposal Revenue Bonds, 5.75%
(Anheuser-Busch Cos., Inc.)/(Original Issue Yield: 5.818%),
12/1/2030 A+ 949,086
700,000 California PCFA, Solid Waste Disposal Revenue Bonds, 6.875%
(Browning-Ferris Industries, Inc.)/(Original Issue Yield: 6.95%),
11/1/2027 A- 767,228
1,000,000 California Rural Home Mortgage Finance Authority, SFM Revenue
Bonds, (Series 1994 B-4), 5.75% (GNMA Collateralized Home Mortgage
Program COL), 12/1/2029 AAA 1,111,330
20,000 California State, UT GO Bonds, 5.75% (Original Issue Yield: 6.25%),
3/1/2019 A+ 21,180
580,000 California State, UT GO Bonds, 5.75% (Original Issue Yield: 6.25%),
3/1/2019 A+ 645,070
500,000 California State, Refunding UT GO Bonds, 5.00% (Original Issue
Yield: 5.06%), 2/1/2021 A+ 496,315
400,000 California Statewide Communities Development Authority,
Certificates of Participation, 5.25% (St. Joseph Health System
Group, CA)/(Original Issue Yield: 5.47%), 7/1/2021 AA 404,752
600,000 California Statewide Communities Development Authority, Revenue
Certificates of Participation, 6.625% (St. Joseph Health System
Group, CA)/(United States Treasury PRF)/(Original Issue Yield:
6.674%), 7/1/2021 AA 693,258
400,000 California Statewide Communities Development Authority, Special
Facilities Revenue Bonds, 5.625% (United Air Lines)/(Original Issue
Yield: 5.75%), 10/1/2034 BB+ 410,772
500,000 Chula Vista, CA, IDA, Revenue Bonds (Series A), 6.40% (San Diego
Gas & Electric)/(Original Issue Yield: 6.473%), 12/1/2027 A+ 543,700
1,000,000 Eden Township, CA, Hospital District, Hospital Revenue Bonds, 7.40%
(Original Issue Yield: 7.483%), 11/1/2019 BBB+ 1,064,360
500,000 El Dorado County, CA, Public Agency Financing Authority, Revenue
Bonds, 5.50%
(FGIC INS)/(Original Issue Yield: 5.85%), 2/15/2021 AAA 524,985
700,000 Foothill/Eastern Transportation Corridor Agency, CA, (Series
1995A), Senior Lien Toll Road Revenue Bonds, 6.50% (Original Issue
Yield: 6.78%), 1/1/2032 BBB- 772,814
500,000 Inland Empire Solid Waste Financing Authority, CA, Revenue Bonds
(Series B), 6.25% (FSA INS), 8/1/2011 AAA 569,840
600,000 Los Angeles, CA, Community Redevelopment Agency, Housing Revenue
Refunding Bonds (Series A), 6.55% (AMBAC INS), 1/1/2027 AAA 641,628
900,000 Port of Oakland, CA, Revenue Bonds (Series 1997G), 5.50% (MBIA
INS)/(Original Issue Yield: 5.83%), 11/1/2017 AAA 944,766
700,000 University of California, Research Facilities Revenue Bonds (Series
1995B), 6.55%, 9/1/2024 A+ 799,960
1,000,000 Riverside County, CA, Asset Leasing Corp., Leasehold Revenue Bonds
(Riverside County Hospital)/(MBIA INS)/(Original Issue Yield:
5.98%), 6/1/2021 AAA 321,830
</TABLE>
FEDERATED CALIFORNIA MUNICIPAL INCOME FUND
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
<C> <S> <S> <C>
LONG-TERM MUNICIPALS--CONTINUED
CALIFORNIA--CONTINUED
$ 600,000 Sacramento, CA, Municipal Utility District, Electric Revenue Bonds
(Series J), 5.50% (AMBAC INS)/(Original Issue Yield: 5.80%),
8/15/2021 AAA $ 631,218
300,000 San Francisco, CA, City & County Airport Commission, Second Series
Revenue Bonds (Issue 12A), 5.90% (San Francisco International
Airport)/(Original Issue Yield: 5.97%), 5/1/2026 A+ 319,755
1,000,000 Sierra Madre, CA, Financing Authority, Tax Increment Revenue
Refunding Bonds (Series 1998A), 5.00% (MBIA INS)/(Original Issue
Yield: 5.35%), 11/1/2019 AAA 994,120
1,000,000 Sierra View Local Health Care District, CA, Refunding Revenue Bonds
(Series 1998), 5.25% (American Capital Access INS)/(Original Issue
Yield: 5.40%), 7/1/2018 A 999,310
400,000 Stockton, CA, Health Facility Revenue Bonds (Series 1997A), 5.70%
(Dameron Hospital Association), 12/1/2014 BBB+ 409,472
1,000,000 Stockton, CA, Revenue Certificates of Participation (Series 1998A),
5.00% (MBIA INS)/(Original Issue Yield: 5.15%), 9/1/2023 AAA 990,840
745,000 Vista, CA, Joint Powers Financing Authority, Revenue Bonds (Series
1997B), 5.50% (Original Issue Yield: 5.57%), 9/1/2020 NR 745,082
500,000 Watsonville, CA, Insured Hospital Revenue Refunding Bonds (Series
1996A), 6.20% (Watsonville Community Hospital)/(California State
INS)/(Original Issue Yield: 6.225%), 7/1/2012 A+ 574,235
700,000 West Basin, CA, Municipal Water District, Refunding Revenue
Certificates of Participation (Series A), 5.375% (AMBAC INS)/
(Original Issue Yield: 5.50%), 8/1/2014 AAA 740,005
1,000,000 West Sacramento, CA, Limited Obligation Refunding Improvement
Bonds, 5.60% (West Sacramento Reassessment District of 1998)/
(Original Issue Yield: 5.70%), 9/2/2017 NR 1,002,900
1,000,000 Whisman, CA, School District, UT GO Bonds (Series B), (MBIA INS)/
(Original Issue Yield: 5.48%), 8/1/2021 AAA 319,170
1,000,000 Whisman, CA, School District, UT GO Bonds (Series B), (MBIA INS)/
(Original Issue Yield: 5.48%), 8/1/2022 AAA 303,510
Total 34,265,032
PUERTO RICO--2.1%
700,000 Puerto Rico Electric Power Authority, Revenue Bonds (Series T),
6.375% (Original Issue Yield: 6.58%), 7/1/2024 BBB+ 798,966
TOTAL LONG-TERM MUNICIPALS (IDENTIFIED COST $32,961,253) 35,063,998
</TABLE>
FEDERATED CALIFORNIA MUNICIPAL INCOME FUND
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
<C> <S> <S> <C>
SHORT-TERM MUNICIPALS--7.7%
CALIFORNIA--5.9%
$ 2,300,000 Monterey Peninsula, CA, Water Management District Weekly VRDNs
(Wastewater Reclaimation)/(Sumitomo Bank Ltd., Osaka LOC) A- $ 2,300,000
PUERTO RICO--1.8%
700,000 Government Development Bank for Puerto Rico (GDB) Weekly VRDNs
(MBIA INS)/(Credit Suisse First Boston LIQ) AAA 700,000
TOTAL SHORT-TERM MUNICIPALS (AT AMORTIZED COST) 3,000,000
TOTAL INVESTMENTS (IDENTIFIED COST $35,961,253)(A) $38,063,998
</TABLE>
Securities that are subject to Alternative Minimum Tax represent 25.6% of the
portfolio as calculated based upon total portfolio market value.
* Please refer to the Appendix on page 18 of this prospectus for an explanation
of the credit ratings. Current credit ratings are unaudited.
(a) The cost of investments for federal tax purposes amounts to $35,961,253. The
net unrealized appreciation of investments on a federal tax basis amounts to
$2,102,745 which is comprised of $2,104,157 appreciation and $1,412 depreciation
at August 31, 1998.
Note: The categories of investments are shown as a percentage of net assets
($38,811,645) at August 31, 1998.
The following acronyms are used throughout this portfolio:
AMBAC--American Municipal Bond Assurance Corporation COL --Collateralized FGIC
- --Financial Guaranty Insurance Company FSA --Financial Security Assurance GNMA
- --Government National Mortgage Association GO --General Obligation HFA --Housing
Finance Authority IDA --Industrial Development Authority INS --Insured LIQ
- --Liquidity Agreement LOC --Letter of Credit MBIA --Municipal Bond Investors
Assurance PCR --Pollution Control Revenue PCFA --Pollution Control Finance
Authority PRF --Prerefunded SFM --Single Family Mortgage UT --Unlimited Tax
VRDNs--Variable Rate Demand Notes
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF ASSETS AND LIABILITIES
FEDERATED CALIFORNIA MUNICIPAL INCOME FUND
AUGUST 31, 1998
<TABLE>
<S> <C> <C>
ASSETS:
Total investments in securities, at value (identified and tax cost
$35,961,253) $38,063,998
Cash 4,071
Income receivable 506,601
Receivable for shares sold 322,807
Prepaid expenses 11,652
Total assets 38,909,129
LIABILITIES:
Payable for shares redeemed $25,727
Income distribution payable 71,757
Total liabilities 97,484
NET ASSETS for 3,486,729 shares outstanding $38,811,645
NET ASSETS CONSIST OF:
Paid in capital $37,445,863
Net unrealized appreciation of investments 2,102,745
Accumulated net realized loss on investments (736,963)
Total net assets $38,811,645
NET ASSET VALUE, OFFERING PRICE, AND REDEMPTION PROCEEDS PER SHARE:
CLASS A SHARES:
Net Asset Value and Redemption Proceeds Per Share ($28,792,071 /
2,586,583 shares outstanding) $11.13
Offering Price Per Share (100 / 95.50 of $11.13)* $11.65
Redemption Proceeds Per Share $11.13
CLASS B SHARES:
Net Asset Value and Offering Price Per Share ($10,019,574 / 900,146
shares outstanding) $11.13
Offering Price Per Share $11.13
Redemption Proceeds Per Share (94.50 / 100 of $11.13)** $10.52
</TABLE>
* See "Investing in the Fund" in the Prospectus.
** See "Contingent Deferred Sales Charge" in the Prospectus.
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF OPERATIONS
FEDERATED CALIFORNIA MUNICIPAL INCOME FUND
YEAR ENDED AUGUST 31, 1998
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest $1,529,657
EXPENSES:
Investment advisory fee $ 110,704 Administrative personnel and services fee
147,521 Custodian fees 973 Transfer and dividend disbursing agent fees and
expenses 33,068 Directors'/Trustees' fees 3,409 Auditing fees 13,348 Legal fees
2,074 Portfolio accounting fees 60,007 Distribution services fee--Class A Shares
62,202 Distribution services fee--Class B Shares 20,968 Shareholder services
fee--Class A Shares 62,204 Shareholder services fee--Class B Shares 6,989 Share
registration costs 32,518 Printing and postage 10,392 Insurance premiums 2,375
Miscellaneous 28,388 Total expenses 597,140 Waivers -- Waiver of investment
advisory fee $(110,704) Waiver of distribution services fee--Class A Shares
(62,202) Reimbursement of other operating expenses (213,858) Total waivers and
reimbursements (386,764) Net expenses 210,376 Net investment income 1,319,281
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized gain on
investments 16,809 Net change in unrealized appreciation of investments
1,036,136 Net realized and unrealized gain on investments 1,052,945 Change in
net assets resulting from operations $2,372,226 </TABLE>
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF CHANGES IN NET ASSETS
FEDERATED CALIFORNIA MUNICIPAL INCOME FUND
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1998 1997
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS--
Net investment income $ 1,319,281 $ 1,008,967
Net realized gain on investments ($16,809 and $243,033 net gain,
respectively, as computed for federal tax purposes) 16,809 243,124
Net change in unrealized appreciation 1,036,136 581,586
Change in net assets resulting from operations 2,372,226 1,833,677
DISTRIBUTIONS TO SHAREHOLDERS--
Distributions from net investment income
Class A Shares (1,204,810) (1,008,967)
Class B Shares (114,471) --
Change in net assets resulting from distributions to shareholders (1,319,281) (1,008,967)
SHARE TRANSACTIONS--
Proceeds from sale of shares 19,344,464 5,429,830
Net asset value of shares issued to shareholders in payment of
distributions declared 671,591 482,845
Cost of shares redeemed (4,257,476) (1,884,903)
Change in net assets resulting from share transactions 15,758,579 4,027,772
Change in net assets 16,811,524 4,852,482
NET ASSETS:
Beginning of period 22,000,121 17,147,639
End of period $ 38,811,645 $ 22,000,121
</TABLE>
(See Notes which are an integral part of the Financial Statements)
NOTES TO FINANCIAL STATEMENTS
FEDERATED CALIFORNIA MUNICIPAL INCOME FUND
AUGUST 31, 1998
ORGANIZATION
Municipal Securities Income Trust (the "Trust") is registered under the
Investment Company Act of 1940, as amended (the "Act") as an open-end,
management investment company. The Trust consists of five portfolios. The
financial statements included herein are only those of Federated California
Municipal Income Fund (the "Fund"), a non-diversified portfolio. The financial
statements of the other portfolios are presented separately. The assets of each
portfolio are segregated and a shareholder's interest is limited to the
portfolio in which shares are held. The investment objective of the Fund is to
provide current income exempt from federal regular income tax (federal regular
income tax does not include the federal alternative minimum tax) and personal
income taxes imposed by the state of California and California municipalities.
The Fund offers two classes of shares: Class A Shares and Class B Shares.
Effective December 1, 1997, the Trust added Class B Shares and designated the
existing share class as Class A Shares.
SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS
Municipal bonds are valued by an independent pricing service, taking into
consideration yield, liquidity, risk, credit quality, coupon, maturity, type of
issue, and any other factors or market data the pricing service deems relevant.
Short-term securities are valued at the prices provided by an independent
pricing service. However, short-term securities with remaining maturities of
sixty days or less at the time of purchase may be valued at amortized cost,
which approximates fair market value.
INVESTMENT INCOME, EXPENSES, AND DISTRIBUTIONS
Interest income and expenses are accrued daily. Bond premium and discount, if
applicable, are amortized as required by the Internal Revenue Code, as amended
(the "Code"). Dividend income and distributions to shareholders are recorded on
the ex-dividend date.
FEDERAL TAXES
It is the Fund's policy to comply with the provisions of the Code applicable to
regulated investment companies and to distribute to shareholders each year
substantially all of its income. Accordingly, no provisions for federal tax are
necessary.
At August 31, 1998, the Fund, for federal tax purposes, had a capital loss
carryforward of $736,963, which will reduce the Fund's taxable income arising
from future net realized gain on investments, if any, to the extent permitted by
the Code, and thus will reduce the amount of the distributions to shareholders
which would otherwise be necessary to relieve the Fund of any liability for
federal tax. Pursuant to the Code, such capital loss carryforward will expire as
follows:
EXPIRATION YEAR EXPIRATION AMOUNT
2003 $518,633
2004 218,330
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may engage in when-issued or delayed delivery transactions. The Fund
records when-issued securities on the trade date and maintains security
positions such that sufficient liquid assets will be available to make payment
for the securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts of assets, liabilities, expenses, and revenues reported in
the financial statements. Actual results could differ from those estimated.
OTHER
Investment transactions are accounted for on the trade date.
SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Board of Trustees (the Trustees) to issue
an unlimited number of full and fractional shares of beneficial interest
(without par value) for each class of shares.
Transactions in shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
CLASS A SHARES 1998 1997
<S> <C> <C>
Shares sold 850,058 515,114
Shares issued to shareholders in payment of distributions declared 55,492 45,852
Shares redeemed (370,125) (179,343)
Net change resulting from Class A Share transactions 535,425 381,623
<CAPTION>
YEAR ENDED
AUGUST 31,
CLASS B SHARES 1998(A)
<S> <C>
Shares sold 912,747
Shares issued to shareholders in payment of distributions declared 5,755
Shares redeemed (18,356)
Net change resulting from Class B Share transactions 900,146
Net change resulting from share transactions 1,435,571
</TABLE>
(a) Reflects operations for the period from December 1, 1997 (date of initial
public investment) to August 31, 1998.
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE
Federated Advisers, the Fund's investment adviser (the "Adviser"), receives for
its services an annual investment advisory fee equal to 0.40% of the Fund's
average daily net assets. The Adviser may voluntarily choose to waive any
portion of its fee and reimburse certain operating expenses of the Fund. The
Adviser can modify or terminate this voluntary waiver and reimbursement at any
time at its sole discretion.
ADMINISTRATIVE FEE
Federated Services Company ("FServ"), under the Administrative Services
Agreement, provides the Fund with administrative personnel and services. The fee
paid to FServ is based on the level of average aggregate daily net assets of all
funds advised by subsidiaries of Federated Investors, Inc. for the period. The
administrative fee received during the period of the Administrative Services
Agreement shall be at least $125,000 per portfolio and $30,000 per each
additional class of shares.
DISTRIBUTION SERVICES FEE
The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1
under the Act. Under the terms of the Plan, the Fund will compensate Federated
Securities Corp. ("FSC"), the principal distributor, from the net assets of the
Fund to finance activities intended to result in the sale of the Fund's Class A
Shares and Class B Shares. The Plan provides that the Fund may incur
distribution expenses up to 0.25% of the average daily net assets of the Fund's
Class A Shares, annually, and up to 0.75% of the average daily net assets of the
Fund's Class B Shares, annually, to compensate FSC. FSC may voluntarily choose
to waive any portion of its fee. FSC can modify or terminate this voluntary
waiver at any time at its sole discretion.
SHAREHOLDER SERVICES FEE
Under the terms of a Shareholder Services Agreement with Federated Shareholder
Services ("FSS"), the Fund will pay FSS up to 0.25% of average daily net assets
of the Fund's Class A and Class B Shares for the period. The fee paid to FSS is
used to finance certain services for shareholders and to maintain shareholder
accounts. FSS may voluntarily choose to waive any portion of its fee. FSS can
modify or terminate this voluntary waiver at any time at its sole discretion.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES
FServ, through its subsidiary, Federated Shareholder Services Company ("FSSC")
serves as transfer and dividend disbursing agent for the Fund. The fee paid to
FSSC is based on the size, type, and number of accounts and transactions made by
shareholders.
PORTFOLIO ACCOUNTING FEES
FServ maintains the Fund's accounting records for which it receives a fee. The
fee is based on the level of the Fund's average daily net assets for the period,
plus out-of-pocket expenses.
INTERFUND TRANSACTIONS
During the period ended August 31, 1998, the Corporation engaged in purchase and
sale transactions with funds that have a common investment adviser (or
affiliated investment advisers), common Directors/Trustees, and/or common
Officers. These purchase and sale transactions were made at current market value
pursuant to Rule 17a-7 under the Act amounting to $21,600,000 and $16,600,000,
respectively.
GENERAL
Certain of the Officers and Trustees of the Trust are Officers and Directors or
Trustees of the above companies.
INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended August 31, 1998, were as follows:
PURCHASES $14,955,342
SALES $ 1,605,829
CONCENTRATION OF CREDIT RISK
Since the Fund invests a substantial portion of its assets in issuers located in
one state, it will be more susceptible to factors adversely affecting issuers of
that state than would be a comparable tax-exempt mutual fund that invests
nationally. In order to reduce the credit risk associated with such factors, at
August 31, 1998, 44% of the securities in the portfolio of investments are
backed by letters of credit or bond insurance of various financial institutions
and financial guaranty assurance agencies. The percentage of investments insured
by or supported (backed) by a letter of credit from any one institution or
agency did not exceed 14% of total investments.
YEAR 2000 (UNAUDITED)
Similar to other financial organizations, the Fund could be adversely affected
if the computer systems used by the Fund's service providers do not properly
process and calculate date-related information and data from and after January
1, 2000. The Fund's Adviser and Administrator are taking measures that they
believe are reasonably designed to address the Year 2000 issue with respect to
computer systems that they use and to obtain reasonable assurances that
comparable steps are being taken by each of the Fund's other service providers.
