MANAGEMENT DISCUSSION AND ANALYSIS
Federated California Municipal Income Fund
ANNUAL REPORT FOR THE FISCAL YEAR ENDED AUGUST 31, 1999
CLASS A SHARES
CLASS B SHARES
WHAT'S YOUR REVIEW OF THE MUNICIPAL BOND MARKETPLACE OVER THE
REPORTING PERIOD?
A market environment of low absolute interest rates and historically narrow
credit spreads have combined to make bond structure the most important factor in
determining performance over the reporting period. Bond coupon, effective
maturity and call protection were the relevant structural elements which
determined relative price performance in a municipal bond portfolio.
Credit spread widening did occur selectively in specific sectors of the
municipal bond market, and has been the most prevalent in the hospital sector.
The hospital sector has continued to show specific vulnerability as a result of
Medicare reimbursement reductions and the related pressure on hospital
operations. Credit spreads have widened considerably since April 1999, with BBB
category hospital spreads widening 104 basis points off the 30-year Municipal
Market Data curve.
The appetite for tax exempt securities from traditional crossover buyers
(corporations and insurance companies) has remained soft due to the
attractiveness of spread product (taxable corporate debt). The glut of pre- Year
2000 (Y2K) corporate debt issuance has created attractive relative value
opportunities in the taxable sector. Liquidity in the municipal market has also
become an issue. Retail demand is not able to support the trading of larger
blocks of municipal bonds while certain coupon structures, particularly market
discount securities, are receiving lukewarm attention from investors.
HOW HAVE CALIFORNIA MUNICIPAL BONDS PERFORMED OVER THE REPORTING PERIOD?
Municipal credit quality in general has benefited from the strong U.S. economy.
Municipal tax receipts, at all levels of government, have exceeded forecasts,
which has allowed municipal fund balances and reserve accounts to expand.
Generally, credit quality continued to improve throughout California, driven by
solid employment growth, new business formation, recovery in real estate and a
protracted low inflation environment; the state's budget surplus has eased
fiscal pressure at all levels of government. Standard and Poor's upgraded the
state's debt from A+ to AA- on August 10, 1999, to bring its rating in line with
the other rating agencies. The major exception to this positive trend has been
the health care sector, where competition and federal budget cuts have caused
some damage.
California debt issuance in 1999 lagged 1998 levels, while demand increased
sharply, particularly from retail buyers. California municipal debt was trading
with a spread of approximately 23 basis points to the benchmark AAA municipal
yield curve at the end of August 1999, in line with its six month average of 71
basis points.
HOW HAS FEDERATED CALIFORNIA MUNICIPAL INCOME FUND PERFORMED WITH RESPECT
TO TOTAL RETURN AND INCOME FOR THE 12-MONTH REPORTING PERIOD ENDED
AUGUST 31, 1999?
For the 12-month reporting period ended August 31, 1999, the fund's Class A
Shares produced a total return of (1.20%) based on net asset value. 1 This
return lagged the total return of the Lehman Brothers Municipal Bond Index2 of
0.50%, but outperformed the Lipper California Municipal Fund Category total
return of (1.49%).3 The income on the fund remained competitive during the
reporting period. On August 31, 1999, the fund's 30-day current net yield, or
SEC yield, was 4.78% for Class A Shares based on net asset value. The yield
represents an increase from the 4.57% SEC yield at the beginning of the
reporting period.1
1 The total return and SEC yield for Class A Shares, based on offering price,
for the reporting period were (6.51%) and 4.56%, respectively. Performance
quoted represents past performance and is not indicative of future results.
Investment return and principal value will fluctuate, so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
2 This index is unmanaged.
3 Lipper figures represent the average of the total returns reported by all of
the mutual funds designated by Lipper Analytical Services, Inc. as falling into
the respective categories indicated.
WHAT ACCOUNTED FOR THE FUND'S PERFORMANCE?
The strategy over the reporting period included tax-swapping to generate tax
loss carryforwards which can be used to offset any realized capital gains, while
also adding incremental yield by improving the weighted average book yield
within the portfolio. The duration and average maturity of the fund were
structured so as to take advantage of what management expected to be a trading
range for municipal interest rates over the reporting period. The Bond Buyer
Municipal Index 4 moved from 5.14% at the beginning of the reporting period to
5.78% at the end of the reporting period; it reached a low of 4.95% on October
6, 1998, and a high of 5.88% on August 16, 1999. Due to the recent upward bias
in interest rates, the market has become especially sensitive to slight
problems, especially for bonds issued over the last year when rates were at
their lowest. As a municipal bond approaches its low threshold, the risk of
generating ordinary income, which is taxed at the holder's top marginal bracket,
becomes relevant. This reality impacts the bond's liquidity and requires the
bond's duration to be calculated on a tax adjusted basis. The fund was also
affected by spread widening in the BBB credit sector, to which it had limited
exposure. With the many questions associated with Y2K looming, the fund is
maintaining a highly liquid position which will enable management to deal with
potential disruptions which could occur around year end.
WHAT KIND OF ENVIRONMENT DO YOU SEE AHEAD FOR MUNICIPAL BONDS?
The municipal bond market is technically driven by supply and demand imbalances
which are created by changes in interest rates, coupon payment period cycles and
economic conditions. The municipal market has recently experienced a demand
shift away from institutional buyers (insurance companies, corporations and
arbitrageurs) toward retail buyers (individuals) of municipal bonds. The ratio
of municipal bond yields to Treasury bond yields has widened from highs near
100%, which has caused many crossover buyers to unwind their municipal
positions. Crossover buyers purchase municipal bonds on a relative valuation
basis and not necessarily because of the tax exempt income. Y2K spending by
municipal governments is a potential credit factor which must be taken into
consideration as far as both the cost and the effectiveness of their Y2K
preparedness. The market does not expect any material interruptions in the
supply of necessary municipal services. However, there remains the potential for
some state and local functions to suffer temporary disruptions. The approach of
the presidential election cycle will bring potential federal tax law changes
back into the news. Potential impacts such as the introduction of a flat tax or
significant changes to the top marginal brackets could affect the trading value
of municipal debt relative to taxable fixed income alternatives, such as
corporate and Treasury securities.
4 This index is unmanaged.
LAST MEETING OF SHAREHOLDERS
A Special Meeting of Shareholders of Federated California Municipal Income Fund
(the "Fund"), a portfolio of Federated Municipal Securities Income Trust (the
"Trust"), was held on June 25, 1999. On April 27, 1999, the record date for
shareholders voting at the meeting, there were 5,363,338 total outstanding
shares. The meeting was adjourned to August 11, 1999, when the following items
were considered by shareholders of the Fund and the results of their voting were
as follows:
AGENDA ITEM 1
To elect Trustees: 1
WITHHELD
AUTHORITY
FOR TO VOTE
Thomas G. Bigley 4,468,452 41,838
Nicholas P. Constantakis 4,468,452 41,838
John F. Cunningham 4,470,603 39,687
Charles F. Mansfield, Jr. 4,470,603 39,687
John E. Murray, Jr., J.D., S.J.D. 4,470,603 39,687
John S. Walsh 4,470,603 39,687
1 The following Trustees continued their terms: John F. Donahue, John T.
Conroy, J. Christopher Donahue, Lawrence D. Ellis, M.D., Peter E. Madden
and Marjorie P. Smuts.
AGENDA ITEM 2
To ratify the selection of Deloitte & Touche LLP as the independent auditors for
the Trust.
The results of shareholders voting were as follows:
FOR AGAINST ABSTENTIONS
4,302,218 37,737 170,334
AGENDA ITEM 3
To amend the Fund's fundamental investment policies regarding borrowing money
and issuing senior securities.
The results of shareholders voting were as follows:
FOR AGAINST ABSTENTIONS
2,791,519 117,197 268,640
AGENDA ITEM 4
To amend the Fund's fundamental investment policies regarding investments in
real estate.
The results of shareholders voting were as follows:
FOR AGAINST ABSTENTIONS
2,791,175 117,197 301,282
AGENDA ITEM 5
To amend the Fund's fundamental investment policies regarding investments in
commodities.
The results of shareholders voting were as follows:
FOR AGAINST ABSTENTIONS
2,780,841 126,842 301,972
AGENDA ITEM 6
To amend the Fund's fundamental investment policies regarding underwriting
securities.
The results of shareholders voting were as follows:
FOR AGAINST ABSTENTIONS
2,807,359 151,417 250,879
AGENDA ITEM 7
To amend the Fund's fundamental investment policies regarding lending by the
Funds.
The results of shareholders voting were as follows:
FOR AGAINST ABSTENTIONS
2,765,586 168,615 275,454
AGENDA ITEM 8
To amend the Fund's fundamental investment policies regarding concentration of
the Fund's investments in the securities of companies in the same industry.
The results of shareholders voting were as follows:
FOR AGAINST ABSTENTIONS
2,855,976 77,203 276,476
AGENDA ITEM 9
To amend, and to make non-fundamental, the Fund's fundamental investment
policies regarding buying securities on margin.
The results of shareholders voting were as follows:
FOR AGAINST ABSTENTIONS
2,787,763 161,323 260,569
AGENDA ITEM 10
To amend, and to make non-fundamental, the Fund's fundamental investment
policies regarding pledging assets.
The results of shareholders voting were as follows:
FOR AGAINST ABSTENTIONS
2,728,504 179,290 301,861
AGENDA ITEM 11
To remove the Fund's fundamental investment policies regarding selling
securities short.
The results of shareholders voting were as follows:
FOR AGAINST ABSTENTIONS
2,733,114 210,439 266,102
AGENDA ITEM 12
To remove the Fund's fundamental investment policies regarding dealing in puts,
calls, straddles, spreads and any combination thereof.
The results of shareholders voting were as follows:
FOR AGAINST ABSTENTIONS
2,732,202 208,245 269,207
AGENDA ITEM 13
To approve an amendment and restatement to the Trust's Declaration of Trust to
permit the Board of Trustees to liquidate assets of the Trust without seeking
shareholder approval.
The results of shareholders voting were as follows:
FOR AGAINST ABSTENTIONS
2,706,158 293,110 210,387
CLASS A SHARES
GROWTH OF $10,000 INVESTED IN FEDERATED CALIFORNIA MUNICIPAL INCOME FUND
[Graphic] - See Appendix D.
AVERAGE ANNUAL TOTAL RETURN 1 FOR THE PERIOD ENDED AUGUST 31, 1999
1 Year (6.51%)
5 Years 5.44%
Start of Performance (12/2/92) 5.54%
The graph above illustrates the hypothetical investment of $10,000 2 in the
Federated California Municipal Income Fund (Class A Shares) (the "Fund") from
December 2, 1992 (start of performance) to August 31, 1999 compared to the
Lehman Brothers Revenue Bond Index (LBRBI) and the Lehman Brothers Municipal
Bond Index (LBMBI).3
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
This report must be preceded or accompanied by the Fund's prospectus dated
October 31, 1999, and, together with financial statements contained therein,
constitutes the Fund's annual report.
1 Total return quoted reflects all applicable sales charges and contingent
deferred sales charges.
2 Represents a hypothetical investment of $10,000 in the Fund after deducting
the maximum sales charge of 1.00% ($10,000 investment minus $100 sales charge =
$9,900) which was effective on December 2, 1992. Effective December 1, 1997, the
maximum sales charge has been increased to 4.50%. The ending value of the Fund
reflects a 0.75% contingent deferred sales charge on any redemption less than
two years from the purchase date. The Fund's performance assumes the
reinvestment of all dividends and distributions. The LBRBI and the LBMBI have
been adjusted to reflect reinvestment of dividends on securities in the indexes.
3 The LBRBI and the LBMBI are not adjusted to reflect sales charges, expenses or
other fees that the SEC requires to be reflected in the Fund's performance.
These indexes are unmanaged.
CLASS B SHARES
GROWTH OF $10,000 INVESTED IN FEDERATED CALIFORNIA MUNICIPAL INCOME FUND
[Graphic] - See Appendix E.
AVERAGE ANNUAL TOTAL RETURN 1 FOR THE PERIOD ENDED AUGUST 31, 1999
1 Year (7.10%)
Start of Performance (12/1/97) (0.61%)
The graph above illustrates the hypothetical investment of $10,000 2 in the
Federated California Municipal Income Fund (Class B Shares) (the "Fund") from
December 1, 1997 (start of performance) to August 31, 1999 compared to the
Lehman Brothers Revenue Bond Index (LBRBI) and the Lehman Brothers Municipal
Bond Index (LBMBI).3
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
This report must be preceded or accompanied by the Fund's prospectus dated
October 31, 1999, and, together with financial statements contained therein,
constitutes the Fund's annual report.
1 Total return quoted reflects all applicable sales charges and contingent
deferred sales charges.
2 Represents a hypothetical investment of $10,000 in the Fund. The ending value
of the Fund reflects a 5.50% contingent deferred sales charge on any redemption
less than one year from the purchase date. The Fund's performance assumes the
reinvestment of all dividends and distributions. The LBRBI and LBMBI have been
adjusted to reflect reinvestment of dividends on securities in the indexes.
3 The LBRBI and the LBMBI are not adjusted to reflect sales charges, expenses or
other fees that the SEC requires to be reflected in the Fund's performance.
These indexes are unmanaged.
[Graphic]
Federated
Federated California Municipal Income Fund
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
1-800-341-7400
WWW.FEDERATEDINVESTORS.COM
Federated Securities Corp., Distributor
Cusip 625922109
Cusip 625922828
G00574-05 (10/99)
[Graphic]
PROSPECTUS
Federated California Municipal Income Fund
A Portfolio of Federated Municipal Securities Income Trust
CLASS A SHARES
CLASS B SHARES
A mutual fund seeking 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 by investing primarily in a portfolio of
long-term, investment grade California tax exempt securities.
As with all mutual funds, the Securities and Exchange Commission (SEC) has not
approved or disapproved these securities or passed upon the adequacy of this
prospectus. Any representation to the contrary is a criminal offense.
OCTOBER 31, 1999
CONTENTS
Risk/Return Summary 1
What are the Fund's Fees and Expenses? 3
What are the Fund's Investment Strategies? 4
What are the Principal Securities
in Which the Fund Invests? 5
What are the Specific Risks of Investing in the Fund? 8
What Do Shares Cost? 9
How is the Fund Sold? 12
How to Purchase Shares 12
How to Redeem and Exchange Shares 14
Account and Share Information 16
Who Manages the Fund? 17
Financial Information 18
Independent Auditors' Report 34
Risk/Return Summary
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
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. While there is no assurance that the
Fund will achieve its investment objective, it endeavors to do so by following
the strategies and policies described in this prospectus.
WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?
The Fund invests in a portfolio of tax exempt securities 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 from the Fund's investments may be subject to the
federal alternative minimum tax for individuals and corporations (AMT). The
Fund's portfolio securities will be primarily long-term, investment grade
securities.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?
All mutual funds take investment risks. Therefore, it is possible to lose money
by investing in the Fund. The primary factors that may reduce the Fund's returns
include:
INTEREST RATE RISKS
Prices of tax exempt securities generally fall when interest rates rise.
Interest rate changes have a greater effect on the price of fixed income
securities with longer durations.
CREDIT RISKS
Issuers of tax exempt securities may default on the payment of interest or
principal when due.
CALL RISKS
Issuers of tax exempt securities may redeem the securities prior to maturity at
a price below their current market value.
SECTOR RISKS
Since the Fund invests primarily in issuers from California, the Fund may be
subject to additional risks compared to funds that invest in multiple states.
California's economy is dependent upon high technology, entertainment, trade and
construction. A downturn in any of these industries could have a negative impact
on the economy of the state. Moreover, the ability of California state and local
governments to issue debt and raise taxes is limited by certain initiatives.
The Fund is non-diversified. Compared to diversified mutual funds, it may invest
a higher percentage of its assets among fewer issuers of portfolio securities.
This increases the Fund's risk by magnifying the impact (positively or
negatively) that any one issuer has on the Fund's Share price and performance.
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 or
guaranteed by the U.S. government, the Federal Deposit Insurance Corporation,
the Federal Reserve Board or any other government agency.
RISK/RETURN BAR CHART AND TABLE
[Graphic]
The bar chart shows the variability of the Fund's Class A Shares total returns
on a calendar year-end basis.
The total returns displayed for the Fund's Class A Shares do not reflect payment
of any sales charges or recurring shareholder account fees. If these charges or
fees had been included, the returns shown would have been lower.
The Fund's Class A Shares total return for the nine-month period from January 1,
1999 to September 30, 1999 was (2.99%).
Within the period shown in the Chart, the Fund's Class A Shares highest
quarterly return was 9.04% (quarter ended March 31, 1995). Its lowest quarterly
return was (7.76%) (quarter ended March 31, 1994).
AVERAGE ANNUAL TOTAL RETURN TABLE
The following table represents the Fund's Class A Shares and Class B Shares
Average Annual Total Returns, reduced to reflect applicable sales charges, for
the calendar periods ended December 31, 1998. The table shows the Fund's total
returns averaged over a period of years relative to Lehman Brothers Revenue Bond
Index (LBRBI) and Lehman Brothers Municipal Bond Index (LBMBI), both broad-based
market indexes. The LBRBI is a total return performance benchmark for the
long-term, investment grade, revenue bond market. The LBMBI is a broad market
performance benchmark for the tax exempt bond market. To be included in the
LBMBI, bonds must have a minimum credit rating of Baa. Total returns for the
indexes shown do not reflect sales charges, expenses or other fees that the SEC
requires to be reflected in the Fund's performance. Indexes are unmanaged, and
it is not possible to invest directly in an index.
CLASS A CLASS B
CALENDAR PERIOD SHARES SHARES LBRBI LBMBI
1 Year 0.63% 0.13% 6.33% 6.22%
5 Years 4.86% N/A 6.39% 6.49%
Start of Performance 1 6.66% 2.12% 7.56% N/A
1 The Fund's start of performance dates for Class A Shares and Class B Shares
were December 2, 1992 and December 1, 1997, respectively.
Past performance does not necessarily predict future performance. This
information provides you with historical performance information so that you can
analyze whether the Fund's investment risks are balanced by its potential
returns.
What are the Fund's Fees and Expenses?
FEDERATED CALIFORNIA MUNICIPAL INCOME FUND
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
Shares of the Fund.
<TABLE>
SHAREHOLDER FEES CLASS A CLASS B
<S> <C> <C>
Fees Paid Directly From
Your Investment
Maximum Sales Charge
(Load) Imposed on
Purchases (as a percentage
of offering price) 4.50% None
Maximum Deferred Sales
Charge (Load) (as a
percentage of original
purchase price or
redemption proceeds, as
applicable) None 5.50%
Maximum Sales Charge
(Load) Imposed on
Reinvested Dividends (and
other Distributions) (as a
percentage of offering
price) None None
Redemption Fee (as a
percentage of amount
redeemed, if applicable) None None
Exchange Fee None None
ANNUAL FUND OPERATING EXPENSES (Before Waivers and Reimbursements) 1 Expenses
That are Deducted From Fund Assets (as a percentage of average net assets)
Management Fee 2 0.40% 0.40%
Distribution (12b-1) Fee 3 0.25% 0.75%
Shareholder Services Fee 0.25% 0.25%
Other Expenses 4 0.67% 0.67%
Total Annual Fund
Operating Expenses 1.57% 2.07% 5
1 Although not contractually obligated to do so, the adviser and distributor
waived and reimbursed certain amounts. These are shown
below along with the net expenses the Fund actually paid for the fiscal year
ended August 31, 1999.
Total Waivers and
Reimbursements of Fund
Expenses 1.07% 0.82%
Total Actual Annual Fund
Operating Expenses (after
waivers and
reimbursements) 0.50% 1.25%
2 The adviser voluntarily waived the management fee. The adviser can terminate
this voluntary waiver at any time. The management fee paid by the Fund (after
the voluntary waiver) was 0.00% for the fiscal year ended August 31, 1999.
3 The distributor voluntarily waived the distribution (12b-1) fee for the Class
A Shares. The distributor can terminate this voluntary waiver at any time. The
distribution (12b-1) fee paid by the Fund's Class A Shares (after the voluntary
waiver) was 0.00% for the fiscal year ended August 31, 1999.
4 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. Total other operating expenses paid by the Fund for Class
A Shares and Class B Shares (after the voluntary reimbursement) were 0.25% and
0.25%, respectively, for the fiscal year ended August 31, 1999.
5 Class B Shares convert to Class A Shares (which pay lower ongoing expenses)
approximately eight years after purchase.
</TABLE>
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund's
Class A Shares and Class B Shares with the cost of investing in other mutual
funds.
The Example assumes that you invest $10,000 in the Fund's Class A Shares and
Class B Shares for the time periods indicated and then redeem all of your Shares
at the end of those periods. Expenses assuming no redemption are also shown. The
Example also assumes that your investment has a 5% return each year and that the
Fund's Class A Shares and Class B Shares operating expenses are BEFORE WAIVERS
AND REIMBURSEMENTS as shown in the table and remain the same. Although your
actual costs may be higher or lower, based on these assumptions your costs would
be:
SHARE CLASS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
CLASS A
Expenses assuming redemption $603 $923 $1,267 $2,233
Expenses assuming no redemption $603 $923 $1,267 $2,233
CLASS B
Expenses assuming redemption $760 $1,049 $1,134 $2,385
Expenses assuming no redemption $210 $649 $1,114 $2,340
What are the Fund's Investment Strategies?
The Fund invests in a portfolio of tax exempt securities 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. As a matter of operating policy, the Fund ordinarily will invest
so that 100% of its annual interest income is exempt from such taxes. Interest
income from the Fund's investments may be subject to AMT.
The Fund invests at least 65% of its assets in investment grade securities. The
Fund does not limit itself to securities of a particular maturity range, but
currently focuses on long-term securities with maturities greater than 10 years.
The Fund's investment adviser (Adviser) actively manages the Fund's portfolio,
seeking to manage the interest rate risk and credit risk assumed by the Fund and
to provide superior levels of after tax total return.
The Adviser manages the Fund's interest rate risk by adjusting the duration of
its portfolio. "Duration" measures the sensitivity of a security's price to
changes in interest rates. The greater a portfolio's duration, the greater the
change in the portfolio's value in response to a change in market interest
rates. The Adviser will increase or reduce the Fund's portfolio duration based
on its interest rate outlook. When the Adviser expects interest rates to fall,
it will maintain a longer portfolio duration. When the Adviser expects interest
rates to increase, it will shorten the portfolio duration. The Adviser considers
a variety of factors in formulating its interest rate outlook, including the
following:
* current and expected U.S. economic growth;
* current and expected interest rates and inflation;
* the Federal Reserve's monetary policy; and
* supply and demand factors related to the municipal market and the effect they
may have on the returns offered for various bond maturities.
The Adviser manages credit risk by performing a fundamental credit analysis on
tax exempt securities before the Fund purchases such securities. The Adviser
considers various factors, including the following:
* the economic feasibility of revenue bond financings and general purpose
financings;
* the financial condition of the issuer or guarantor; and
* political developments that may affect credit quality.
The Adviser monitors the credit risks of all portfolio securities on an ongoing
basis by reviewing periodic financial data and ratings of nationally recognized
ratings services.
The Adviser attempts to provide superior levels of after tax total return. After
tax total return consists of two components: (1) income received from the Fund's
portfolio securities; and (2) changes in the market value of the Fund's
portfolio securities and attendant increase or decrease in the market value of
Fund shares. The Adviser seeks total return on an after tax basis, so that it
will try to maximize tax exempt income distributions; make no ordinary income
distributions; and minimize or eliminate capital gains distributions.