At this time, however, there can be no assurance that these steps will be
sufficient to avoid any adverse impact to the Fund.
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees of MUNICIPAL SECURITIES INCOME TRUST and Shareholders
of FEDERATED CALIFORNIA MUNICIPAL INCOME FUND:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Federated California Municipal Income Fund as
of August 31, 1998, the related statement of operations for the year then ended,
the statements of changes in net assets for the years ended August 31, 1998 and
1997, and the financial highlights for the periods presented. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
August 31, 1998, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Federated California
Municipal Income Fund as of August 31, 1998, the results of its operations, the
changes in its net assets and its financial highlights for the respective stated
periods in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
October 9, 1998
[Graphic]
Federated
California
Municipal
Income Fund
(A Portfolio of Municipal Securities Income Trust)
Class A Shares
Class B Shares
PROSPECTUS
OCTOBER 31, 1998
A Non-Diversified Portfolio of Municipal Securities Income Trust, an Open-
End, Management Investment Company
FEDERATED CALIFORNIA MUNICIPAL INCOME FUND
CLASS A SHARES
CLASS B SHARES
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
DISTRIBUTOR
Federated Securities Corp.
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
INVESTMENT ADVISER
Federated Advisers
Federated Investors Tower
1001 Liberty Avenue
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
Federated Securities Corp., Distributor
1-800-341-7400
www.federatedinvestors.com
Cusip 625922109
Cusip 625922828
2092918A (10/98)
[Graphic}
FEDERATED CALIFORNIA MUNICIPAL INCOME FUND
CLASS A 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 October 31, 1998. 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 CALIFORNIA MUNICIPAL INCOME FUND
FEDERATED INVESTORS FUNDS
5800 CORPORATE DRIVE
PITTSBURGH, PENNSYLVANIA 15237-7000
Statement dated October 31, 1998
[Graphic]
Federated Securities Corp., Distributor
Federated Investors, Inc.
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
1-800-341-7400
www.federatedinvestors.com
Cusip 625922109
Cusip 625922828
2092918B (10/98)
[Graphic]
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
Investing in Securities of
Other Investment Companies 3
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 12
Adviser to the Fund 12
Advisory Fees 12
OTHER SERVICES 12
Fund Administration 12
Custodian and Portfolio Accountant 12
Transfer Agent 12
Independent Auditors 12
BROKERAGE TRANSACTIONS 12
PURCHASING SHARES 13
Quantity Discounts and Accumulated Purchases 13
Concurrent Purchases 13
Letter of Intent 13
Reinvestment Privilege 13
Conversion of Class B Shares 14
Distribution Plan and
Shareholder Services Agreement 14
Conversion to Federal Funds 14
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 15
Redemption in Kind 15
Contingent Deferred Sales Charge-Class B Shares 16
Massachusetts Partnership Law 16
TAX STATUS 16
The Fund's Tax Status 16
Shareholders' Tax Status 16
TOTAL RETURN 17
YIELD 17
TAX-EQUIVALENT YIELD 17
Tax-Equivalency Table 18
PERFORMANCE COMPARISONS 19
Economic and Market Information 19
ABOUT FEDERATED INVESTORS, INC. 19
Mutual Fund Market 20
Institutional Clients 20
Bank Marketing 20
Broker/Dealers and
Bank Broker/Dealer Subsidiaries 20
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 of the above-mentioned 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 ("S&P") or Fitch IBCA,
Inc. ("Fitch") change because of changes in those organizations or in their
rating systems, the Fund will try to use comparable ratings as standards in
accordance with the investment policies described in the Fund's prospectus.
TYPES OF ACCEPTABLE INVESTMENTS
Examples of California municipal securities include: governmental lease
certificates of participation issued by state or municipal authorities where
payment is secured by installment payments for equipment, buildings, or other
facilities being leased by the state or municipality;
* municipal notes and tax-exempt commercial paper;
* serial bonds;
* tax anticipation notes sold to finance working capital needs of
municipalities in anticipation of receiving taxes;
* bond anticipation notes sold in anticipation of the issuance of long-term
bonds;
* pre-refunded municipal bonds whose timely payment of interest and principal
is ensured by an escrow of U.S. government obligations; and
* general obligation bonds.
PARTICIPATION INTERESTS
The financial institutions from which the Fund purchases participation interests
frequently provide or secure from another financial institution irrevocable
letters of credit or guarantees and give the Fund the right to demand payment of
the principal amounts of the participation interests plus accrued interest on
short notice (usually within seven days).
VARIABLE-RATE MUNICIPAL SECURITIES
Variable interest rates generally reduce changes in the market value of
municipal securities from their original purchase prices. Accordingly, as
interest rates decrease or increase, the potential for capital appreciation or
depreciation is less for variable rate municipal securities than for fixed
income obligations. Many municipal securities with variable interest rates
purchased by the Fund are subject to repayment of principal (usually within
seven days) on the Fund's demand. The terms of these variable-rate demand
instruments require payment of principal and accrued interest from the issuer of
the municipal obligations, the issuer of the participation interests, or a
guarantor of either issuer.
MUNICIPAL LEASES
The Fund may purchase municipal securities in the form of participation
interests which represent undivided proportional interests in lease payments by
a governmental or non-profit entity. The lease payments and other rights under
the lease provide for and secure the payments on the certificates. Lease
obligations may be limited by municipal charter or the nature of the
appropriation for the lease. In particular, lease obligations may be subject to
periodic appropriation. If the entity does not appropriate funds for future
lease payments, the entity cannot be compelled to make such payments.
Furthermore, a lease may provide that the certificate trustee cannot accelerate
lease obligations upon default. The trustee would only be able to enforce lease
payments as they became due. In the event of a default or failure of
appropriation, it is unlikely that the trustee would be able to obtain an
acceptable substitute source of payment. In determining the liquidity of
municipal lease securities, the investment adviser, under the authority
delegated by the Trustees, will base its determination on the following factors:
* whether the lease can be terminated by the lessee;
* the potential recovery, if any, from a sale of the leased property upon
termination of the lease;
* the lessee's general credit strength (e.g., its debt, administrative,
economic and financial characteristics and prospectus);
* 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
* 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.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest in the securities of affiliated money market funds as an
efficient means of managing the Fund's uninvested cash.
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, 1998 and
1997, the Fund's portfolio turnover rates were 6.0% and 29%, 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 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 1998 was
5.8%, compared to 6.2% in August 1997. Major sectors of employment growth have
been high tech, entertainment and trade. Gains in these and other sectors have
more than offset previous 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, the state's finances have greatly
improved, resulting in a budget surplus of over $4 billion for 1997- 1998. In
view of the improved economic climate and resulting stronger financial results,
Moody's raised their rating of the state's general obligation bonds to Aa3 from
A1.
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
Chief Executive Officer and Director or Trustee of the
Funds; Chairman and Director, Federated Investors, Inc.;
Chairman and Trustee, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director,
Federated Research Corp. and Federated Global Research
Corp.; Chairman, Passport Research, Ltd.; Mr. Donahue is the
father of J. Christopher Donahue, Executive Vice President
and Trustee of the Trust.
Thomas G. Bigley
15 Old Timber Trail
Pittsburgh, PA
Birthdate: February 3, 1934
Trustee
Director or Trustee of the Funds; Director, Member of Executive Committee,
Children's Hospital of Pittsburgh; formerly, Senior Partner, Ernst & Young LLP;
Director, MED 3000 Group, Inc.; Director, Member of Executive Committee,
University of Pittsburgh.
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
Director or Trustee of the Funds; 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.
Nicholas P. Constantakis
175 Woodshire Drive
Pittsburgh, PA
Birthdate: September 3, 1939
Trustee
Director or Trustee of the Funds; formerly, Partner,
Anderson Worldwide SC.
William J. Copeland
One PNC Plaza--23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Trustee
Director or Trustee of the Funds; 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, United Refinery;
Chairman, Pittsburgh Foundation; Director, Forbes Fund;
Chairman, Pittsburgh Civic Light Opera.
J. Christopher Donahue*
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
Executive Vice President and Trustee President or Executive Vice President of
the Funds; President and Director, Federated Investors, Inc.; President and
Trustee, 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; Director or Trustee of some of the Funds. Mr. Donahue is the
son of John F. Donahue, Chairman and Trustee of the Trust.
James E. Dowd, Esq.
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Trustee
Director or Trustee of the Funds; Attorney-at-law; Director,
The Emerging Germany Fund, Inc.; formerly, President, Boston
Stock Exchange, Inc.; Regional Administrator, United States
Securities and Exchange Commission.
Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Trustee
Director or Trustee of the Funds; Professor of Medicine, University of
Pittsburgh; Medical Director, University of Pittsburgh Medical Center--Downtown;
Hematologist, Oncologist, and Internist, Presbyterian and Montefiore Hospitals;
formerly, Member, National Board of Trustees, Leukemia Society of America.
Edward L. Flaherty, Jr., Esq.@
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: June 18, 1924
Trustee
Director or Trustee of the Funds; Attorney of Counsel, Miller, Ament, Henny &
Kochuba; Director, Eat'N Park Restaurants, Inc.; formerly, Counsel, Horizon
Financial, F.A., Western Region; Partner, Meyer and Flaherty.
Peter E. Madden
One Royal Palm Way
100 Royal Palm Way
Palm Beach, FL
Birthdate: March 16, 1942
Trustee
Director or Trustee of the Funds; formerly, Representative, Commonwealth of
Massachusetts General Court; President, State Street Bank and Trust Company and
State Street Corporation; Director, VISA USA and VISA International; Chairman
and Director, Massachusetts Banker Association; Director, Depository Trust
Corporation.
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Trustee
Director or Trustee of the Funds; President, Law Professor, Duquesne University;
Consulting Partner, Mollica & Murray; formerly, Dean and Professor of Law,
University of Pittsburgh School of Law; Dean and Professor of Law, Villanova
University School of Law.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Trustee
Director or Trustee of the Funds; President, World Society of Ekistics, Athens;
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; formerly, Professor, United States
Military Academy; Professor, United States Air Force Academy.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Trustee
Director or Trustee of the Funds; Public Relations/
Marketing/Conference Planning; formerly, National
Spokesperson, Aluminum Company of America; business owner
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
President
President or Vice President of some of the Funds; Director or Trustee of some of
the Funds; Executive Vice President, Federated Investors, Inc.; Chairman and
Director, Federated Securities Corp.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
Executive Vice President
Trustee or Director of some of the Funds; President, Executive Vice President
and Treasurer of some of the Funds; Vice Chairman, Federated Investors, Inc.;
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.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Executive Vice President, Secretary, and Treasurer Executive Vice President and
Secretary of the Funds; Treasurer of some of the Funds; Executive Vice
President, Secretary, and Director, Federated Investors, Inc.; 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.
* 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:Automated Government Money Trust; Blanchard Funds;
Blanchard Precious Metals Fund, Inc.; Cash Trust Series II; Cash Trust Series,
Inc.; CCB Funds; 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 Core Trust; 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.; 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; Regions Funds; RIGGS 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;
WCT Funds; and World Investment Series, Inc.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the outstanding Shares.
As of October 9, 1998, the following shareholders of record owned 5% or more of
the outstanding Class A Shares of the Fund: Merrill Lynch Pierce Fenner & Smith,
Jacksonville, Florida, owned approximately 948,040 Shares (38.31%); and CIBC
Oppenheimer Corp. New York, New York, owned approximately 225,572 Shares
(9.12%).
As of October 9, 1998, there were no shareholders of record who owned 5% or more
of the outstanding Class B Shares of the Fund.
TRUSTEE COMPENSATION
<TABLE>
<CAPTION>
AGGREGATE
NAME, COMPENSATION TOTAL COMPENSATION PAID
POSITION WITH TRUST FROM TRUST*# FROM FUND COMPLEX+
<S> <C> <C>
John F. Donahue
Trustee and Chairman $0 $0 for the Trust and
56 other investment companies in the Fund Complex
Thomas G. Bigley
Trustee $220.93 $111,222 for the Trust and
56 other investment companies in the Fund Complex
John T. Conroy, Jr.
Trustee $243.05 $122,362 for the Trust and
56 other investment companies in the Fund Complex
Nicholas P. Constantakis+
Trustee $167.14 $0 for the Trust and
36 other investment companies in the Fund Complex
William J. Copeland
Trustee $243.05 $122,362 for the Trust and
56 other investment companies in the Fund Complex
J. Christopher Donahue
Trustee and Exec. Vice Pres. $0 $0 for the Trust and
18 other investment companies in the Fund Complex
James E. Dowd, Esq.
Trustee $243.05 $122,362 for the Trust and
56 other investment companies in the Fund Complex
Lawrence D. Ellis, M.D.
Trustee $220.93 $111,222 for the Trust and
56 other investment companies in the Fund Complex
Edward L. Flaherty, Jr., Esq.
Trustee $243.05 $122,362 for the Trust and
56 other investment companies in the Fund Complex
Peter E. Madden
Trustee $220.93 $111,222 for the Trust and
56 other investment companies in the Fund Complex
John E. Murray, Jr., J.D., S.J.D.
Trustee $220.93 $111,222 for the Trust and
56 other investment companies in the Fund Complex
Wesley W. Posvar
Trustee $220.93 $111,222 for the Trust and
56 other investment companies in the Fund Complex
Marjorie P. Smuts
Trustee $220.93 $111,222 for the Trust and
56 other investment companies in the Fund Complex
</TABLE>
* Information is furnished for the fiscal year ended August 31, 1998.
# The aggregate compensation is provided for the Trust which is comprised of
five portfolios.
+ The information is provided for the last calendar year.
++ Mr. Constantakis became a member of the Board of Trustees on February 23,
1998. He did not earn any fees for serving the Fund Complex since these fees are
reported as of the end of 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, Inc. All the voting securities of
Federated Investors, Inc. 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, 1998,
1997, and 1996, the Adviser earned advisory fees of $110,704, $76,824, and
$62,691, respectively, all of which were voluntarily waived.
OTHER SERVICES
FUND ADMINISTRATION
Federated Services Company, a subsidiary of Federated Investors, Inc., 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, Inc. 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, 1998, 1997, and 1996, the Administrators collectively
earned $147,521, $125,002, 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, 1998, 1997, and 1996, 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, if applicable) 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." For further information on any of the programs listed below, please
contact your financial intermediary or Federated Securities Corp.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES
As described in the prospectus, larger purchases of the same Share class reduce
or eliminate the sales charge paid. For example, the Fund will combine all Class
A Share purchases 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 into the same Share class 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
Shareholders have the privilege of combining concurrent purchases of the same
Share class of two or more funds in the Federated Complex in calculating the
applicable sales charge.
To receive a 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
A shareholder can sign a letter of intent committing to purchase a certain
amount of the same Share class within a 13-month period in order to combine such
purchases in calculating the applicable sales charge. The Fund's custodian will
hold Shares in escrow equal to the maximum applicable sales charge. If the
shareholder completes the commitment, the escrowed Shares will be released to
their account. If the commitment is not completed within 13 months, the
custodian will redeem an appropriate number of escrowed Shares to pay for the
applicable 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
The reinvestment privilege is available for all Shares of the Fund within the
same Share class.
Class A shareholders who redeem from the Fund may reinvest the redemption
proceeds back into the same Share class at the next determined net asset value
without any sales charge. The original Shares must have been subject to a sales
charge and the reinvestment must be within 120 days.
Similarly, Class B Shares also may be reinvested within 120 days of redemption,
although such reinvestment will be made into Class A Shares. Shareholders would
not be entitled to a reimbursement of the contingent deferred sales charge if
paid at the time of redemption on any Share class. However, reinvested Shares
would not be subject to a contingent deferred sales charge, if otherwise
applicable, upon later redemption.
In addition, if 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, if otherwise applicable.
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 PLAN AND SHAREHOLDER SERVICES AGREEMENT
These arrangements permit the payment of fees to financial institutions, the
distributor, and Federated Shareholder Services, to stimulate distribution
activities and to cause services to be provided to shareholders by a
representative who has knowledge of the shareholder's particular circumstances
and goals. These activities and services may include, but are not limited to,
marketing efforts; providing office space, equipment, telephone facilities, and
various clerical, supervisory, computer, and other personnel as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries; and assisting
clients in changing dividend options, account designations, and addresses.
By adopting the Distribution Plan, the Trustees expect that the Fund will be
able to achieve a more predictable flow of cash for investment purposes and to
meet redemptions. This will facilitate more efficient portfolio management and
assist the Fund in pursuing its investment objectives. By identifying potential
investors whose needs are served by the Fund's objectives, and properly
servicing these accounts, it may be possible to curb sharp fluctuations in rates
of redemptions and sales.
Other benefits, which may be realized under either arrangement, may include: (1)
providing personal services to shareholders; (2) investing shareholder assets
with a minimum of delay and administrative detail; (3) enhancing shareholder
recordkeeping systems; and (4) responding promptly to shareholders' requests and
inquiries concerning their accounts.
For the fiscal year ended August 31, 1998, the Fund's Class A Shares and Class B
Shares incurred $62,202 and $20,968, respectively, in distribution services
fees, of which $62,202 and $0, respectively, were waived. In addition, for the
fiscal year ended August 31, 1998, the Fund's Class A Shares and Class B Shares
paid shareholder services fees in the amount of $62,204 and $6,989,
respectively, none of which was waived.
CONVERSION TO FEDERAL FUNDS
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be in
federal funds or be converted into federal funds before shareholders begin to
earn dividends. State Street Bank 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:
* Trustees, employees, and sales representatives of the Fund, Federated
Advisers, and Federated Securities Corp. and its affiliates;
* Federated Life Members;
* any associated person of an investment dealer who has a sales agreement with
Federated Securities Corp.; and 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, Jr. 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
prospectus 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
Although the Fund intends to redeem Shares in cash, it reserves the right under
certain circumstances to pay the redemption price in whole or in part by a
distribution of securities from the Fund's portfolio.
Redemption in kind will be made in conformity with applicable SEC rules, taking
such securities at the same value employed in determining net asset value and
selecting the securities in a manner the Directors determine to be fair and
equitable.
The Corporation has elected to be governed by Rule 18f-1 of the Investment
Company Act of 1940 under which the Corporation is obligated to redeem Shares
for any shareholder in cash up to the lesser of $250,000 or 1% of the Fund's net
asset value during any 90-day period.
Redemption in kind is not as liquid as a cash redemption. If redemption is made
in kind, shareholders receiving their securities and selling them before their
maturity could receive less than the redemption value of their securities and
could incur certain transaction costs.
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.
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:
* derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;
* invest in securities within certain statutory limits; and
* distribute to its shareholders at least 90% of its net income earned during
the year.
SHAREHOLDERS' TAX STATUS
CAPITAL GAINS
Capital gains or losses may be realized by the Fund on the sale of portfolio
securities and as a result of discounts from par value on securities held to
maturity. Sales would generally be made because of:
* the availability of higher relative yields;
* differentials in market values;
* new investment opportunities;
* changes in creditworthiness of an issuer; or
* an attempt to preserve gains or limit losses.
Distributions of long-term capital gains are taxed as such, whether they are
taken in cash or reinvested, and regardless of the length of time the
shareholder has owned Shares. Any loss by a shareholder on Shares held for less
than six months and sold after a capital gains distribution will be treated as a
long-term capital loss to the extent of the capital gains distribution.
TOTAL RETURN
The Fund's average annual total returns for Class A Shares for the one-year and
five-year periods ended August 31, 1998, and for the period from December 2,
1992 (date of initial public investment) to August 31, 1998, were 2.88%, 5.05%,
and 6.75%, respectively.
The Fund's cumulative total return for Class B Shares for the period from
December 1, 1997 to August 31, 1998 was (0.14%).
Cumulative total return reflects the Fund's total performance over a specified
period of time. This total return assumes and is reduced by the payment of the
maximum sales charge. The Fund's total return is reflective of only 10 months of
Fund activity since the Fund's date of initial public investment.
The average annual total return for all classes 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, less any applicable sales
charge, adjusted over the period by any additional Shares, assuming a
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 of
Shares redeemed.
YIELD
The Fund's yields for Class A Shares and Class B Shares for the thirty-day
period ended August 31, 1998 were 4.36% and 3.83%, respectively.
The yield for all classes 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 yields for Class A Shares and Class B Shares for the
thirty-day period ended August 31, 1998 were 8.53% and 7.50%, respectively.
The tax-equivalent yield 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 following tables
indicate, a "tax-free" investment is an attractive choice for investors,
particularly in times of narrow spreads between tax-free and taxable yields.
TAXABLE YIELD EQUIVALENT FOR 1998
STATE OF CALIFORNIA
COMBINED FEDERAL AND STATE INCOME TAX BRACKET:
23.00% 37.30% 40.30% 45.30% 48.90%
SINGLE $1- $25,351- $61,401- $128,101- over
RETURN 25,350 61,400 128,100 278,450 $278,450
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 1998
STATE OF CALIFORNIA
COMBINED FEDERAL AND STATE INCOME TAX BRACKET:
21.00% 37.30% 40.30% 45.30% 48.90%
JOINT $1- $42,351- $102,301- $155,951- over
RETURN 42,350 102,300 155,950 278,450 $278,450
TAX-EXEMPT
YIELD TAXABLE YIELD EQUIVALENT
1.50% 1.90% 2.39% 2.51% 2.74% 2.94%
2.00% 2.53% 3.19% 3.35% 3.66% 3.91%
2.50% 3.16% 3.99% 4.19% 4.57% 4.89%
3.00% 3.80% 4.78% 5.03% 5.48% 5.87%
3.50% 4.43% 5.58% 5.86% 6.40% 6.85%
4.00% 5.06% 6.38% 6.70% 7.31% 7.83%
4.50% 5.70% 7.18% 7.54% 8.23% 8.81%
5.00% 6.33% 7.97% 8.38% 9.14% 9.78%
5.50% 6.96% 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.
The charts above are for illustrative purposes only. They are not indicators 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:
* portfolio quality;
* average portfolio maturity;
* type of instruments in which the portfolio is invested;
* changes in interest rates and market value of portfolio securities;
* changes in the Fund's class expenses; and
* various other factors.
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:
* LEHMAN BROTHERS REVENUE BOND INDEX is a total return performance benchmark for
the long-term, investment grade, revenue bond market. Returns and attributes for
the index are calculated semi-monthly.
* LIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes the
reinvestment of all capital gains distributions and income dividends and takes
into account any change in 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.
* 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, INC.
Federated Investors, Inc. 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, 1997, Federated Investors, Inc.
managed 11 bond funds with approximately $2.1 billion in assets and 22 money
market funds with approximately $10.9 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.
The Chief Investment Officers responsible for oversight of the various
investment sectors within Federated Investors, Inc. are: U.S. equity and
high yield-J. Thomas Madden; U.S. fixed income-William D. Dawson, III; and
global equities and fixed income-Henry A. Frantzen. The Chief Investment
Officers are Executive Vice Presidents of the Federated advisory companies.
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 $4.4 trillion to the more than 6,700 funds available.*
Federated Investors, Inc., through its subsidiaries, distributes mutual funds
for a variety of investment applications. Specific markets include:
INSTITUTIONAL CLIENTS
Federated Investors, Inc. meets the needs of approximately 900 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
Federated New York Municipal Income Fund
(A Portfolio of Municipal Securities Income Trust)
Class A Shares (formerly, Class F Shares)
Prospectus
The Class A Shares of Federated New York Municipal Income Fund (the "Fund")
offered by this prospectus represent interests in a non-diversified
portfolio of securities which is one of a series of investment portfolios in
Municipal Securities Income Trust (the "Trust"), an open-end management
investment company (a mutual fund). The investment objective of the Fund is
to provide current income exempt from federal regular income tax and the
personal income taxes imposed by the state of New York and New York
municipalities. The Fund invests primarily in a portfolio of New York
municipal securities.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF ANY
BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY
OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in Class A Shares. Keep this prospectus for future reference.
The Fund has also filed a Statement of Additional Information for Class A
Shares dated October 31, 1998, with the Securities and Exchange Commission
("SEC"). The information contained in the Statement of Additional
Information is incorporated by reference into this prospectus. You may
request a copy of the Statement of Additional Information or a paper copy of
this prospectus, if you have received your prospectus electronically, free
of charge by calling 1-800-341-7400. To obtain other information or to make
inquiries about the Fund, contact your financial institution. The Statement
of Additional Information, material incorporated by reference into this
document, and other information regarding the Fund is maintained
electronically with the SEC at Internet Web site (http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Prospectus dated October 31, 1998
TABLE OF CONTENTS
Summary of Fund Expenses 1
Financial Highlights--Class A Shares 2
General Information 3
Calling the Fund 3
Year 2000 Statement 3
Investment Information 3
Investment Objective 3
Investment Policies 3
New York Municipal Securities 6
Investment Risks 6
Reducing Risks of Lower-Rated Securities 7
Non-Diversification 7
Investment Limitations 7
Net Asset Value 7
Investing in the Fund 8
Purchasing Shares 8
Purchasing Shares Through a Financial Intermediary 8
Purchasing Shares by Wire 8
Purchasing Shares by Check 8
Systematic Investment Program 9
Redeeming and Exchanging Shares 9
Redeeming or Exchanging Shares Through
a Financial Intermediary 9
Redeeming or Exchanging Shares
by Telephone 9
Redeeming or Exchanging Shares by Mail 10
Requirements for Redemption 10
Requirements for Exchange 10
Systematic Withdrawal Program 10
Contingent Deferred Sales Charge 10
Account and Share Information 11
Confirmations and Account Statements 11
Dividends and Distributions 11
Accounts with Low Balances 11
Trust Information 11 Management of the Trust 11 Distribution of Shares 12
Administration of the Fund 13
Shareholder Information 13
Tax Information 14
Federal Income Tax 14
State and Local Taxes 14
Performance Information 14
Appendix 15
Financial Statements 18
Independent Auditors' Report 27
SUMMARY OF FUND EXPENSES
CLASS A SHARES (FORMERLY, CLASS F SHARES)
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
<S> <C>
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
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)
<S> <C> <C>
Management Fee (after waiver)(1) 0.00%
12b-1 Fee (after waiver)(2) 0.02%
Total Other Expenses (after expense reimbursement)(3) 0.69%
Shareholder Services Fee (after waiver)(4) 0.23%
Total Operating Expenses(5) 0.71%
</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 12b-1 fee has been reduced to reflect the voluntary waiver of a
portion of the 12b-1 fee. The distributor can terminate this voluntary
waiver at any time at its sole discretion. The maximum 12b-1 fee is 0.50%.
(3) The adviser has voluntarily reimbursed other operating expenses of the
Fund. The adviser can terminate this voluntary reimbursement of other
operating expenses at any time at its sole discretion.
(4) The shareholder services fee has been reduced to reflect the voluntary
waiver of a portion of the shareholder services fee. The shareholder
services provider can terminate this voluntary waiver at any time at its
sole discretion. The maximum shareholder services fee is 0.25%.
(5) The total fund operating expenses were 0.71% for the fiscal year ended
August 31, 1998 and would have been 2.31% 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 by the
adviser.
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.
EXAMPLE
<TABLE>
<CAPTION>
<S> <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.
1 Year $ 52
3 Years $ 67
5 Years $ 83
10 Years $129
</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.
FINANCIAL HIGHLIGHTS--CLASS A SHARES (FORMERLY, CLASS F SHARES)
FEDERATED NEW YORK MUNICIPAL INCOME FUND
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Report of Independent Auditors' Report on page 27.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1998 1997 1996 1995 1994 1993(A)
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.62 $10.17 $10.13 $10.10 $10.92 $10.04
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.54 0.56 0.58 0.57 0.57 0.44
Net realized and unrealized gain (loss) on investments 0.38 0.45 0.04 0.03 (0.82) 0.88
Total from investment operations 0.92 1.01 0.62 0.60 (0.25) 1.32
LESS DISTRIBUTIONS
Distributions from net investment income (0.54) (0.56) (0.58) (0.57) (0.57) (0.44)
NET ASSET VALUE, END OF PERIOD $11.00 $10.62 $10.17 $10.13 $10.10 $10.92
TOTAL RETURN(B) 8.83% 10.13% 6.18% 6.41% (2.31%) 13.38%
RATIOS TO AVERAGE NET ASSETS
Expenses 0.71% 0.66% 0.60% 0.59% 0.39% 0.25%*
Net investment income 4.96% 5.34% 5.62% 5.94% 5.49% 5.53%*
Expense waiver/reimbursement(c) 1.60% 1.75% 1.93% 1.74% 2.07% 1.91%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $24,351 $22,386 $21,932 $21,600 $23,152 $14,495
Portfolio turnover 30% 59% 11% 55% 37% 0%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from December 2, 1992 (date of initial
public investment) to August 31, 1993.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
GENERAL INFORMATION
The Trust was established as a Massachusetts business trust on August 6,
1990. On August 21, 1998, the Board of Trustees ("Trustees") approved the
conversion of its presently offered Class F Shares to Class A Shares. Class A
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 investing primarily in New
York municipal securities. The Fund is not likely to be a suitable investment
for non-New York taxpayers or retirement plans since New York municipal
securities are not likely to produce competitive after-tax yields for such
persons and entities when compared to other investments.
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.
YEAR 2000 STATEMENT
Like other mutual funds and business organizations worldwide, the Fund's
service providers (among them, the adviser, distributor, administrator and
transfer agent) must ensure that their computer systems are adjusted to
properly process and calculate date-related information from and after
January 1, 2000. Many software programs and, to a lesser extent, the computer
hardware in use today cannot distinguish the year 2000 from the year 1900.
Such a design flaw could have a negative impact in the handling of securities
trades, pricing and accounting services. The Fund and its service providers
are actively working on necessary changes to computer systems to deal with
the year 2000 issue and believe that systems will be year 2000 compliant when
required. Analysis continues regarding the financial impact of instituting a
year 2000 compliant program on the Fund's operations.
INVESTMENT INFORMATION
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide current income exempt from
federal regular income tax (federal regular income tax does not include the
federal alternative minimum tax) and the personal income taxes imposed by the
state of New York and New York municipalities. The investment objective
cannot be changed without approval of shareholders. While there is no
assurance that the Fund will achieve its investment objective, it endeavors
to do so by following the investment policies described in this prospectus.
The Fund invests its assets so that at least 80% of its annual interest
income is exempt from federal regular income tax and the personal income
taxes imposed by the state of New York and New York municipalities. Interest
income of the Fund that is exempt from the income taxes described above
retains its exempt status when distributed to the Fund's shareholders. Income
distributed by the Fund may not necessarily be exempt from state or municipal
taxes in states other than New York.
The Fund may invest up to but not including 35% of its net assets in lower
quality bonds. These bonds will usually offer higher yields than higher-rated
bonds, but involve greater investment risk at the time of issue. (See
"Investment Risks.")
INVESTMENT POLICIES
The Fund pursues its investment objective by investing primarily in
securities which are exempt from federal regular income tax and personal
income taxes imposed by the state of New York and New York municipalities. At
least 65% of the value of the Fund's total assets will be invested in
obligations issued by or on behalf of the state of New York, its political
subdivisions, or agencies. Unless indicated otherwise, investment policies
of the Fund may be changed by the Trustees without approval of shareholders.
Shareholders will be notified before any material changes in these policies
become effective.
ACCEPTABLE INVESTMENTS
The securities in which the Fund invests include:
* obligations issued by or on behalf of the state of New York, its political
subdivisions, or agencies;
* debt obligations of any state, territory, or possession of the United
States, including the District of Columbia, or any political subdivision of
any of these; and
* participation interests, as described below, in any of the above
obligations, the interest from which is, in the opinion of bond counsel for
the issuers or in the opinion of officers of the Fund and/or the investment
adviser to the Fund, exempt from both federal regular income tax and the
personal income tax imposed by the state of New York and New York
municipalities.
The prices of fixed income securities fluctuate inversely to the direction of
interest rates.
CHARACTERISTICS
The New York municipal securities which the Fund buys are both investment
grade and lower rated bonds. The Fund invests at least 65% of its assets in
bonds which have the same characteristics assigned by Moody's Investors
Service, Inc. ("Moody's"), Standard & Poor's ("S&P") or Fitch IBCA, Inc.
("Fitch") to bonds of investment grade quality (rated Aaa, Aa, A, or Baa by
Moody's or AAA, AA, A, or BBB by S&P or Fitch). The Fund will limit its
purchases of bonds rated Ba or below by Moody's or BB or below by S&P or
Fitch (commonly known as "junk bonds") to up to but not including 35% of its
net assets. Changes in economic conditions or other circumstances are more
likely to lead to weakened capacity to make principal and interest payments
than higher rated bonds.
If a rated bond loses its rating or has its rating reduced after the Fund has
purchased it, the Fund is not required to drop the bond from the portfolio,
but will consider doing so. In certain cases the Fund's adviser may choose
bonds which are unrated if it judges the bonds to have the same
characteristics as otherwise permissible bonds.
There is no limit to portfolio maturity. A description of the rating
categories is contained in the Appendix to this prospectus.
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 New York
municipal securities. The financial institutions from which the Fund
purchases participation interests frequently provide or secure irrevocable
letters of credit or guarantees to assure that the participation interests
are of high quality. The Trustees will determine that participation interests
meet the prescribed quality standards for the Fund.
VARIABLE RATE MUNICIPAL SECURITIES
Some of the New York municipal securities which the Fund purchases may have
variable interest rates. Variable interest rates are ordinarily based on a
published interest rate, interest rate index, or a similar standard, such as
the 91-day U.S. Treasury bill rate. Many variable rate municipal securities
are subject to payment of principal on demand by the Fund in not more than
seven days. All variable rate municipal securities will meet the quality
standards for the Fund. The Fund's investment adviser has been instructed by
the Trustees to monitor the pricing, quality, and liquidity of the variable
rate municipal securities, including participation interests held by the
Fund on the basis of published financial information and reports of the
rating agencies and other analytical services.
MUNICIPAL LEASES
Municipal leases are obligations issued by state and local governments or
authorities to finance the acquisition of equipment and facilities and may be
considered to be illiquid. They may take the form of a lease, an installment
purchase contract, a conditional sales contract or a participation
certificate on any of the above. Lease obligations may be subject to periodic
appropriation. If the entity does not appropriate funds for future lease
payments, the entity cannot be compelled to make such payments. In the event
of failure of appropriation, unless the participation interests are credit
enhanced, it is unlikely that the participants would be able to obtain an
acceptable substitute source of payment.
RESTRICTED AND ILLIQUID SECURITIES
The Fund may invest in restricted securities. Restricted securities are any
securities in which the Fund may invest pursuant to its investment objective
and policies but which are subject to restrictions on resale under federal
securities laws. Under criteria established by the Trustees, certain
restricted securities are determined to be liquid. To the extent that
restricted securities are not determined to be liquid, the Fund will limit
their purchase, together with other illiquid securities including repurchase
agreements providing for settlement in more than seven days after notice, 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 into transactions to
sell its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at
later dates. The Fund may realize short-term profits or losses upon the sale
of such commitments.
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.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest its assets in securities of other investment companies as
an efficient means of carrying out its investment policies. It should be
noted that investment companies incur certain expenses, such as management
fees, and, therefore, any investment by the Fund in shares of other
investment companies may be subject to such duplicate expenses.
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 New York and New York municipalities. This
policy cannot change without shareholder approval. However, from time to
time, when the investment adviser determines that market conditions call for
a temporary defensive posture, the Fund may invest in short-term, non-New
York municipal tax-exempt obligations or taxable temporary investments.
These temporary investments include: notes issued by or on behalf of
municipal or corporate issuers; obligations issued or guaranteed by the
U.S. government, its agencies, or instrumentalities; other debt securities;
commercial paper; certificates of deposit of banks; and repurchase
agreements (arrangements in which the organization selling the Fund a bond or
temporary investment agrees at the time of sale to repurchase it at a
mutually agreed upon time and price).
There are no rating requirements applicable to temporary investments.
However, the investment adviser will limit temporary investments to those
rated within the investment grade categories described under "Acceptable
Investments--Characteristics" (if rated) or (if unrated) those which the
investment adviser judges to have the same characteristics as such investment
grade securities.
Although the Fund is permitted to make taxable, temporary investments, there
is no current intention of generating income subject to federal regular
income tax or personal income taxes imposed by the state of New York or New
York municipalities.
NEW YORK MUNICIPAL SECURITIES
New York municipal securities are generally issued to finance public works,
such as airports, bridges, highways, housing, hospitals, mass transportation
projects, schools, streets, and water and sewer works. They are also issued
to repay outstanding obligations, to raise funds for general operating
expenses, and to make loans to other public institutions and facilities.
New York municipal securities include industrial development bonds issued by or
on behalf of public authorities to provide financing aid to acquire sites or
construct and equip facilities for privately or publicly owned corporations.
The availability of this financing encourages these corporations to locate
within the sponsoring communities and thereby increases local employment.
The two principal classifications of municipal securities are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its full faith and credit and taxing power for the payment
of principal and interest. Interest on and principal of revenue bonds,
however, are payable only from the revenue generated by the facility financed
by the bond or other specified sources of revenue. Revenue bonds do not
represent a pledge of credit or create any debt of or charge against the
general revenues of a municipality or public authority. Industrial
development bonds are typically classified as revenue bonds.
INVESTMENT RISKS
The value of Shares will fluctuate. The amount of this fluctuation is
dependent upon the quality and maturity of the bonds in the Fund's portfolio
as well as on market conditions. Yields on New York municipal securities
depend on a variety of factors, including, but not limited to: the general
conditions of the short-term municipal note market and the municipal bond
market; the size of the particular offering; the maturity of the obligations;
and the rating of the issue. Further, any adverse economic conditions or
developments affecting the state or city of New York could impact the Fund's
portfolio. The ability of the Fund to achieve its investment objective also
depends on the continuing ability of the issuers of New York municipal
securities and participation interests, or the guarantors of either, to meet
their obligations for the payment of interest and principal when due.
Investing in New York municipal securities which meet the Fund's quality
standards may not be possible if the state and city of New York do not
maintain their current credit ratings.
A further discussion of the risks of a portfolio which invests largely in New
York municipal securities is contained in the Statement of Additional
Information.
The prices of longer term bonds fluctuate more widely in response to market
interest rate changes. Generally speaking, the lower quality, long-term bonds
in which the Fund invests have greater fluctuation in value than high quality,
shorter-term bonds.
Bond prices are interest rate sensitive, which means that their value varies
inversely with market interest rates. Thus, if market interest rates have
increased from the time a bond was purchased, the bond, if sold, might be
sold at a price less than its cost. Similarly, if market interest rates have
declined from the time a bond was purchased, the bond, if sold, might be sold
at a price greater than its cost. (In either instance, if the bond was held
to maturity, no loss or gain normally would be realized as a result of
interim market fluctuations.)
Prices of lower grade bonds also fluctuate with changes in the perceived
quality of the credit of their issuers. Consequently, Shares may not be
suitable for persons who cannot assume the somewhat greater risks of capital
depreciation associated with higher tax-exempt income yields. In addition,
bonds rated "BBB" and below by S&P or Fitch or "Baa" and below by Moody's
have speculative characteristics. Changes in economic conditions or other
circumstances are more likely to lead to weakened capacity to make principal
and interest payments than higher rated bonds.
A large portion of the Fund's portfolio may be invested in bonds whose
interest payments are from revenues of similar projects (such as housing or
hospitals) or where issuers share the same geographic location. As a result,
the Fund may be more susceptible to similar economic, political or regulatory
developments than would a portfolio of bonds with a greater geographic and
project variety. This susceptibility may result in greater fluctuations in
share price.
Many issuers of bonds which have characteristics of rated bonds choose not to
have their obligations rated. Unrated bonds may carry a greater risk and
higher yield than rated securities. Although unrated bonds are not
necessarily of lower quality, the market for them may not be as broad as that
for rated bonds since many investors rely solely on the major rating agencies
for credit appraisal.