HEDGING
Hedging transactions are intended to reduce specific risks. For example, to
protect the Fund against circumstances that would normally cause the Fund's
portfolio securities to decline in value, the Fund may buy or sell a futures
contract that would normally increase in value under the same circumstances. The
Fund may also attempt to hedge by using combinations of different futures
contracts, or futures contracts and securities. The Fund's ability to hedge may
be limited by the costs of the futures contracts. The Fund may attempt to lower
the cost of hedging by entering into transactions that provide only limited
protection, including transactions that (1) hedge only a portion of its
portfolio, (2) use futures contracts that cover a narrow range of circumstances
or (3) involve the sale of futures contracts with different terms. Consequently,
hedging transactions will not eliminate risk even if they work as intended. In
addition, hedging strategies are not always successful, and could result in
increased expenses and losses to the Fund.
TEMPORARY DEFENSIVE INVESTMENTS
The Fund may temporarily depart from its principal investment strategies by
investing its assets in securities subject to federal regular income tax and the
income tax imposed by the state of California and California municipalities. It
may do this to minimize potential losses and maintain liquidity to meet
shareholder redemptions during adverse market conditions. This may cause the
Fund to receive and distribute taxable income to investors.
What are the Principal Securities in Which the Fund Invests?
TAX EXEMPT SECURITIES
Tax exempt securities are fixed income securities that pay interest that is not
subject to federal regular income taxes. Fixed income securities pay interest,
dividends or distributions at a specified rate. The rate may be a fixed
percentage of the principal or adjusted periodically.
Typically, states, counties, cities and other political subdivisions and
authorities issue tax exempt securities. The market categorizes tax exempt
securities by their source of repayment.
GENERAL OBLIGATION BONDS
General obligation bonds are supported by the issuer's power to exact property
or other taxes. The issuer must impose and collect taxes sufficient to pay
principal and interest on the bonds. However, the issuer's authority to impose
additional taxes may be limited by its charter or state law.
SPECIAL REVENUE BONDS
Special revenue bonds are payable solely from specific revenues received by the
issuer such as specific taxes, assessments, tolls or fees. Bondholders may not
collect from the municipality's general taxes or revenues. For example, a
municipality may issue bonds to build a toll road, and pledge the tolls to repay
the bonds. Therefore, a shortfall in the tolls normally would result in a
default on the bonds.
PRIVATE ACTIVITY BONDS
Private activity bonds are special revenue bonds used to finance private
entities. For example, a municipality may issue bonds to finance a new factory
to improve its local economy. The municipality would lend the proceeds from its
bonds to the company using the factory, and the company would agree to make loan
payments sufficient to repay the bonds. The bonds would be payable solely from
the company's loan payments, not from any other revenues of the municipality.
Therefore, any default on the loan normally would result in a default on the
bonds.
The interest on many types of private activity bonds is subject to AMT. The Fund
may invest in bonds subject to AMT.
TAX INCREMENT FINANCING BONDS
Tax increment financing (TIF) bonds are payable from increases in taxes or other
revenues attributable to projects financed by the bonds. For example, a
municipality may issue TIF bonds to redevelop a commercial area. The TIF bonds
would be payable solely from any increase in sales taxes collected from
merchants in the area. The bonds could default if merchants' sales, and related
tax collections, failed to increase as anticipated.
MUNICIPAL LEASES
Municipalities may enter into leases for equipment or facilities. In order to
comply with state public financing laws, these leases are typically subject to
annual appropriation. In other words, a municipality may end a lease, without
penalty, by not providing for the lease payments in its annual budget. After the
lease ends, the lessor can resell the equipment or facility but may lose money
on the sale.
The Fund may invest in securities supported by pools of municipal leases. The
most common type of lease backed securities are certificates of participation
(COPs). However, the Fund may also invest directly in individual leases.
ZERO COUPON SECURITIES
Zero coupon securities do not pay interest or principal until final maturity
unlike debt securities that provide periodic payments of interest (referred to
as a coupon payment). Investors buy zero coupon securities at a price below the
amount payable at maturity. The difference between the purchase price and the
amount paid at maturity represents interest on the zero coupon security.
Investors must wait until maturity to receive interest and principal, which
increases the interest rate risks and credit risks of a zero coupon security.
INVERSE FLOATERS
An inverse floater has a floating or variable interest rate that moves in the
opposite direction of market interest rates. When market interest rates go up,
the interest rate paid on the inverse floater goes down; when market interest
rates go down, the interest rate paid on the inverse floater goes up. Inverse
floaters generally respond more rapidly to market interest rate changes than
fixed rate tax exempt securities. Inverse floaters are subject to interest rate
risks and leverage risks.
CREDIT ENHANCEMENT
Credit enhancement consists of an arrangement in which a company agrees to pay
amounts due on a fixed income security if the issuer defaults. In some cases the
company providing credit enhancement makes all payments directly to the security
holders and receives reimbursement from the issuer. Normally, the credit
enhancer has greater financial resources and liquidity than the issuer. For this
reason, the Adviser usually evaluates the credit risk of a fixed income security
based solely upon its credit enhancement.
FUTURES CONTRACTS
Futures contracts, which are a type of derivative contract, provide for the
future sale by one party and purchase by another party of a specified amount of
an underlying asset at a specified price, date and time. Entering into a
contract to buy an underlying asset is commonly referred to as buying a contract
or holding a long position in the asset. Entering into a contract to sell an
underlying asset is commonly referred to as selling a contract or holding a
short position in the asset. Futures contracts are considered to be commodity
contracts.
The Fund may buy and sell interest rate and index financial futures contracts.
Depending upon how the Fund uses futures contracts and the relationships between
the market value of a futures contract and the underlying asset, futures
contracts may increase or decrease the Fund's exposure to interest rate risks,
and may also expose the Fund to liquidity risks and leverage risks.
SPECIAL TRANSACTIONS
DELAYED DELIVERY TRANSACTIONS
Delayed delivery transactions, including when-issued transactions, are
arrangements in which the Fund buys securities for a set price, with payment and
delivery of the securities scheduled for a future time. During the period
between purchase and settlement, no payment is made by the Fund to the issuer
and no interest accrues to the Fund. The Fund records the transaction when it
agrees to buy the securities and reflects their value in determining the price
of its shares. Settlement dates may be a month or more after entering into these
transactions so that the market values of the securities bought may vary from
the purchase prices. Therefore, delayed delivery transactions create interest
rate risks for the Fund. Delayed delivery transactions also involve credit risks
in the event of a counterparty default.
ASSET COVERAGE
In order to secure its obligations in connection with futures contracts or
special transactions, the Fund will either own the underlying assets, enter into
an offsetting transaction or set aside readily marketable securities with a
value that equals or exceeds the Fund's obligations. Unless the Fund has other
readily marketable assets to set aside, it cannot trade assets used to secure
such obligations without entering into an offsetting futures contract or
terminating a special transaction. This may cause the Fund to miss favorable
trading opportunities or to realize losses on futures contracts or special
transactions.
INVESTMENT RATINGS FOR INVESTMENT GRADE SECURITIES
The Adviser will determine whether a security is investment grade based upon the
credit ratings given by one or more nationally recognized rating services. For
example, Standard and Poor's, a rating service, assigns ratings to investment
grade securities (AAA, AA, A and BBB) based on its assessment of the likelihood
of the issuer's inability to pay interest or principal (default) when due on
each security. Lower credit ratings correspond to higher credit risk. If a
security has not received a rating, the Fund must rely entirely upon the
Adviser's credit assessment that the security is comparable to investment grade.
If a security is downgraded below the minimum quality grade discussed above, the
Adviser will reevaluate the security, but will not be required to sell it.
What are the Specific Risks of Investing in the Fund?
INTEREST RATE RISKS
Prices of fixed income securities rise and fall in response to changes in the
interest rates paid by similar securities. Generally, when interest rates rise,
prices of fixed income securities fall. However, market factors, such as the
demand for particular fixed income securities, may cause the price of certain
fixed income securities to fall while the prices of other securities rise or
remain unchanged.
Interest rate changes have a greater effect on the price of fixed income
securities with longer durations. Duration measures the price sensitivity of a
fixed income security to changes in interest rates.
CREDIT RISKS
Credit risk is the possibility that an issuer will default on a security by
failing to pay interest or principal when due. If an issuer defaults, the Fund
will lose money.
Many fixed income securities receive credit ratings from services such as
Standard & Poor's and Moody's Investors Service. These services assign ratings
to securities by assessing the likelihood of issuer default. Lower credit
ratings correspond to higher credit risk. If a security has not received a
rating, the Fund must rely entirely upon the Adviser's credit assessment.
Credit risk includes the possibility that a party to a transaction involving the
Fund will fail to meet its obligations. This could cause the Fund to lose the
benefit of the transaction or prevent the Fund from selling or buying other
securities to implement its investment strategy.
CALL RISKS
Call risk is the possibility that an issuer may redeem a fixed income security
before maturity (a call) at a price below its current market price. An increase
in the likelihood of a call may reduce the security's price.
If a fixed income security is called, the Fund may have to reinvest the proceeds
in other fixed income securities with lower interest rates, higher credit risks
or other less favorable characteristics.
SECTOR RISKS
A substantial part of the Fund's portfolio may be comprised of securities issued
by California issuers or credit enhanced by insurance companies or companies
with similar characteristics. As a result, the Fund will be more susceptible to
any economic, business, political or other developments which generally affect
these entities.
California's economy is dependent upon high technology, entertainment, trade and
construction. A downturn in any of these industries could have a negative impact
on the economy of the state. Moreover, the ability of California state and local
governments to issue debt and raise taxes is limited by certain initiatives.
Specifically, Proposition 13 limits the valuation of real property for tax
purposes and the power of local authorities to increase property tax rates and
revenues; Proposition 62 requires that a majority of voters approve new general
taxes; and Proposition 218 requires two-thirds voter approval for the imposition
of new special taxes. Finally, since many local revenues are dependent upon real
property taxation, fluctuations in real estate prices can affect local revenues.
TAX RISKS
In order to be tax exempt, tax exempt securities must meet certain legal
requirements. Failure to meet such requirements may cause the interest received
and distributed by the Fund to shareholders to be taxable.
Changes or proposed changes in federal tax laws may cause the prices of tax
exempt securities to fall.
Income from the Fund may be subject to AMT.
LEVERAGE RISKS
Leverage risk is created when an investment exposes the Fund to a level of risk
that exceeds the amount invested. Changes in the value of such an investment
magnify the Fund's risk of loss and potential for gain.
Investments can have these same results if their returns are based on a multiple
of a specified index, security or other benchmark.
RISKS ASSOCIATED WITH NONINVESTMENT GRADE SECURITIES
Securities rated below investment grade, also known as junk bonds, generally
entail greater interest rate, credit and liquidity risks than investment grade
securities. For example, their prices are more volatile, economic and financial
setbacks may affect their prices more negatively, and their trading market may
be more limited. The Fund may invest up to 35% of its assets in noninvestment
grade securities.
LIQUIDITY RISKS
Trading opportunities are more limited for fixed income securities that have not
recorded any credit ratings, have recorded ratings below investment grade or are
not widely held.
Liquidity risk also refers to the possibility that the Fund may not be able to
sell a security or close out a futures contract when it wants to. If this
happens, the Fund will be required to continue to hold the security or keep the
position open, and the Fund could incur losses.
What Do Shares Cost?
You can purchase, redeem or exchange Shares any day the New York Stock Exchange
(NYSE) is open. When the Fund receives your transaction request in proper form
(as described in the prospectus), it is processed at the next calculated net
asset value (NAV) plus any applicable front-end sales charge (public offering
price). NAV is determined at the end of regular trading (normally 4:00 p.m.
Eastern time) each day the NYSE is open. The Fund generally values fixed income
securities at the last sale price on a national securities exchange, if
available, otherwise, as determined by an independent pricing service.
The Fund's current NAV and public offering price may be found in the mutual
funds section of certain local newspapers under "Federated" and the appropriate
class designation listing.
The following table summarizes the minimum required investment amount and the
maximum sales charge, if any, that you will pay on an investment in the Fund.
Keep in mind that investment professionals may charge you fees for their
services in connection with your Share transactions.
MINIMUM MAXIMUM SALES CHARGE
INITIAL/ CONTINGENT
SUBSEQUENT FRONT-END DEFERRED
INVESTMENT SALES SALES
SHARES OFFERED AMOUNTS 1 CHARGE 2 CHARGE 3
Class A $1,500/$100 4.50% 0.00%
Class B $1,500/$100 None 5.50%
1 The minimum subsequent investment amounts for Systematic Investment Programs
is $50. Investment professionals may impose higher or lower minimum investment
requirements on their customers than those imposed by the Fund. Orders for
$250,000 or more will be invested in Class A Shares instead of Class B Shares to
maximize your return and minimize the sales charges and marketing fees. Accounts
held in the name of an investment professional may be treated differently. Class
B Shares will automatically convert into Class A Shares after eight full years
from the purchase date. This conversion is a non-taxable event.
2 Front-End Sales Charge is expressed as a percentage of public offering
price. See "Sales Charge When You Purchase."
3 See "Sales Charge When You Redeem."
SALES CHARGE WHEN YOU PURCHASE
<TABLE>
<CAPTION>
CLASS A SHARES
SALES CHARGE
AS A PERCENTAGE SALES CHARGE
OF PUBLIC AS A PERCENTAGE
PURCHASE AMOUNT OFFERING PRICE OF NAV
<S> <C> <C>
Less than $100,000 4.50% 4.71%
$100,000 but less than $250,000 3.75% 3.90%
$250,000 but less than $500,000 2.50% 2.56%
$500,000 but less than
$1 million 2.00% 2.04%
$1 million or greater 1 0.00% 0.00%
</TABLE>
1 A contingent deferred sales charge of 0.75% of the redemption amount applies
to Class A Shares redeemed up to 24 months after purchase under certain
investment programs where an investment professional received an advance payment
on the transaction. To determine whether your Contingent Deferred Sales Charge
may be waived, see "Sales Charge When You Redeem."
THE SALES CHARGE AT PURCHASE MAY BE REDUCED OR ELIMINATED BY:
* purchasing Shares in greater quantities to reduce the applicable sales
charge;
* combining concurrent purchases of Shares:
- - by you, your spouse, and your children under age 21; or
- - of the same share class of two or more Federated Funds (other than money
market funds);
* accumulating purchases (in calculating the sales charge on an additional
purchase, include the current value of previous Share purchases still invested
in the Fund); or
* signing a letter of intent to purchase a specific dollar amount of Shares
within 13 months (call your investment professional or the Fund for more
information).
THE SALES CHARGE WILL BE ELIMINATED WHEN YOU PURCHASE SHARES:
* within 120 days of redeeming Shares of an equal or lesser amount;
* by exchanging shares from the same share class of another Federated Fund
(other than a money market fund);
* through wrap accounts or other investment programs where you pay the
investment professional directly for services;
* through investment professionals that receive no portion of the sales
charge;
* as a Federated Life Member (Class A Shares only) and their immediate
family members; or
* as a Trustee, Director or employee of the Fund, the Adviser, the Distributor
and their affiliates, and the immediate family members of these individuals.
If your investment qualifies for a reduction or elimination of the sales charge,
you or your investment professional should notify the Fund's Distributor at the
time of purchase. If the Distributor is not notified, you will receive the
reduced sales charge only on additional purchases, and not retroactively on
previous purchases.
SALES CHARGE WHEN YOU REDEEM
Your redemption proceeds may be reduced by a sales charge, commonly referred to
as a contingent deferred sales charge (CDSC).
CLASS A SHARES
A CDSC of 0.75% of the redemption amount applies to Class A Shares redeemed up
to 24 months after purchase under certain investment programs where an
investment professional received an advance payment on the transaction.
<TABLE>
<CAPTION>
CLASS B SHARES
Shares Held Up To: CDSC
<S> <C>
1 year 5.50%
2 years 4.75%
3 years 4.00%
4 years 3.00%
5 years 2.00%
6 years 1.00%
7 years or more 0.00%
</TABLE>
YOU WILL NOT BE CHARGED A CDSC WHEN REDEEMING SHARES:
* purchased with reinvested dividends or capital gains;
* purchased within 120 days of redeeming Shares of an equal or lesser
amount;
* that you exchanged into the same share class of another Federated Fund if the
shares were held for the applicable CDSC holding period (other than a money
market fund);
* purchased through investment professionals who did not receive advanced
sales payments;
* if, after you purchase Shares, you become disabled as defined by the IRS;
* if the Fund redeems your Shares and closes your account for not meeting
the minimum balance requirement; or
* upon the death of the last surviving shareholder of the account.
If your redemption qualifies, you or your investment professional should notify
the Distributor at the time of redemption to eliminate the CDSC. If the
Distributor is not notified, the CDSC will apply.
TO KEEP THE SALES CHARGE AS LOW AS POSSIBLE, THE FUND REDEEMS YOUR SHARES IN
THIS ORDER:
* Shares that are not subject to a CDSC; and
* Shares held the longest (to determine the number of years your Shares have
been held, include the time you held shares of other Federated Funds that have
been exchanged for Shares of this Fund).
The CDSC is then calculated using the share price at the time of purchase or
redemption, whichever is lower.
How is the Fund Sold?
The Fund offers two share classes: Class A Shares and Class B Shares, each
representing interests in a single portfolio of securities.
The Fund's Distributor, Federated Securities Corp., markets the Shares described
in this prospectus to customers of financial institutions, such as
broker/dealers, banks, fiduciaries or investment advisers, or to individuals,
directly or through investment professionals. The Fund may not be a suitable
investment for retirement plans or for non-California taxpayers because it
invests in California municipal securities.
When the Distributor receives marketing fees and sales charges, it may pay some
or all of them to investment professionals. The Distributor and its affiliates
may pay out of their assets other amounts (including items of material value) to
investment professionals for marketing and servicing Shares. The Distributor is
a subsidiary of Federated Investors, Inc.
(Federated).
RULE 12B-1 PLAN
The Fund has adopted a Rule 12b-1 Plan, which allows it to pay marketing fees to
the Distributor and investment professionals for the sale, distribution and
customer servicing of the Fund's Class A Shares and Class B Shares. Because
these Shares pay marketing fees on an ongoing basis, your investment cost may be
higher over time than other shares with different sales charges and marketing
fees.
How to Purchase Shares
You may purchase Shares through an investment professional, directly from the
Fund, or through an exchange from another Federated Fund. The Fund reserves the
right to reject any request to purchase or exchange Shares.
Where the Fund offers more than one share class and you do not specify the class
choice on your New Account Form or form of payment (e.g., Federal Reserve wire
or check) you automatically will receive Class A Shares.
THROUGH AN INVESTMENT PROFESSIONAL
* Establish an account with the investment professional; and
* Submit your purchase order to the investment professional before the end of
regular trading on the NYSE (normally 4:00 p.m. Eastern time). You will receive
the next calculated NAV if the investment professional forwards the order to the
Fund on the same day and the Fund receives payment within three business days.
You will become the owner of Shares and receive dividends when the Fund receives
your payment.
Investment professionals should send payments according to the instructions in
the sections "By Wire" or "By Check."
DIRECTLY FROM THE FUND
* Establish your account with the Fund by submitting a completed New
Account Form; and
* Send your payment to the Fund by Federal Reserve wire or check.
You will become the owner of Shares and your Shares will be priced at the next
calculated NAV after the Fund receives your wire or your check. If your check
does not clear, your purchase will be canceled and you could be liable for any
losses or fees incurred by the Fund or Federated Shareholder Services Company,
the Fund's transfer agent.
An institution may establish an account and place an order by calling the Fund
and the Shares will be priced at the next calculated NAV after the Fund receives
the order.
BY WIRE
Send your wire to:
State Street Bank and Trust Company
Boston, MA
Dollar Amount of Wire
ABA Number 011000028
Attention: EDGEWIRE
Wire Order Number, Dealer Number or Group Number
Nominee/Institution Name
Fund Name and Number and Account Number
You cannot purchase Shares by wire on holidays when wire transfers are
restricted.
BY CHECK
Make your check payable to THE FEDERATED FUNDS, note your account number on the
check, and mail it to:
Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600
If you send your check by a PRIVATE COURIER OR OVERNIGHT DELIVERY SERVICE that
requires a street address, mail it to:
Federated Shareholder Services Company
1099 Hingham Street
Rockland, MA 02370-3317
Payment should be made in U.S. dollars and drawn on a U.S. bank. The Fund
will not accept third-party checks (checks originally payable to someone
other than you or The Federated Funds).
THROUGH AN EXCHANGE
You may purchase Shares through an exchange from the same Share class of another
Federated Fund. You must meet the minimum initial investment requirement for
purchasing Shares and both accounts must have identical registrations.
BY SYSTEMATIC INVESTMENT PROGRAM
Once you have opened an account, you may automatically purchase additional
Shares on a regular basis by completing the Systematic Investment Program
section of the New Account Form or by contacting the Fund or your investment
professional.
BY AUTOMATED CLEARING HOUSE (ACH)
Once you have opened an account, you may purchase additional Shares through a
depository institution that is an ACH member. This purchase option can be
established by completing the appropriate sections of the New Account Form.
How to Redeem and Exchange Shares
You should redeem or exchange Shares:
* through an investment professional if you
purchased Shares through an investment professional; or
* directly from the Fund if you purchased Shares directly from the Fund.
THROUGH AN INVESTMENT PROFESSIONAL
Submit your redemption or exchange request to your investment professional by
the end of regular trading on the NYSE (normally 4:00 p.m. Eastern time). The
redemption amount you will receive is based upon the next calculated NAV after
the Fund receives the order from your investment professional.
DIRECTLY FROM THE FUND
BY TELEPHONE
You may redeem or exchange Shares by calling the Fund at 1-800-341-7400 once you
have completed the appropriate authorization form for telephone transactions. If
you call before the end of regular trading on the NYSE (normally 4:00 p.m.
Eastern time) you will receive a redemption amount based on that day's NAV.
BY MAIL
You may redeem or exchange Shares by mailing a written request to the Fund. You
will receive a redemption amount based on the next calculated NAV after the Fund
receives your written request in proper form.
Send requests by mail to:
Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600
Send requests by PRIVATE COURIER OR OVERNIGHT DELIVERY SERVICE to:
Federated Shareholder Services Company
1099 Hingham Street
Rockland, MA 02370-3317
All requests must include:
* Fund Name and Share Class, account number and account registration; * amount
to be redeemed or exchanged; * signatures of all shareholders exactly as
registered; and * IF EXCHANGING, the Fund Name and Share Class, account number
and account registration into which you are exchanging.
Call your investment professional or the Fund if you need special instructions.
SIGNATURE GUARANTEES
Signatures must be guaranteed if:
* your redemption will be sent to an address other than the address of record; *
your redemption will be sent to an address of record that was changed within the
last 30 days; * a redemption is payable to someone other than the shareholder(s)
of record; or * IF EXCHANGING (TRANSFERRING) into another fund with a different
shareholder registration.
A signature guarantee is designed to protect your account from fraud. Obtain a
signature guarantee from a bank or trust company, savings association, credit
union or broker, dealer, or securities exchange member. A NOTARY PUBLIC CANNOT
PROVIDE A SIGNATURE GUARANTEE.
PAYMENT METHODS FOR REDEMPTIONS
Your redemption proceeds will be mailed by check to your address of record. The
following payment options are available if you complete the appropriate section
of the New Account Form or an Account Service Options Form. These payment
options require a signature guarantee if they were not established when the
account was opened:
* an electronic transfer to your account at a financial institution that is an
ACH member; or * wire payment to your account at a domestic commercial bank that
is a Federal Reserve System member.
REDEMPTION IN KIND
Although the Fund intends to pay Share redemptions in cash, it reserves the
right to pay the redemption price in whole or in part by a distribution of the
Fund's portfolio securities.
LIMITATIONS ON REDEMPTION PROCEEDS
Redemption proceeds normally are wired or mailed within one business day after
receiving a request in proper form. Payment may be delayed up to seven days:
* to allow your purchase to clear;
* during periods of market volatility; or
* when a shareholder's trade activity or amount adversely impacts the Fund's
ability to manage its assets.
You will not accrue interest or dividends on uncashed checks from the Fund if
those checks are undeliverable and returned to the Fund.
EXCHANGE PRIVILEGE
You may exchange Shares of the Fund into Shares of the same class of another
Federated Fund. To do this, you must:
* ensure that the account registrations are identical; * meet any minimum
initial investment requirements; and * receive a prospectus for the fund into
which you wish to exchange.
An exchange is treated as a redemption and a subsequent purchase, and is a
taxable transaction.
The Fund may modify or terminate the exchange privilege at any time. The Fund's
management or investment adviser may determine from the amount, frequency and
pattern of exchanges that a shareholder is engaged in excessive trading that is
detrimental to the Fund and other shareholders. If this occurs, the Fund may
terminate the availability of exchanges to that shareholder and may bar that
shareholder from purchasing other Federated Funds.
SYSTEMATIC WITHDRAWAL/EXCHANGE PROGRAM
You may automatically redeem or exchange Shares in a minimum amount of $100 on a
regular basis. Complete the appropriate section of the New Account Form or an
Account Service Options Form or contact your investment professional or the
Fund. Your account value must meet the minimum initial investment amount at the
time the program is established. This program may reduce, and eventually
deplete, your account. Payments should not be considered yield or income.
Generally, it is not advisable to continue to purchase Class A Shares subject to
a sales charge while redeeming Shares using this program.
SYSTEMATIC WITHDRAWAL PROGRAM (SWP) ON CLASS B SHARES
You will not be charged a CDSC on SWP redemptions if:
* you redeem 12% or less of your account value in a single year; * you reinvest
all dividends and capital gains distributions; and * your account has at least a
$10,000 balance when you establish the SWP. (You cannot aggregate multiple Class
B Share accounts to meet this minimum balance.)
You will be subject to a CDSC on redemption amounts that exceed the 12% annual
limit. In measuring the redemption percentage, your account is valued when you
establish the SWP and then annually at calendar year-end. You can redeem
monthly, quarterly or semi-annually.
For SWP accounts established prior to April 1, 1999, your account must be at
least one year old in order to be eligible for the waiver of the CDSC.
ADDITIONAL CONDITIONS
TELEPHONE TRANSACTIONS
The Fund will record your telephone instructions. If the Fund does not follow
reasonable procedures, it may be liable for losses due to unauthorized or
fraudulent telephone instructions.
SHARE CERTIFICATES
The Fund no longer issues share certificates. If you are redeeming or exchanging
Shares represented by certificates previously issued by the Fund, you must
return the certificates with your written redemption or exchange request. For
your protection, send your certificates by registered or certified mail, but do
not endorse them.
Account and Share Information
CONFIRMATIONS AND ACCOUNT STATEMENTS
You will receive confirmation of purchases, redemptions and exchanges (except
for systematic transactions). In addition, you will receive periodic statements
reporting all account activity, including systematic transactions, dividends and
capital gains paid.
DIVIDENDS AND CAPITAL GAINS
The Fund declares and pays any dividends monthly to shareholders. Dividends are
paid to all shareholders invested in the Fund on the record date. The record
date is the date on which a shareholder must officially own Shares in order to
earn a dividend.
In addition, the Fund pays any capital gains at least annually. Your dividends
and capital gains distributions will be automatically reinvested in additional
Shares without a sales charge, unless you elect cash payments.
If you purchase Shares just before a Fund declares a capital gain distribution,
you will pay the full price for the Shares and then receive a portion of the
price back in the form of a taxable distribution, whether or not you reinvest
the distribution in Shares. Therefore, you should consider the tax implications
of purchasing Shares shortly before the Fund declares a capital gain. Contact
your investment professional or the Fund for information concerning when
dividends and capital gains will be paid.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, accounts may be
closed if redemptions or exchanges cause the account balance to fall below the
minimum initial investment amount. Before an account is closed, you will be
notified and allowed 30 days to purchase additional Shares to meet the minimum.
TAX INFORMATION
The Fund sends an annual statement of your account activity to assist you in
completing your federal, state and local tax returns. It is anticipated that
Fund distributions will be primarily dividends that are exempt from federal
income tax, although a portion of the Fund's dividends may not be exempt.
Dividends may be subject to state and local taxes, although the Federated
California Municipal Income Fund's dividends will be exempt from the California
taxes discussed above to the extent they are derived from interest on
obligations exempt from such taxes. Capital gains and non-exempt dividends are
taxable whether paid in cash or reinvested in the Fund. Redemptions and
exchanges are taxable sales. Please consult your tax adviser regarding your
federal, state and local tax liability.
Who Manages the Fund?
The Board of Trustees governs the Fund. The Board selects and oversees the
Adviser, Federated Investment Management Company. The Adviser manages the Fund's
assets, including buying and selling portfolio securities. The Adviser's address
is Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, PA 15222-3779.
The Adviser and other subsidiaries of Federated advise approximately 175 mutual
funds and separate accounts, which totaled approximately $111 billion in assets
as of December 31, 1998. Federated was established in 1955 and is one of the
largest mutual fund investment managers in the United States with approximately
1,900 employees. More than 4,000 investment professionals make Federated Funds
available to their customers.
THE FUND'S PORTFOLIO MANAGERS ARE:
J. SCOTT ALBRECHT
J. Scott Albrecht has been the Fund's portfolio manager since March 1995. He is
Vice President of the Fund. Mr. Albrecht joined Federated in 1989. He has been a
Senior Portfolio Manager since 1997 and a Vice President of the Fund's Adviser
since 1994. He was a Portfolio Manager from 1994 to 1996. Mr. Albrecht is a
Chartered Financial Analyst and received his M.S. in Public Management from
Carnegie Mellon University.
LEE R. CUNNINGHAM II
Lee R. Cunningham II has been a portfolio manager of the Fund since
May 1998. Mr. Cunningham joined Federated in 1995 as an Investment Analyst
and has been a Portfolio Manager since 1998. He was named an Assistant Vice
President of the Fund's 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
Mary Jo Ochson has been the Fund's portfolio manager since April 1997.
Ms. Ochson joined Federated in 1982 and has been a Senior Portfolio Manager
and a Senior Vice President of the Fund's Adviser since 1996. From 1988
through 1995, Ms. Ochson served as a Portfolio Manager and a Vice President
of the Fund's Adviser. Ms. Ochson is a Chartered Financial Analyst and
received her M.B.A. in Finance from the University of Pittsburgh.
ADVISORY FEES
The Adviser receives an annual investment advisory fee of 0.40% of the Fund's
average daily net assets. The Adviser may voluntarily waive a portion of its fee
or reimburse the Fund for certain operating expenses.
YEAR 2000 READINESS (UNAUDITED)
The "Year 2000" problem is the potential for computer errors or failures because
certain computer systems may be unable to interpret dates after December 31,
1999 or experience other date-related problems. The Year 2000 problem may cause
systems to process information incorrectly and could disrupt businesses, such as
the Fund, that rely on computers.
While it is impossible to determine in advance all of the risks to the Fund, the
Fund could experience interruptions in basic financial and operational
functions. Fund shareholders could experience errors or disruptions in Fund
share transactions or Fund communications.
The Fund's service providers are making changes to their computer systems to fix
any Year 2000 problems. In addition, they are working to gather information from
third-party providers to determine their Year 2000 readiness.
Year 2000 problems would also increase the risks of the Fund's investments. To
assess the potential effect of the Year 2000 problem, the Adviser is reviewing
information regarding the Year 2000 readiness of issuers of securities the Fund
may purchase. The financial impact of these issues for the Fund is still being
determined. There can be no assurance that potential Year 2000 problems would
not have a material adverse effect on the Fund.
Financial Information
FINANCIAL HIGHLIGHTS
The following Financial Highlights will help you understand the Fund's financial
performance for its past five fiscal years or since inception, if the life of
the Fund is shorter. Some of the information is presented on a per share basis.
Total returns represent the rate an investor would have earned (or lost) on an
investment in the Fund, assuming reinvestment of any dividends and capital
gains.
This information has been audited by Deloitte & Touche LLP, whose report, along
with the Fund's audited financial statements, is included in
this prospectus.
Financial Highlights-Class A Shares
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 34.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $11.13 $10.73 $10.27 $10.13 $10.01
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income 0.52 0.53 0.55 0.58 0.59
Net realized and
unrealized gain (loss) on
investments (0.64) 0.40 0.46 0.14 0.12
TOTAL FROM INVESTMENT
OPERATIONS (0.12) 0.93 1.01 0.72 0.71
LESS DISTRIBUTIONS:
Distributions from net
investment income (0.52) (0.53) (0.55) (0.58) (0.59)
NET ASSET VALUE, END OF
PERIOD $10.49 $11.13 $10.73 $10.27 $10.13
TOTAL RETURN 1 (1.20%) 8.84% 10.11% 7.21% 7.48%
RATIOS TO AVERAGE NET
ASSETS:
Expenses 2 1.57% 2.11% 2.63% 2.98% 2.96%
Net investment income 2 3.63% 3.42% 3.28% 3.23% 3.63%
Expenses (after waivers
and reimbursements) 0.50% 0.69% 0.66% 0.60% 0.55%
Net investment income
(after waivers
and reimbursements) 4.70% 4.84% 5.25% 5.61% 6.04%
SUPPLEMENTAL DATA:
Net assets, end of period
(000 omitted) $28,054 $28,792 $22,000 $17,148 $14,400
Portfolio turnover 35% 6% 29% 21% 63%
</TABLE>
1 Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
2 During the period, certain fees were voluntarily waived and reimbursed. If
such voluntary waivers and reimbursements had not occurred, the ratios would
have been as indicated.
See Notes which are an integral part of the Financial Statements
Financial Highlights-Class B Shares
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 34.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31 1999 1998 1
<S> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $11.13 $10.87
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income 0.44 0.33
Net realized and
unrealized gain (loss) on
investments (0.64) 0.26
TOTAL FROM INVESTMENT
OPERATIONS (0.20) 0.59
LESS DISTRIBUTIONS:
Distributions from net
investment income (0.44) (0.33)
NET ASSET VALUE, END OF
PERIOD $10.49 $11.13
TOTAL RETURN 2 (1.92%) 5.53%
RATIOS TO AVERAGE NET
ASSETS:
Expenses 3 2.07% 2.56% 4
Net investment income 3 3.14% 2.98% 4
Expenses (after waivers
and reimbursements) 1.25% 1.40% 4
Net investment income
(after waivers and
reimbursements) 3.96% 4.14% 4
SUPPLEMENTAL DATA:
Net assets, end of period
(000 omitted) $35,594 $10,020
Portfolio turnover 35% 6%
</TABLE>
1 Reflects operations for the period from December 1, 1997 (date of initial
public investment) to August 31, 1998.
2 Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
3 During the period, certain fees were voluntarily waived and reimbursed. If
such voluntary waivers and reimbursements had not occurred, the ratios would
have been as indicated.
4 Computed on an annualized basis.
See Notes which are an integral part of the Financial Statements
Portfolio of Investments
AUGUST 31, 1999
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING 1 VALUE
<S> <C> <C> <C>
LONG-TERM MUNICIPALS-85.9%
CALIFORNIA-84.7%
$ 500,000 ABAG 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- $ 461,325
2,000,000 Alameda Corridor
Transportation Authority,
CA, Senior Lien Revenue
Bonds (Series 1999A),
5.125% (MBIA INS),
10/1/2018 AAA 1,913,100
500,000 Anaheim, CA, Public
Financing Authority, Lease
Revenue Bonds
(Series 1997C), 6.00%
(Anaheim Public
Improvements Project),
(FSA INS)/ 9/1/2010 AAA 545,675
500,000 Anaheim, CA, Public
Financing Authority, Lease
Revenue Bonds
(Series 1997C), 6.00%
(Anaheim Public
Improvements Project),
9/1/2016 AAA 535,120
995,000 Antioch, CA, Public
Financing Authority,
Reassessment Revenue Bonds
(Series 1998A), 5.00%
(AMBAC INS)/(Original
Issue Yield: 5.08%),
9/2/2018 AAA 926,265
1,000,000 Beverly Hills, CA, Public
Finance Authority, Lease
Revenue Bonds
(Series 1998A), 5.25%,
6/1/2028 AA 938,660
605,000 Blythe, CA, Financing
Authority, Sewer Revenue
Bonds (Series 1998),
5.75%, 4/1/2028 NR 574,913
500,000 Bonita Canyon, CA, Public
Facilities Financing
Authority, Community
Facilities District No.
98-1 Special Tax Bonds
(Series 1998), 5.375%
(Original Issue Yield:
5.50%), 9/1/2028 NR 446,940
1,000,000 California Educational
Facilities Authority,
Revenue Bonds (Series
1999A), 5.00% (Pepperdine
University)/(Original
Issue Yield: 5.05%),
11/1/2018 AA 920,580
1,000,000 California Educational
Facilities Authority,
Revenue Bonds (Series
1999B), 5.875% (Pomona
College), 7/1/2019 AAA 1,020,430
625,000 California Educational
Facilities Authority,
Revenue Bonds (Series B),
6.60% (Loyola Marymount
University), 10/1/2002
(@102) A1 681,781
1,000,000 California Educational
Facilities Authority,
Revenue Bonds (Series N),
5.35% (Stanford
University)/(Original
Issue Yield: 5.43%),
6/1/2027 AAA 957,450
600,000 California Educational
Facilities Authority,
Revenue Bonds, 6.70%
(Southwestern
University)/(Original
Issue Yield: 6.838%),
11/1/2024 A3 651,120
500,000 California Educational
Facilities Authority,
Student Loan Revenue Bonds
(Series 1998), 5.55%
(AMBAC INS), 4/1/2028 AAA 493,970
675,000 California HFA, SFM
Revenue Bonds (Series C),
6.75%, 2/1/2025 AA- 699,415
745,000 California HFA, SFM
Revenue Bonds (Series F-
1), 7.00%, 8/1/2026 AA- 783,569
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING 1 VALUE
<S> <C> <C> <C>
LONG-TERM MUNICIPALS-
continued
CALIFORNIA-CONTINUED
$ 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 AA- $ 961,150
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+ 463,760
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- 917,460
1,000,000 California Health
Facilities Financing
Authority, Revenue Bonds
(Series 1998B), 5.00%
(Kaiser
Permanente)/(Original
Issue Yield: 5.20%),
10/1/2020 A 896,060
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 420,780
700,000 California Health
Facilities Financing
Authority, Revenue
Refunding Bonds (1996
Series A), 6.00% (Catholic
Healthcare West)/(MBIA
INS)/ (Original Issue
Yield: 6.15%), 7/1/2017 AAA 723,429
900,000 California PCFA, Exempt
Facilities Revenue Bonds
(Series 1996), 5.50%
(Mobil Corp.)/(Original
Issue Yield: 5.72%),
12/1/2029 AA 863,469
500,000 California PCFA, PCR
Revenue Bonds (Series B),
6.40% (Southern California
Edison Co.)/ (Original
Issue Yield: 6.55%),
12/1/2024 A+ 526,990
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+ 900,198
700,000 California PCFA, Solid
Waste Disposal Revenue
Bonds, 6.875% (Browning-
Ferris Industries,
Inc.)/(Original Issue
Yield: 6.95%), 11/1/2027 BB- 711,893
1,000,000 California PCFA, Solid
Waste Refunding Revenue
Bonds (Series 1999A),
5.125% (West County
Resource Recovery,
Inc.)/(Comerica Bank,
N.A., California
LOC)/(Original Issue
Yield: 5.323%), 1/1/2014 NR 932,520
970,000 California Rural Home
Mortgage Finance Authority, SFM Revenue Bonds, Series 1998 B-4,
5.75% (GNMA COL),
12/1/2029 AAA 1,015,338
1,000,000 California State Public
Works Board, Lease Revenue
Bonds
(Series 1998A), 4.875%
(Department of Forestry
and Fire Protection
Telecommunication Towers
and Vaults)/ (Original
Issue Yield: 5.01%),
10/1/2018 A 903,120
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING 1 VALUE
<S> <C> <C> <C>
LONG-TERM MUNICIPALS-
continued
CALIFORNIA-CONTINUED
$ 580,000 California State, GO UT
Bonds, 5.75% (Original
Issue Yield: 6.25%),
3/1/2019 A+ $ 622,595
20,000 California State, GO UT
Bonds, 5.75% (Original
Issue Yield: 6.25%),
3/1/2019 A+ 20,298
1,000,000 California State,
Refunding UT GO Bonds,
4.75% (Original Issue
Yield: 4.82%), 2/1/2016 AAA 915,000
500,000 California State,
Refunding UT GO Bonds,
5.00% (Original Issue
Yield: 5.06%), 2/1/2021 A+ 459,025
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 372,220
1,000,000 California Statewide
Communities Development
Authority, Certificates
of Participation, Series
1999, 5.375% (Internext
Group)/(Original Issue
Yield: 5.52%), 4/1/2017 BBB 931,590
600,000 California Statewide
Communities Development
Authority, Revenue
Certificates of
Participation, 6.625% (St.
Joseph Health System
Group, CA)/(Original Issue
Yield: 6.674%), 7/1/2021 AA 670,722
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+ 367,500
500,000 Chula Vista, CA IDA,
Revenue Bonds (Series A),
6.40% (San Diego Gas &
Electric)/(Original Issue
Yield: 6.473%), 12/1/2027 AA- 524,685
1,000,000 Contra Costa County, CA
Public Financing
Authority, Tax Allocation
Revenue Bonds (Series
1999), 5.125% (Pleasant
Hill BART, North Richmond,
Bay Point, Oakley, and
Rodeo Redevelopment
Project Areas)/(Original
Issue Yield: 5.27%),
8/1/2019 BBB 907,130
2,000,000 Corona, CA Community
Facilities District No.
86-2, Refunding Special
Tax Allocation Bonds,
5.125% (AMBAC
INS)/(Original Issue
Yield: 5.37%), 9/1/2019 AAA 1,871,740
1,000,000 Eden Township, CA Hospital
District, Hospital Revenue
Bonds, 7.40% (Original
Issue Yield: 7.40%),
11/1/2019 (@102) BBB+ 1,026,120
500,000 El Dorado Cnty, CA Public
Agency Financing
Authority, Revenue Bonds,
5.50% (Original Issue
Yield: 5.85%), 2/15/2021 AAA 495,945
790,000 El Monte, CA Public
Financing Authority, Tax
Allocation Revenue Bonds
(Series 1998), 5.75% (El
Monte, CA Community
Redevelopment Agency),
6/1/2028 NR 746,621
700,000 Foothill/Eastern
Transportation Corridor
Agency, CA, (Series 1995A)
Senior Lien Toll Road
Revenue Bonds, 6.50%
(United States Treasury
GTD)/(Original Issue
Yield: 6.78%), 1/1/2032 BBB- 778,946
1,760,000 Fresno, CA Unified School
District, Refunding UT GO
Bonds
(Series 1999C), 5.90%,
2/1/2017 AAA 1,857,416
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING 1 VALUE
<S> <C> <C> <C>
LONG-TERM MUNICIPALS-
continued
CALIFORNIA-CONTINUED
$ 500,000 Inland Empire Solid Waste
Financing Authority, CA,
Revenue Bonds (Series B),
6.25% (FSA INS), 8/1/2011 AAA $ 538,560
2,750,000 Los Angeles County, CA,
Metropolitan
Transportation Authority,
Sales Tax Revenue Bonds
(Series 1993B), 4.75%
(AMBAC INS)/ (Original
Issue Yield: 5.35%),
7/1/2013 AAA 2,593,828
600,000 Los Angeles, CA, Community
Redevelopment Agency,
Housing Revenue Refunding
Bonds (Series A), 6.55%
(AMBAC INS), 1/1/2027 AAA 624,000
2,000,000 Los Angeles, CA, Unified
School District, UT GO
Bonds (Series C), 5.50%,
7/1/2013 AAA 2,046,560
1,000,000 Pico Rivera, CA, Water
Authority, Revenue Bonds,
5.50% (MBIA INS), 5/1/2019 AAA 998,130
460,000 Pomona, CA, Redevelopment
Agency, Tax Allocation
Bonds (Series 1998X), 5.40%
(Mountain Meadows
Redevelopment Project),
12/1/2024 BBB+ 424,014
900,000 Port of Oakland, CA,
Revenue Bonds (Series 1997G), 5.50% (MBIA INS)/ (Original Issue
Yield:
5.83%), 11/1/2017 AAA 892,278
1,000,000 Redlands, CA, Financing
Authority, Water Revenue
Refunding Bonds, Series A,
5.00% (FSA INS)/(Original
Issue Yield: 5.15%),
9/1/2015 AAA 963,210
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 286,110
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 595,074
1,500,000 San Francisco, CA, City &
County Airport Commission,
International Airport
Revenue Bonds (Series
18A), 5.00% (FGIC
INS)/(Original Issue
Yield: 5.24%), 5/1/2022 AAA 1,357,485
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+ 302,085
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 920,590
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 933,600
400,000 Stockton, CA, Health
Facility Revenue Bonds
(Series 1997A), 5.70%
(Dameron Hospital
Association), 12/1/2014 BBB+ 387,688
500,000 Stockton, CA, Revenue
Certificates of Participation (Series 1998A), 5.00% (MBIA INS)/
(Original Issue Yield:
5.15%), 9/1/2023 AAA 456,055
700,000 University of California,
Research Facilities
Revenue Bonds (1995
Series B), 6.55%, 9/1/2024 A+ 773,626
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING 1 VALUE
<S> <C> <C> <C>
LONG-TERM MUNICIPALS-
continued
CALIFORNIA-CONTINUED
$ 745,000 Vista, CA, Joint Powers
Financing Authority,
Revenue Bonds
(Series 1997B), 5.50%
(Original Issue Yield:
5.57%), 9/1/2020 NR $ 707,243
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+ 542,445
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 697,837
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 948,950
1,000,000 Whisman, CA, School
District, UT GO Bonds
(Series B) (MBIA INS)/
(Original Issue Yield:
5.48%), 8/1/2021 AAA 285,740
1,000,000 Whisman, CA, School District, UT GO Bonds (Series B) (MBIA INS)/
(Original Issue Yield:
5.48%), 8/1/2022 AAA 269,510
TOTAL 53,898,651
PUERTO RICO-1.2%
700,000 Puerto Rico Electric Power Authority, Revenue Bonds (Series T),
6.375% (Original Issue Yield:
6.58%), 7/1/2024 BBB+ 772,030
TOTAL LONG-TERM MUNICIPALS
(IDENTIFIED COST
$55,722,610) 54,670,681
SHORT-TERM INVESTMENTS-
14.0%
CALIFORNIA-10.1%
3,900,000 California PCFA, (Series
1996 E) Daily VRDNs
(Pacific Gas & Electric
Co.)/(Morgan Guaranty
Trust Co., New York LOC),
2.55%, 11/1/2026 AA+ 3,900,000
2,500,000 California PCFA, Series A
Daily VRDNs (Southern
California Edison Co.),
2.60%, 2/28/2008 A+ 2,500,000
TOTAL 6,400,000
PUERTO RICO-3.9%
2,500,000 Puerto Rico Commonwealth
Infrastructure Financing
Authority, Floater
Certificates (Series 1998-
139) Weekly VRDNs (AMBAC
INS)/(Morgan Stanley, Dean
Witter Municipal Funding,
Inc. LIQ), 2.99%, 7/1/2028 AAA 2,500,000
TOTAL SHORT-TERM
INVESTMENTS (AT AMORTIZED
COST) $ 8,900,000
TOTAL INVESTMENTS
(IDENTIFIED COST
$64,622,610) 2 $ 63,570,681
</TABLE>
Securities that are subject to alternative minimum tax represent 17.00% of the
Fund's portfolio as calculated based upon total portfolio market value.