Further, the lower-rated or unrated bonds which the Fund may purchase are
frequently traded only in markets where the number of potential purchasers
and sellers is limited. This consideration may have the effect of limiting
the availability of such bonds for the Fund to purchase and may also have the
effect of limiting the ability of the Fund to sell such bonds at their fair
market value either to meet redemption requests or to respond to changes in
the economy or the financial markets. The Fund will not invest more than 15%
of its total assets in securities which are not readily marketable.
REDUCING RISKS OF LOWER-RATED SECURITIES
The Fund's investment adviser believes that the risks of investing in lower-
rated securities can be reduced. The professional portfolio management
techniques used by the Fund to attempt to reduce these risks include:
CREDIT RESEARCH
When purchasing bonds, rated or unrated, the Fund's investment adviser
performs its own credit analysis in addition to using recognized rating
agencies. This credit analysis considers the economic feasibility of revenue
bond project financing and general purpose borrowings, the financial
condition of the issuer or guarantor with respect to liquidity, cash flow and
ability to meet anticipated debt service requirements, and political
developments that may affect credit quality.
DIVERSIFICATION
The Fund invests in securities of many different issuers to reduce portfolio
risks.
ECONOMIC ANALYSIS
The Fund's adviser also considers trends in the overall economy, in
geographic areas, in various industries, and in the financial markets.
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.
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.
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.
INVESTING IN THE FUND
This prospectus offers Class A Shares with the characteristics described
below.
<TABLE>
<CAPTION>
CLASS A
<S> <C>
Minimum and Subsequent
Investment Amounts $1500/$100
Minimum and Subsequent
Investment Amount
for Retirement Plans NA
Maximum Sales Charge 4.50%*
Maximum Contingent Deferred
Sales Charge** None***
Conversion Feature No
</TABLE>
* Class A Shares are sold at NAV, plus a sales charge as follows:
<TABLE>
<CAPTION>
SALES CHARGE AS A DEALER
PERCENTAGE OF CONCESSION AS
PUBLIC NET A PERCENTAGE
OFFERING AMOUNT OF PUBLIC
AMOUNT OF TRANSACTION PRICE INVESTED OFFERING PRICE
<S> <C> <C> <C>
Less than $100,000 4.50% 4.71% 4.00%
$100,000 but less
than $250,000 3.75% 3.90% 3.25%
$250,000 but less
than $500,000 2.50% 2.56% 2.25%
$500,000 but less
than $1 million 2.00% 2.04% 1.80%
$1 million or greater 0.00% 0.00% 0.75%+
</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.
*** Applies only to Shares purchased where the dealer has received an advanced
commisssion.
+ See Dealer Concession.
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, Inc. ("Federated Funds") may exchange
their Shares for Class F Shares 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.
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 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.
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 Shares. Financial intermediaries
purchasing Class A Shares for their customers in amounts of $1 million or
more are eligible to receive an advance commission from the distributor based
on the following breakpoints:
<TABLE>
<CAPTION>
ADVANCE COMMISSION
TRANSACTION AS A PERCENTAGE OF
AMOUNT PUBLIC OFFERING PRICE
<S> <C>
First $1 - $5 million 0.75%
Next $5 - $20 million 0.50%
Over $20 million 0.25%
</TABLE>
For accounts with assets over $1 million, the dealer commission resets
annually to the first breakpoint on the anniversary of the first purchase.
Class A Share purchases under this program may be made by Letter of Intent or
by combining concurrent purchases. The above commission will be paid only on
those purchases that were not previously subject to a front-end sales charge
and dealer commission. Certain retirement accounts may not be eligible for
this program. Financial intermediaries must notify the Fund once an account
reaches $1 million in order to qualify for advance commissions.
A contingent deferred sales charge of 0.75% of the redemption amount applies
to Class A Shares redeemed up to 24 months after purchase if a financial
intermediary received an advance commission on the transaction.
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 Shares.
REDEEMING AND EXCHANGING SHARES
Shares of the Fund may be redeemed for cash or exchanged for shares of New
York Municipal Cash Trust or Shares of the same class of 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 Share
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 of not less than $100. To
be eligible to participate in this program, a shareholder must have an
account value of at least $10,000. A shareholder may apply for participation
in this program through his financial 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.
CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge applies only to Shares purchased where
the dealer has received an advanced commission. 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:
* following the death or disability, as defined in Section 72(m)(7) of the
Internal Revenue Code of 1986, of the last surviving shareholder and any
designated beneficiaries;
* 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;
* which are involuntary redemptions of shareholder accounts that do not
comply with the minimum balance requirements;
* which are reinvested in the Fund under the reinvestment privilege;
* of Shares held by Directors, 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
* 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 daily 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 NAV 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. 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 Board of 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 "Adviser"), the
Fund's investment adviser, subject to direction by the Trustees. The Adviser
continually conducts investment research and supervision for the Fund and is
responsible for the purchase and sale of portfolio instruments, for which it
receives an annual fee from the Fund.
ADVISORY FEES
The Fund's Adviser receives an annual investment advisory fee equal to 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, Inc. All of the Class A (voting)
Shares of Federated Investors, Inc. are owned by a trust, the trustees of
which are John F. Donahue, Chairman and Director of Federated Investors,
Inc., Mr. Donahue's wife, and Mr. Donahue's son, J. Christopher Donahue, who
is President and Director of Federated Investors, Inc.
Federated Advisers and other subsidiaries of Federated Investors, Inc. 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 $120 billion invested across more
than 300 funds under management and/or administration by its subsidiaries, as
of December 31, 1997, Federated Investors, Inc. 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 4,000
financial institutions nationwide.
J. Scott Albrecht has been a portfolio manager of the Fund since March 1995.
Mr. Albrecht joined Federated Investors, Inc. or its predecessor 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 a portfolio manager of the Fund since April 1997.
Ms. Ochson joined Federated Investors, Inc. or its predecessor 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, Inc.
DISTRIBUTION PLAN AND SHAREHOLDER SERVICES
Under a distribution plan adopted in accordance with Investment Company Act
Rule 12b-1 (the "Distribution Plan"), the Fund may pay to the distributor an
amount, computed at an annual rate of 0.50% of the average daily NAV of
Shares to finance any activity which is principally intended to result in the
sale of Shares subject to the Distribution Plan. The distributor may select
financial institutions such as banks, fiduciaries, custodians for public
funds, investment advisers, and broker/ dealers to provide sales services or
distribution related support services as agents for their clients or
customers.
The Distribution Plan is a compensation-type plan. As such, the Fund makes no
payments to the distributor except as described above. Therefore, the Fund
does not pay for unreimbursed expenses of the distributor, including amounts
expended by the distributor in excess of amounts received by it from the
Fund, interest, carrying or other financing charges in connection with excess
amounts expended, or the distributor's overhead expenses. However, the
distributor may be able to recover such amount or may earn a profit from
future payments made by the Fund under the Distribution Plan.
In addition, the Fund has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, Inc.,
under which the Fund may make payments up to 0.25% of the average daily NAV
of Shares, computed at an annual rate, to obtain certain personal services
for shareholders and for the maintenance of shareholder accounts. Under the
Shareholder Services Agreement, Federated Shareholder 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. will pay financial institutions, for distribution
and/or administrative services, an amount equal to 1.00% of the offering
price of the Shares acquired by their clients or customers on purchases up to
$1,999,999, 0.50% of the offering price on purchases of $2,000,000 to
$4,999,999, and 0.25% of the offering price on purchases of $5,000,000 or
more. (This fee is in addition to the 1.00% sales charge on purchases of less
than $1 million.)
Furthermore, in addition to payments made pursuant to the Distribution Plan
and Shareholder Services Agreement, Federated Securities Corp. and Federated
Shareholder Services, from their own assets, may pay financial institutions
supplemental fees for the performance of substantial sales services,
distribution related support services, or shareholder services. The support
may include sponsoring sales, educational and training seminars for their
employees at recreational-type facilities, providing sales literature, and
engineering computer software programs that emphasize the attributes of the
Fund. Such assistance will be predicated upon the amount of Shares the
financial institution sells or may sell and/or upon the type and nature of
sales or marketing support furnished by the financial institution. Any
payments made by the distributor may be reimbursed by the Fund's Adviser or
its affiliates, and not the Fund.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES
Federated Services Company, a subsidiary of Federated Investors, Inc.,
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, Inc., as specified below:
<TABLE>
<CAPTION>
AVERAGE AGGREGATE
MAXIMUM FEE DAILY NET ASSETS
<C> <S>
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 Trust 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 by 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 Trust's
outstanding shares of all series entitled to vote.
As of October 9, 1998, 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 Shares for its clients), Jacksonville, FL,
owned approximately 799,834 Shares (36.09%) 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.
Dividends of the Fund representing net interest income earned on some
temporary investments and any realized net short-term gains are taxed as
ordinary income.
These tax consequences apply whether dividends are received in cash or as
additional Shares. Information on the tax status of dividends and
distributions is provided annually.
NEW YORK TAXES
Under existing New York laws, distributions made by the Fund will not be
subject to New York state or New York City personal income taxes to the
extent that such distributions qualify as "exempt-interest dividends" under
the Code, and represent interest income attributable to obligations of the
state of New York and its political subdivisions, as well as certain other
obligations, the interest on which is exempt from New York state and New York
City personal income taxes, such as, for example, certain obligations of the
Commonwealth of Puerto Rico. Conversely, to the extent that distributions
made by the Fund are derived from other types of obligations, such
distributions will be subject to New York state and New York City personal
income taxes.
The Fund cannot predict in advance the exact portion of its dividends that
will be exempt from New York state and New York City personal income taxes.
However, the Fund will report to shareholders at least annually what
percentage of the dividends it actually paid is exempt from such taxes.
Dividends paid by the Fund are exempt from the New York City unincorporated
business tax to the extent that they are exempt from the New York City
personal income tax.
Dividends paid by the Fund are not excluded from net income in determining
New York state or New York City franchise taxes on corporations or financial
institutions.
STATE AND LOCAL TAXES
Income from the Fund is not necessarily free from taxes in states other than
New York. Shareholders are urged to consult their own tax advisers regarding
the status of their accounts under state and local tax laws.
PERFORMANCE INFORMATION
From time to time, the Fund advertises the total return, yield, and tax-
equivalent yield for Shares.
Total return represents the change, over a specific period of time, in the
value of an investment in Shares after reinvesting all income and capital
gains distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.
The yield of Shares is calculated by dividing the net investment income per
Share (as defined by the SEC earned by Shares over a thirty-day period by the
maximum offering price per Share of Shares on the last day of the period. This
number is then annualized using semi-annual compounding. The tax-equivalent
yield of Shares is calculated similarly to the yield, but is adjusted to
reflect the taxable yield that Shares would have had to earn to equal its
actual yield, assuming a specific tax rate. The yield and the tax-equivalent
yield do not necessarily reflect income actually earned by Shares and,
therefore, may not correlate to the dividends or other distributions paid to
shareholders.
The performance information reflects the effect of the maximum sales charge
and other similar non-recurring changes, such as the contingent deferred
sales charge, which, if excluded, would increase the total return, yield, and
tax-equivalent yield.
From time to time, advertisements for the Fund may refer to ratings,
rankings and other information in certain financial publications and/or
compare the Fund's performance to certain indices.
APPENDIX
STANDARD & POOR'S ("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.
BB--Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
The "BB" rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied "BBB" rating.
B--Debt rated "B" has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity of
willingness to pay interest and repay principal. The "B" rating cagegory is
also used for debt subordinated to senior debt that is assigned an actual or
implied "BBB" or "BB" rating.
CCC--Debt rated "CCC" has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions
to meet timely payment of interest and repayment of principal. In the event
of adverse business, financial, or economic conditions, it is not likely to
have the capacity to pay interest and repay principal. The "CCC" rating
category is also used for debt subordinated to senior debt that is assigned
an actual or implied "B" or "B-" rating.
CC--The rating "CC" typically is applied to debt subordinated to senior debt
that is assigned an actual or implied "CCC" debt rating.
C--The rating "C" typically is applied to debt subordinated to senior debt
which is assigned an actual or implied "CCC-" debt rating. The "C" rating may
be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
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. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
AA--Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than
in Aaa securities.
A--Bonds which are rated "A" possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may
be present which suggest a susceptibility to impairment sometime in the
future.
BAA--Bonds which are rated "Baa" are considered as medium grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present, but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
BA--Bonds which are rated "Ba" are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B--Bonds which are rated "B" generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA--Bonds which are rated "Caa" are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
CA--Bonds which are rated "Ca" represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C--Bonds which are rated "C" are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
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 IBCA, 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.
BB--Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified which could
assist the obligor in satisfying its debt service requirements.
B--Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued
timely payment of principal and interest reflects the limited margin of
safety and the need for reasonable business and economic activity throughout
the life of the issue.
CCC--Bonds have certain identifiable characteristics which, if not remedied,
may lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC--Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C--Bonds are in imminent default in payment of interest
or principal.
DDD, DD, AND D--Bonds are in default on interest and/or principal payments.
Such bonds are extremely speculative and should be valued on the basis of
their ultimate recovery value in liquidation or reorganization of the
obligor. DDD represents the highest potential for recovery on these bonds,
and D represents the lowest potential for recovery.
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.
S&P 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 SHORT-TERM LOAN RATINGS
MIG1/VMIG1--This designation denotes best quality. There is a present strong
protection by established cash flows, superior liquidity support or
demonstrated broad based access to the market for refinancing.
MIG2/VMIG2--This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
FITCH 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.
S&P 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 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.
PORTFOLIO OF INVESTMENTS
FEDERATED NEW YORK MUNICIPAL INCOME FUND
AUGUST 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
<S> <C> <C>
LONG-TERM MUNICIPALS--95.4%
NEW YORK--95.4%
$1,000,000 Amherst, NY IDA, Tax-Exempt Lease Revenue Bonds (Series 1997A),
5.55% (KeyBank, N.A. LOC)/(Original Issue Yield: 5.65%), 10/1/2017 A $ 1,043,290
500,000 Essex County, NY IDA, PCR Refunding Revenue Bonds (Series 1997C),
5.70% (International Paper Co.), 7/1/2016 BBB+ 540,390
500,000 Essex County, NY IDA, Solid Waste Disposal Revenue Bonds (Series
A), 5.80% (International Paper Co.), 12/1/2019 BBB+ 523,630
500,000 Long Island Power Authority, Electric System General Revenue Bonds,
(Series 1998A), 5.50% (Original Issue Yield: 5.57%), 12/1/2029 A- 514,045
500,000 Metropolitan Transportation Authority, New York, Commuter
Facilities Revenue Bonds (Series 1998A), 5.125% (Original Issue
Yield: 5.43%), 7/1/2018 BBB+ 499,655
305,000 Nassau County, NY IDA, Civic Facility Revenue Bonds, 6.85% (Hofstra
University), 1/1/2012 A 356,344
330,000 Nassau County, NY IDA, Civic Facility Revenue Bonds, 6.85% (Hofstra
University), 1/1/2013 A 385,552
1,000,000 New York City Municipal Water Finance Authority, Water & Sewer
System Revenue Bonds, (Series A), 5.125% (Original Issue Yield:
5.50%), 6/15/2021 A- 994,600
1,000,000 New York City, NY IDA, Civic Facility Revenue Bonds, (Series 1995),
6.30% (College of New Rochelle)/(Original Issue Yield: 6.45%), 9/1/
2015 Baa2 1,067,530
500,000 New York City, NY IDA, Civic Facility Revenue Bonds, 7.00% (Mt. St.
Vincent College, NY), 5/1/2008 NR 549,790
400,000 New York City, NY IDA, Civil Facilities Revenue Bonds, 5.80% (YMCA
of Greater NY)/(Original Issue Yield: 6.10%), 8/1/2016 Baa3 423,824
400,000 New York City, NY IDA, Industrial Development Revenue Bonds (Series
1997), 5.75% (Brooklyn Navy Yard Cogeneration Partners, L.P.
Project)/(Original Issue Yield: 5.81%), 10/1/2036 BBB- 412,108
400,000 New York City, NY IDA, Revenue Bonds, 5.65% (United Air Lines)/
(Original Issue Yield: 5.682%), 10/1/2032 BB+ 409,748
750,000 New York City, NY IDA, Special Facilities Revenue Bonds, 6.90%
(American Airlines), 8/1/2024 BBB- 838,080
1,000,000 New York City, NY Transitional Finance Authority, Future Tax
Secured Bonds (Series 1998B), 4.75% (Original Issue Yield: 4.95%),
11/15/2018 AA 966,630
500,000 New York City, NY, GO UT Bonds, (Series B), 7.25% (Original Issue
Yield: 7.55%), 8/15/2019 A- 590,315
900,000 New York State Dormitory Authority, Revenue Bonds (Series A), 6.50%
(University of Rochester, NY)/(Original Issue Yield: 6.582%), 7/1/
2019 A+ 1,007,982
</TABLE>
FEDERATED NEW YORK MUNICIPAL INCOME FUND
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
<S> <C> <C>
LONG-TERM MUNICIPALS--CONTINUED
NEW YORK--CONTINUED
$ 1,000,000 New York State Dormitory Authority, Revenue Bonds, 5.50%
(Long Island University)/(Asset Guaranty INS)/(Original Issue
Yield:
5.75%), 9/1/2020 AA $ 1,044,980
500,000 New York State Dormitory Authority, Revenue Bonds, 6.25% (Nyack
Hospital)/(Original Issue Yield: 6.50%), 7/1/2013 Baa2 540,175
1,000,000 New York State Environmental Facilities Corp., Solid Waste Disposal
Revenue Bonds, 6.10% (Occidental Petroleum Corp.)/(Original Issue
Yield: 6.214%), 11/1/2030 BBB+ 1,063,900
900,000 New York State Environmental Facilities Corp., Water Facilities
Revenue Refunding Bonds (Series A), 6.30% (Spring Valley Water Co.,
NY)/(AMBAC INS), 8/1/2024 AAA 991,440
1,000,000 New York State HFA, Service Contract Obligation Revenue Bonds,
(Series 1995A), 6.375% (Original Issue Yield: 6.45%), 9/15/2015 BBB+ 1,109,020
1,000,000 New York State Medical Care Facilities Finance Agency, FHA-Mortgage
Revenue Bonds (Series A), 6.50% (Lockport Memorial Hospital, NY)/
(FHA GTD), 2/15/2035 AA 1,108,410
1,000,000 New York State Medical Care Facilities Finance Agency, Revenue
Bonds (Series B), 6.60% (FHA GTD)/(Original Issue Yield: 6.625%),
8/15/2034 AA 1,118,660
2,000,000 New York State Mortgage Agency, Revenue Bonds (Series 40A), 6.70%,
4/1/2025 Aaa 2,168,700
400,000 New York State Power Authority, Revenue Bonds (Series 1998A), 5.00%
(Original Issue Yield: 5.13%), 2/15/2015 AA- 403,988
1,000,000 New York State Thruway Authority, Local Highway and Bridge Service
Contract Revenue Bonds (Series 1995), 6.25% (Original Issue Yield:
6.436%), 4/1/2014 BBB+ 1,099,480
500,000 New York State Urban Development Corp., Correctional Capital
Facilities Refunding Revenue Bonds (Series 1998), 5.00% (Original
Issue Yield: 5.32%), 1/1/2020 BBB+ 489,375
400,000 Niagara Falls, NY FGI, Certificates of Participation (Series 1998),
5.375% (Original Issue Yield: 5.42%), 6/15/2028 BBB- 404,848
500,000 Port Authority of New York and New Jersey, Revenue Bonds (Series
96), 6.60% (FGIC INS)/(Original Issue Yield: 6.65%), 10/1/2023 AAA 557,855
TOTAL LONG TERM MUNICIPALS (IDENTIFIED COST $21,379,947) 23,224,344
SHORT-TERM MUNICIPALS--3.3%
PUERTO RICO--3.3%
800,000 Puerto Rico Government Development Bank Weekly VRDNs (MBIA INS)/
(Credit Suisse First Boston LIQ) (AT AMORTIZED COST) AA 800,000
TOTAL INVESTMENTS (IDENTIFIED COST $22,179,947)(A) $24,024,344
</TABLE>
* Please refer to the Appendix on page 15 of this prospectus for an
explanation of the credit ratings. Current credit ratings are unaudited.