1 Please refer to the Appendix of the Statement of Additional Information for an
explanation of the credit ratings. Current credit ratings are unaudited.
2 The cost of investments for federal tax purposes amounts to $64,622,610. The
net unrealized depreciation of investments on a federal tax basis amounts to
$(1,051,929) which is comprised of $911,619 appreciation and $1,963,548
depreciation at August 31, 1999.
Note: The categories of investments are shown as a percentage of net assets
($63,647,960) at August 31, 1999.
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 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 PCFA -Pollution Control
Finance Authority SFM -Single Family Mortgage UT -Unlimited Tax VRDNs -Variable
Rate Demand Notes
See Notes which are an integral part of the Financial Statements
Statement of Assets and Liabilities
AUGUST 31, 1999
<TABLE>
<S> <C> <C>
ASSETS:
Total investments in
securities, at value
(identified and tax cost
$64,622,610) $ 63,570,681
Cash 187,345
Income receivable 809,390
Receivable for investments
sold 860,471
Receivable for shares sold 330,178
Receivable for daily
variation margin 10,938
TOTAL ASSETS 65,769,003
LIABILITIES:
Payable for investments
purchased $ 1,839,420
Payable for shares
redeemed 131,905
Income distribution
payable 120,475
Accrued expenses 29,243
TOTAL LIABILITIES 2,121,043
Net assets for 6,068,350
shares outstanding $ 63,647,960
NET ASSETS CONSIST OF:
Paid in capital $ 65,942,835
Net unrealized
depreciation of
investments and futures
transactions (1,083,366)
Accumulated net realized
loss on investments (1,211,509)
TOTAL NET ASSETS $ 63,647,960
NET ASSET VALUE, OFFERING
PRICE AND REDEMPTION
PROCEEDS PER SHARE
CLASS A SHARES:
Net Asset Value Per Share
($28,053,845 / 2,674,691
shares outstanding) $10.49
Offering Price Per Share
(100/95.50 of $10.49) 1 $10.98
Redemption Proceeds Per
Share (100.00/100 of
$10.49) 2 $10.49
CLASS B SHARES:
Net Asset Value Per Share
($35,594,115 / 3,393,659
shares outstanding) $10.49
Offering Price Per Share
(100/100.00 of $10.49) 1 $10.49
Redemption Proceeds Per
Share (94.50/100 of
$10.49) 2 $9.91
</TABLE>
1 See "What Do Shares Cost?" in the Prospectus.
2 See "Sales Charge When You Redeem" in the Prospectus.
See Notes which are an integral part of the Financial Statements
Statement of Operations
YEAR ENDED AUGUST 31, 1999
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest $ 2,775,073
EXPENSES:
Investment advisory fee $ 213,175
Administrative personnel
and services fee 155,000
Custodian fees 4,185
Transfer and dividend
disbursing agent fees and
expenses 55,827
Directors'/Trustees' fees 4,075
Auditing fees 13,923
Legal fees 2,669
Portfolio accounting fees 63,143
Distribution services fee-
Class A Shares 70,667
Distribution services fee-
Class B Shares 187,703
Shareholder services fee-
Class A Shares 70,667
Shareholder services fee-
Class B Shares 62,568
Share registration costs 27,952
Printing and postage 17,859
Insurance premiums 2,855
Miscellaneous 6,364
TOTAL EXPENSES 958,632
WAIVERS AND
REIMBURSEMENTS:
Waiver of investment
advisory fee $ (213,175)
Waiver of distribution
services fee-Class A
Shares (70,667)
Reimbursement of other
operating expenses (218,268)
TOTAL WAIVERS AND
REIMBURSEMENTS (502,110)
Net expenses 456,522
Net investment income 2,318,551
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
AND FUTURES TRANSACTIONS:
Net realized gain (loss) on
investments and futures
transactions (474,546)
Net change in unrealized
depreciation of
investments and
futures transactions (3,186,111)
Net realized and
unrealized gain (loss) on
investments and
futures transactions (3,660,657)
Change in net assets
resulting from operations $ (1,342,106)
</TABLE>
See Notes which are an integral part of the Financial Statements
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31 1999 1998
<S> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS
OPERATIONS:
Net investment income $ 2,318,551 $ 1,319,281
Net realized gain (loss) on
investments and futures
transactions (($474,546)
and $16,809, respectively,
as computed for federal
tax purposes) (474,546) 16,809
Net change in unrealized
appreciation/(depreciation) (3,186,111) 1,036,136
CHANGE IN NET ASSETS
RESULTING FROM OPERATIONS (1,342,106) 2,372,226
DISTRIBUTIONS TO
SHAREHOLDERS:
Distributions from net
investment income
Class A Shares (1,327,405) (1,204,810)
Class B Shares (991,146) (114,471)
CHANGE IN NET ASSETS
RESULTING FROM
DISTRIBUTIONS
TO SHAREHOLDERS (2,318,551) (1,319,281)
SHARE TRANSACTIONS:
Proceeds from sale of
shares 41,012,918 19,344,464
Net asset value of shares
issued to shareholders in
payment of
distributions declared 1,269,456 671,591
Cost of shares redeemed (13,785,402) (4,257,476)
CHANGE IN NET ASSETS
RESULTING FROM SHARE
TRANSACTIONS 28,496,972 15,758,579
Change in net assets 24,836,315 16,811,524
NET ASSETS:
Beginning of period 38,811,645 22,000,121
End of period $ 63,647,960 $ 38,811,645
</TABLE>
See Notes which are an integral part of the Financial Statements
Notes to Financial Statements
AUGUST 31, 1999
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 six 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 Fund 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 60
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 31,1999, the Fund, for federal tax purposes, had a capital loss
carryforward of $732,129, 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
EXPIRATION YEAR AMOUNT
2003 $513,799
2004 $218,330
FUTURES CONTRACTS
The Fund purchases stock index futures contracts to manage cashflows, enhance
yield, and to potentially reduce transaction costs. Upon entering into a stock
index futures contract with a broker, the Fund is required to deposit in a
segregated account a specified amount of cash or U.S. government securities.
Futures contracts are valued daily and unrealized gains or losses are recorded
in a "variation margin" account. Daily, the Fund receives from or pays to the
broker a specified amount of cash based upon changes in the variation margin
account. When a contract is closed, the Fund recognizes a realized gain or loss.
Futures contracts have market risks, including the risk that the change in the
value of the contract may not correlate with changes in the value of the
underlying securities. For the year ended August 31, 1999, the Fund had realized
gains of $178,368 on future contracts.
At August 31, 1999, the Fund had outstanding futures contracts as set forth
below:
CONTRACTS UNREALIZED
EXPIRATION DATE TO RECEIVE POSITION DEPRECIATION
December 1999 25 Municipal Bond Short ($31,437)
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTION
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 1999 1998
<S> <C> <C>
CLASS A SHARES:
Shares sold 900,962 850,058
Shares issued to
shareholders in payment of
distributions declared 61,949 55,492
Shares redeemed (874,803) (370,125)
NET CHANGE RESULTING FROM
CLASS A SHARE TRANSACTIONS 88,108 535,425
<CAPTION>
YEAR ENDED AUGUST 31 1999 1998 1
<S> <C> <C>
CLASS B SHARES:
Shares sold 2,818,762 912,747
Shares issued to
shareholders in payment of
distributions declared 53,752 5,755
Shares redeemed (379,001) (18,356)
NET CHANGE RESULTING FROM
CLASS B SHARE TRANSACTIONS 2,493,513 900,146
NET CHANGE RESULTING FROM
SHARE TRANSACTIONS 2,581,621 1,435,571
</TABLE>
1 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 Investment Management Company, 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 according to the following schedule annually, to
compensate FSC.
PERCENTAGE OF
AVERAGE DAILY
NET ASSETS
SHARE CLASS NAME OF CLASS
Class A 0.25%
Class B 0.75%
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 Company ("FSSC"), the Fund will pay FSSC 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 FSSC is used to finance certain services for shareholders and to maintain
shareholder accounts. FSSC may voluntarily choose to waive any portion of its
fee. FSSC 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 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, 1999, 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 $45,760,000 and $40,000,000 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, 1999, were as follows:
Purchases $41,543,875
Sales $17,333,490
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, 1999, 33.7% 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 percentage of investments insured
by or supported (backed) by a letter of credit from any one institution or
agency did not exceed 16.2% 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 FEDERATED 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, 1999, the related statement of operations for the year then ended,
the statement of changes in net assets for the years ended August 31, 1999 and
1998, 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, 1999, 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, 1999, 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
Boston, Massachusetts
October 15, 1999
PROSPECTUS
[Graphic]
Federated World Class Investment Manager
Federated California Municipal Income Fund
A Portfolio of Federated
Municipal Securities Income Trust
CLASS A SHARES
CLASS B SHARES
OCTOBER 31, 1999
A Statement of Additional Information (SAI) dated October 31, 1999, is
incorporated by reference into this prospectus. Additional information about the
Fund's investments is contained in the Fund's Annual and SemiAnnual Reports to
shareholders as they become available. The Annual Report's Management Discussion
and Analysis discusses market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year. To
obtain the SAI, Annual Report, Semi-Annual Report and other information without
charge, and make inquiries, call your investment professional or the Fund at
1-800-341- 7400.
You can obtain information about the Fund (including the SAI) by writing to or
visiting the Public Reference Room in Washington, D.C. You may also access fund
information from the EDGAR Database on the SEC's Internet site at
http://www.sec.gov. You can purchase copies of this information by contacting
the SEC by email at [email protected] or by writing to the SEC's Public
Reference Section, Washington, D.C. 20549-0102. Call 1-202-942-8090 for
information on the Public Reference Room's operations and copying fees.
[Graphic]
Federated
Federated California Municipal Income Fund
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
1-800-341-7400
WWW.FEDERATEDINVESTORS.COM
Federated Securities Corp., Distributor
Investment Company Act File No. 811-6165
Cusip 625922109
Cusip 625922828
2092918A (10/99)
[Graphic]
STATEMENT OF ADDITIONAL INFORMATION
Federated California Municipal Income Fund
A Portfolio of Federated Municipal Securities Income Trust
CLASS A SHARES
CLASS B SHARES
This Statement of Additional Information (SAI) is not a prospectus. Read this
SAI in conjunction with the prospectus for Federated California Municipal Income
Fund (Fund), dated October 31, 1999. Obtain the prospectus and the Annual
Report's Management Discussion & Analysis without charge by calling
1-800-341-7400.
OCTOBER 31, 1999
[Graphic]
Federated
World-Class Investment Manager
Federated California Municipal Income
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
1-800-341-7400
WWW.FEDERATEDINVESTORS.COM
Federated Securities Corp., Distributor
2092918B (10/99)
[Graphic]
CONTENTS
How is the Fund Organized? 1
Securities in Which the Fund Invests 1
What Do Shares Cost? 4
How is the Fund Sold? 5
Subaccounting Services 6
Redemption in Kind 6
Massachusetts Partnership Law 6
Account and Share Information 7
Tax Information 7
Who Manages and Provides Services to the Fund? 8
How Does the Fund Measure Performance? 11
Who is Federated Investors, Inc.? 14
Investment Ratings 15
Addresses 18
How is the Fund Organized?
The Fund is a non-diversified portfolio of Federated Municipal Securities Income
Trust (Trust). The Trust is an open-end, management investment company that was
established under the laws of the Commonwealth of Massachusetts on August 6,
1990. The Trust may offer separate series of shares representing interests in
separate portfolios of securities. The Fund changed its name from California
Municipal Income Fund to Federated California Municipal Income Fund on February
26, 1996. Effective October 1, 1999, the Trust changed its name from Municipal
Securities Income Trust to Federated Municipal Securities Income Trust.
The Board of Trustees (the Board) has established two classes of shares of the
Fund, known as Class A Shares and Class B Shares (Shares). This SAI relates to
both classes of Shares. The Fund's investment adviser is Federated Investment
Management Company (Adviser). The Adviser, formerly known as Federated Advisers,
changed its name effective March 31, 1999.
Securities in Which the Fund Invests
The Fund's principal securities are described in its prospectus. Additional
securities, and further information regarding the principal securities, are
outlined below. In pursuing its investment strategy, the Fund may invest in the
following securities for any purpose that is consistent with its investment
objective.
SECURITIES DESCRIPTIONS AND TECHNIQUES
FIXED INCOME SECURITIES
Fixed income securities pay interest, dividends or distributions at a specified
rate. The rate may be a fixed percentage of the principal or adjusted
periodically. In addition, the issuer of a fixed income security must repay the
principal amount of the security, normally within a specified time. Fixed income
securities provide more regular income than equity securities. However, the
returns on fixed income securities are limited and normally do not increase with
the issuer's earnings. This limits the potential appreciation of fixed income
securities as compared to equity securities.
A security's yield measures the annual income earned on a security as a
percentage of its price. A security's yield will increase or decrease depending
upon whether it costs less (a discount) or more (a premium) than the principal
amount. If the issuer may redeem the security before its scheduled maturity, the
price and yield on a discount or premium security may change based upon the
probability of an early redemption. Securities with higher risks generally have
higher yields.
TAX EXEMPT SECURITIES
Tax exempt securities are fixed income securities that pay interest that is not
subject to federal regular income taxes. Typically, states, counties, cities and
other political subdivisions and authorities issue tax exempt securities. The
market categorizes tax exempt securities by their source of repayment.
MUNICIPAL NOTES
Municipal notes are short-term tax exempt securities. Many municipalities issue
such notes to fund their current operations before collecting taxes or other
municipal revenues. Municipalities may also issue notes to fund capital projects
prior to issuing long-term bonds. The issuers typically repay the notes at the
end of their fiscal year, either with taxes, other revenues or proceeds from
newly issued notes or bonds.
VARIABLE RATE DEMAND INSTRUMENTS
Variable rate demand instruments are tax exempt securities that require the
issuer or a third party, such as a dealer or bank, to repurchase the security
for its face value upon demand. The securities also pay interest at a variable
rate intended to cause the securities to trade at their face value. The Fund
treats demand instruments as short-term securities, because their variable
interest rate adjusts in response to changes in market rates, even though their
stated maturity may extend beyond 13 months.
CREDIT ENHANCEMENT
Common types of credit enhancement include guarantees, letters of credit, bond
insurance and surety bonds. Credit enhancement also includes arrangements where
securities or other liquid assets secure payment of a fixed income security. If
a default occurs, these assets may be sold and the proceeds paid to the
security's holders. Either form of credit enhancement reduces credit risks by
providing another source of payment for a fixed income security.
DERIVATIVE CONTRACTS
Derivative contracts are financial instruments that require payments based upon
changes in the values of designated (or underlying) securities, currencies,
commodities, financial indices or other assets. Some derivative contracts (such
as futures, forwards and options) require payments relating to a future trade
involving the underlying asset. The other party to a derivative contract is
referred to as a counterparty.
Many derivative contracts are traded on securities or commodities exchanges. In
this case, the exchange sets all the terms of the contract except for the price.
Investors make payments due under their contracts through the exchange. Most
exchanges require investors to maintain margin accounts through their brokers to
cover their potential obligations to the exchange. Parties to the contract make
(or collect) daily payments to the margin accounts to reflect losses (or gains)
in the value of their contracts. This protects investors against potential
defaults by the counterparty. Trading contracts on an exchange also allows
investors to close out their contracts by entering into offsetting contracts.
For example, the Fund could close out an open contract to buy an asset at a
future date by entering into an offsetting contract to sell the same asset on
the same date. If the offsetting sale price is more than the original purchase
price, the Fund realizes a gain; if it is less, the Fund realizes a loss.
Exchanges may limit the amount of open contracts permitted at any one time. Such
limits may prevent the Fund from closing out a position. If this happens, the
Fund will be required to keep the contract open (even if it is losing money on
the contract), and to make any payments required under the contract (even if it
has to sell portfolio securities at unfavorable prices to do so). Inability to
close out a contract could also harm the Fund by preventing it from disposing of
or trading any assets it has been using to secure its obligations under the
contract.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest its assets in securities of other investment companies,
including the securities of affiliated money market funds, as an efficient means
of carrying out its investment policies and managing its uninvested cash.
TEMPORARY DEFENSIVE INVESTMENTS
The Fund may make temporary defensive investments in the following taxable
securities:
REPURCHASE AGREEMENTS
Repurchase agreements are transactions in which the Fund buys a security from a
dealer or bank and agrees to sell the security back at a mutually agreed upon
time and price. The repurchase price exceeds the sale price, reflecting the
Fund's return on the transaction. This return is unrelated to the interest rate
on the underlying security. The Fund will enter into repurchase agreements only
with banks and other recognized financial institutions, such as securities
dealers, deemed creditworthy by the Adviser.
The Fund's custodian or subcustodian will take possession of the securities
subject to repurchase agreements. The Adviser or subcustodian will monitor the
value of the underlying security each day to ensure that the value of the
security always equals or exceeds the repurchase price.
Repurchase agreements are subject to credit risks.
REVERSE REPURCHASE AGREEMENTS
Reverse repurchase agreements are repurchase agreements in which the Fund is the
seller (rather than the buyer) of the securities, and agrees to repurchase them
at an agreed upon time and price. A reverse repurchase agreement may be viewed
as a type of borrowing by the Fund. Reverse repurchase agreements are subject to
credit risks. In addition, reverse repurchase agreements create leverage risks
because the Fund must repurchase the underlying security at a higher price,
regardless of the market value of the security at the time of repurchase.
TREASURY SECURITIES
Treasury securities are direct obligations of the federal government of the
United States.
AGENCY SECURITIES
Agency securities are issued or guaranteed by a federal agency or other
government sponsored entity acting under federal authority (a GSE). The United
States supports some GSEs with its full faith and credit. Other GSEs receive
support through federal subsidies, loans or other benefits. A few GSEs have no
explicit financial support, but are regarded as having implied support because
the federal government sponsors their activities.
CORPORATE DEBT SECURITIES
Corporate debt securities are fixed income securities issued by businesses.
Notes, bonds, debentures and commercial paper are the most prevalent types of
corporate debt securities.
COMMERCIAL PAPER
Commercial paper is an issuer's obligation with a maturity of less than nine
months. Companies typically issue commercial paper to pay for current
expenditures. Most issuers constantly reissue their commercial paper and use the
proceeds (or bank loans) to repay maturing paper. If the issuer cannot continue
to obtain liquidity in this fashion, its commercial paper may default. The short
maturity of commercial paper reduces both the market and credit risks as
compared to other debt securities of the same issuer.
BANK INSTRUMENTS
Bank instruments are unsecured interest bearing deposits with banks. Bank
instruments include bank accounts, time deposits, certificates of deposit and
banker's acceptances.
INVESTMENT RISKS
There are many factors which may affect an investment in the Fund. The Fund's
principal risks are described in its prospectus. Additional risk factors are
outlined below.
CREDIT RISKS
Fixed income securities generally compensate for greater credit risk by paying
interest at a higher rate. The difference between the yield of a security and
the yield of a AAA municipal security with a comparable maturity (the spread)
measures the additional interest paid for risk. Spreads may increase generally
in response to adverse economic or market conditions. A security's spread may
also increase if the security's rating is lowered, or the security is perceived
to have an increased credit risk. An increase in the spread will cause the price
of the security to decline.
LIQUIDITY RISKS
Limited trading opportunities may make it more difficult to sell or buy a
security at a favorable price or time. Consequently, the Fund may have to accept
a lower price to sell a security, sell other securities to raise cash or give up
an investment opportunity, any of which could have a negative effect on the
Fund's performance. Infrequent trading of securities may also lead to an
increase in their price volatility.
FUNDAMENTAL INVESTMENT OBJECTIVE AND POLICY
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 Fund pursues its investment objective by investing 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.
The investment objective and policy may not be changed by the Fund's Trustees
without shareholder approval.
INVESTMENT LIMITATIONS
BORROWING MONEY AND ISSUING SENIOR SECURITIES
The Fund may borrow money, directly or indirectly, and issue senior securities
to the maximum extent permitted under the 1940 Act.
INVESTING IN REAL ESTATE
The Fund may not purchase or sell real estate, provided that this restriction
does not prevent the Fund from investing in issuers which invest, deal, or
otherwise engage in transactions in real estate or interests therein, or
investing in securities that are secured by real estate or interests therein.
The Fund may exercise its rights under agreements relating to such securities,
including the right to enforce security interests and to hold real estate
acquired by reason of such enforcement until that real estate can be liquidated
in an orderly manner.
INVESTING IN COMMODITIES
The Fund may not purchase or sell physical commodities, provided that the Fund
may purchase securities of companies that deal in commodities.
UNDERWRITING
The Fund may not underwrite the securities of other issuers, except that the
Fund may engage in transactions involving the acquisition, disposition or resale
of its portfolio securities, under circumstances where it may be considered to
be an underwriter under the Securities Act of 1933.
LENDING CASH OR SECURITIES
The Fund may not make loans, provided that this restriction does not prevent the
Fund from purchasing debt obligations, entering into repurchase agreements,
lending its assets to broker/dealers or institutional investors and investing in
loans, including assignments and participation interests.
CONCENTRATION OF INVESTMENTS
The Fund will not make investments that will result in the concentration of its
investments in the securities of issuers primarily engaged in the same industry.
Government securities, municipal securities and bank instruments will not be
deemed to constitute an industry.
THE ABOVE LIMITATIONS CANNOT BE CHANGED BY THE BOARD UNLESS AUTHORIZED BY THE
"VOTE OF A MAJORITY OF ITS OUTSTANDING VOTING SECURITIES," AS DEFINED BY THE
INVESTMENT COMPANY ACT OF 1940. THE FOLLOWING LIMITATIONS, HOWEVER, MAY BE
CHANGED BY THE BOARD WITHOUT SHAREHOLDER APPROVAL. SHAREHOLDERS WILL BE NOTIFIED
BEFORE ANY MATERIAL CHANGE IN THESE LIMITATIONS BECOMES EFFECTIVE.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any of its assets, provided
that this shall not apply to the transfer of securities in connection with any
permissible borrowing or to collateral arrangements in connection with
permissible activities.
BUYING ON MARGIN
The Fund will not purchase securities on margin, provided that the Fund may
obtain short-term credits necessary for the clearance of purchases and sales of
securities, and further provided that the Fund may make margin deposits in
connection with its use of financial options and futures, forward and spot
currency contracts, swap transactions and other financial contracts or
derivative instruments.