At August 31, 1998, 31.2% of the total investments at market value were
subject to alternative minimum tax.
(a) The cost of investments for federal tax purposes amounts to $22,179,947.
The net unrealized appreciation of investments on a federal tax basis amounts
to $1,844,397 which is comprised of $1,852,341 appreciation and $7,944
depreciation at August 31, 1998.
Note: The categories of investments are shown as a percentage of net assets
($24,351,420) at August 31, 1998.
The following acronyms are used throughout this portfolio:
AMBAC --American Municipal Bond Assurance Corporation CSD --Central School
District FHA --Federal Housing Administration GO --General Obligation GTD
- --Guaranty HFA --Housing Finance Authority IDA --Industrial Development
Authority INS --Insured LIQ --Liquidity Agreement LOC --Letter of Credit MBIA
- --Municipal Bond Investors Assurance PCR --Pollution Control Revenue UT
- --Unlimited Tax VRDNs --Variable Rate Demand Notes
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF ASSETS AND LIABILITIES
FEDERATED NEW YORK MUNICIPAL INCOME FUND
AUGUST 31, 1998
<TABLE>
<S> <C> <C>
ASSETS:
Total investments in securities, at value (identified and tax cost
$22,179,947) $24,024,344
Cash 71,403
Income receivable 373,264
Receivable for shares sold 34,648
Total assets 24,503,659
LIABILITIES:
Payable for shares redeemed $89,708
Income distribution payable 51,847
Accrued expenses 10,684
Total liabilities 152,239
NET ASSETS for 2,213,722 shares outstanding $24,351,420
NET ASSETS CONSIST OF:
Paid in capital $23,494,363
Net unrealized appreciation of investments 1,844,397
Accumulated net realized loss on investments (987,340)
Total Net Assets $24,351,420
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
Net Asset Value Per Share ($24,351,420 / 2,213,722 shares
outstanding) $11.00
Offering Price Per Share (100/95.50 of $11.00)* $11.52
</TABLE>
* See "Investing in the Fund" in the Prospectus.
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF OPERATIONS
FEDERATED NEW YORK MUNICIPAL INCOME FUND
YEAR ENDED AUGUST 31, 1998
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest $1,308,224
EXPENSES:
Investment advisory fee $ 92,417
Administrative personnel and services fee 125,002
Custodian fees 1,253
Transfer and dividend disbursing agent fees and expenses 23,870
Directors'/Trustees' fees 701
Auditing fees 14,348
Legal fees 1,829
Portfolio accounting fees 49,555
Distribution services fee 115,521
Shareholder services fee 57,761
Share registration costs 11,787
Printing and postage 9,982
Insurance premiums 2,904
Miscellaneous 26,680
Total expenses 533,610
Waivers and reimbursements--
Waiver of investment advisory fee $ (92,417)
Waiver of distribution services fee (110,901)
Waiver of shareholder services fee (4,621)
Reimbursement of other operating expenses (162,796)
Total waivers and reimbursements (370,735)
Net expenses 162,875
Net investment income 1,145,349
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments 146,593
Net change in unrealized appreciation of investments 660,446
Net realized and unrealized gain on investments 807,039
Change in net assets resulting from operations $1,952,388
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF CHANGES IN NET ASSETS
FEDERATED NEW YORK MUNICIPAL INCOME FUND
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1998 1997
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS--
Net investment income $ 1,145,349 $ 1,219,601
Net realized gain on investments ($146,593 and $566,956,
respectively, as computed for federal tax purposes) 146,593 566,956
Net change in unrealized appreciation 660,446 432,403
Change in net assets resulting from operations 1,952,388 2,218,960
DISTRIBUTIONS TO SHAREHOLDERS--
Distributions from net investment income (1,145,349) (1,219,601)
SHARE TRANSACTIONS--
Proceeds from sale of shares 4,905,471 3,711,284
Net asset value of shares issued to shareholders in payment of
distributions declared 548,237 532,033
Cost of shares redeemed (4,295,799) (4,787,869)
Change in net assets resulting from share transactions 1,157,909 (544,552)
Change in net assets 1,964,948 454,807
NET ASSETS:
Beginning of period 22,386,472 21,931,665
End of period $24,351,420 $22,386,472
</TABLE>
(See Notes which are an integral part of the Financial Statements)
NOTES TO FINANCIAL STATEMENTS
FEDERATED NEW YORK MUNICIPAL INCOME FUND
AUGUST 31, 1998
ORGANIZATION
Municipal Securities Income Trust (the "Trust") is registered under the
Investment Company Act of 1940, as amended (the "Act") as an open-ended,
management investment company. The Trust consists of five portfolios. The
financial statements included herein are only those of Federated New York
Municipal Income Fund (the "Fund"), a non-diversified portfolio. The
financial statements of the other portfolios are presented separately. The
assets of each portfolio are segregated and a shareholder's interest is
limited to the portfolio in which shares are held. The investment objective
of the Fund is to provide current income exempt from federal regular income
tax (federal regular income tax does not include the federal alternative
minimum tax) and the personal income taxes imposed by the state of New York
and New York municipalities.
On June 2, 1997, the Fund acquired all the net assets of The William Penn New
York Tax-Free Income Fund ("Acquired Fund") pursuant to a plan of
reorganization approved by the Acquired Fund's shareholders. The acquisition
was accomplished by a tax-free exchange of 26,036 shares of the Fund (valued
at $271,302) for the 26,795 shares of the Acquired Fund outstanding on
June 2, 1997. The Acquired Fund's net assets of $270,336 which consisted of
$268,620 of Paid in Capital and, $2,117 of unrealized appreciation, and $401
of net realized loss on investments at that date were combined with those of
the Fund. The aggregate net assets of the Fund and the Acquired Fund
immediately before the acquisition were $22,867,645 and $270,336,
respectively.
SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS
Municipal bonds are valued by an independent pricing service, taking into
consideration yield, liquidity, risk, credit quality, coupon, maturity, type
of issue, and any other factors or market data the pricing service deems
relevant. Short-term securities are valued at the prices provided by an
independent pricing service. However, short-term securities with remaining
maturities of sixty days or less at the time of purchase may be valued at
amortized cost, which approximates fair market value.
INVESTMENT INCOME, EXPENSES, AND DISTRIBUTIONS
Interest income and expenses are accrued daily. Bond premium and discount, if
applicable, are amortized as required by the Internal Revenue Code, as
amended (the "Code"). Distributions to shareholders are recorded on the ex-
dividend date.
FEDERAL TAXES
It is the Funds' policy to comply with the provisions of the Code applicable
to regulated investment companies and to distribute to shareholders each year
substantially all of its income. Accordingly, no provisions for federal tax
are necessary.
At August 31, 1998, the Fund, for federal tax purposes, had a capital loss
carryforward of $987,340, which will reduce the Fund's taxable income arising
from future net realized gain on investments, if any, to the extent permitted
by the Code, and thus will reduce the amount of the distributions to
shareholders which would otherwise be necessary to relieve the Fund of any
liability for federal tax. Pursuant to the Code, such capital loss
carryforward will expire as follows:
EXPIRATION YEAR EXPIRATION AMOUNT
2003 $ 3,143
2004 983,796
2005 401
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may engage in when-issued or delayed delivery transactions. The Fund
records when-issued securities on the trade date and maintains security
positions such that sufficient liquid assets will be available to make
payment for the securities purchased. Securities purchased on a when-issued
or delayed delivery basis are marked to market daily and begin earning
interest on the settlement date.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts of assets, liabilities, expenses and
revenues reported in the financial statements. Actual results could differ
from those estimated.
OTHER
Investment transactions are accounted for on the trade date.
SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value).
Transactions in shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1998 1997
<S> <C> <C>
Shares sold 452,550 356,926
Shares issued to shareholders in payment of distributions declared 50,557 51,006
Shares redeemed (396,777) (456,448)
Net change resulting from share transactions 106,330 (48,516)
</TABLE>
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE
Federated Advisers, the Fund's investment adviser (the "Adviser"), receives
for its services an annual investment advisory fee equal to 0.40% of the
Fund's average daily net assets.
The Adviser may voluntarily choose to waive any portion of its fee and/or
reimburse certain operating expenses of the Fund. The Adviser can modify or
terminate this voluntary waiver at any time at its sole discretion.
ADMINISTRATIVE FEE
Federated Services Company ("FServ"), under the Administrative Services
Agreement, provides the Fund with administrative personnel and services. The
fee paid to FServ is based on the level of average aggregate daily net assets
of all funds advised by subsidiaries of Federated Investors, Inc. for the
period. The administrative fee received during the period of the
Administrative Services Agreement shall be at least $125,000 per portfolio
and $30,000 per each additional class of shares.
DISTRIBUTION SERVICES FEE
The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1
under the Act. Under the terms of the Plan, the Fund will compensate
Federated Securities Corp., ("FSC") the principal distributor, from the net
assets of the Fund to finance activities intended to result in the sale of
the Fund's shares. The Plan provides that the Fund may incur distribution
expenses up to 0.50% of the average daily net assets of the Fund, annually,
to compensate FSC.
The distributor may voluntarily choose to waive any portion of its fee. The
distributor can modify or terminate this voluntary waiver at any time at its
sole discretion.
SHAREHOLDER SERVICES FEE
Under the terms of a Shareholder Services Agreement with Federated
Shareholder Services, ("FSS"), the Fund will pay FSS up to 0.25% of average
daily net assets of the Fund for the period. The fee paid to FSS is used to
finance certain services for shareholders and to maintain shareholder
accounts. FSS may voluntarily choose to waive any portion of its fee. FSS can
modify or terminate this voluntary waiver at any time at its sole discretion.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES
FServ, through its subsidiary, Federated Shareholder Services Company
("FSSC") serves as transfer and dividend disbursing agent for the Fund. The
fee paid to FSSC is based on the size, type, and number of accounts and
transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES
FServ maintains the Fund's accounting records for which it receives a fee.
The fee is based on the level of the Fund's average daily net assets for the
period, plus out-of-pocket expenses.
INTERFUND TRANSACTION
During the period ended August 31, 1998, the Trust engaged in purchase and
sales transactions with funds that have a common investment adviser (or
affiliated investment adviser), common Directors/Trustees, and/or common
Officers. These purchase and sale transactions were made at current market
value pursuant to Rule 17a-7 under the Act amounting to $7,400,000 and
$7,400,000, respectively.
GENERAL
Certain of the Officers and Trustees of the Trust are Officers and Directors
or Trustees of the above companies.
INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended August 31, 1998, were as follows:
PURCHASES $6,889,253
SALES $6,895,020
CONCENTRATION OF CREDIT RISK
Since the Fund invests a substantial portion of its assets in issuers located
in one state, it will be more susceptible to factors adversely affecting
issuers of that state than would be a comparable tax-exempt mutual fund that
invests nationally. In order to reduce the credit risk associated with such
factors, at August 31, 1998, 27.7% of the securities in the portfolio of
investments are backed by letters of credit or bond insurance of various
financial institutions and financial guaranty assurance agencies. The value
of investments insured by or supported (backed) by a letter of credit from
any one institution or agency did not exceed 9.3% of total investments.
YEAR 2000 (UNAUDITED)
Similar to other financial organizations, the Fund could be adversely
affected if the computer systems used by the Fund's service providers do not
properly process and calculate date-related information and data from and
after January 1, 2000. The Fund's Adviser and Administrator are taking
measures that they believe are reasonably designed to address the Year 2000
issue with respect to computer systems that they use and to obtain reasonable
assurances that comparable steps are being taken by each of the Fund's other
service providers. At this time, however, there can be no assurance that
these steps will be sufficient to avoid any adverse impact to the Fund.
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees of
MUNICIPAL SECURITIES INCOME TRUST
and Shareholders of
FEDERATED NEW YORK MUNICIPAL INCOME FUND:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Federated New York Municipal
Income Fund as of August 31, 1998, the related statement of operations for
the year then ended, the statements of changes in net assets for the years
ended August 31, 1998 and 1997, and the financial highlights for the periods
presented. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of the
securities owned as of August 31, 1998, by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Federated New
York Municipal Income Fund as of August 31, 1998, the results of its
operations, the changes in its net assets and its financial highlights for
the respective stated periods in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
October 9, 1998
Federated
New York
Municipal
Income Fund
(A Portfolio of Municipal Securities
Income Trust)
Class A Shares
(formerly, Class F Shares)
PROSPECTUS
OCTOBER 31, 1998
A Non-Diversified Portfolio of
Municipal Securities Income Trust, an
Open-End Management
Investment Company
FEDERATED NEW YORK MUNICIPAL INCOME FUND
CLASS A SHARES
(FORMERLY, CLASS F SHARES)
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
DISTRIBUTOR
Federated Securities Corp.
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
INVESTMENT ADVISER
Federated Advisers
Federated Investors Tower
1001 Liberty Avenue
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
Federated Securities Corp., Distributor
1-800-341-7400
www.federatedinvestors.com
Cusip 625922208
2092919A-FS (10/98)
[Graphic]
Federated New York Municipal Income Fund
(A Portfolio of Municipal Securities Income Trust)
Class A Shares (formerly, Class F Shares)
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the prospectus
of Federated New York Municipal Income Fund (the "Fund"), a portfolio of
Municipal Securities Income Trust dated October 31, 1998. 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 NEW YORK MUNICIPAL INCOME FUND
FEDERATED INVESTORS FUNDS
5800 CORPORATE DRIVE
PITTSBURGH, PENNSYLVANIA 15237-7000
Statement dated October 31, 1998
[Graphic]
Federated Securities Corp., Distributor
Federated Investors, Inc.
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
1-800-341-7400
www.federatedinvestors.com
Cusip 625922208
2092919B (10/98)
[Graphic]
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
Investing in Securities of Other Investment
Companies 2
Temporary Investments 2
Portfolio Turnover 3
Investment Limitations 3
New York Investment Risks 4
Municipal Securities Income Trust Management 5
Fund Ownership 8
Trustee Compensation 9
Trustee Liability 9
Investment Advisory Services 9
Adviser to the Fund 9
Advisory Fees 10
Other Services 10
Fund Administration 10
Custodian and Portfolio Accountant 10
Transfer Agent 10
Independent Auditors 10
Brokerage Transactions 10
Purchasing Shares 10
Quantity Discounts and Accumulated Purchases 11
Concurrent Purchases 11
Letter of Intent 11
Reinvestment Privilege 11
Distribution Plan and Shareholder Services
Agreement 11
Conversion to Federal Funds 12
Purchases by Sales Representatives,
Fund Directors, and Employees 12
Determining Net Asset Value 12
Valuing Municipal Bonds 12
Use of Amortized Cost 12
Redeeming Shares 13
Redemption in Kind 13
Massachusetts Partnership Law 13
Tax Status 13
The Fund's Tax Status 13
Total Return 14
Yield 14
Tax-Equivalent Yield 14
Tax-Equivalency Table 15
Performance Comparisons 15
Economic and Market Information 16
About Federated Investors, Inc. 16
Mutual Fund Market 17
Institutional Clients 17
Bank Marketing 17
Broker/Dealers and Bank Broker/Dealer
Subsidiaries 17
GENERAL INFORMATION ABOUT THE FUND
The Fund is a portfolio of Municipal Securities Income Trust (the "Trust").
The Trust was established as a Massachusetts business trust under a
Declaration of Trust dated August 6, 1990. On February 26, 1996 (effective
date March 31, 1996), the Trustees approved changing the name of the Fund from
New York Municipal Income Fund to Federated New York Municipal Income Fund and
also approved change the name of the Fund's presently offered shares from
Fortress Shares to Class F Shares ("Shares"). On August 21, 1998, the Trustees
approved the name change of Class F Shares to Class A Shares.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide current income exempt from
federal regular income tax (federal regular income tax does not include the
federal alternative minimum tax) and the personal income taxes imposed by the
state of New York and New York municipalities. The investment objective
cannot be changed without approval of shareholders.
ACCEPTABLE INVESTMENTS
The Fund invests primarily in New York municipal securities.
CHARACTERISTICS
The New York municipal securities in which the Fund invests have the
characteristics set forth in the prospectus. If ratings made by Moody's
Investors Service, Inc. ("Moody's"), Standard & Poor's ("S&P") or Fitch IBCA,
Inc. ("Fitch") change because of changes in those organizations or in their
rating systems, the Fund will try to use comparable ratings as standards in
accordance with the investment policies described in the Fund's prospectus.
TYPES OF ACCEPTABLE INVESTMENTS
Examples of New York municipal securities include:
* governmental lease certificates of participation issued by state or
municipal authorities where payment is secured by installment payments for
equipment, buildings, or other facilities being leased by the state
or municipality;
* municipal notes and tax-exempt commercial paper;
* serial bonds;
* tax anticipation notes sold to finance working capital needs of
municipalities in anticipation of receiving taxes;
* bond anticipation notes sold in anticipation of the issuance of long-term
bonds;
* pre-refunded municipal bonds whose timely payment of interest and principal
is ensured by an escrow of U.S. government obligations; and
* general obligation bonds.
PARTICIPATION INTERESTS
The financial institutions from which the Fund purchases participation
interests frequently provide or secure from another financial institution
irrevocable letters of credit or guarantees and give the Fund the right to
demand payment of the principal amounts of the participation interests plus
accrued interest on short notice (usually within seven days).
VARIABLE RATE MUNICIPAL SECURITIES
Variable interest rates generally reduce changes in the market value of
municipal securities from their original purchase prices. Accordingly, as
interest rates decrease or increase, the potential for capital appreciation
or depreciation is less for variable rate municipal securities than for
fixed-income obligations. Many municipal securities with variable-interest
rates purchased by the Fund are subject to repayment of principal (usually
within seven days) on the Fund's demand. The terms of these variable rate
demand instruments require payment of principal and accrued interest from the
issuer of the municipal obligations, the issuer of the participation
interests, or a guarantor of either issuer.
MUNICIPAL LEASES
The Fund may purchase municipal securities in the form of participation
interests which represent undivided proportional interests in lease payments
by a governmental or non-profit entity. The lease payments and other rights
under the lease provide for and secure the payments on the certificates.
Lease obligations may be limited by municipal charter or the nature of the
appropriation for the lease. In particular, lease obligations may be subject
to periodic appropriation. If the entity does not appropriate funds for
future lease payments, the entity cannot be compelled to make such payments.
Furthermore, a lease may provide that the certificate trustee cannot
accelerate lease obligations upon default. The trustee would only be able to
enforce lease payments as they became due. In the event of a default or
failure of appropriation, it is unlikely that the trustee would be able to
obtain an acceptable substitute source of payment.
In determining the liquidity of municipal lease securities, the investment
adviser, under the authority delegated by the Trustees, will base its
determination on the following factors:
* whether the lease can be terminated by the lessee;
* the potential recovery, if any, from a sale of the leased property upon
termination of the lease;
* the lessee's general credit strength (e.g., its debt, administrative,
economic and financial characteristics and prospects);
* the likelihood that the lessee will discontinue appropriating funding for the
leased property because the property is no longer deemed essential to its
operations (e.g., the potential for an "event of non-appropriation"); and
* 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.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest in the securities of affiliated money market funds as an
efficient means of managing the Fund's uninvested cash.
TEMPORARY INVESTMENTS
The Fund may also invest in temporary investments during times of unusual
market conditions for defensive purposes.
REPURCHASE AGREEMENTS
Repurchase agreements are arrangements in which banks, broker/dealers, and
other recognized financial institutions sell U.S. government securities or
certificates of deposit to the Fund and agree at the time of sale to
repurchase them at a mutually agreed upon time and price within one year from
the date of acquisition. The Fund or its custodian will take possession of
the securities subject to repurchase agreements. To the extent that the
original seller does not repurchase the securities from the Fund, the Fund
could receive less than the repurchase price on any sale of such securities.