ILLIQUID SECURITIES
The Fund will not purchase securities for which there is no readily available
market, or enter into repurchase agreements or purchase time deposits maturing
in more than seven days, if immediately after and as a result, the value of such
securities would exceed, in the aggregate, 15% of the Fund's net assets.
RESTRICTED SECURITIES
The Fund may invest its securities subject to restrictions on resale under the
Securities Act of 1933.
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.
In applying the Fund's commodities limitation, investments in transactions
involving futures contracts and options, forward currency contracts, swap
transactions and other financial contracts that settle by payment of cash are
not deemed to be investments in commodities.
In applying the Fund's concentration limitation: (a) utility companies will be
divided according to their services, for example, gas, gas transmission,
electric and telephone will each be considered a separate industry; (b)
financial service companies will be classified according to the end users of
their services, for example, automobile finance, bank finance and diversified
finance will each be considered a separate industry; and (c) asset-backed
securities will be classified according to the underlying assets securing such
securities. To conform to the current view of the Securities and Exchange
Commission (SEC) staff that only domestic bank instruments may be excluded from
industry concentration limitations, the Fund will not exclude foreign bank
instruments from industry concentration limits as long as the policy of the SEC
remains in effect. The Fund will consider concentration to be the investment of
more than 25% of the value of its total assets in any one industry.
DETERMINING MARKET VALUE OF SECURITIES
Market values of the Fund's portfolio securities are determined as follows:
* for fixed income securities, at the last sale price on a national securities
exchange, if available, otherwise, as determined by an independent pricing
service;
* futures contracts and options are generally valued at market values
established by the exchanges on which they are traded at the close of trading on
such exchanges. Options traded in the over-the-counter market are generally
valued according to the mean between the last bid and the last asked price for
the option as provided by an investment dealer or other financial institution
that deals in the option. The Board may determine in good faith that another
method of valuing such investments is necessary to appraise their fair market
value;
* for short-term obligations, according to the mean between bid and asked prices
as furnished by an independent pricing service, except that short-term
obligations with remaining maturities of less than 60 days at the time of
purchase may be valued at amortized cost or at fair market value as determined
in good faith by the Board; and
* for all other securities at fair value as determined in good faith by the
Board.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may consider institutional trading in
similar groups of securities, yield, quality, stability, risk, coupon rate,
maturity, type of issue, trading characteristics, and other market data or
factors. From time to time, when prices cannot be obtained from an independent
pricing service, securities may be valued based on quotes from broker/dealers or
other financial institutions that trade the securities.
What Do Shares Cost?
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.
REDUCING OR ELIMINATING THE FRONT-END SALES CHARGE
You can reduce or eliminate the applicable front-end sales charge, as follows:
QUANTITY DISCOUNTS
Larger purchases of the same Share class reduce the sales charge you pay. You
can combine purchases of Shares made on the same day by you, your spouse and
your children under age 21. In addition, purchases made at one time by a trustee
or fiduciary for a single trust estate or a single fiduciary account can be
combined.
ACCUMULATED PURCHASES
If you make an additional purchase of Shares, you can count previous Share
purchases still invested in the Fund in calculating the applicable sales charge
on the additional purchase.
CONCURRENT PURCHASES
You can combine concurrent purchases of the same share class of two or more
Federated Funds in calculating the applicable sales charge.
LETTER OF INTENT (CLASS A SHARES)
You can sign a Letter of Intent committing to purchase a certain amount of the
same class of Shares within a 13-month period to combine such purchases in
calculating the sales charge. The Fund's custodian will hold Shares in escrow
equal to the maximum applicable sales charge. If you complete the Letter of
Intent, the Custodian will release the Shares in escrow to your account. If you
do not fulfill the Letter of Intent, the Custodian will redeem the appropriate
amount from the Shares held in escrow to pay the sales charges that were not
applied to your purchases.
REINVESTMENT PRIVILEGE
You may reinvest, within 120 days, your Share redemption proceeds at the next
determined NAV without any sales charge.
PURCHASES BY AFFILIATES OF THE FUND
The following individuals and their immediate family members may buy Shares at
NAV without any sales charge because there are nominal sales efforts associated
with their purchases:
* the Trustees or Directors, employees and sales representatives of the
Fund, the Adviser, the Distributor and their affiliates;
* any associated person of an investment dealer who has a sales agreement
with the Distributor; and
* trusts, pension or profit-sharing plans for these individuals.
FEDERATED LIFE MEMBERS
Shareholders of the Fund known as "Federated Life Members" are exempt from
paying any front-end sales charge. These shareholders joined the Fund
originally:
* through the "Liberty Account," an account for Liberty Family of Funds
shareholders on February 28, 1987 (the Liberty Account and Liberty Family of
Funds are no longer marketed); or
* as Liberty Account shareholders by investing through an affinity group prior
to August 1, 1987.
REDUCING OR ELIMINATING THE CONTINGENT DEFERRED SALES CHARGE
These reductions or eliminations are offered because: no sales commissions have
been advanced to the investment professional selling Shares; the shareholder has
already paid a Contingent Deferred Sales Charge (CDSC); or nominal sales efforts
are associated with the original purchase of Shares.
Upon notification to the Distributor or the Fund's transfer agent, no CDSC will
be imposed on redemptions:
* following the death or post-purchase disability, as defined in Section
72(m)(7) of the Internal Revenue Code of 1986, of the last surviving
shareholder;
* of Shares that represent a reinvestment within 120 days of a
previous redemption;
* of Shares held by the Trustees or Directors, employees, and sales
representatives of the Fund, the Adviser, the Distributor and their affiliates;
employees of any investment professional that sells Shares according to a sales
agreement with the Distributor; and the immediate family members of the above
persons;
* of Shares originally purchased through a bank trust department, a registered
investment adviser or retirement plans where the third party administrator has
entered into certain arrangements with the Distributor or its affiliates, or any
other investment professional, to the extent that no payments were advanced for
purchases made through these entities;
* which are involuntary redemptions processed by the Fund because the
accounts do not meet the minimum balance requirements; and
CLASS B SHARES ONLY
* which are qualifying redemptions of Class B Shares under a Systematic
Withdrawal Program.
How is the Fund Sold?
Under the Distributor's Contract with the Fund, the Distributor (Federated
Securities Corp.) offers Shares on a continuous, best-efforts basis.
FRONT-END SALES CHARGE REALLOWANCES
The Distributor receives a front-end sales charge on certain Share sales. The
Distributor generally pays up to 90% (and as much as 100%) of this charge to
investment professionals for sales and/or administrative services. Any payments
to investment professionals in excess of 90% of the front-end sales charge are
considered supplemental payments. The Distributor retains any portion not paid
to an investment professional.
RULE 12B-1 PLAN (CLASS A SHARES AND CLASS B SHARES)
As a compensation-type plan, the Rule 12b-1 Plan is designed to pay the
Distributor (who may then pay investment professionals such as banks,
broker/dealers, trust departments of banks, and registered investment advisers)
for marketing activities (such as advertising, printing and distributing
prospectuses, and providing incentives to investment professionals) to promote
sales of Shares so that overall Fund assets are maintained or increased. This
helps the Fund achieve economies of scale, reduce per share expenses, and
provide cash for orderly portfolio management and Share redemptions. In
addition, the Fund's service providers that receive asset-based fees also
benefit from stable or increasing Fund assets.
The Fund may compensate the Distributor more or less than its actual marketing
expenses. In no event will the Fund pay for any expenses of the Distributor that
exceed the maximum Rule 12b-1 Plan fee.
For some classes of Shares, the maximum Rule 12b-1 Plan fee that can be paid in
any one year may not be sufficient to cover the marketing-related expenses the
Distributor has incurred. Therefore, it may take the Distributor a number of
years to recoup these expenses. Federated and its subsidiaries may benefit from
arrangements where the Rule 12b-1 Plan fees related to Class B Shares may be
paid to third parties who have advanced commissions to investment professionals.
SHAREHOLDER SERVICES
The Fund may pay Federated Shareholder Services Company, a subsidiary of
Federated Investors, Inc. (Federated), for providing shareholder services and
maintaining shareholder accounts. Federated Shareholder Services Company may
select others to perform these services for their customers and may pay them
fees.
SUPPLEMENTAL PAYMENTS
Investment professionals may be paid fees out of the assets of the Distributor
and/or Federated Shareholder Services Company (but not out of Fund assets). The
Distributor and/or Federated Shareholder Services Company may be reimbursed by
the Adviser or its affiliates.
Investment professionals receive such fees for providing
distribution-related or shareholder services such as sponsoring sales, providing
sales literature, conducting training seminars for employees, and engineering
sales-related computer software programs and systems. Also, investment
professionals may be paid cash or promotional incentives, such as reimbursement
of certain expenses relating to attendance at informational meetings about the
Fund or other special events at recreational-type facilities, or items of
material value. These payments will be based upon the amount of Shares the
investment professional sells or may sell and/or upon the type and nature of
sales or marketing support furnished by the investment professional.
When an investment professional's customer purchases shares, the investment
professional may receive an amount up to 5.50% and 1.00%, respectively, of the
NAV of Class B Shares.
In addition, the Distributor may pay investment professionals 0.25% of the
purchase price of $1 million or more of Class A Shares that its customer has not
redeemed over the first year.
CLASS A SHARES
Investment professionals purchasing Class A Shares for their customers are
eligible to receive an advance payment from the Distributor based on the
following breakpoints:
ADVANCE PAYMENTS AS A
AMOUNT PERCENTAGE OF 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 advance payments reset
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 advance payments will be paid only on
those purchases that were not previously subject to a front-end sales charge and
dealer advance payments. Certain retirement accounts may not be eligible for
this program.
A contingent deferred sales charge of 0.75% of the redemption amount applies to
Class A Shares redeemed up to 24 months after purchase. The CDSC does not apply
under certain investment programs where the investment professional does not
receive an advance payment on the transaction including, but not limited to,
trust accounts and wrap programs where the investor pays an account level fee
for investment management.
Subaccounting Services
Certain investment professionals may wish to use the transfer agent's
subaccounting system to minimize their internal recordkeeping requirements. The
transfer agent may charge a fee based on the level of subaccounting services
rendered. Investment professionals holding Shares in a fiduciary, agency,
custodial, or similar capacity may charge or pass through subaccounting fees as
part of or in addition to normal trust or agency account fees. They may also
charge fees for other services that may be related to the ownership of Shares.
This information should, therefore, be read together with any agreement between
the customer and the investment professional about the services provided, the
fees charged for those services, and any restrictions and limitations imposed.
Redemption in Kind
Although the Fund intends to pay Share redemptions in cash, it reserves the
right, as described below, to pay the redemption price in whole or in part by a
distribution of the Fund's portfolio securities.
Because the Fund has elected to be governed by Rule 18f-1 under the Investment
Company Act of 1940, the Fund is obligated to pay Share redemptions to any one
shareholder in cash only up to the lesser of $250,000 or 1% of the net assets
represented by such Share class during any 90-day period.
Any Share redemption payment greater than this amount will also be in cash
unless the Fund's Board determines that payment should be in kind. In such a
case, the Fund will pay all or a portion of the remainder of the redemption in
portfolio securities, valued in the same way as the Fund determines its NAV. The
portfolio securities will be selected in a manner that the Fund's Board deems
fair and equitable and, to the extent available, such securities will be readily
marketable.
Redemption in kind is not as liquid as a cash redemption. If redemption is made
in kind, shareholders receiving the portfolio securities and selling them before
their maturity could receive less than the redemption value of the 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 obligations of the Trust. To protect its
shareholders, the Trust has filed legal documents with Massachusetts that
expressly disclaim the liability of its shareholders for acts or obligations of
the Trust.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required by the Declaration of Trust to use its
property to protect or compensate the shareholder. On request, the Trust will
defend any claim made and pay any judgment against a shareholder for any act or
obligation of the Trust. Therefore, financial loss resulting from liability as a
shareholder will occur only if the Trust itself cannot meet its obligations to
indemnify shareholders and pay judgments against them.
Account and Share 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 the Trust have equal voting rights, except that in matters
affecting only a particular Fund or class, only Shares of that Fund or class are
entitled to vote.
Trustees may be removed by the Board or by shareholders at a special meeting. A
special meeting of shareholders will be called by the Board upon the written
request of shareholders who own at least 10% of the Trust's outstanding shares
of all series entitled to vote.
As of October 7, 1999, the following shareholders owned of record, beneficially,
or both, 5% or more of outstanding Shares: Merrill Lynch Pierce Fenner & Smith
(as record owner holding Class A Shares for its clients), Jacksonville, Florida,
owned approximately 769,135 Class A Shares (12.54%).
Tax Information
FEDERAL INCOME TAX
The Fund intends to meet requirements of Subchapter M of the Internal Revenue
Code applicable to regulated investment companies. If these requirements are not
met, it will not receive special tax treatment and will pay federal income tax.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income earned and capital gains and losses realized by the
Trust's other portfolios will be separate from those realized by the Fund.
The Fund is entitled to a loss carry-forward, which may reduce the taxable
income or gain that the Fund would realize, and to which the shareholder would
be subject, in the future.
STATE TAXES
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.
Who Manages and Provides Services to the Fund?
BOARD OF TRUSTEES
The Board is responsible for managing the Trust's business affairs and for
exercising all the Trust's powers except those reserved for the shareholders.
Information about each Board member is provided below and includes each
person's: name, address, birth date, present position(s) held with the Trust,
principal occupations for the past five years and positions held prior to the
past five years, total compensation received as a Trustee from the Trust for its
most recent fiscal year, and the total compensation received from the Federated
Fund Complex for the most recent calendar year. The Trust is comprised of six
funds and the Federated Fund Complex is comprised of 54 investment companies,
whose investment advisers are affiliated with the Fund's Adviser.
As of October 7, 1999, the Fund's Board and Officers as a group owned less than
1% of the Fund's outstanding Class A and Class B Shares.
<TABLE>
<CAPTION>
NAME TOTAL
BIRTH DATE AGGREGATE COMPENSATION
ADDRESS PRINCIPAL OCCUPATIONS COMPENSATION FROM TRUST AND
POSITION WITH TRUST FOR PAST FIVE YEARS FROM TRUST FUND COMPLEX
<S> <C> <C> <C>
JOHN F. DONAHUE*+# Chief Executive Officer $0 $0 for the Trust and
Birth Date: July 28, 1924 and Director or Trustee of 54 other investment
Federated Investors Tower the Federated Fund companies in the
1001 Liberty Avenue Complex; Chairman and Fund Complex
Pittsburgh, PA Director, Federated
CHAIRMAN and TRUSTEE Investors, Inc.; Chairman
and Trustee, Federated Investment
Management Company; Chairman and
Director, Federated Investment
Counseling and Federated Global
Investment Management Corp.; Chairman,
Passport Research, Ltd.
THOMAS G. BIGLEY Director or Trustee of $1,305.35 $113,860.22 for the Trust
Birth Date: February 3, 1934 the Federated Fund and 54 other investment
15 Old Timber Trail Complex; Director, Member companies in the
Pittsburgh, PA of Executive Committee, Fund Complex
TRUSTEE Children's Hospital of
Pittsburgh; Director,
Robroy Industries, Inc.
(coated steel conduits/
computer storage
equipment); formerly:
Senior Partner, Ernst &
Young LLP; Director, MED
3000 Group, Inc.
(physician practice
management); Director,
Member of Executive
Committee, University of
Pittsburgh.
JOHN T. CONROY, JR. Director or Trustee of the $1,436.05 $125,264.48 for the Trust
Birth Date: June 23, 1937 Federated Fund Complex; and 54 other investment
Wood/Commercial Dept. President, Investment companies in the
John R. Wood Associates, Inc. Realtors Properties Corporation; Fund Complex
3255 Tamiami Trail North Senior Vice President,
Naples, FL John R. Wood and
TRUSTEE 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 CONSTANTAKIS Director or Trustee of some $1,305.35 $47,958.02 for the Trust
Birth Date: September 3, 1939 of the Federated Fund and 29 other investment
175 Woodshire Drive Complex; formerly: companies in the
Pittsburgh, PA Partner, Andersen Fund Complex
TRUSTEE Worldwide SC.
JOHN F. CUNNINGHAM++ Director or Trustee of some $331.87 $0 for the Trust
Birth Date: March 5, 1943 of the Federated Fund and 46 other investment
353 El Brillo Way Complex; Chairman, companies in the
Palm Beach, FL President and Chief Fund Complex
TRUSTEE Executive Officer,
Cunningham & Co., Inc.
(strategic business
consulting); Trustee
Associate, Boston College;
Director, Iperia Corp.
(communications/software);
formerly: Director,
Redgate Communications and
EMC Corporation (computer
storage systems).
Previous Positions:
Chairman of the Board and
Chief Executive Officer,
Computer Consoles, Inc.;
President and Chief
Operating Officer, Wang
Laboratories; Director,
First National Bank of
Boston; Director, Apollo
Computer, Inc.
LAWRENCE D. ELLIS, M.D.* Director or Trustee of the $1,305.35 $113,860.22 for the Trust
Birth Date: October 11, 1932 Federated Fund Complex; and 54 other investment
3471 Fifth Avenue Professor of Medicine, companies in the
Suite 1111 University of Pittsburgh; Fund Complex
Pittsburgh, PA Medical Director,
TRUSTEE University of Pittsburgh
Medical Center - Downtown;
Hematologist, Oncologist and Internist,
University of Pittsburgh Medical
Center; Member, National Board of
Trustees, Leukemia Society of America.
PETER E. MADDEN Director or Trustee of the $1,189.91 $113,860.22 for the Trust
Birth Date: March 16, 1942 Federated Fund Complex; and 54 other investment
One Royal Palm Way formerly: Representative, companies in the
100 Royal Palm Way Commonwealth of Fund Complex
Palm Beach, FL Massachusetts General
TRUSTEE Court; President, State
Street Bank and Trust
Company and State Street
Corporation.
Previous Positions:
Director, VISA USA and VISA
International; Chairman
and Director,
Massachusetts Bankers
Association; Director,
Depository Trust
Corporation; Director, The
Boston Stock Exchange.
<CAPTION>
NAME TOTAL
BIRTH DATE AGGREGATE COMPENSATION
ADDRESS PRINCIPAL OCCUPATIONS COMPENSATION FROM TRUST AND
POSITION WITH TRUST FOR PAST FIVE YEARS FROM TRUST FUND COMPLEX
<S> <C> <C> <C>
CHARLES F. MANSFIELD, JR.++ Director or Trustee of some $1,016.39 $0 for the Trust
Birth Date: April 10, 1945 of the Federated Fund and 50 other investment
80 South Road Complex; Management companies in the
Westhampton Beach, NY Consultant. Fund Complex
TRUSTEE Previous Positions: Chief
Executive Officer, PBTC International
Bank; Partner, Arthur Young & Company
(now Ernst & Young LLP); Chief
Financial Officer of Retail Banking
Sector, Chase Manhattan Bank; Senior
Vice President, Marine Midland Bank;
Vice President, Citibank; Assistant
Professor of Banking and Finance, Frank
G. Zarb School of Business, Hofstra
University.
JOHN E. MURRAY, JR., J.D., S.J.D.# Director or Trustee of $1,403.80 $113,860.22 for the Trust
Birth Date: December 20, 1932 the Federated Fund and 54 other investment
President, Duquesne University Complex; President, Law companies in the
Pittsburgh, PA Professor, Duquesne Fund Complex
TRUSTEE University; Consulting
Partner, Mollica & Murray;
Director, Michael Baker
Corp. (engineering,
construction, operations
and technical services).
Previous Positions: Dean
and Professor of Law,
University of Pittsburgh
School of Law; Dean and
Professor of Law,
Villanova University
School of Law.
MARJORIE P. SMUTS Director or Trustee of the $1,305.35 $113,860.22 for the Trust
Birth Date: June 21, 1935 Federated Fund Complex; and 54 other investment
4905 Bayard Street Public Relations/ companies in the
Pittsburgh, PA Marketing/Conference Fund Complex
TRUSTEE Planning.
Previous Positions:
National Spokesperson,
Aluminum Company of
America; television
producer; business owner.
JOHN S. WALSH++ Director or Trustee of some $331.87 $0 for the Trust
Birth Date: November 28, 1957 of the Federated Fund and 48 other investment
2007 Sherwood Drive Complex; President and companies in the
Valparaiso, IN Director, Heat Wagon, Inc. Fund Complex
TRUSTEE (manufacturer of
construction temporary
heaters); President and
Director, Manufacturers
Products, Inc.
(distributor of portable
construction heaters);
President, Portable Heater
Parts, a division of
Manufacturers Products,
Inc.; Director, Walsh &
Kelly, Inc. (heavy highway
contractor); formerly:
Vice President, Walsh &
Kelly, Inc.
J. CHRISTOPHER DONAHUE*+ President or Executive $0 $0 for the Trust
Birth Date: April 11, 1949 Vice President of the and 16 other investment
Federated Investors Tower Federated Fund Complex; companies in the
1001 Liberty Avenue Director or Trustee of some Fund Complex
Pittsburgh, PA of the Funds in the
EXECUTIVE VICE PRESIDENT and TRUSTEE Federated Fund Complex;
President, Chief Executive Officer and
Director, Federated Investors, Inc.;
President and Trustee, Federated
Investment Management Company and
Federated Investment Counseling;
President and Director, Federated
Global Investment Management Corp.;
President, Passport Research, Ltd.;
Trustee, Federated Shareholder Services
Company; Director, Federated Services
Company.
EDWARD C. GONZALES Trustee or Director of some $0 $0 for the Trust
Birth Date: October 22, 1930 of the Funds in the and 1 other investment
Federated Investors Tower Federated Fund Complex; company in the
1001 Liberty Avenue President, Executive Vice Fund Complex
Pittsburgh, PA President and Treasurer of
EXECUTIVE VICE PRESIDENT some of the Funds in the
Federated Fund Complex; Vice Chairman,
Federated Investors, Inc.; Vice
President, Federated Investment
Management Company, Federated
Investment Counseling, Federated Global
Investment Management Corp. and
Passport Research, Ltd.; Executive Vice
President and Director, Federated
Securities Corp.; Trustee, Federated
Shareholder Services Company.
JOHN W. MCGONIGLE Executive Vice President $0 $0 for the Trust
Birth Date: October 26, 1938 and Secretary of the and 54 other investment
Federated Investors Tower Federated Fund Complex; companies in the
1001 Liberty Avenue Executive Vice President, Fund Complex
Pittsburgh, PA Secretary and Director,
EXECUTIVE VICE PRESIDENT Federated Investors, Inc.;
Trustee, Federated Investment
Management Company and Federated
Investment Counseling; Director,
Federated Global Investment Management
Corp., Federated Services Company and
Federated Securities Corp.
RICHARD J. THOMAS Treasurer of the Federated $0 $0 for the Trust
Birth Date: June 17, 1954 Fund Complex; Vice and 54 other investment
Federated Investors Tower President - Funds companies in the
1001 Liberty Avenue Financial Services Fund Complex
Pittsburgh, PA Division, Federated
TREASURER Investors, Inc.; formerly:
various management
positions within Funds
Financial Services
Division of Federated
Investors, Inc.
RICHARD B. FISHER President or Vice $0 $0 for the Trust
Birth Date: May 17, 1923 President of some of the and 6 other investment
Federated Investors Tower Funds in the Federated Fund companies in the
1001 Liberty Avenue Complex; Director or Fund Complex
Pittsburgh, PA Trustee of some of the
PRESIDENT Funds in the Federated Fund
Complex; Executive Vice
President, Federated
Investors, Inc.; Chairman
and Director, Federated
Securities Corp.
<CAPTION>
NAME TOTAL
BIRTH DATE AGGREGATE COMPENSATION
ADDRESS PRINCIPAL OCCUPATIONS COMPENSATION FROM TRUST AND
POSITION WITH TRUST FOR PAST FIVE YEARS FROM TRUST FUND COMPLEX
<S> <C> <C> <C>
WILLIAM D. DAWSON, III Chief Investment Officer $0 $0 for the Trust
Birth Date: March 3, 1949 of this Fund and various and 41 other investment
Federated Investors Tower other Funds in the companies in the
1001 Liberty Avenue Federated Fund Complex; Fund Complex
Pittsburgh, PA Executive Vice President,
CHIEF INVESTMENT OFFICER Federated Investment
Counseling, Federated Global Investment
Management Corp., Federated Investment
Management Company and Passport
Research, Ltd.; Registered
Representative, Federated Securities
Corp.; Portfolio Manager, Federated
Administrative Services; Vice
President, Federated Investors, Inc.;
formerly: Executive Vice President and
Senior Vice President, Federated
Investment Counseling Institutional
Portfolio Management Services Division;
Senior Vice President, Federated
Investment Management Company and
Passport Research, Ltd.
J. SCOTT ALBRECHT J. Scott Albrecht has been $0 $0 for the Trust
Birth Date: June 1, 1960 the Fund's portfolio and 1 other investment
Federated Investors Tower manager since March 1995. company in the
1001 Liberty Avenue He is Vice President of the Fund Complex
Pittsburgh, PA Trust. Mr. Albrecht joined
VICE PRESIDENT Federated in 1989. He has
been a Senior Portfolio
Manager since 1997 and a
Vice President of the
Fund's investment adviser
since 1994. He was a
Portfolio Manager from
1994 to 1996. Mr. Albrecht
is a Chartered Financial
Analyst and received his
M.S. in Public Management
from Carnegie Mellon
University.
</TABLE>
* An asterisk denotes a Trustee who is deemed to be an interested person as
defined in the Investment Company Act of 1940.
# A pound sign denotes a Member of the Board's Executive Committee, which
handles the Board's responsibilities between its meetings.
+ Mr. Donahue is the father of J. Christopher Donahue, Executive Vice
President and Trustee of the Trust.
++ Mr. Mansfield became a member of the Board of Trustees on January 1,
1999. Messrs. Cunningham and Walsh became members of the Board of
Trustees on July 1, 1999. They did not earn any fees for serving the Fund
Complex since these fees are reported as of the end of the last calendar
year.
INVESTMENT ADVISER
The Adviser conducts investment research and makes investment decisions for the
Fund.
The Adviser is a wholly owned subsidiary of Federated.
The Adviser shall not be liable to the Trust or any Fund shareholder 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 Fund.
OTHER RELATED SERVICES
Affiliates of the Adviser may, from time to time, provide certain electronic
equipment and software to institutional customers in order to facilitate the
purchase of Fund Shares offered by the Distributor.
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. 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. In selecting among firms believed to meet these
criteria, the Adviser may give consideration to those firms which have sold or
are selling Shares of the Fund and other funds distributed by the Distributor
and its affiliates. The Adviser makes decisions on portfolio transactions and
selects brokers and dealers subject to review by the Fund's Board.
Investment decisions for the Fund are made independently from those of other
accounts managed by the Adviser. When the Fund and one or more of those accounts
invests in, or disposes of, the same security, available investments or
opportunities for sales will be allocated among the Fund and the account(s) in a
manner believed by the Adviser to be equitable. While the coordination and
ability to participate in volume transactions may benefit the Fund, it is
possible that this procedure could adversely impact the price paid or received
and/or the position obtained or disposed of by the Fund.
ADMINISTRATOR
Federated Services Company, a subsidiary of Federated, provides administrative
personnel and services (including certain legal and financial reporting
services) necessary to operate the Fund. Federated Services Company provides
these at the following annual rate of the average aggregate daily net assets of
all Federated Funds as specified below:
AVERAGE AGGREGATE DAILY
MAXIMUM ADMINISTRATIVE FEE NET ASSETS OF THE FEDERATED FUNDS 0.150 of 1% on the
first $250 million 0.125 of 1% on the next $250 million 0.100 of 1% on the next
$250 million 0.075 of 1% on assets in excess of $750 million
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 voluntarily waive a portion of its fee and may
reimburse the Fund for expenses.
Federated Services Company also provides certain accounting and recordkeeping
services with respect to the Fund's portfolio investments for a fee based on
Fund assets plus
out-of-pocket expenses.
CUSTODIAN
State Street Bank and Trust Company, Boston, Massachusetts, is custodian for the
securities and cash of the Fund. Foreign instruments purchased by the Fund are
held by foreign banks participating in a network coordinated by State Street
Bank.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Federated Services Company, through its registered transfer agent subsidiary,
Federated Shareholder Services Company, maintains all necessary shareholder
records. The Fund pays the transfer agent a fee based on the size, type and
number of accounts and transactions made by
shareholders.
INDEPENDENT AUDITORS
The independent auditor for the Fund, Deloitte & Touche LLP, plans and performs
its audit so that it may provide an opinion as to whether the Fund's financial
statements and financial highlights are free of material misstatement.
FEES PAID BY THE FUND FOR SERVICES
FOR THE YEAR ENDED AUGUST 31 1999 1998 1997
Advisory Fee Earned $213,175 $110,704 $ 76,824
Advisory Fee Reduction 213,175 110,704 76,824
Administrative Fee 155,000 147,521 125,002
12B-1 FEE
Class A Shares 0 - -
Class B Shares 187,703 - -
SHAREHOLDER SERVICES FEE
Class A Shares 70,667 - -
Class B Shares 62,658 - -
Fees are allocated among classes based on their pro rata share of Fund assets,
except for marketing (Rule 12b-1) fees and shareholder services fees, which are
borne only by the applicable class of Shares.
How Does the Fund Measure Performance?
The Fund may advertise Share performance by using the SEC's standard method for
calculating performance applicable to all mutual funds. The SEC also permits
this standard performance information to be accompanied by non-standard
performance information.
Share performance reflects the effect of non-recurring charges, such as maximum
sales charges, which, if excluded, would increase the total return and yield.
The performance of Shares depends upon such variables as: portfolio quality;
average portfolio maturity; type and value of portfolio securities; changes in
interest rates; changes or differences in the Fund's or any class of Shares'
expenses; and various other factors.
Share performance fluctuates on a daily basis largely because net earnings
fluctuate daily. Both net earnings and offering price per Share are factors in
the computation of yield and total return.
AVERAGE ANNUAL TOTAL RETURNS AND YIELD
Total returns are given for the one-year, five-year and Start of Performance
periods ended August 31, 1999.
Yield and Tax-Equivalent Yield are given for the 30-day period ended August 31,
1999.
<TABLE>
<CAPTION>
30-DAY START OF PERFORMANCE
PERIOD 1 YEAR 5 YEARS ON DECEMBER 2, 1992
<S> <C> <C> <C> <C>
CLASS A SHARES:
Total Return NA (6.51%) 5.44% 5.54%
Yield 4.78% NA NA NA
Tax-Equivalent Yield 9.35% NA NA NA
<CAPTION>
30-DAY START OF PERFORMANCE
PERIOD 1 YEAR 5 YEARS ON DECEMBER 1, 1997
CLASS B SHARES:
<S> <C> <C> <C> <C>
Total Return NA (7.10%) NA (0.61%)
Yield 4.02% NA NA NA
Tax-Equivalent Yield 7.87% NA NA NA
</TABLE>
TOTAL RETURN
Total return represents the change (expressed as a percentage) in the value of
Shares over a specific period of time, and includes the investment of income and
capital gains distributions.
The average annual total return for Shares is the average compounded rate of
return for a given period that would equate a $1,000 initial investment to the
ending redeemable value of that investment. The ending redeemable value is
computed by multiplying the number of Shares owned at the end of the period by
the NAV 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 annual reinvestment of all
dividends and distributions.
YIELD AND TAX-EQUIVALENT YIELD
The yield of Shares is calculated by dividing: (i) the net investment income per
Share earned by the Shares over a 30-day period; by (ii) the maximum offering
price per Share on the last day of the period. This number is then annualized
using semi-annual compounding. This means that the amount of income generated
during the 30-day period is assumed to be generated each month over a 12-month
period and is reinvested every six months. 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 the actual yield, assuming a
specific tax rate. The yield and tax-equivalent yield do not necessarily reflect
income actually earned by Shares because of certain adjustments required by the
SEC and, therefore, may not correlate to the dividends or other distributions
paid to shareholders.
To the extent investment professionals and broker/dealers charge fees in
connection with services provided in conjunction with an investment in Shares,
the Share performance is lower for shareholders paying those fees.
TAX EQUIVALENCY TABLE
Set forth below is a sample of a tax-equivalency table that may be used in
advertising and sales literature. This table is for illustrative purposes only
and is not representative of past or future performance of the Fund. The
interest earned by the municipal securities owned by the Fund generally remains
free from federal regular income tax and is often free from state and local
taxes as well. However, some of the Fund's income may be subject to the federal
alternative minimum tax and state and/or local taxes.
TAX EQUIVALENCY TABLE
<TABLE>
<CAPTION>
TAXABLE YIELD EQUIVALENT
FOR 1999 - STATE OF
CALIFORNIA
COMBINED FEDERAL AND STATE
INCOME TAX BRACKET: 23.00% 37.30% 40.30% 45.30% 48.90%
<S> <C> <C> <C> <C> <C>
Single Return $1-25,750 $25,751-62,450 $62,451-130,250 $130,251-283,150 Over 283,150
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%
</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 1999 - STATE OF
CALIFORNIA
COMBINED FEDERAL AND STATE
INCOME TAX BRACKET: 21.00% 37.30% 40.30% 45.30% 48.90%
<S> <C> <C> <C> <C> <C>
Joint Return $1-43,050 $43,051-104,050 $104,051-158,550 $158,551-283,150 Over 283,150
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%
</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.
PERFORMANCE COMPARISONS
Advertising and sales literature may include:
* references to ratings, rankings, and financial publications and/or
performance comparisons of Shares to certain indices;
* charts, graphs and illustrations using the Fund's returns, or returns in
general, that demonstrate investment concepts such as tax-deferred compounding,
dollar-cost averaging and systematic investment;
* discussions of economic, financial and political developments and their impact
on the securities market, including the portfolio manager's views on how such
developments could impact the Fund; and
* information about the mutual fund industry from sources such as the Investment
Company Institute.
The Fund may compare its performance, or performance for the types of securities
in which it invests, to a variety of other investments, including federally
insured bank products such as bank savings accounts, certificates of deposit,
and Treasury bills.
The Fund may quote information from reliable sources regarding individual
countries and regions, world stock exchanges, and economic and demographic
statistics.
You may use financial publications and/or indices to obtain a more complete view
of Share performance. When comparing performance, you should consider all
relevant factors such as the composition of the 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
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.
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.
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.
Who is Federated Investors, Inc.?
Federated is dedicated to meeting investor needs by making structured,
straightforward and consistent investment decisions. Federated investment
products have a history of competitive performance and have gained the
confidence of thousands of financial institutions and individual investors.
Federated's disciplined investment selection process is rooted in sound
methodologies backed by fundamental and technical research. At Federated,
success in investment management does not depend solely on the skill of a single
portfolio manager. It is a fusion of individual talents and state- of-the-art
industry tools and resources. Federated's investment process involves teams of
portfolio managers and analysts, and investment decisions are executed by
traders who are dedicated to specific market sectors and who handle trillions of
dollars in annual trading volume.
FEDERATED FUNDS OVERVIEW
MUNICIPAL FUNDS
In the municipal sector, as of December 31, 1998, Federated managed 10 bond
funds with approximately $2.2 billion in assets and 23 money market funds with
approximately $12.5 billion in total assets. In 1976, Federated introduced one
of the first municipal bond mutual funds in the industry and is now one of the
largest institutional buyers of municipal securities. The Funds may quote
statistics from organizations including The Tax Foundation and the National
Taxpayers Union regarding the tax obligations of Americans.
EQUITY FUNDS
In the equity sector, Federated has more than 28 years' experience. As of
December 31, 1998, Federated managed 27 equity funds totaling approximately
$14.9 billion in assets across growth, value, equity income, international,
index and sector (i.e. utility) styles. Federated's value- oriented management
style combines quantitative and qualitative analysis and features a structured,
computer-assisted composite modeling system that was developed in the 1970s.
CORPORATE BOND FUNDS
In the corporate bond sector, as of December 31, 1998,
Federated managed 9 money market funds and 15 bond funds with assets
approximating $22.8 billion and $7.1 billion, respectively. Federated's
corporate bond decision making-based on intensive, diligent credit analysis-is
backed by over 26 years of experience in the corporate bond sector. In 1972,
Federated introduced one of the first high-yield bond funds in the industry. In
1983, Federated was one of the first fund managers to participate in the asset
backed securities market, a market totaling more than $209 billion.
GOVERNMENT FUNDS
In the government sector, as of December 31, 1998, Federated managed 9 mortgage
backed, 5 government/agency and 19 government money market mutual funds, with
assets approximating $5.3 billion, $1.8 billion and $41.6 billion, respectively.
Federated trades approximately $425 million in U.S. government and mortgage
backed securities daily and places approximately $25 billion in repurchase
agreements each day. Federated introduced the first U.S. government fund to
invest in U.S. government bond securities in 1969. Federated has been a major
force in the short- and intermediate-term government markets since 1982 and
currently manages approximately $43.2 billion in government funds within these
maturity ranges.
MONEY MARKET FUNDS
In the money market sector, Federated gained prominence in the mutual fund
industry in 1974 with the creation of the first institutional money market fund.
Simultaneously, the company pioneered the use of the amortized cost method of
accounting for valuing shares of money market funds, a principal means used by
money managers today to value money market fund shares. Other innovations
include the first institutional tax-free money market fund. As of December 31,
1998, Federated managed more than $76.7 billion in assets across 52 money market
funds, including 19 government, 9 prime and 23 municipal with assets
approximating $41.6 billion, $22.8 billion and $12.5 billion, respectively.
The Chief Investment Officers responsible for oversight of the various
investment sectors within Federated 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 $5 trillion to the more than 7,300 funds available,
according to the Investment Company Institute.
FEDERATED CLIENTS OVERVIEW
Federated distributes mutual funds through its subsidiaries for a variety of
investment purposes. Specific markets include:
INSTITUTIONAL CLIENTS
Federated meets the needs of approximately 900 institutional clients nationwide
by managing and servicing separate accounts and mutual funds for a variety of
purposes, 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 advisers. The marketing effort
to these institutional clients is headed by John B. Fisher, President,
Institutional Sales Division, Federated Securities Corp.
BANK MARKETING
Other institutional clients include 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,
Broker/Dealer Sales Division, Federated Securities Corp.
Investment Ratings
STANDARD AND POOR'S LONG-TERM DEBT RATING DEFINITIONS
AAA-Debt rated AAA has the highest rating assigned by Standard & Poor's.
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 or 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 BB 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.
MOODY'S INVESTORS SERVICE LONG-TERM BOND RATING DEFINITIONS
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 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.
FITCH IBCA, INC. LONG-TERM DEBT RATING DEFINITIONS
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 credit 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 obligor's 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 imminent default in payment of interest or principal.
MOODY'S INVESTORS SERVICE COMMERCIAL PAPER RATINGS
PRIME-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 structure 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.
PRIME-2-Issuers rated Prime-1 (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.
STANDARD AND POOR'S COMMERCIAL PAPER RATINGS
A-1-This designation 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.
FITCH IBCA, INC. COMMERCIAL PAPER RATING DEFINITIONS
FITCH-1-(Highest Grade) Commercial paper assigned this rating is regarded as
having the strongest degree of assurance for timely payment.
FITCH-2-(Very Good Grade) Issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than the strongest issues.
Addresses
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 Investment Management Company
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
200 Berkeley Street
Boston, MA 02116
MANAGEMENT DISCUSSION AND ANALYSIS
Federated Michigan Intermediate Municipal Trust
ANNUAL REPORT FOR FISCAL YEAR ENDED AUGUST 31, 1999
WHAT'S YOUR REVIEW OF THE MUNICIPAL BOND MARKETPLACE OVER THE REPORTING PERIOD?
A market environment of low absolute interest rates and historically narrow
credit spreads have combined to make bond structure the most important factor in
determining performance over the reporting period. Bond coupon, effective
maturity and call protection were the relevant structural elements which
determined relative price performance in a municipal bond portfolio.
Credit spread widening did occur selectively in specific sectors of the
municipal bond market, and has been the most prevalent in the hospital sector.
The hospital sector has continued to show specific vulnerability as a result of
Medicare reimbursement reductions and the related pressure on hospital
operations. Credit spreads have widened considerably since April 1999, with BBB
category hospital spreads widening 104 basis points off the 30-year Municipal
Market Data curve.
The appetite for tax exempt securities from traditional crossover buyers
(corporations and insurance companies) has remained soft due to the
attractiveness of spread product (taxable corporate debt). The glut of pre- Year
2000 (Y2K) corporate debt issuance has created attractive relative value
opportunities in the taxable sector. Liquidity in the municipal market has also
become an issue. Retail demand is not able to support the trading of larger
blocks of municipal bonds while certain coupon structures, particularly market
discount securities, are receiving lukewarm attention from investors.
HOW HAVE MICHIGAN MUNICIPAL BONDS PERFORMED OVER THE REPORTING PERIOD?
Municipal credit quality in general has benefited from the strong U.S. economy.
Municipal tax receipts, at all levels of government, have exceeded forecasts,
which has allowed municipal fund balances and reserve accounts to expand. Credit
quality continued to remain strong throughout Michigan as represented by strong
employment growth and numerous public and private construction projects. There
have been sectors of the Michigan bond market which have experienced credit
weakness. The hospital sector in particular has experienced credit downgrades as
a result of competition and federal budget cuts.
HOW HAS FEDERATED MICHIGAN INTERMEDIATE MUNICIPAL TRUST PERFORMED WITH
RESPECT TO TOTAL RETURN AND INCOME FOR THE 12-MONTH REPORTING PERIOD ENDED
AUGUST 31, 1999?
For the 12-month reporting period ended August 31, 1999, the fund produced a
total return of 0.47% based on net asset value. 1 This return slightly lagged
the total return of the Lehman Brothers Municipal Bond Index2 of 0.50%, but beat
the Lipper States Intermediate Municipal Fund Category total return of 0.11%.3
The income on the fund remained competitive during the reporting period. On
August 31, 1999, the fund's 30- day current net yield, or SEC yield, was 4.38%
based on net asset value. The yield represents an increase from the 4.09% SEC
yield at the beginning of the reporting period.1
WHAT ACCOUNTED FOR THE FUND'S PERFORMANCE?
The strategy over the reporting period included tax-swapping to generate tax
loss carryforwards which can be used to offset any realized capital gains, while
also adding incremental yield by improving the weighted average book yield
within the portfolio. The duration and average maturity of the fund were
structured so as to take advantage of what management expected to be a trading
range for municipal interest rates over the reporting period while focusing on
adding incremental yield. The Bond Buyer Municipal Index 2 moved from 5.14% at
the beginning of the reporting period to 5.78% at the end of the reporting
period; it reached a low of 4.95% on October 6, 1998, and a high of 5.88% on
August 16, 1999. Due to the recent upward bias in interest rates, the market has
become especially sensitive to slight problems, especially for bonds issued over
the last year when rates were at their lowest. As a municipal bond approaches
its low threshold, the risk of generating ordinary income, which is taxed at the
holder's top marginal bracket, becomes relevant. This reality impacts the bond's
liquidity and requires the bond's duration to be calculated on a tax adjusted
basis. The fund was also affected by spread widening in the BBB credit sector,
to which it had limited exposure. With the many questions associated with Y2K
looming, the fund is maintaining a highly liquid position which will enable
management to deal with potential disruptions which could occur around year end.
WHAT KIND OF ENVIRONMENT DO YOU SEE AHEAD FOR MUNICIPAL BONDS?
The municipal bond market is technically driven by supply and demand imbalances
which are created by changes in interest rates, coupon payment period cycles and
economic conditions. The municipal market has recently experienced a demand
shift away from institutional buyers (insurance companies, corporations and
arbitrageurs) toward retail buyers (individuals) of municipal bonds. The ratio
of municipal bond yields to Treasury bond yields has widened from highs near
100%, which has caused many crossover buyers to unwind their municipal bond
positions. Crossover buyers purchase municipal bonds on a relative valuation
basis and not necessarily because of the tax exempt income. Y2K spending by
municipal governments is a potential credit factor which must be taken into
consideration as far as both the cost and the effectiveness of their Y2K
preparedness. The market does not expect any material interruptions in the
supply of necessary municipal services. However, there remains the potential for
some state and local functions to suffer temporary disruptions. The approach of
the presidential election cycle will bring potential federal tax law changes
back into the news. Potential impacts such as the introduction of a flat tax or
significant changes to the top marginal brackets could affect the trading value
of municipal debt relative to taxable fixed income alternatives, such as
corporate and Treasury securities.
1 The total return and SEC yield, based on offering price, for the reporting
period were (2.51%) and 4.24%, respectively. Performance quoted represents past
performance and is not indicative of future results. Investment return and
principal value will fluctuate, so that an investor's shares, when redeemed, may
be worth more or less than their original cost.
2 This index is unmanaged.
3 Lipper figures represent the average of the total returns reported by all of
the mutual funds designated by Lipper Analytical Services, Inc. as falling into
the respective categories indicated. These figures do not reflect sales charges.
LAST MEETING OF SHAREHOLDERS
A Special Meeting of Shareholders of Federated Michigan Intermediate Municipal
Trust (the "Fund"), a portfolio of Federated Municipal Securities Income Trust
(the "Trust"), was held on June 25, 1999. On April 27, 1999, the record date for
shareholders voting at the meeting, there were 7,295,383 total outstanding
shares. The following items were considered by shareholders of the Fund and the
results of their voting were as follows:
AGENDA ITEM 1
To elect Trustees: 1
<TABLE>
<CAPTION>
WITHHELD
AUTHORITY
FOR TO VOTE
<S> <C> <C>
Thomas G. Bigley 7,082,013 8,535
Nicholas P. Constantakis 7,082,013 8,535
John F. Cunningham 7,082,013 8,535
Charles F. Mansfield, Jr. 7,082,013 8,535
John E. Murray, Jr., J.D., S.J.D. 7,082,013 8,535
John S. Walsh 7,082,013 8,535
</TABLE>
1 The following Trustees continued their terms: John F. Donahue, John T.
Conroy, J. Christopher Donahue, Lawrence D. Ellis, M.D., Peter E. Madden
and Marjorie P. Smuts.
AGENDA ITEM 2
To ratify the selection of Deloitte & Touche LLP as the independent auditors for
the Trust.
The results of shareholders voting were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
<S> <C> <C>
7,072,147 4,466 13,935
</TABLE>
AGENDA ITEM 3
To amend the Fund's fundamental investment policies regarding borrowing money
and issuing senior securities.
The results of shareholders voting were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
<S> <C> <C>
6,087,941 444,512 23,276
</TABLE>
AGENDA ITEM 4
To amend the Fund's fundamental investment policies regarding investments in
real estate:
The results of shareholders voting were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
<S> <C> <C>
6,362,145 171,022 22,562
</TABLE>
AGENDA ITEM 5
To amend the Fund's fundamental investment policies regarding investments in
commodities.