In the event that such a defaulting seller filed for bankruptcy or became
insolvent, disposition of such securities by the Fund might be delayed
pending court action. The Fund believes that under the regular procedures
normally in effect for custody of the Fund's portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in favor
of the Fund and allow retention or disposition of such securities. The Fund
may only enter into repurchase agreements with banks and other recognized
financial institutions such as broker/dealers which are found by the Fund's
investment adviser to be creditworthy pursuant to guidelines established by
the Trustees.
From time to time, such as when suitable New York municipal bonds are not
available, the Fund may invest a portion of its assets in cash. Any portion
of the Fund's assets maintained in cash will reduce the amount of assets in
New York municipal bonds and thereby reduce the Fund's yield.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements. This transaction
is similar to borrowing cash. In a reverse repurchase agreement the Fund
transfers possession of a portfolio instrument to another person, such as a
financial institution, broker, or dealer, in return for a percentage of the
instrument's market value in cash, and agrees that on a stipulated date in
the future the Fund will repurchase the portfolio instrument by remitting the
original consideration plus interest at an agreed upon rate. The use of
reverse repurchase agreements may enable the Fund to avoid selling portfolio
instruments at a time when a sale may be deemed to be disadvantageous, but
the ability to enter into reverse repurchase agreements does not ensure that
the Fund will be able to avoid selling portfolio instruments at a
disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated on the Fund's records at the trade date. These assets are
marked to market daily and are maintained until the transaction is settled.
PORTFOLIO TURNOVER
The Fund may trade or dispose of portfolio securities as considered
necessary to meet its investment objective. It is not anticipated that the
portfolio trading engaged in by the Fund will result in its annual rate of
portfolio turnover exceeding 100%. For the fiscal years ended August 31,
1998 and 1997, the Fund's portfolio turnover rates were 30% and 59%,
respectively.
INVESTMENT LIMITATIONS
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities on
margin but may obtain such short-term credits as may be necessary for
clearance of purchases and sales of securities.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities except that the Fund may borrow
money and engage in reverse repurchase agreements in amounts up to one-third
of the value of its total assets, including the amounts borrowed. The Fund
will not borrow money or engage in reverse repurchase agreements for
investment leverage, but rather as a temporary, extraordinary, or emergency
measure to facilitate management of the portfolio by enabling the Fund to,
for example, meet redemption requests when the liquidation of portfolio
securities is deemed to be inconvenient or disadvantageous. The Fund will not
purchase any securities while borrowings in excess of 5% of its total assets
are outstanding.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate its assets except to
secure permitted borrowings. In those cases, it may mortgage, pledge, or
hypothecate assets having a market value not exceeding 10% of the value of
its total assets at the time of the pledge.
UNDERWRITING
The Fund will not underwrite any issue of securities except as it may be
deemed to be an underwriter under the Securities Act of 1933 in connection
with the sale of securities in accordance with its investment objective,
policies, and limitations.
INVESTING IN REAL ESTATE
The Fund will not purchase or sell real estate including limited partnership
interests although it may invest in municipal bonds secured by real estate or
interests in real estate.
INVESTING IN COMMODITIES
The Fund will not buy or sell commodities, commodity contracts, or
commodities futures contracts.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets except that it may acquire publicly
or non-publicly issued municipal bonds or temporary investments or enter into
repurchase agreements in accordance with its investment objective, policies,
and limitations or its Declaration of Trust.
DEALING IN PUTS AND CALLS
The Fund will not buy or sell puts, calls, straddles, spreads, or any
combination of these.
CONCENTRATION OF INVESTMENTS
The Fund will not purchase securities if, as a result of such purchase, 25% or
more of the value of its total assets would be invested in any one industry or
in industrial development bonds or other securities, the interest upon which is
paid from revenues of similar types of projects. However, the Fund may invest as
temporary investments more than 25% of the value of its assets in cash or cash
items, securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities, or instruments secured by these money market instruments,
i.e., repurchase agreements.
The above investment limitations cannot be changed without shareholder
approval. The following limitation, however, may be changed by the Trustees
without shareholder approval. Shareholders will be notified before any
material change in these limitations becomes effective.
RESTRICTED AND ILLIQUID SECURITIES
The Fund will not invest more than 15% of the value of its net assets in
illiquid securities, including certain restricted securities not determined to
be liquid under criteria established by the Trustees and repurchase agreements
providing for settlement in more than seven days after notice.
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.
NEW YORK INVESTMENT RISKS
The Fund invests in obligations of New York issuers which results in the
Fund's performance being subject to risks associated with the overall
conditions present within the state. The following information is a brief
summary of the recent prevailing economic conditions and a general summary of
the state's financial status. This information is based on official
statements relating to securities that have been offered by New York issuers
and from other sources believed to be accurate but should not be relied upon
as a complete description of all relevant information.
New York state continues to be an improving credit as the state maintained the
1997 upgraded A ratings by Moody's and S&P.
The stable outlook on New York state's bonds reflects improved financial
operations that have generated three years of record performance through
fiscal 1998. The state has more conservatively estimated revenues in recent
years. In addition, New York's monitoring and management of the budget during
the fiscal year has improved, thereby reducing the risk of budget imbalance.
These factors, combined with increased expenditure restraint and an improved
economic climate fueled by the financial services sector, have contributed to
year-end surpluses in five of the past six years.
Although the state has a diverse economy that continues to expand modestly
and relatively high income, further rating upgrades will be precluded until
significant financial and budgetary reform is implemented. This would
include on-time budget adoption, ongoing structurally balanced financial
operations, elimination of the state's generally accepted accounting
principals (GAAP)-based deficit, and continued improvement in debt
management policies.
As fiscal 1999 progresses, the state has been successful in reducing the
GAAP-based deficit and displayed a marked improvement in the fiscal budget
process. Further improvements are needed in the non-financial services
sector of the economy and in projected out year budget gaps.
The Fund's concentration in securities issued by the state and its political
subdivisions provides a greater level of risk than a fund which is
diversified across numerous states and municipal entities. The ability of the
state or its municipalities to meet their obligations will depend on the
availability of tax and other revenues; economic, political, and demographic
conditions within the state; and the underlying fiscal condition of the state
and its municipalities.
MUNICIPAL SECURITIES INCOME TRUST MANAGEMENT
Officers and Trustees are listed with their addresses, 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
Chief Executive Officer and Director or Trustee of the
Funds; Chairman and Director, Federated Investors, Inc.;
Chairman and Trustee, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director,
Federated Research Corp. and Federated Global Research
Corp.; Chairman, Passport Research, Ltd.; Mr. Donahue is the
father of J. Christopher Donahue, Executive Vice President
and Trustee of the Trust.
Thomas G. Bigley
15 Old Timber Trail
Pittsburgh, PA
Birthdate: February 3, 1934
Trustee
Director or Trustee of the Funds; Director, Member of Executive Committee,
Children's Hospital of Pittsburgh; formerly, Senior Partner, Ernst & Young LLP;
Director, MED 3000 Group, Inc.; Director, Member of Executive Committee,
University of Pittsburgh.
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
Director or Trustee of the Funds; 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.
Nicholas P. Constantakis
175 Woodshire Drive
Pittsburgh, PA
Birthdate: September 3, 1939
Trustee
Director or Trustee of the Funds; formerly, Partner,
Anderson Worldwide SC.
William J. Copeland
One PNC Plaza--23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Trustee
Director or Trustee of the Funds; 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, United Refinery;
Chairman, Pittsburgh Foundation; Director, Forbes Fund;
Chairman, Pittsburgh Civic Light Opera.
J. Christopher Donahue*
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
Executive Vice President and Trustee
President or Executive Vice President of the Funds;
President and Director, Federated Investors, Inc.; President
and Trustee, 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; Director or
Trustee of some of the Funds. Mr. Donahue is the son of John
F. Donahue, Chairman and Trustee of the Trust.
James E. Dowd, Esq.
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Trustee
Director or Trustee of the Funds; Attorney-at-law; Director,
The Emerging Germany Fund, Inc.; formerly, President, Boston
Stock Exchange, Inc.; Regional Administrator, United States
Securities and Exchange Commission.
Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Trustee
Director or Trustee of the Funds; Professor of Medicine, University of
Pittsburgh; Medical Director, University of Pittsburgh Medical Center -
Downtown; Hematologist, Oncologist, and Internist, Presbyterian and Montefiore
Hospitals; formerly, Member, National Board of Trustees, Leukemia Society of
America.
Edward L. Flaherty, Jr., Esq.@
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: June 18, 1924
Trustee
Director or Trustee of the Funds; Attorney of Counsel, Miller, Ament, Henny &
Kochuba; Director, Eat'N Park Restaurants, Inc.; formerly, Counsel, Horizon
Financial, F.A., Western Region; Partner, Meyer and Flaherty.
Peter E. Madden
One Royal Palm Way
100 Royal Palm Way
Palm Beach, FL
Birthdate: March 16, 1942
Trustee
Director or Trustee of the Funds; formerly, Representative, Commonwealth of
Massachusetts General Court; President, State Street Bank and Trust Company and
State Street Corporation; Director, VISA USA and VISA International; Chairman
and Director, Massachusetts Banker Association; Director, Depository Trust
Corporation.
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Trustee
Director or Trustee of the Funds; President, Law Professor, Duquesne University;
Consulting Partner, Mollica & Murray; formerly, Dean and Professor of Law,
University of Pittsburgh School of Law; Dean and Professor of Law, Villanova
University School of Law.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Trustee
Director or Trustee of the Funds; President, World Society of Ekistics, Athens;
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; formerly, Professor, United States
Military Academy; Professor, United States Air Force Academy.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Trustee
Director or Trustee of the Funds; Public relations/ Marketing/Conference
Planning; formerly, National Spokesperson, Aluminum Company of America; business
owner.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
President
President or Vice President of some of the Funds; Director or Trustee of some of
the Funds; Executive Vice President, Federated Investors, Inc.; Chairman and
Director, Federated Securities Corp.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
Executive Vice President
Trustee or Director of some of the Funds; President, Executive Vice President
and Treasurer of some of the Funds; Vice Chairman, Federated Investors, Inc.;
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.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Executive Vice President, Secretary, and Treasurer
Executive Vice President and Secretary of the Funds; Treasurer of some of the
Funds; Executive Vice President, Secretary, and Director, Federated Investors,
Inc.; 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.
* 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: Automated Government Money Trust; Blanchard Funds;
Blanchard Precious Metals Fund, Inc.; Cash Trust Series II; Cash Trust
Series, Inc.; CCB Funds; 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 Core
Trust; 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.; 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; Regions Funds; RIGGS
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; WCT Funds; and World
Investment Series, Inc.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the outstanding Shares.
As of October 9, 1998, the following shareholders of record owned 5% or more
of the outstanding Shares of the Fund: North Fork Bank, Mattituck, New York,
owned approximately 245,451 Shares (11.07%); and Merrill Lynch Pierce Fenner
& Smith (as record owner holding Shares for its clients), Jacksonville,
Florida, owned approximately 799,834 Shares (36.09%).
TRUSTEE COMPENSATION
<TABLE>
<CAPTION>
NAME, AGGREGATE
POSITION WITH COMPENSATION TOTAL COMPENSATION PAID
TRUST FROM TRUST*# FROM FUND COMPLEX+
<S> <C> <C>
John F. Donahue
Trustee and Chairman $0 $0 for the Trust and
56 other investment companies in the Fund Complex
Thomas G. Bigley
Trustee $220.28 $111,222 for the Trust and
56 other investment companies in the Fund Complex
John T. Conroy, Jr.
Trustee $242.34 $122,362 for the Trust and
56 other investment companies in the Fund Complex
Nicholas P. Constantakis+
Trustee $165.96 $0 for the Trust and
36 other investment companies in the Fund Complex
William J. Copeland
Trustee $242.34 $122,362 for the Trust and
56 other investment companies in the Fund Complex
J. Christopher Donahue
President and Trustee $0 $0 for the Trust and
18 other investment companies in the Fund Complex
James E. Dowd, Esq.
Trustee $242.34 $122,362 for the Trust and
56 other investment companies in the Fund Complex
Lawrence D. Ellis, M.D.
Trustee $220.28 $111,222 for the Trust and
56 other investment companies in the Fund Complex
Edward L. Flaherty, Jr., Esq.
Trustee $242.34 $122,362 for the Trust and
56 other investment companies in the Fund Complex
Peter E. Madden
Trustee $220.28 $111,222 for the Trust and
56 other investment companies in the Fund Complex
John E. Murray, Jr., J.D., S.J.D.
Trustee $220.28 $111,222 for the Trust and
56 other investment companies in the Fund Complex
Wesley W. Posvar
Trustee $220.28 $111,222 for the Trust and
56 other investment companies in the Fund Complex
Marjorie P. Smuts
Trustee $220.28 $111,222 for the Trust and
56 other investment companies in the Fund Complex
</TABLE>
* Information is furnished for the fiscal year ended August 31, 1998.
# The aggregate compensation is provided for the Trust which is comprised of
five portfolios.
+ The information is provided for the last calendar year.
++ Mr. Constantakis became a member of the Board of Trustees on February 23,
1998. He did not earn any fees for serving the Fund Complex since these fees
are reported as of the end of 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, Inc. All the voting securities of
Federated Investors, Inc. 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,
1998, 1997, and 1996, the Adviser earned advisory fees of $92,417, $91,304,
and $86,941, respectively, all of which were voluntarily waived.
OTHER SERVICES
FUND ADMINISTRATION
Federated Services Company, a subsidiary of Federated Investors, Inc.,
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, Inc., served as
the Fund's Administrator. For purposes of this Statement, Federated Services
Company and Federated Administrative Services may hereinafter collectively
be referred to as the "Administrators". For the fiscal years ended August 31,
1998, 1997, and 1996, the Administrators 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. They
determine in good faith that commissions charged by such persons are
reasonable in relationship to the value of the brokerage and research
services provided. During the fiscal years ended August 31, 1998, 1997, and
1996, 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 NAV plus a sales charge on days the New York Stock Exchange is
open for business. The procedure for purchasing Shares is explained in the
prospectus under "Investing in the Fund" and "Purchasing Shares." For further
information on any of the programs listed below, please contact your
financial intermediary or Federated Securities Corp.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES
As described in the prospectus, larger purchases of the same Share class
reduce or eliminate the sales charge paid. For example, the Fund will combine
all Class A Share purchases 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 the same Share class 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
Shareholders have the privilege of combining concurrent purchases of the same
Share class of two or more funds in the Federated Complex in calculating the
applicable sales charge.
To receive a sales charge reduction or elimination, Federated Securities
Corp. must be notified by the shareholder in writing or by their 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
A shareholder can sign a letter of intent committing to purchase a certain
amount of the same Share class within a 13-month period in order to combine
such purchases in calculating the applicable sales charge. The Fund's
custodian will hold Shares in escrow equal to the maximum applicable sales
charge. If the shareholder completes the commitment, the escrowed Shares will
be released to their account. If the commitment is not completed within 13
months, the custodian will redeem an appropriate number of escrowed Shares to
pay for the applicable 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
The reinvestment privilege is available for all Shares of the Fund within the
same Share class.
Class A shareholders who redeem from the Fund may reinvest the redemption
proceeds back into the same Share class at the next determined net asset
value without any sales charge. The original Shares must have been subject to
a sales charge and the reinvestment must be within 120 days.
Similarly, Class B Shares also may be reinvested within 120 days of
redemption, although such reinvestment will be made into Class A Shares.
Shareholders would not be entitled to a reimbursement of the contingent
deferred sales charge if paid at the time of redemption on any Share class.
However, reinvested Shares would not be subject to a contingent deferred
sales charge, if otherwise applicable, upon later redemption.
In addition, if 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, if otherwise
applicable. 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.
DISTRIBUTION PLAN AND SHAREHOLDER SERVICES AGREEMENT
These arrangements permit the payment of fees to financial institutions, the
distributor, and Federated Shareholder Services, to stimulate distribution
activities and to cause services to be provided to shareholders by a
representative who has knowledge of the shareholder's particular
circumstances and goals. These activities and services may include, but are
not limited to, marketing efforts; providing office space, equipment,
telephone facilities, and various clerical, supervisory, computer, and other
personnel as necessary or beneficial to establish and maintain shareholder
accounts and records; processing purchase and redemption transactions and
automatic investments of client account cash balances; answering routine
client inquiries; and assisting clients in changing dividend options, account
designations, and addresses.
By adopting the Distribution Plan, the Trustees expect that the Fund will be
able to achieve a more predictable flow of cash for investment purposes and
to meet redemptions. This will facilitate more efficient portfolio
management and assist the Fund in pursuing its investment objectives. By
identifying potential investors whose needs are served by the Fund's
objectives, and properly servicing these accounts, it may be possible to curb
sharp fluctuations in rates of redemptions and sales.
Other benefits, which may be realized under either arrangement, may include:
(1) providing personal services to shareholders; (2) investing shareholder
assets with a minimum of delay and administrative detail; (3) enhancing
shareholder recordkeeping systems; and (4) responding promptly to
shareholders' requests and inquiries concerning their accounts.
For the fiscal year ended August 31, 1998, payment in the amount of $115,521
was made pursuant to the Distribution Plan, of which $110,901 was waived. In
addition, for the fiscal year ended August 31, 1998, the Fund paid
shareholder services fees in the amount of $57,761, of which $4,621 was
waived.
CONVERSION TO FEDERAL FUNDS
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be
in federal funds or be converted into federal funds before shareholders begin
to earn dividends. State Street Bank acts as the shareholder's agent in
depositing checks and converting them to federal funds.
PURCHASES BY SALES REPRESENTATIVES, FUND DIRECTORS, AND EMPLOYEES
The following individuals and their immediate family members may buy Class A
Shares at net asset value without a sales charge:
* Directors, employees, and sales representatives of the Fund, Federated
Advisers, and Federated Securities Corp. and its affiliates;
* Federated Life Members (Class A Shares only);
* any associated person of an investment dealer who has a sales agreement with
Federated Securities Corp.; and
* 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 NAV per Share fluctuates and is based on the market value of all
securities and other assets of the Fund.
NAV is not determined on (i) days on which there are not sufficient changes
in the value of the Fund's portfolio securities that its NAV 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, Jr. 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 NAV after the Fund receives the
redemption request. Shareholder redemptions may be subject to a contingent
deferred sales charge. Redemption procedures are explained in the prospectus
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
Although the Fund intends to redeem Shares in cash, it reserves the right
under certain circumstances to pay the redemption price in whole or in part
by a distribution of securities from the Fund's portfolio.
Redemption in kind will be made in conformity with applicable SEC rules,
taking such securities at the same value employed in determining net asset
value and selecting the securities in a manner the Directors determine to be
fair and equitable.
The Corporation has elected to be governed by Rule 18f-1 of the Investment
Company Act of 1940 under which the Corporation is obligated to redeem Shares
for any shareholder in cash up to the lesser of $250,000 or 1% of the Fund's
net asset value during any 90-day period.
Redemption in kind is not as liquid as a cash redemption. If redemption is
made in kind, shareholders receiving their securities and selling them before
their maturity could receive less than the redemption value of their
securities and could incur certain transaction costs.
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:
* derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;
* invest in securities within certain statutory limits; and
* distribute to its shareholders at least 90% of its net income earned during
the year.Capital Gains
Capital gains or losses may be realized by the Fund on the sale of portfolio
securities and as a result of discounts from par value on securities held to
maturity. Sales would generally be made because of:
* the availability of higher relative yields;
* differentials in market values;
* new investment opportunities;
* changes in creditworthiness of an issuer; or
* an attempt to preserve gains or limit losses.Distributions of long-term
capital gains are taxed as such, whether they are taken in cash or
reinvested, and regardless of the length of time the shareholder has owned
Shares. Any loss by a shareholder on Shares held for less than six months and
sold after a capital gains distribution will be treated as a long-term
capital loss to the extent of the capital gains distribution.