The results of shareholders voting were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
<S> <C> <C>
6,311,215 221,952 22,562
</TABLE>
AGENDA ITEM 6
To amend the Fund's fundamental investment policies regarding underwriting
securities.
The results of shareholders voting were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
<S> <C> <C>
6,363,767 173,782 18,180
</TABLE>
AGENDA ITEM 7
To amend the Fund's fundamental investment policies regarding lending by the
Funds.
The results of shareholders voting were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
<S> <C> <C>
6,319,538 215,251 20,940
</TABLE>
AGENDA ITEM 8
To amend the Fund's fundamental investment policies regarding concentration of
the Fund's investments in the securities of companies in the same industry:
The results of shareholders voting were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
<S> <C> <C>
6,040,619 491,221 23,889
</TABLE>
AGENDA ITEM 9
To amend, and to make non-fundamental, the Fund's fundamental investment
policies regarding buying securities on margin:
The results of shareholders voting were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
<S> <C> <C>
6,042,248 493,899 19,582
</TABLE>
AGENDA ITEM 10
To amend, and to make non-fundamental, the Fund's fundamental investment
policies regarding pledging assets.
The results of shareholders voting were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
<S> <C> <C>
6,039,404 490,720 25,605
</TABLE>
AGENDA ITEM 11
To amend, and to make non-fundamental, the Fund's fundamental investment policy
regarding investing in illiquid securities.
The results of shareholders voting were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
<S> <C> <C>
3,873,402 285,063 11,476
</TABLE>
AGENDA ITEM 12
To remove the Fund's fundamental investment policies regarding selling short.
The results of shareholders voting were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
<S> <C> <C>
6,042,009 490,874 22,845
</TABLE>
AGENDA ITEM 13
To remove the Fund's fundamental investment policies regarding dealing in puts,
calls, straddles, spreads and any combination thereof.
The results of shareholders voting were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
<S> <C> <C>
6,027,400 505,484 22,845
</TABLE>
AGENDA ITEM 14
To remove the Fund's fundamental investment policies regarding investing in
restricted securities.
The results of shareholders voting were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
<S> <C> <C>
6,030,245 506,911 18,573
</TABLE>
AGENDA ITEM 15
To approve an amendment and restatement to the Trust's Declaration of Trust to
permit the Board of Trustees to liquidate assets of the Trust without seeking
shareholder approval.
The results of shareholders voting were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
<S> <C> <C>
6,069,257 463,517 22,955
</TABLE>
FEDERATED MICHIGAN INTERMEDIATE MUNICIPAL TRUST
GROWTH OF $10,000 INVESTED IN FEDERATED MICHIGAN INTERMEDIATE MUNICIPAL TRUST
[Graphic] See Appendix C.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN 1 FOR THE PERIOD ENDED AUGUST 31, 1999
<S> <C>
1 Year (2.51%)
5 Year 4.49%
Start of Performance (9/18/91) 5.57%
</TABLE>
The graph above illustrates the hypothetical investment of $10,000 2 in the
Federated Michigan Intermediate Municipal Trust (the "Fund") from September 18,
1991 (start of performance) to August 31, 1999 compared to the Lehman Brothers 7
Year State General Obligation Bond Index (LB7YRSGOBI) and the Lehman Brothers
Municipal Bond Index (LBMBI).3
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF
OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
This report must be preceded or accompanied by the Fund's prospectus dated
October 31, 1999, and, together with financial statements contained therein,
constitutes the Fund's annual report.
1 Total return quoted reflects all applicable sales charges and contingent
deferred sales charges.
2 Represents a hypothetical investment of $10,000 in the Fund after deducting
the maximum sales charge of 3.00% ($10,000 investment minus $300 sales charge =
$9,700). The Fund's performance assumes the reinvestment of all dividends and
distributions. The LB7YRSGOBI and the LBMBI have been adjusted to reflect
reinvestment of dividends on securities in the indexes.
3 The LB7YRSGOBI and the LBMBI are not adjusted to reflect sales charges,
expenses, or other fees that the SEC requires to be reflected in the Fund's
performance. These indexes are unmanaged.
[Graphic]
Federated
Federated Michigan Intermediate Municipal Trust
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
1-800-341-7400
WWW.FEDERATEDINVESTORS.COM
Federated Securities Corp., Distributor
Cusip 625922703
G01106-03 (10/99)
[Graphic]
PROSPECTUS
Federated Michigan Intermediate Municipal Trust
A Portfolio of Federated Municipal Securities Income Trust
A mutual fund seeking to provide current income exempt from federal regular
income tax and the personal income taxes imposed by the state of Michigan and
Michigan municipalities by investing primarily in a portfolio of investment
grade Michigan tax exempt securities.
As with all mutual funds, the Securities and Exchange Commission (SEC) has not
approved or disapproved these securities or passed upon the adequacy of this
prospectus. Any representation to the contrary is a criminal offense.
OCTOBER 31, 1999
CONTENTS
Risk/Return Summary 1
What are the Fund's Fees and Expenses? 3
What are the Fund's Investment Strategies? 4
What are the Principal Securities in Which the Fund Invests? 6
What are the Specific Risks of Investing in the Fund? 9
What Do Shares Cost? 10
How is the Fund Sold? 12
How to Purchase Shares 12
How to Redeem and Exchange Shares 14
Account and Share Information 16
Who Manages the Fund? 17
Financial Information 19
Independent Auditors' Report 34
Risk/Return Summary
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
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. While there is no assurance that the Fund
will achieve its investment objective, it endeavors to do so by following the
strategies and policies described in this prospectus.
WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?
The Fund invests in a portfolio of tax exempt securities so that at least 80% of
its annual interest income is exempt from federal regular income tax and the
state of Michigan and Michigan municipalities personal income taxes. Interest
from the Fund's investments may be subject to the federal alternative minimum
tax for individuals and corporations (AMT). The Fund's portfolio securities will
be investment grade or of comparable quality. The Fund's dollar-weighted average
portfolio maturity is between three and ten years, and its average-weight
duration is between three and seven years.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?
All mutual funds take investment risks. Therefore, it is possible to lose money
by investing in the Fund. The primary factors that may reduce the Fund's returns
include:
INTEREST RATE RISKS
Prices of the tax exempt securities generally fall when interest rates rise.
Interest rate changes have a greater effect on the price of fixed income
securities with longer durations.
CREDIT RISKS
Issuers of tax exempt securities may default on the payment of interest or
principal when due.
CALL RISKS
Issuers of tax exempt securities may redeem the securities prior to maturity at
a price below their current market value.
SECTOR RISKS
Since the Fund invests primarily in issuers from Michigan, the Fund may be
subject to additional risks compared to funds that invest in multiple states.
Although it has diversified, Michigan's economy is still heavily dependent upon
certain industries, especially automobile, manufacturing and related industries.
Any downturn in these industries may adversely affect the economy of the state.
The Fund is non-diversified. Compared to diversified mutual funds, it may invest
a higher percentage of its assets among fewer issuers of portfolio securities.
This increases the Fund's risk by magnifying the impact (positively or
negatively) that any one issuer has on the Fund's Share price and performance.
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 or
guaranteed by the U.S. government, the Federal Deposit Insurance Corporation,
the Federal Reserve Board or any other government agency.
RISK/RETURN BAR CHART AND TABLE
[Graphic]
The bar chart shows the variability of the Fund's total returns on a calendar
year-end basis.
The total returns displayed for the Fund do not reflect the payment of any sales
charges or recurring shareholder account fees. If these charges or fees had been
included, the returns shown would have been lower.
The Fund's total return for the nine-month period from January 1, 1999 to
September 30, 1999 was (1.16%).
Within the period shown in the Chart, the Fund's highest quarterly return was
5.72% (quarter ended March 31, 1995). Its lowest quarterly return was (4.60%)
(quarter ended March 31, 1994).
AVERAGE ANNUAL TOTAL RETURN TABLE
The following table represents the Fund's Average Annual Total Returns, reduced
to reflect applicable sales charges, for the calendar periods ended December 31,
1998. The table shows the Fund's total returns averaged over a period of years
relative to the Lehman Brothers 7 Year State General Obligation Index
(LB7YRSGOI) and the Lehman Brothers Municipal Bond Index (LBMBI), both
broad-based market indexes. The LB7YRSGOI is an index of general obligation
bonds rated A or better with six to eight years to maturity. The LBMBI is a
broad market performance benchmark for the tax exempt bond market. To be
included in the LBMBI, bonds must have a minimum credit rating of Baa. Total
returns for the indexes shown do not reflect sales charges, expenses or other
fees that the SEC requires to be reflected in the Fund's performance. Indexes
are unmanaged, and it is not possible to invest directly in an index.
CALENDAR PERIOD FUND LB7YRSGOI LBMBI
1 Year 2.41% 6.48% 6.22%
5 Years 4.35% 5.96% 6.49%
Start of Performance 1 6.26% 6.68% NA
1 The Fund's start of performance date was September 18, 1991.
Past performance does not necessarily predict future performance. This
information provides you with historical performance information so that you can
analyze whether the Fund's investment risks are balanced by its potential
returns.
What are the Fund's Fees and Expenses?
FEDERATED MICHIGAN INTERMEDIATE MUNICIPAL TRUST
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
Shares of the Fund.
<TABLE>
<CAPTION>
SHAREHOLDER FEES
<S> <C>
Fees Paid Directly From
Your Investment
Maximum Sales Charge
(Load) Imposed on
Purchases (as a percentage
of offering price) 3.00%
Maximum Deferred Sales
Charge (Load) (as a
percentage of original
purchase price or
redemption proceeds,
as applicable) None
Maximum Sales Charge
(Load) Imposed on
Reinvested Dividends (and
other Distributions)
(as a percentage of
offering price). None
Redemption Fee (as a
percentage of amount
redeemed, if applicable) None
Exchange Fee None
ANNUAL FUND OPERATING
EXPENSES (Before Waivers)
1
Expenses That are Deducted
From Fund Assets (as a
percentage of average net
assets)
Management Fee 2 0.40%
Distribution (12b-1) Fee None
Shareholder Services Fee 3 0.25%
Other Expenses 0.35%
Total Annual Fund
Operating Expenses 1.00%
1 Although not contractually obligated to do so, the adviser and shareholder
services provider waived certain amounts. These are shown below along with the
net expenses the Fund actually paid for the fiscal year ended August 31, 1999.
Total Waiver of Fund
Expenses 0.50%
Total Actual Annual Fund
Operating Expenses (after
waivers) 0.50%
2 The adviser voluntarily waived a portion of the management fee. The adviser
can terminate this voluntary waiver at any time. The management fee paid by the
Fund (after the voluntary waiver) was 0.08% for the fiscal year ended August 31,
1999. 3 The shareholder services provider voluntarily waived a portion of the
shareholder services fee. The shareholder services provider can terminate this
voluntary waiver at any time. The shareholder services fee paid by the Fund
(after the voluntary waiver) was 0.07% for the fiscal year ended August 31,
1999.
</TABLE>
EXAMPLE
The following Example is intended to help you compare the cost of investing in
the Fund's Shares with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund's Shares for the time
periods indicated and then redeem all of your shares at the end of those
periods. The Example also assumes that your investment has a 5% return each year
and that the Fund's Shares operating expenses are BEFORE WAIVERS as shown in the
table and remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1 Year $ 399
3 Years $ 609
5 Years $ 836
10 Years $1,488
What are the Fund's Investment Strategies?
The Fund invests in a portfolio of tax exempt securities 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. As a matter
of operating policy, the Fund ordinarily will invest so that 100% of its annual
interest income is exempt from such taxes. Interest income from the Fund's
investments may be subject to AMT.
The Fund's portfolio securities will be investment grade or of comparable
quality. Under normal market conditions, the Fund's dollar-weighted average
portfolio maturity is between three and ten years, and its average- weight
duration is between three and seven years. The Fund's investment adviser
(Adviser) actively manages the Fund's portfolio, seeking to manage the interest
rate risk and credit risk assumed by the Fund and to provide superior levels of
after tax total return.
The Adviser manages the Fund's interest rate risk by adjusting the duration of
its portfolio. "Duration" measures the sensitivity of a security's price to
changes in interest rates. The greater a portfolio's duration, the greater the
change in the portfolio's value in response to a change in market interest
rates. The Adviser will increase or reduce the Fund's portfolio duration based
on its interest rate outlook. When the Adviser expects interest rates to fall,
it will maintain a longer portfolio duration. When the Adviser expects interest
rates to increase, it will shorten the portfolio duration. The Adviser considers
a variety of factors in formulating its interest rate outlook, including the
following:
* current and expected U.S. economic growth;
* current and expected interest rates and inflation;
* the Federal Reserve's monetary policy; and
* supply and demand factors related to the municipal market and the effect they
may have on the returns offered for various bond maturities.
The Adviser manages credit risk by performing a fundamental credit analysis on
tax exempt securities before the Fund purchases such securities. The Adviser
considers various factors, including the following:
* the economic feasibility of revenue bond financings and general purpose
financings; * the financial condition of the issuer or guarantor; and *
political developments that may affect credit quality.
The Adviser monitors the credit risks of all portfolio securities on an ongoing
basis by reviewing periodic financial data and ratings of nationally recognized
ratings services.
The Adviser attempts to provide superior levels of after tax total return. After
tax total return consists of two components: (1) income received from the Fund's
portfolio securities; and (2) changes in the market value of the Fund's
portfolio securities and attendant increase or decrease in the market value of
Fund shares. The Adviser seeks total return on an after tax basis, so that it
will try to maximize tax exempt income distributions; make no ordinary income
distributions; and minimize or eliminate capital gains distributions.
HEDGING
Hedging transactions are intended to reduce specific risks. For example, to
protect the Fund against circumstances that would normally cause the Fund's
portfolio securities to decline in value, the Fund may buy or sell a futures
contract that would normally increase in value under the same circumstances. The
Fund may also attempt to hedge by using combinations of different futures
contracts, or futures contracts and securities. The Fund's ability to hedge may
be limited by the costs of the futures contracts. The Fund may attempt to lower
the cost of hedging by entering into transactions that provide only limited
protection, including transactions that: (1) hedge only a portion of its
portfolio; (2) use futures contracts that cover a narrow range of circumstances;
or (3) involve the sale of futures contracts with different terms. Consequently,
hedging transactions will not eliminate risk even if they work as intended. In
addition, hedging strategies are not always successful, and could result in
increased expenses and losses to the Fund.
TEMPORARY DEFENSIVE INVESTMENTS
The Fund may temporarily depart from its principal investment strategies by
investing its assets in securities subject to federal regular income tax and the
income tax imposed by the state of Michigan and Michigan municipalities. It may
do this to minimize potential losses and maintain liquidity to meet shareholder
redemptions during adverse market conditions. This may cause the Fund to receive
and distribute taxable income to investors.
What are the Principal Securities in Which the Fund Invests?
TAX EXEMPT SECURITIES
Tax exempt securities are fixed income securities that pay interest that is not
subject to federal regular income taxes. Fixed income securities pay interest,
dividends or distributions at a specified rate. The rate may be a fixed
percentage of the principal or adjusted periodically.
Typically, states, counties, cities and other political subdivisions and
authorities issue tax exempt securities. The market categorizes tax exempt
securities by their source of repayment.
GENERAL OBLIGATION BONDS
General obligation bonds are supported by the issuer's power to exact property
or other taxes. The issuer must impose and collect taxes sufficient to pay
principal and interest on the bonds. However, the issuer's authority to impose
additional taxes may be limited by its charter or state law.
SPECIAL REVENUE BONDS
Special revenue bonds are payable solely from specific revenues received by the
issuer such as specific taxes, assessments, tolls or fees. Bondholders may not
collect from the municipality's general taxes or revenues. For example, a
municipality may issue bonds to build a toll road, and pledge the tolls to repay
the bonds. Therefore, a shortfall in the tolls normally would result in a
default on the bonds.
PRIVATE ACTIVITY BONDS
Private activity bonds are special revenue bonds used to finance private
entities. For example, a municipality may issue bonds to finance a new factory
to improve its local economy. The municipality would lend the proceeds from its
bonds to the company using the factory, and the company would agree to make loan
payments sufficient to repay the bonds. The bonds would be payable solely from
the company's loan payments, not from any other revenues of the municipality.
Therefore, any default on the loan normally would result in a default on the
bonds.
The interest on many types of private activity bonds is subject to AMT. The Fund
may invest in bonds subject to AMT.
MUNICIPAL LEASES
Municipalities may enter into leases for equipment or facilities. In order to
comply with state public financing laws, these leases are typically subject to
annual appropriation. In other words, a municipality may end a lease, without
penalty, by not providing for the lease payments in its annual budget. After the
lease ends, the lessor can resell the equipment or facility but may lose money
on the sale.
The Fund may invest in securities supported by pools of municipal leases. The
most common type of lease backed securities are certificates of participation
(COPs). However, the Fund may also invest directly in individual leases.
ZERO COUPON SECURITIES
Zero coupon securities do not pay interest or principal until final maturity
unlike debt securities that provide periodic payments of interest (referred to
as a coupon payment). Investors buy zero coupon securities at a price below the
amount payable at maturity. The difference between the purchase price and the
amount paid at maturity represents interest on the zero coupon security.
Investors must wait until maturity to receive interest and principal, which
increases the interest rate risks and credit risks of a zero coupon security.
INVERSE FLOATERS
An inverse floater has a floating or variable interest rate that moves in the
opposite direction of market interest rates. When market interest rates go up,
the interest rate paid on the inverse floater goes down; when market interest
rates go down, the interest rate paid on the inverse floater goes up. Inverse
floaters generally respond more rapidly to market interest rate changes than
fixed rate tax exempt securities. Inverse floaters are subject to interest rate
risks and leverage risks.
CREDIT ENHANCEMENT
Credit enhancement consists of an arrangement in which a company agrees to pay
amounts due on a fixed income security if the issuer defaults. In some cases the
company providing credit enhancement makes all payments directly to the security
holders and receives reimbursement from the issuer. Normally, the credit
enhancer has greater financial resources and liquidity than the issuer. For this
reason, the Adviser usually evaluates the credit risk of a fixed income security
based solely upon its credit enhancement.
FUTURES CONTRACTS
Futures contracts, which are a type of derivative contract, provide for the
future sale by one party and purchase by another party of a specified amount of
an underlying asset at a specified price, date and time. Entering into a
contract to buy an underlying asset is commonly referred to as buying a contract
or holding a long position in the asset. Entering into a contract to sell an
underlying asset is commonly referred to as selling a contract or holding a
short position in the asset. Futures contracts are considered to be commodity
contracts.
The Fund may buy and sell interest rate and index financial futures contracts.
Depending upon how the Fund uses futures contracts and the relationships between
the market value of a futures contract and the underlying asset, futures
contracts may increase or decrease the Fund's exposure to interest rate risks,
and may also expose the Fund to liquidity risks and leverage risks.
SPECIAL TRANSACTIONS
DELAYED DELIVERY TRANSACTIONS
Delayed delivery transactions, including when-issued transactions, are
arrangements in which the Fund buys securities for a set price, with payment and
delivery of the securities scheduled for a future time. During the period
between purchase and settlement, no payment is made by the Fund to the issuer
and no interest accrues to the Fund. The Fund records the transaction when it
agrees to buy the securities and reflects their value in determining the price
of its shares. Settlement dates may be a month or more after entering into these
transactions so that the market values of the securities bought may vary from
the purchase prices. Therefore, delayed delivery transactions create interest
rate risks for the Fund. Delayed delivery transactions also involve credit risks
in the event of a counterparty default.
ASSET COVERAGE
In order to secure its obligations in connection with futures contracts or
special transactions, the Fund will either own the underlying assets, enter into
an offsetting transaction or set aside readily marketable securities with a
value that equals or exceeds the Fund's obligations. Unless the Fund has other
readily marketable assets to set aside, it cannot trade assets used to secure
such obligations without entering into an offsetting futures contract or
terminating a special transaction. This may cause the Fund to miss favorable
trading opportunities or to realize losses on futures contracts or special
transactions.
INVESTMENT RATINGS FOR INVESTMENT GRADE SECURITIES
The Adviser will determine whether a security is investment grade based upon the
credit ratings given by one or more nationally recognized rating services. For
example, Standard and Poor's, a rating service, assigns ratings to investment
grade securities (AAA, AA, A and BBB) based on its assessment of the likelihood
of the issuer's inability to pay interest or principal (default) when due on
each security. Lower credit ratings correspond to higher credit risk. If a
security has not received a rating, the Fund must rely entirely upon the
Adviser's credit assessment that the security is comparable to investment grade.
If a security is downgraded below the minimum quality grade discussed above, the
Adviser will reevaluate the security, but will not be required to sell it.
What are the Specific Risks of Investing in the Fund?
INTEREST RATE RISKS
Prices of fixed income securities rise and fall in response to changes in the
interest rates paid by similar securities. Generally, when interest rates rise,
prices of fixed income securities fall. However, market factors, such as the
demand for particular fixed income securities, may cause the price of certain
fixed income securities to fall while the prices of other securities rise or
remain unchanged.
Interest rate changes have a greater effect on the price of fixed income
securities with longer durations. Duration measures the price sensitivity of a
fixed income security to changes in interest rates.
CREDIT RISKS
Credit risk is the possibility that an issuer will default on a security by
failing to pay interest or principal when due. If an issuer defaults, the Fund
will lose money.
Many fixed income securities receive credit ratings from services such as
Standard & Poor's and Moody's Investors Service. These services assign ratings
to securities by assessing the likelihood of issuer default. Lower credit
ratings correspond to higher credit risk. If a security has not received a
rating, the Fund must rely entirely upon the Adviser's credit assessment.
Credit risk includes the possibility that a party to a transaction involving the
Fund will fail to meet its obligations. This could cause the Fund to lose the
benefit of the transaction or prevent the Fund from selling or buying other
securities to implement its investment strategy.
CALL RISKS
Call risk is the possibility that an issuer may redeem a fixed income security
before maturity (a call) at a price below its current market price. An increase
in the likelihood of a call may reduce the security's price.
If a fixed income security is called, the Fund may have to reinvest the proceeds
in other fixed income securities with lower interest rates, higher credit risks
or other less favorable characteristics.
SECTOR RISKS
A substantial part of the Fund's portfolio may be comprised of securities issued
by Michigan issuers or credit enhanced by insurance companies or companies with
similar characteristics. As a result, the Fund will be more susceptible to any
economic, business, political or other developments which generally affect these
entities. Although it has diversified, Michigan's economy is still heavily
dependent upon certain industries, especially automobile, manufacturing and
related industries. Any downturn in these industries may adversely affect the
economy of the state.
TAX RISKS
In order to be tax exempt, tax exempt securities must meet certain legal
requirements. Failure to meet such requirements may cause the interest received
and distributed by the Fund to shareholders to be taxable.
Changes or proposed changes in federal tax laws may cause the prices of tax
exempt securities to fall.
Income from the Fund may be subject to AMT.
LEVERAGE RISKS
Leverage risk is created when an investment exposes the Fund to a level of risk
that exceeds the amount invested. Changes in the value of such an investment
magnify the Fund's risk of loss and potential for gain.
Investments can have these same results if their returns are based on a multiple
of a specified index, security or other benchmark.
LIQUIDITY RISKS
Liquidity risk refers to the possibility that the Fund may not be able to sell a
security or close out a futures contract when it wants to. If this happens, the
Fund will be required to continue to hold the security or keep the position
open, and the Fund could incur losses.