TOTAL RETURN
The Fund's average annual total returns for the one-year and five-year
periods ended August 31, 1998, and for the period from December 2, 1992
(date of initial public investment) to August 31, 1998 were 6.65%, 5.55%
and 7.20%, respectively.
The average annual total return for Shares of the Fund is the average
compounded rate of return for a given period that would equate a $1,000
initial investment to the ending redeemable value of that investment. The
ending redeemable value is computed by multiplying the number of Shares owned
at the end of the period by the offering price per Share at the end of the
period. The number of Shares owned at the end of the period is based on the
number of Shares purchased at the beginning of the period with $1,000, less
any applicable sales charge, adjusted over the period by any additional
Shares, assuming the reinvestment of all dividends and distributions. Any
applicable contingent deferred sales charge is deducted from the ending value
of the investment based on the lesser of the original purchase price or the
offering price of Shares redeemed.
YIELD
The Fund's yield for the thirty-day period ended August 31, 1998 was 4.45%.
The yield for Shares of the Fund is determined by dividing the net investment
income per Share (as defined by the Securities and Exchange Commission)
earned by Shares over a thirty-day period by the maximum offering price per
Share of Shares on the last day of the period. This 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 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 the
Fund, the performance will be reduced for those shareholders paying those
fees.
TAX-EQUIVALENT YIELD
The Fund's tax-equivalent yield for the thirty-day period ended August 31,
1998 was 6.18%.
The tax-equivalent yield of the Fund is calculated similarly to the yield,
but is adjusted to reflect the taxable yield that the Fund would have had to
earn to equal its actual yield, assuming a 28% tax rate (the maximum
effective federal rate for individuals) and assuming that income is 100% tax-
exempt.
TAX-EQUIVALENCY TABLE
The Fund may also use a tax-equivalency table in advertising and sales
literature. The interest earned by the municipal obligations in the Fund's
portfolio generally remains free from federal regular income tax,* and the
income taxes imposed by the state of New York. As the table on the next page
indicates, a "tax-free" investment is an attractive choice for investors,
particularly in times of narrow spreads between tax-free and taxable yields.
<TABLE>
<CAPTION>
TAXABLE YIELD EQUIVALENT FOR 1998
STATE OF NEW YORK
COMBINED FEDERAL AND STATE INCOME TAX BRACKET:
<S> <C> <C> <C> <C> <C>
JOINT
RETURN $1- $42,351- $102,301- $155,951- OVER
42,350 102,300 155,950 278,450 $278,450
SINGLE $1- $25,351- $ 61,401- $128,101- OVER
RETURN 25,350 61,400 128,100 278,450 $278,450
<CAPTION>
TAX-EXEMPT
YIELD TAXABLE YIELD EQUIVALENT
<S> <C> <C> <C> <C> <C>
1.50% 1.92% 2.30% 2.41% 2.62% 2.80%
2.00% 2.56% 3.07% 3.22% 3.50% 3.73%
2.50% 3.20% 3.84% 4.02% 4.37% 4.67%
3.00% 3.84% 4.60% 4.83% 5.25% 5.60%
3.50% 4.48% 5.37% 5.63% 6.12% 6.54%
4.00% 5.12% 6.14% 6.44% 7.00% 7.47%
4.50% 5.76% 6.91% 7.24% 7.87% 8.40%
5.00% 6.40% 7.67% 8.05% 8.75% 9.34%
5.50% 7.04% 8.44% 8.85% 9.62% 10.27%
6.00% 7.68% 9.21% 9.65% 10.50% 11.20%
</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 Fund Shares.
* SOME PORTION OF THE FUND'S INCOME MAY BE SUBJECT TO THE FEDERAL ALTERNATIVE
MINIMUM TAX AND STATE AND LOCAL INCOME TAXES.
PERFORMANCE COMPARISONS
The performance of Shares depends upon such variables as:
* portfolio quality;
* average portfolio maturity;
* type of instruments in which the portfolio is invested;
* changes in interest rates and market value of portfolio securities;
* changes in the Fund's expenses; and
* various other factors.The Fund's performance fluctuates on a daily basis
largely because net earnings and offering price per Share fluctuate daily.
Both net earnings and offering price per Share are factors in the computation
of yield and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance,
investors should consider all relevant factors such as the composition of any
index used, prevailing market conditions, portfolio compositions of other
funds, and methods used to value portfolio securities and compute offering
price. The financial publications and/or indices which the Fund uses in
advertising may include:
* LEHMAN BROTHERS REVENUE BOND INDEX is a total return performance benchmark
for the long-term, investment grade, revenue bond market. Returns and
attributes for the index are calculated semi-monthly.
* LIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes the
reinvestment of all capital gains distributions and income dividends and
takes into account any change in offering price over a specific period of
time. From time to time, the Fund will quote its Lipper ranking in the "New
York Municipal Bond Funds" category in advertising and sales literature.
* MORNINGSTAR, INC., an independent rating service, is the publisher of the
bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000
NASDAQ-listed mutual funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and ratings are effective for two
weeks.Advertisements and other sales literature for the Fund may quote total
returns which are calculated on non-standardized base periods. The total
returns represent the historic change in the value of an investment in the
Fund based on monthly reinvestment of dividends over a specified period of
time.
Advertisements may quote performance information which does not reflect the
effect of the sales 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, INC.
Federated Investors, Inc. 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, 1997, Federated Investors, Inc.
managed 11 bond funds with approximately $2.1 billion in assets and 22 money
market funds with approximately $10.9 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.
The Chief Investment Officers responsible for oversight of the various
investment sectors within Federated Investors, Inc. are: U.S. equity and
high yield--J. Thomas Madden; U.S. fixed income--William D. Dawson, III; and
global equities and fixed income--Henry A. Frantzen. The Chief Investment
Officers are Executive Vice Presidents of the Federated advisory companies.
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 $4.4 trillion to the more than 6,700 funds
available.*
Federated Investors, Inc., through its subsidiaries, distributes mutual
funds for a variety of investment applications. Specific markets include:
INSTITUTIONAL CLIENTS
Federated Investors, Inc. meets the needs of approximately 900 institutional
clients nationwide by managing and servicing separate accounts and mutual
funds for a variety of applications, including defined benefit and defined
contribution programs, cash management, and asset/liability management.
Institutional clients include corporations, pension funds, tax-exempt
entities, foundations/endowments, insurance companies, and investment and
financial advisors. The marketing effort to theses institutional clients is
headed by John B. Fisher, President, Institutional Sales Division.
BANK MARKETING
Other institutional clients include close relationships with more than 1,600
banks and trust organizations. Virtually all of the trust divisions of the
top 100 bank holding companies use Federated funds in their clients'
portfolios. The marketing effort to trust clients is headed by Timothy C.
Pillion, Senior Vice President, Bank Marketing & Sales.
BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES
Federated mutual funds are available to consumers through major brokerage
firms nationwide--we have over 2,200 broker/dealer and bank broker/dealer
relationships across the country--supported by more wholesalers than any
other mutual fund distributor. Federated's service to financial
professionals and institutions has earned it high 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, Federated Securities Corp.
* SOURCE: INVESTMENT COMPANY INSTITUTE
PART C. OTHER INFORMATION.
Item 24. FINANCIAL STATEMENTS AND EXHIBITS:
(a) Financial Statements: (1-5) Filed in Part A.
(b) Exhibits:
(1) (i) Paper Copy of Declaration of Trust of the
Registrant (1);
(ii) Paper Copy of Amendment No. 1 (dated August 26, 1991)
to Declaration of Trust (5);
(iii) Conformed Copy of Amendment No. 2
(dated August 6, 1990) to the Declaration of Trust (6);
(iv) Conformed Copy of Amendment No. 3
(dated August 31, 1992) to the Declaration of Trust (8);
(v) Conformed Copy of Amendment No. 4
(dated September 17, 1992) to the Declaration of
Trust (8);
(vi) Conformed Copy of Amendment No. 5
(dated February 4, 1993) to the Declaration of
Trust (10);
(vii) Conformed Copy of Amendment No. 6 (dated May 24, 1993)
to the Declaration of Trust (13);
+ All exhibits are filed electronically.
1. Response is incorporated by reference to Registrant's Initial Registration
Statement on Form N-1A filed August 31, 1990. (File Nos. 33-36729 and
811-6165)
5. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 4 on Form N-1A filed on October 28, 1991. (File Nos. 33-36729
and 811-6165)
6. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 5 on Form N-1A filed on January 24, 1992. (File Nos. 33-36729
and 811-6165)
8. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 7 on Form N-1A filed on September 25, 1992. (File Nos.
33-36729 and 811-6165)
10. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 10 on Form N-1A filed on March 24, 1993. (File Nos. 33-36729
and 811-6165)
13. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 13 on Form N-1A filed on July 2, 1993, (File Nos. 33-36729
and 811-6165)
14. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 14 on Form N-1A filed on October 28, 1993. (File Nos.
33-36729 and 811-6165)
19. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 21 on Form N-1A filed on October 23, 1996, (File Nos.
33-36729 and 811-6165)
21. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 23 on Form N-1A filed on October 15, 1997. (File Nos.
33-36729 and 811-6165)
<PAGE>
(2) Copy of By-Laws of the Registrant (1);
(i) Copy of Amendment No. 1 (dated November 18, 1997) to
the By-Laws (23);
(ii) Copy of Amendment No. 2 (dated February 23, 1998) to
the By-Laws (23);
(iii) Copy of Amendment No. 3 (dated February 27, 1998) to
the By-Laws (23);
(iv) Copy of Amendment No. 4 (dated May 12, 1998) to the
By-Laws (23);
(3) Not applicable;
(4) Copy of Specimen Certificate for Shares of Beneficial
Interest for:
(i) Federated Pennsylvania Municipal Income Fund-Class
A Shares (19);
(ii) Federated Pennsylvania Municipal Income Fund- Class
B Shares (22);
(iii) Federated Ohio Municipal Income Fund-Class F
Shares (19);
(iv) Federated California Municipal Income Fund-Class F
Shares (19);
(v) Federated New York Municipal Income Fund-Class F
Shares (19);
(vi) Federated Michigan Intermediate Municipal Trust (19);
(5) Conformed Copy of new Investment Advisory Contract of the
Registrant (21);
(i) Copy of Amendment to Investment Advisory Contract (12)
(ii) Conformed Copies of Amendments to Investment Advisory
Contract (14); (iii) Conformed Copies of Amendments to
Investment Advisory Contract (14);
(6) (i) Conformed Copy of Distributor's Contract of the
Registrant (21); (ii) Conformed Copy of Amendment to
Distributor's Contract (12);
+ All exhibits are filed electronically.
1. Response is incorporated by reference to Registrant's Initial Registration
Statement on Form N-1A filed August 31, 1990. (File Nos. 33-36729 and
811-6165)
12. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 12 on Form N-1A filed on May 17, 1993. (File Nos. 33-36729
and 811-6165)
14. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 14 on Form N-1A filed on October 28, 1993. (File Nos.
33-36729 and 811-6165)
21. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 23 on Form N-1A filed on October 15, 1997. (File Nos.
33-36729 and 811-6165)
22. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 25 on Form N-1A filed on October 31, 1997. (File Nos.
33-36729 and 811-6165)
23. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 26 on Form N-1A filed on August 28, 1998. (File Nos. 33-36729
and 811-6165)
<PAGE>
(iii) Conformed Copy of Amendment to Distributor's Contract
(14); (iv) Conformed Copy of Exhibit O to the Distributor's
Contract (23);
(v) Conformed Copy of Distributor's Contract (Class B
Shares) (23);
(vi) The Registrant hereby incorporates the conformed copy of the
specimen Mutual Fund Sales and Service Agreement; Mutual Funds
Service Agreement; and Plan Trustee/Mutual Funds Service
Agreement from Item 24(b)(6) of the Cash Trust Series II
Registration Statement on Form N-1A filed with the Commission
on July 24, 1995. (File Number 33-38550 and 811-6269).
(7) Not applicable;
(8) (i) Conformed Copy of Custodian Contract of the
Registrant (18);
(ii) Conformed Copy of Custodian Fee Schedule (22);
(9) (i) Conformed Copy of Amended and Restated Shareholder
Services Agreement (22);
(ii) Conformed Copy of Principal Shareholder Services
Agreement (Class B Shares) (23);
(iii) Conformed Copy of Shareholder Services Agreement
(Class B Shares) (23);
(iv) Conformed Copy of Amended and Restated Agreement for
Fund Accounting Services, Administrative Services,
Transfer Agency Services and Custody Services
Procurement (23);
(v) With regard to Federated Pennsylvania Municipal Income
Fund, Federated Ohio Municipal Income Fund, Federated
California Municipal Income Fund and Federated New York
Municipal Income Fund, the Registrant hereby
incorporates the conformed copy of the Shareholder
Services Sub-Contract between Fidelity and Federated
Shareholder Services from Item 24(b)(9)(iii) of the
Federated GNMA Trust Registration Statement on Form
N-1A, filed with the Commission on March 25, 1996. (File
Nos. 2-75670 and 811-3375).
+ All exhibits are filed electronically.
12. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 12 on Form N-1A filed on May 17, 1993. (File Nos. 33-36729
and 811-6165)
14. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 14 on Form N-1A filed on October 28, 1993. (File Nos.
33-36729 and 811-6165)
18. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 19 on Form N-1A filed on October 30, 1995. (File Nos.
33-36729 and 811-6165)
19. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 21 on Form N-1A filed on October 23, 1996. (File Nos.
33-36729 and 811-6165)
21. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 23 on Form N-1A filed on October 15, 1997. (File Nos.
33-36729 and 811-6165)
22. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 25 on Form N-1A filed on October 31, 1997. (File Nos.
33-36729 and 811-6165)
23. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 26 on Form N-1A filed on August 28, 1998. (File Nos. 33-36729
and 811-6165)
<PAGE>
(vi) The response described in Item 24(b)(6)(iv) are
hereby incorporated by reference;
(10) Conformed Copy of Opinion and Consent of Counsel as to the
legality of shares being registered (1);
(11) Conformed Copy of Independent Auditors' Consent; +
(12) Not applicable;
(13) Conformed Copy of Initial Capital Understanding (1);
(14) Not applicable;
(15) (i) Conformed Copy of Rule 12b-1 Plan (21);
(ii) Conformed Copy of Distribution Plan (21); (iii) Conformed
Copy of Exhibit B to the Distribution
Plan (23);
(iv) Conformed Copy of Exhibit 1 Amendment to the Distribution
Plan for the Investment Companies(Class B Shares) (23); (v)
The response described in Item 24(b)(6)(iv) are hereby
incorporated by reference;
(16) Copy of Schedule for Computation of Fund Performance Data for:
(i) Ohio Municipal Income Fund (18);
(ii) Pennsylvania Municipal Income Fund (18);
(iii) California Municipal Income Fund (11);
(iv) New York Municipal Income Fund (11);
(v) Michigan Municipal Income Fund (11);
(17) Copy of Financial Data Schedules; +
(18) With regard to Federated Pennsylvania Municipal Income Fund,
Federated Ohio Municipal Income Fund, Federated California
Municipal Income Fund and Federated New York Municipal Income
Fund, the Registrant hereby incorporates the conformed copy of
the specimen Multiple Class Plan from Item 24(b)(18) of the
World Investment Series, Inc. Registration Statement on Form
N-1A, filed with the Commission on January 26, 1996. (File
Nos. 33-52149 and 811-07141);
(19) Conformed Copy of Power of Attorney (23);
+ All exhibits are filed electronically.
1. Response is incorporated by reference to Registrant's Initial Registration
Statement on Form N-1A filed August 31, 1990. (File Nos. 33-36729 and
811-6165)
11. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 11 on Form N-1A filed on April 28, 1993. (File Nos. 33-36729
and 811-6165)
18. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 19 on Form N-1A filed on October 30, 1995. (File Nos.
33-36729 and 811-6165)
21. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 23 on Form N-1A filed on October 15, 1997. (File Nos.
33-36729 and 811-6165)
22. Response is incorporated by reference to Registratnt's Post-Effective
Amendment No. 25 on Form N-1A filed on October 31, 1997. (File Nos.
33-36729 and 811-6165)
23. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 26 on Form N-1A filed on August 28, 1998. (File Nos. 33-36729
and 811-6165)
<PAGE>
Item 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None
Item 26. NUMBER OF HOLDERS OF SECURITIES:
Number of Record Holders
TITLE OF CLASS AS OF OCTOBER 9, 1998
-------------- ----------------------
Shares of Beneficial Interest
(no par value)
Federated California Municipal Income Fund
Class A Shares (formerly, Class F Shares) 392
Class B Shares 218
Federated Michigan Municipal Income Trust 325
Federated New York Municipal Income Fund
Class A Shares (formerly, Class F Shares) 387
Federated Ohio Municipal Income Fund 1,537
Federated Pennsylvania Municipal Income Fund
Class A Shares 5,339
Class B Shares 872
Item 27. INDEMNIFICATION: (1)
Item 28. Business and Other Connections of Investment Adviser:
(a) For a description of the other business of the investment adviser, see
the section entitled "Trust Information"in Part A. The affiliations
with the Registrant of four of the Trustees and one of the Officers of
the investment adviser are included in Part B of this Registration
Statement under "Municipal Securities Income Trust Management." The
remaining Trustee of the investment adviser, his position with the
investment adviser, and, in parentheses, his principal occupation is:
Mark D. Olson (Partner, Wilson, Halbrook & Bayard), 107 W. Market
Street, Georgetown, Delaware 19947.
The remaining Officers of the investment adviser are:
Executive Vice Presidents: William D. Dawson, III
Henry A. Frantzen
J. Thomas Madden
Senior Vice Presidents: Joseph M. Balestrino
Drew J. Collins
Jonathan C. Conley
Deborah A. Cunningham
Mark E. Durbiano
Sandra L. McInerney
Susan M. Nason
Mary Jo Ochson
Robert J. Ostrowski
Vice Presidents: Todd A. Abraham
J. Scott Albrecht
Arthur J. Barry
Randall S. Bauer
David A. Briggs
Micheal W. Casey
Kenneth J. Cody
Alexandre de Bethmann
Michael P. Donnelly
Linda A. Duessel
Donald T. Ellenberger
Kathleen M. Foody-Malus
Thomas M. Franks
Edward C. Gonzales
James E. Grefenstette
Susan R. Hill
Stephen A. Keen
Robert K. Kinsey
Robert M. Kowit
Jeff A. Kozemchak
Richard J. Lazarchic
Steven Lehman
Marian R. Marinack
Charles A. Ritter
Keith J. Sabol
Scott B. Schermerhorn
Frank Semack
Aash M. Shah
Christopher Smith
Tracy P. Stouffer
Edward J. Tiedge
Paige M. Wilhelm
Jolanta M. Wysocka
Assistant Vice Presidents: Nancy J. Belz
Robert E. Cauley
Lee R. Cunningham, II
B. Anthony Delserone, Jr.
Paul S. Drotch
Salvatore A. Esposito
Donna M. Fabiano
John T. Gentry
William R. Jamison
Constantine Kartsonsas
John C. Kerber
Grant K. McKay
Natalie F. Metz
Joseph M. Natoli
John Sheehy
Michael W. Sirianni
Leonardo A. Vila
Lori A. Wolff
Secretary: Stephen A. Keen
Treasurer: Thomas R. Donahue
Assistant Secretaries: Thomas R. Donahue
Richard B. Fisher
Christine I. McGonigle
Assistant Treasurer: Richard B. Fisher
The business address of each of the Officers of the investment adviser
is Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh,
Pennsylvania 15222-3779. These individuals are also officers of a
majority of the investment advisers to the Funds listed in Part B of
this Registration Statement.
<PAGE>
ITEM 29. PRINCIPAL UNDERWRITERS:
(a) Federated Securities Corp. the Distributor for shares of the Registrant,
acts as principal underwriter for the following open-end investment
companies, including the Registrant:
Automated Government Money Trust; Cash Trust Series II; Cash Trust Series, Inc.;
CCB Funds; 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 Core Trust; 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 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.; Fixed Income Securities, Inc.; Independence
One Mutual Funds; Intermediate Municipal Trust; International Series, Inc.;
Investment Series Funds, Inc.; Liberty U.S. Government Money Market Trust;
Liquid Cash Trust; Managed Series Trust; Marshall Funds, Inc.; Money Market
Management, Inc.; Money Market Obligations Trust; Money Market Obligations Trust
II; Money Market Trust; Municipal Securities Income Trust; Newpoint Funds;
Regions Funds; RIGGS Funds; SouthTrust Funds; Tax-Free Instruments Trust; The
Planters Funds; The Wachovia Funds; The Wachovia Municipal Funds; Tower Mutual
Funds; Trust for Government Cash Reserves; Trust for Short-Term U.S. Government
Securities; Trust for U.S. Treasury Obligations; Vision Group of Funds, Inc.;
World Investment Series, Inc.; Blanchard Funds; Blanchard Precious Metals Fund,
Inc.; High Yield Cash Trust; Investment Series Trust; Peachtree Funds; Star
Funds; Targeted Duration Trust; The Virtus Funds; Trust for Financial
Institutions;
Federated Securities Corp. also acts as principal underwriter for the following
closed-end investment company: Liberty Term Trust, Inc.- 1999.
<PAGE>
(b)
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
BUSINESS ADDRESS WITH DISTRIBUTOR WITH REGISTRANT
Richard B. Fisher Director, Chairman, Chief
Federated Investors Tower Executive Officer, Chief
1001 Liberty Avenue Operating Officer, Asst.
Pittsburgh, PA 15222-3779 Secretary and Asst.
Treasurer, Federated
Securities Corp.
Edward C. Gonzales Director, Executive Vice
Federated Investors Tower President, Federated,
1001 Liberty Avenue
Pittsburgh, PA 15222-3779 Securities Corp.
Thomas R. Donahue Director, Assistant Secretary
Federated Investors Tower and Assistant Treasurer
1001 Liberty Avenue
Pittsburgh, PA 15222-3779 Federated Securities Corp
James F. Getz President-Broker/Dealer, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
John B. Fisher President-Institutional Sales, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
David M. Taylor Executive Vice President --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Mark W. Bloss Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Richard W. Boyd Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Laura M. Deger Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Theodore Fadool, Jr. Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Bryant R. Fisher Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
<PAGE>
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
BUSINESS ADDRESS WITH DISTRIBUTOR WITH REGISTRANT
Christopher T. Fives Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
James S. Hamilton Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
James M. Heaton Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Keith Nixon Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Ronald Petnuch Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Solon A. Person, IV Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Timothy C. Pillion Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Thomas E. Territ Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Ernest G. Anderson Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Teresa M. Antoszyk Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
John B. Bohnet Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Jane E. Broeren-Lambesis Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
<PAGE>
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
BUSINESS ADDRESS WITH DISTRIBUTOR WITH REGISTRANT
David J. Callahan Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Mary J. Combs Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
R. Edmond Connell, Jr. Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
R. Leonard Corton, Jr. Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Kevin J. Crenny Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Daniel T. Culbertson Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
G. Michael Cullen Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Marc C. Danile Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
William C. Doyle Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Jill Ehrenfeld Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Mark D. Fisher Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Joseph D. Gibbons Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
<PAGE>
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
BUSINESS ADDRESS WITH DISTRIBUTOR WITH REGISTRANT
John K. Goettlicher Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Craig S. Gonzales Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Raymond Hanley Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Bruce E. Hastings Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Beth A. Hetzel Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
James E. Hickey Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Charlene H. Jennings Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
H. Joseph Kennedy Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Michael W. Koenig Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Michael R. Manning Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Mark J. Miehl Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Richard C. Mihm Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
<PAGE>
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
BUSINESS ADDRESS WITH DISTRIBUTOR WITH REGISTRANT
J. Michael Miller Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Alec H. Neilly Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Thomas A. Peters III Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Robert F. Phillips Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Richard A. Recker Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Eugene B. Reed Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Paul V. Riordan Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
John Rogers Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Brian S. Ronayne Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Thomas S. Schinabeck Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Edward L. Smith Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
David W. Spears Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
<PAGE>
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
BUSINESS ADDRESS WITH DISTRIBUTOR WITH REGISTRANT
John A. Staley Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Colin B. Starks Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Jeffrey A. Stewart Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
William C. Tustin Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Paul A. Uhlman Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Miles J. Wallace Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
John F. Wallin Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Richard B. Watts Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Edward J. Wojnarowski Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Michael P. Wolff Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Edward R. Bozek Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Terri E. Bush Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
<PAGE>
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
BUSINESS ADDRESS WITH DISTRIBUTOR WITH REGISTRANT
Beth C. Dell Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
David L. Immonen Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Renee L. Martin Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Robert M. Rossi Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Matthew S. Hardin Secretary, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Denis McAuley Treasurer, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Leslie K. Platt Assistant Secretary, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779 (c) Not applicable.
Item 30. LOCATION OF ACCOUNTS AND RECORDS:
All accounts and records required to be maintained by Section 31(a) of the
Investment Company Act of 1940 and Rules 31a-1 through 31a-3 promulgated
thereunder are maintained at one of the following locations:
Registrant Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Federated Shareholder
Services Company Federated Investors Tower
("Transfer Agent and Dividend 1001 Liberty Avenue
Disbursing Agent") Pittsburgh, PA 15222-3779
Federated Services Company Federated Investors Tower
("Administrator") 1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Federated Advisers Federated Investors Tower
("Adviser") 1001 Liberty Avenue
Pittsburgh, PA 15222-3779
State Street Bank and Trust Company P.O. Box 8600
("Custodian") Boston, MA 02266-8600
Item 31. MANAGEMENT SERVICES: Not applicable.
Item 32. UNDERTAKINGS:
Registrant hereby undertakes to comply with the provisions of
Section 16(c) of the 1940 Act with respect to the removal of
Trustees and the calling of special shareholder meetings by
shareholders.
Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's latest
annual report to shareholders upon request and without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, MUNICIPAL SECURITIES INCOME
TRUST, certifies that it meets all of the requirements for effectiveness of this
Amendment to its Registration Statement pursuant to Rule 485(b) under the
Securities Act of 1933 and has duly caused this Amendment to its Registration
Statement to be signed on its behalf by the undersigned, thereto duly
authorized, in the City of Pittsburgh and Commonwealth of Pennsylvania, on the
29th day of October, 1998.
MUNICIPAL SECURITIES INCOME TRUST
BY: /s/ Nicholas J. Seitanakis
Nicholas J. Seitanakis, Assistant Secretary
Attorney in Fact for John F. Donahue
October 29, 1998
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to its Registration Statement has been signed below by the following person in
the capacity and on the date indicated:
NAME TITLE DATE
By: /s/ Nicholas J. Seitanakis Attorney In Fact October 29, 1998
Nicholas J. Seitanakis For the Persons
ASSISTANT SECRETARY Listed Below
NAME TITLE
John F. Donahue* Chairman and Trustee
(Chief Executive Officer)
Richard B. Fisher* President
J. Christopher Donahue* Executive Vice President
and Trustee
John W. McGonigle * Treasurer and Executive
Vice President
(Principal Financial and
Accounting Officer)
Thomas G. Bigley* Trustee
Nicholas P. Constantakis* Trustee
John T. Conroy, Jr.* Trustee
William J. Copeland* Trustee
James E. Dowd* Trustee
Lawrence D. Ellis, M.D.* Trustee
Edward L. Flaherty, Jr.* Trustee
Peter E. Madden* Trustee
John E. Murray, Jr.* Trustee
Wesley W. Posvar* Trustee
Marjorie P. Smuts* Trustee
Exhibit 11 under Form N-1A
Exhibit 23 under Item 601/Reg. S-K
INDEPENDENT AUDITORS' CONSENT
To the Board of Trustees and Shareholders of
Municipal Securities Income Trust:
We consent to the use in Post-Effective Amendment No. 27 to Registration
Statement (No. 33-36729) of Municipal Securities Income Trust (comprised of the
following portfolios: Federated California Municipal Income Fund, Federated
Michigan Intermediate Municipal Trust, Federated New York Municipal Income Fund,
Federated Ohio Municipal Income Fund and Federated Pennsylvania Municipal Income
Fund) of our report dated October 9, 1998 appearing in the Prospectuses, which
are a part of such Registration Statement, and to the reference to us under the
heading "Financial Highlights" in such Prospectuses.
By: DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
October 28, 1998
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 011
<NAME> Pennsylvania Municipal Income Fund Class A
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-END> AUG-31-1998
<INVESTMENTS-AT-COST> 247,703,487
<INVESTMENTS-AT-VALUE> 264,358,036
<RECEIVABLES> 4,656,664
<ASSETS-OTHER> 29,672
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 269,044,372
<PAYABLE-FOR-SECURITIES> 186,240
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 524,112
<TOTAL-LIABILITIES> 710,352
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 249,851,951
<SHARES-COMMON-STOCK> 19,681,350
<SHARES-COMMON-PRIOR> 18,178,135
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (358,602)
<ACCUMULATED-NET-GAINS> 2,186,122
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 16,654,549
<NET-ASSETS> 268,334,020
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 13,605,908
<OTHER-INCOME> 0
<EXPENSES-NET> (1,980,200)
<NET-INVESTMENT-INCOME> 11,625,708
<REALIZED-GAINS-CURRENT> 2,643,156
<APPREC-INCREASE-CURRENT> 6,503,027
<NET-CHANGE-FROM-OPS> 20,771,891
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (11,176,550)
<DISTRIBUTIONS-OF-GAINS> (692,628)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 51,030,363
<NUMBER-OF-SHARES-REDEEMED> 40,368,962
<SHARES-REINVESTED> 6,739,691
<NET-CHANGE-IN-ASSETS> 47,636,159
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 280,530
<OVERDISTRIB-NII-PRIOR> (477)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (972,754)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (2,219,288)
<AVERAGE-NET-ASSETS> 224,225,370
<PER-SHARE-NAV-BEGIN> 11.710
<PER-SHARE-NII> 0.620
<PER-SHARE-GAIN-APPREC> 0.390
<PER-SHARE-DIVIDEND> 0.000
<PER-SHARE-DISTRIBUTIONS> (0.640)
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 12.080
<EXPENSE-RATIO> 0.75
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 012
<NAME> Pennsylvania Municipal Income Fund Class B
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-END> AUG-31-1998
<INVESTMENTS-AT-COST> 247,703,487
<INVESTMENTS-AT-VALUE> 264,358,036
<RECEIVABLES> 4,656,664
<ASSETS-OTHER> 29,672
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 269,044,372
<PAYABLE-FOR-SECURITIES> 186,240
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 524,112
<TOTAL-LIABILITIES> 710,352
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 249,851,951
<SHARES-COMMON-STOCK> 2,535,845
<SHARES-COMMON-PRIOR> 675,372
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (358,602)
<ACCUMULATED-NET-GAINS> 2,186,122
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 16,654,549
<NET-ASSETS> 268,334,020
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 13,605,908
<OTHER-INCOME> 0
<EXPENSES-NET> (1,980,200)
<NET-INVESTMENT-INCOME> 11,625,708
<REALIZED-GAINS-CURRENT> 2,643,156
<APPREC-INCREASE-CURRENT> 6,503,027
<NET-CHANGE-FROM-OPS> 20,771,891
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (807,283)
<DISTRIBUTIONS-OF-GAINS> (44,936)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 23,421,346
<NUMBER-OF-SHARES-REDEEMED> 1,759,885
<SHARES-REINVESTED> 523,112
<NET-CHANGE-IN-ASSETS> 47,636,159
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 280,530
<OVERDISTRIB-NII-PRIOR> (477)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (972,754)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (2,219,288)
<AVERAGE-NET-ASSETS> 18,967,165
<PER-SHARE-NAV-BEGIN> 11.710
<PER-SHARE-NII> 0.540
<PER-SHARE-GAIN-APPREC> 0.380
<PER-SHARE-DIVIDEND> 0.000
<PER-SHARE-DISTRIBUTIONS> (0.550)
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 12.080
<EXPENSE-RATIO> 1.53
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 020
<NAME> Ohio Municipal Income Fund
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-END> AUG-31-1998
<INVESTMENTS-AT-COST> 73,127,160
<INVESTMENTS-AT-VALUE> 79,191,349
<RECEIVABLES> 1,355,331
<ASSETS-OTHER> 27,304
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 80,573,984
<PAYABLE-FOR-SECURITIES> 118,074
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 181,505
<TOTAL-LIABILITIES> 299,579
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 73,716,049
<SHARES-COMMON-STOCK> 6,740,781
<SHARES-COMMON-PRIOR> 6,548,899
<ACCUMULATED-NII-CURRENT> 9,944
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 484,223
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 6,064,189
<NET-ASSETS> 80,274,405
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 4,366,372
<OTHER-INCOME> 0
<EXPENSES-NET> (692,168)
<NET-INVESTMENT-INCOME> 3,674,204
<REALIZED-GAINS-CURRENT> 780,248
<APPREC-INCREASE-CURRENT> 1,810,941
<NET-CHANGE-FROM-OPS> 6,265,393
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 3,668,894
<DISTRIBUTIONS-OF-GAINS> 134,059
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 13,003,558
<NUMBER-OF-SHARES-REDEEMED> 12,903,472
<SHARES-REINVESTED> 2,205,539
<NET-CHANGE-IN-ASSETS> 4,768,065
<ACCUMULATED-NII-PRIOR> 4,634
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 627,060
<GROSS-ADVISORY-FEES> (306,125)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,080,439
<AVERAGE-NET-ASSETS> 75,453,102
<PER-SHARE-NAV-BEGIN> 11.530
<PER-SHARE-NII> 0.560
<PER-SHARE-GAIN-APPREC> 0.400
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (0.580)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.910
<EXPENSE-RATIO> 0.90
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 030
<NAME> FEDERATED MICHIGAN INTERMEDIATE MUNICIPAL TRUST
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-END> AUG-31-1998
<INVESTMENTS-AT-COST> 74,900,955
<INVESTMENTS-AT-VALUE> 79,309,809
<RECEIVABLES> 1,293,793
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 80,603,602
<PAYABLE-FOR-SECURITIES> 2,590,442
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 282,043
<TOTAL-LIABILITIES> 2,872,485
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 74,088,919
<SHARES-COMMON-STOCK> 7,007,520
<SHARES-COMMON-PRIOR> 6,229,544
<ACCUMULATED-NII-CURRENT> 3,483,095
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (766,656)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,408,854
<NET-ASSETS> 77,731,117
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,845,566
<OTHER-INCOME> 0
<EXPENSES-NET> (755,994)
<NET-INVESTMENT-INCOME> 3,483,095
<REALIZED-GAINS-CURRENT> 359,864
<APPREC-INCREASE-CURRENT> 1,226,386
<NET-CHANGE-FROM-OPS> 5,069,345
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (3,483,095)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,352,166
<NUMBER-OF-SHARES-REDEEMED> (1,639,057)
<SHARES-REINVESTED> 64,867
<NET-CHANGE-IN-ASSETS> 777,976
<ACCUMULATED-NII-PRIOR> 3,217,659
<ACCUMULATED-GAINS-PRIOR> 149,867
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 287,452
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 755,994
<AVERAGE-NET-ASSETS> 70,675,941
<PER-SHARE-NAV-BEGIN> 10.850
<PER-SHARE-NII> 0.530
<PER-SHARE-GAIN-APPREC> 0.024
<PER-SHARE-DIVIDEND> (0.530)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 11.090
<EXPENSE-RATIO> 0.50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 041
<NAME> Federated California Municipal Income Fund
Class A
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-END> AUG-31-1998
<INVESTMENTS-AT-COST> 35,961,253
<INVESTMENTS-AT-VALUE> 38,063,998
<RECEIVABLES> 829,408
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 15,723
<TOTAL-ASSETS> 38,909,129
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 97,484
<TOTAL-LIABILITIES> 97,484
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 37,445,863
<SHARES-COMMON-STOCK> 2,586,583
<SHARES-COMMON-PRIOR> 2,051,158
<ACCUMULATED-NII-CURRENT> 1,319,281
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (736,963)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,102,745
<NET-ASSETS> 38,811,645
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,529,657
<OTHER-INCOME> 0
<EXPENSES-NET> 210,376
<NET-INVESTMENT-INCOME> 1,319,281
<REALIZED-GAINS-CURRENT> 16,809
<APPREC-INCREASE-CURRENT> 1,036,136
<NET-CHANGE-FROM-OPS> 2,372,226
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,204,810)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 850,058
<NUMBER-OF-SHARES-REDEEMED> (370,125)
<SHARES-REINVESTED> 55,492
<NET-CHANGE-IN-ASSETS> 535,425
<ACCUMULATED-NII-PRIOR> 1,008,967
<ACCUMULATED-GAINS-PRIOR> 243,124
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 110,704
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 597,140
<AVERAGE-NET-ASSETS> 24,884,969
<PER-SHARE-NAV-BEGIN> 10.730
<PER-SHARE-NII> 0.530
<PER-SHARE-GAIN-APPREC> 0.400
<PER-SHARE-DIVIDEND> (0.530)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 11.130
<EXPENSE-RATIO> 0.69
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 042
<NAME> Federated California Municipal Income Fund
Class B
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-END> AUG-31-1998
<INVESTMENTS-AT-COST> 35,961,253
<INVESTMENTS-AT-VALUE> 38,063,998
<RECEIVABLES> 829,408
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 15,723
<TOTAL-ASSETS> 38,909,129
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 97,484
<TOTAL-LIABILITIES> 97,484
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 37,445,863
<SHARES-COMMON-STOCK> 900,146
<SHARES-COMMON-PRIOR> 178,825
<ACCUMULATED-NII-CURRENT> 1,319,281
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (736,963)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,102,745
<NET-ASSETS> 38,811,645
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,529,657
<OTHER-INCOME> 0
<EXPENSES-NET> 210,376
<NET-INVESTMENT-INCOME> 1,319,281
<REALIZED-GAINS-CURRENT> 16,809
<APPREC-INCREASE-CURRENT> 1,036,136
<NET-CHANGE-FROM-OPS> 2,372,226
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (114,471)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 912,747
<NUMBER-OF-SHARES-REDEEMED> (18,356)
<SHARES-REINVESTED> 5,755
<NET-CHANGE-IN-ASSETS> 900,146
<ACCUMULATED-NII-PRIOR> 1,008,967
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 110,704
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 597,140
<AVERAGE-NET-ASSETS> 2,795,239
<PER-SHARE-NAV-BEGIN> 10.870
<PER-SHARE-NII> 0.330
<PER-SHARE-GAIN-APPREC> 0.260
<PER-SHARE-DIVIDEND> (0.330)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 11.130
<EXPENSE-RATIO> 1.40
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 050
<NAME> Federated New York Municipal Income Fund
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-END> AUG-31-1998
<INVESTMENTS-AT-COST> 22,179,947
<INVESTMENTS-AT-VALUE> 24,024,344
<RECEIVABLES> 407,912
<ASSETS-OTHER> 71,403
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 24,503,659
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 152,239
<TOTAL-LIABILITIES> 152,239
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 23,494,363
<SHARES-COMMON-STOCK> 2,213,722
<SHARES-COMMON-PRIOR> 2,107,392
<ACCUMULATED-NII-CURRENT> (987,340)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,844,397
<NET-ASSETS> 24,351,420
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,308,224
<OTHER-INCOME> 0
<EXPENSES-NET> (162,875)
<NET-INVESTMENT-INCOME> 1,145,349
<REALIZED-GAINS-CURRENT> 146,593
<APPREC-INCREASE-CURRENT> 660,446
<NET-CHANGE-FROM-OPS> 1,952,388
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,145,349)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,905,471
<NUMBER-OF-SHARES-REDEEMED> (4,295,799)
<SHARES-REINVESTED> 548,237
<NET-CHANGE-IN-ASSETS> 1,964,948
<ACCUMULATED-NII-PRIOR> (1,133,933)
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 92,417
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 533,610
<AVERAGE-NET-ASSETS> 23,100,264
<PER-SHARE-NAV-BEGIN> 10.620
<PER-SHARE-NII> 0.540
<PER-SHARE-GAIN-APPREC> 0.380
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (0.540)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.000
<EXPENSE-RATIO> 0.71
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