What Do Shares Cost?
You can purchase, redeem or exchange Shares any day the New York Stock Exchange
(NYSE) is open. When the Fund receives your transaction request in proper form
(as described in this prospectus), it is processed at the next calculated net
asset value (NAV) plus any applicable front-end sales charge (public offering
price). NAV is determined at the end of regular trading (normally 4:00 p.m.
Eastern time) each day the NYSE is open. The Fund generally values fixed income
securities at the last sale price on a national securities exchange, if
available, otherwise, as determined by an independent pricing service.
The Fund's current NAV and public offering price may be found in the mutual
funds section of certain local newspapers under "Federated" and the appropriate
class designation listing.
The following table summarizes the minimum required investment amount and the
maximum sales charge, if any, that you will pay on an investment in the Fund.
Keep in mind that investment professionals may charge you fees for their
services in connection with your Share transactions.
<TABLE>
<CAPTION>
MAXIMUM SALES CHARGE
MINIMUM INITIAL/ CONTINGENT
SUBSEQUENT FRONT-END DEFERRED
INVESTMENT SALES SALES
AMOUNTS 1 CHARGE 2 CHARGE 3
<S> <C> <C>
$1,500/$100 3.00% 0.00%
</TABLE>
1 The minimum subsequent investment amounts for Systematic Investment Programs
is $50. Investment professionals may impose higher or lower minimum investment
requirements on their customers than those imposed by the Fund.
2 Front-End Sales Charge is expressed as a percentage of public offering
price. See "Sales Charge When You Purchase."
3 See "Sales Charge When You Redeem."
SALES CHARGE WHEN YOU PURCHASE
<TABLE>
<CAPTION>
SALES CHARGE
AS A PERCENTAGE SALES CHARGE
OF PUBLIC AS A PERCENTAGE
PURCHASE AMOUNT OFFERING PRICE OF NAV
<S> <C> <C>
Less than $50,000 3.00% 3.09%
$50,000 but less than $100,000 2.50% 2.56%
$100,000 but less than $250,000 2.00% 2.04%
$250,000 but less than $500,000 1.50% 1.52%
$500,000 but less than $1 million 1.00% 1.01%
$1 million or greater 1 0.00% 0.00%
</TABLE>
1 A contingent deferred sales charge of 0.75% of the redemption amount applies
to Shares redeemed up to 24 months after purchase under certain investment
programs where an investment professional received an advance payment on the
transaction.
THE SALES CHARGE AT PURCHASE MAY BE REDUCED OR ELIMINATED BY:
* purchasing Shares in greater quantities to reduce the applicable sales
charge;
* combining concurrent purchases of Shares:
- - by you, your spouse, and your children under age 21; or
- - of the same share class of two or more Federated Funds (other than money
market funds);
* accumulating purchases (in calculating the sales charge on an additional
purchase, include the current value of previous Share purchases still invested
in the Fund); or
* signing a letter of intent to purchase a specific dollar amount of Shares
within 13 months (call your investment professional or the Fund for more
information).
THE SALES CHARGE WILL BE ELIMINATED WHEN YOU PURCHASE SHARES:
* within 120 days of redeeming Shares of an equal or lesser amount;
* by exchanging shares from the same share class of another Federated Fund
(other than a money market fund);
* through wrap accounts or other investment programs where you pay the
investment professional directly for services;
* through investment professionals that receive no portion of the sales
charge;
* as a Federated Life Member (Class A Shares only) and their immediate
family members; or
* as a Trustee, Director or employee of the Fund, the Adviser, the Distributor
and their affiliates, and the immediate family members of these individuals.
If your investment qualifies for a reduction or elimination of the sales charge,
you or your investment professional should notify the Fund's Distributor at the
time of purchase. If the Distributor is not notified, you will receive the
reduced sales charge only on additional purchases, and not retroactively on
previous purchases.
SALES CHARGE WHEN YOU REDEEM
Your redemption proceeds may be reduced by a sales charge, commonly referred to
as a contingent deferred sales charge (CDSC).
YOU WILL NOT BE CHARGED A CDSC WHEN REDEEMING SHARES:
* purchased with reinvested dividends or capital gains;
* purchased within 120 days of redeeming Shares of an equal or lesser
amount;
* that you exchanged into the same share class of another Federated Fund if the
shares were held for the applicable CDSC holding period (other than a money
market fund);
* purchased through investment professionals who did not receive advanced
sales payments;
* if, after you purchase Shares, you become disabled as defined by the IRS;
* if the Fund redeems your Shares and closes your account for not meeting
the minimum balance requirement; or
* upon the death of the last surviving shareholder of the account.
If your redemption qualifies, you or your investment professional should notify
the Distributor at the time of redemption to eliminate the CDSC. If the
Distributor is not notified, the CDSC will apply.
To keep the sales charge as low as possible, the Fund redeems your Shares in
this order:
* Shares that are not subject to a CDSC; and
* Shares held the longest (to determine the number of years your Shares have
been held, include the time you held shares of other Federated Funds that have
been exchanged for Shares of this Fund).
The CDSC is then calculated using the share price at the time of purchase or
redemption, whichever is lower.
How is the Fund Sold?
The Fund's Distributor, Federated Securities Corp., markets the Shares described
in this prospectus to customers of financial institutions, such as banks,
fiduciaries or investment advisers, broker/dealers, or to individuals, directly
or through investment professionals. The Fund may not be a suitable investment
for retirement plans or for non-Michigan taxpayers because it invests in
Michigan municipal securities.
When the Distributor receives sales charges, it may pay some or all of them to
investment professionals. The Distributor and its affiliates may pay out of
their assets other amounts (including items of material value) to investment
professionals for marketing and servicing Shares. The Distributor is a
subsidiary of Federated Investors, Inc. (Federated).
How to Purchase Shares
You may purchase Shares through an investment professional, directly from the
Fund, or through an exchange from another Federated Fund. The Fund reserves the
right to reject any request to purchase or exchange Shares.
THROUGH AN INVESTMENT PROFESSIONAL
* Establish an account with the investment professional; and
* Submit your purchase order to the investment professional before the end of
regular trading on the NYSE (normally 4:00 p.m. Eastern time). You will receive
the next calculated NAV if the investment professional forwards the order to the
Fund on the same day and the Fund receives payment within three business days.
You will become the owner of Shares and receive dividends when the Fund receives
your payment.
Investment professionals should send payments according to the instructions in
the sections "By Wire" or "By Check."
DIRECTLY FROM THE FUND
* Establish your account with the Fund by submitting a completed New
Account Form; and
* Send your payment to the Fund by Federal Reserve wire or check.
You will become the owner of Shares and your Shares will be priced at the next
calculated NAV after the Fund receives your wire or your check. If your check
does not clear, your purchase will be canceled and you could be liable for any
losses or fees incurred by the Fund or Federated Shareholder Services Company,
the Fund's transfer agent.
An institution may establish an account and place an order by calling the Fund
and the Shares will be priced at the next calculated NAV after the Fund receives
the order.
BY WIRE
Send your wire to:
State Street Bank and Trust Company
Boston, MA
Dollar Amount of Wire
ABA Number 011000028
Attention: EDGEWIRE
Wire Order Number, Dealer Number or Group Number
Nominee/Institution Name
Fund Name and Number and Account Number
You cannot purchase Shares by wire on holidays when wire transfers are
restricted.
BY CHECK
Make your check payable to THE FEDERATED FUNDS, note your account number on the
check, and mail it to:
Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600
If you send your check by a PRIVATE COURIER OR OVERNIGHT DELIVERY SERVICE that
requires a street address, mail it to:
Federated Shareholder Services Company
1099 Hingham Street
Rockland, MA 02370-3317
Payment should be made in U.S. dollars and drawn on a U.S. bank. The Fund
will not accept third-party checks (checks originally payable to someone
other than you or The Federated Funds).
THROUGH AN EXCHANGE
You may purchase Shares through an exchange from the same Share class of another
Federated Fund. You must meet the minimum initial investment requirement for
purchasing Shares and both accounts must have identical registrations.
BY SYSTEMATIC INVESTMENT PROGRAM
Once you have opened an account, you may automatically purchase additional
Shares on a regular basis by completing the Systematic Investment Program
section of the New Account Form or by contacting the Fund or your investment
professional.
BY AUTOMATED CLEARING HOUSE (ACH)
Once you have opened an account, you may purchase additional Shares through a
depository institution that is an ACH member. This purchase option can be
established by completing the appropriate sections of the New Account Form.
How to Redeem and Exchange Shares
You should redeem or exchange Shares:
* through an investment professional if you purchased Shares through an
investment professional; or
* directly from the Fund if you purchased Shares directly from the Fund.
THROUGH AN INVESTMENT PROFESSIONAL
Submit your redemption or exchange request to your investment professional by
the end of regular trading on the NYSE (normally 4:00 p.m. Eastern time). The
redemption amount you will receive is based upon the next calculated NAV after
the Fund receives the order from your investment professional.
DIRECTLY FROM THE FUND
BY TELEPHONE
You may redeem or exchange Shares by calling the Fund at 1-800-341-7400 once you
have completed the appropriate authorization form for telephone transactions. If
you call before the end of regular trading on the NYSE (normally 4:00 p.m.
Eastern time) you will receive a redemption amount based on that day's NAV.
BY MAIL
You may redeem or exchange Shares by mailing a written request to the Fund. You
will receive a redemption amount based on the next calculated NAV after the Fund
receives your written request in proper form. Send requests by mail to:
Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600
Send requests by PRIVATE COURIER OR OVERNIGHT DELIVERY SERVICE to:
Federated Shareholder Services Company
1099 Hingham Street
Rockland, MA 02370-3317
All requests must include:
* Fund Name and Share Class, account number and account registration;
* amount to be redeemed or exchanged;
* signatures of all shareholders exactly as registered; and
* IF EXCHANGING, the Fund Name and Share Class, account number and account
registration into which you are exchanging.
Call your investment professional or the Fund if you need special instructions.
SIGNATURE GUARANTEES
Signatures must be guaranteed if:
* your redemption will be sent to an address other than the address of
record;
* your redemption will be sent to an address of record that was changed
within the last 30 days;
* a redemption is payable to someone other than the shareholder(s) of
record; or
* IF EXCHANGING (TRANSFERRING) into another fund with a different shareholder
registration.
A signature guarantee is designed to protect your account from fraud. Obtain a
signature guarantee from a bank or trust company, savings association, credit
union or broker, dealer, or securities exchange member. A NOTARY PUBLIC CANNOT
PROVIDE A SIGNATURE GUARANTEE.
PAYMENT METHODS FOR REDEMPTIONS
Your redemption proceeds will be mailed by check to your address of record. The
following payment options are available if you complete the appropriate section
of the New Account Form or an Account Service Options Form. These payment
options require a signature guarantee if they were not established when the
account was opened:
* an electronic transfer to your account at a financial institution that is
an ACH member; or
* wire payment to your account at a domestic commercial bank that is a Federal
Reserve System member.
REDEMPTION IN KIND
Although the Fund intends to pay Share redemptions in cash, it reserves the
right to pay the redemption price in whole or in part by a distribution of the
Fund's portfolio securities.
LIMITATIONS ON REDEMPTION PROCEEDS
Redemption proceeds normally are wired or mailed within one business day after
receiving a request in proper form. Payment may be delayed up to seven days:
* to allow your purchase to clear;
* during periods of market volatility; or
* when a shareholder's trade activity or amount adversely impacts the Fund's
ability to manage its assets.
You will not accrue interest or dividends on uncashed checks from the Fund if
those checks are undeliverable and returned to the Fund.
EXCHANGE PRIVILEGE
You may exchange Shares of the Fund into Shares of the same class of another
Federated fund. To do this, you must:
* ensure that the account registrations are identical;
* meet any minimum initial investment requirements; and
* receive a prospectus for the fund into which you wish to exchange.
An exchange is treated as a redemption and a subsequent purchase, and is a
taxable transaction.
The Fund may modify or terminate the exchange privilege at any time. The Fund's
management or investment adviser may determine from the amount, frequency and
pattern of exchanges that a shareholder is engaged in excessive trading that is
detrimental to the Fund and other shareholders. If this occurs, the Fund may
terminate the availability of exchanges to that shareholder and may bar that
shareholder from purchasing other Federated Funds.
SYSTEMATIC WITHDRAWAL/EXCHANGE PROGRAM
You may automatically redeem or exchange Shares in a minimum amount of $100 on a
regular basis. Complete the appropriate section of the New Account Form or an
Account Service Options Form or contact your investment professional or the
Fund. Your account value must meet the minimum initial investment amount at the
time the program is established. This program may reduce, and eventually
deplete, your account. Payments should not be considered yield or income.
Generally, it is not advisable to continue to purchase Shares subject to a sales
charge while redeeming Shares using this program.
For SWP accounts established prior to April 1, 1999, your account must be at
least one year old in order to be eligible for the waiver of the CDSC.
ADDITIONAL CONDITIONS
TELEPHONE TRANSACTIONS
The Fund will record your telephone instructions. If the Fund does not follow
reasonable procedures, it may be liable for losses due to unauthorized or
fraudulent telephone instructions.
SHARE CERTIFICATES
The Fund no longer issues share certificates. If you are redeeming or exchanging
Shares represented by certificates previously issued by the Fund, you must
return the certificates with your written redemption or exchange request. For
your protection, send your certificates by registered or certified mail, but do
not endorse them.
Account and Share Information
CONFIRMATIONS AND ACCOUNT STATEMENTS
You will receive confirmation of purchases, redemptions and exchanges (except
for systematic transactions). In addition, you will receive periodic statements
reporting all account activity, including systematic transactions, dividends and
capital gains paid.
DIVIDENDS AND CAPITAL GAINS
The Fund declares and pays any dividends monthly to shareholders. Dividends are
paid to all shareholders invested in the Fund on the record date. The record
date is the date on which a shareholder must officially own Shares in order to
earn a dividend.
In addition, the Fund pays any capital gains at least annually. Your dividends
and capital gains distributions will be automatically reinvested in additional
Shares without a sales charge, unless you elect cash payments.
If you purchase Shares just before a Fund declares a capital gain distribution,
you will pay the full price for the Shares and then receive a portion of the
price back in the form of a taxable distribution, whether or not you reinvest
the distribution in Shares. Therefore, you should consider the tax implications
of purchasing Shares shortly before the Fund declares a capital gain. Contact
your investment professional or the Fund for information concerning when
dividends and capital gains will be paid.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, accounts may be
closed if redemptions or exchanges cause the account balance to fall below the
minimum initial investment amount. Before an account is closed, you will be
notified and allowed 30 days to purchase additional Shares to meet the minimum.
TAX INFORMATION
The Fund sends an annual statement of your account activity to assist you in
completing your federal, state and local tax returns. It is anticipated that
Fund distributions will be primarily dividends that are exempt from federal
income tax, although a portion of the Fund's dividends may not be exempt.
Dividends may be subject to state and local taxes, although the Federated
Michigan Intermediate Municipal Trust's dividends will be exempt from the
Michigan taxes discussed above to the extent they are derived from interest on
obligations exempt from such taxes. Capital gains and non-exempt dividends are
taxable whether paid in cash or reinvested in the Fund. Redemptions and
exchanges are taxable sales. Please consult your tax adviser regarding your
federal, state and local tax liability.
Who Manages the Fund?
The Board of Trustees governs the Fund. The Board selects and oversees the
Adviser, Federated Investment Management Company. The Adviser manages the Fund's
assets, including buying and selling portfolio securities. The Adviser's address
is Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, PA 15222-3779.
The Adviser and other subsidiaries of Federated advise approximately 175 mutual
funds and separate accounts, which totaled approximately $111 billion in assets
as of December 31, 1998. Federated was established in 1955 and is one of the
largest mutual fund investment managers in the United States with approximately
1,900 employees. More than 4,000 investment professionals make Federated Funds
available to their customers.
THE FUND'S PORTFOLIO MANAGERS ARE:
J. SCOTT ALBRECHT
J. Scott Albrecht has been the Fund's portfolio manager since March 1995. He is
Vice President of the Fund. Mr. Albrecht joined Federated in 1989. He has been a
Senior Portfolio Manager since 1997 and a Vice President of the Fund's Adviser
since 1994. He was a Portfolio Manager from 1994 to 1996. Mr. Albrecht is a
Chartered Financial Analyst and received his M.S. in Public Management from
Carnegie Mellon University.
LEE R. CUNNINGHAM II
Lee R. Cunningham II has been a portfolio manager of the Fund since May
1998. Mr. Cunningham joined Federated in 1995 as an Investment Analyst and
has been a Portfolio Manager since 1998. He was named an Assistant Vice
President of the Fund's 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.
ADVISORY FEES
The Adviser receives an annual investment advisory fee of 0.40% of the Fund's
average daily net assets. The Adviser may voluntarily waive a portion of its fee
or reimburse the Fund for certain operating expenses.
YEAR 2000 READINESS (UNAUDITED)
The "Year 2000" problem is the potential for computer errors or failures because
certain computer systems may be unable to interpret dates after December 31,
1999 or experience other date-related problems. The Year 2000 problem may cause
systems to process information incorrectly and could disrupt businesses, such as
the Fund, that rely on computers.
While it is impossible to determine in advance all of the risks to the Fund, the
Fund could experience interruptions in basic financial and operational
functions. Fund shareholders could experience errors or disruptions in Fund
share transactions or Fund communications.
The Fund's service providers are making changes to their computer systems to fix
any Year 2000 problems. In addition, they are working to gather information from
third-party providers to determine their Year 2000 readiness.
Year 2000 problems would also increase the risks of the Fund's investments. To
assess the potential effect of the Year 2000 problem, the Adviser is reviewing
information regarding the Year 2000 readiness of issuers of securities the Fund
may purchase. The financial impact of these issues for the Fund is still being
determined. There can be no assurance that potential Year 2000 problems would
not have a material adverse effect on the Fund.
Financial Information
FINANCIAL HIGHLIGHTS
The following Financial Highlights will help you understand the Fund's financial
performance for its past five fiscal years. Some of the information is presented
on a per share basis. Total returns represent the rate an investor would have
earned (or lost) on an investment in the Fund, assuming reinvestment of any
dividends and capital gains.
This information has been audited by Deloitte & Touche LLP, whose report, along
with the Fund's audited financial statements, is included in this prospectus.
Financial Highlights
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
Reference is made to the Independent Auditors' Report on page 34.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $11.09 $10.85 $10.70 $10.80 $10.59
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income 0.53 0.53 0.54 0.36 0.54
Net realized and
unrealized gain (loss) on
investments (0.47) 0.24 0.15 (0.10) 0.21
TOTAL FROM INVESTMENT
OPERATIONS 0.06 0.77 0.69 0.26 0.75
LESS DISTRIBUTIONS:
Distributions from net
investment income (0.53) (0.53) (0.54) (0.36) (0.54)
NET ASSET VALUE, END OF
PERIOD $10.62 $11.09 $10.85 $10.70 $10.80
TOTAL RETURN 1 0.47% 7.27% 6.59% 4.13% 7.39%
RATIOS TO AVERAGE NET
ASSETS:
Expenses 2 1.00% 1.05% 1.09% 1.13% 1.15%
Net investment income 2 4.31% 4.30% 4.41% 4.36% 4.54%
Expenses (after waivers) 0.50% 0.50% 0.50% 0.50% 0.50%
Net investment income
(after waivers) 4.81% 4.85% 5.00% 4.99% 5.19%
SUPPLEMENTAL DATA:
Net assets, end of period
(000 omitted) $74,510 $77,731 $67,592 $62,785 $60,621
Portfolio turnover 17% 15% 12% 7% 23%
</TABLE>
1 Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
2 During the period, certain fees were voluntarily waived. If such voluntary
waivers had not occurred, the ratios would have been as indicated.
See Notes which are an integral part of the Financial Statements
Portfolio of Investments
AUGUST 31, 1999
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING 1 VALUE
<C> <S> <C> <C>
LONG-TERM MUNICIPALS-96.0%
MICHIGAN-96.0%
$ 500,000 Avondale, MI, School
District, UT GO Refunding
Bonds, 6.75% (Michigan
State GTD)/ (Original
Issue Yield: 6.95%),
5/1/2014 AA+ $ 522,925
500,000 Battle Creek, MI, Building
Authority, Revenue Bonds,
6.00%, 4/1/2002 A+ 516,270
500,000 Battle Creek, MI, Building
Authority, Revenue Bonds,
6.10%, 4/1/2003 A+ 516,555
2,000,000 Battle Creek, MI, Downtown
Development Authority,
Refunding Bonds, 5.10%
(MBIA INS)/(Original Issue
Yield: 5.20%), 5/1/2010 AAA 1,981,220
1,060,000 Belding Area Schools, MI,
Refunding UT GO Bonds,
4.95% (Original Issue
Yield: 5.05%), 5/1/2014 AAA 1,001,647
1,500,000 Berkley, MI, CSD,
Refunding UT GO Bonds,
4.75% (FGIC INS)/(Original
Issue Yield: 5.05%),
1/1/2019 AAA 1,323,810
1,360,000 Chippewa Hills, MI, School
District, UT GO Bonds,
5.25% (Original
Issue Yield: 5.30%),
5/1/2014 AAA 1,341,436
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 484,182
3,000,000 Detroit, MI, Water Supply
System, Revenue Refunding
Bonds, 6.00% (FGIC
INS)/(Original Issue
Yield: 6.10%), 7/1/2002 AAA 3,137,340
1,000,000 Detroit, MI, UT GO Bonds
(Series 1999A), 5.00% (FSA
INS)/(Original Issue
Yield: 5.16%), 4/1/2019 AAA 919,660
1,000,000 Detroit/Wayne County, MI,
Stadium Authority, Revenue
Bonds, 5.25% (FGIC
INS)/(Original Issue
Yield: 5.55%), 2/1/2011 AAA 1,001,060
1,000,000 Eastern Michigan
University, Revenue Bonds,
6.10% (AMBAC INS)
(Original Issue Yield:
6.15%), 6/1/2004 AAA 1,049,670
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 202,666
425,000 Forest Hills, MI, Public
School, UT GO Bonds, 7.375%
(United States Treasury
PRF)/(Original Issue
Yield: 7.397%), 5/1/2115
(@101) AA 439,301
250,000 Garden City, MI, School District, UT GO Refunding Bonds, 5.90%
(FSA INS),
5/1/2005 AAA 265,675
565,000 Garden City, MI, School District, UT GO Refunding Bonds, 6.00%
(FSA INS),
5/1/2006 AAA 598,990
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING 1 VALUE
<C> <S> <C> <C>
LONG-TERM MUNICIPALS-
continued
MICHIGAN-CONTINUED
$ 515,000 Garden City, MI, School
District, UT GO Refunding
Bonds, 6.10% (FSA INS),
5/1/2007 AAA $ 548,295
150,000 Huron Valley, MI, School
District, UT GO Bonds,
6.50%(Michigan State GTD)
(United States Treasury
PRF), 5/1/2002 (@102) NR 158,267
465,000 Ingham County MI, Sewer
Authority, Revenue Bonds,
Project #4, Delhi Charter
Township, 5.90%, 11/1/2005 AA- 485,967
850,000 Jenison, MI, Public
Schools, UT GO School
Buillding and Site
Refunding Bonds, (Series
1996), 5.30% (FGIC
LOC)/(Original
Issue Yield: 5.40%),
5/1/2007 AAA 886,321
150,000 Jenison, MI, Public Schools, GO UT School Improvements, 5.30%
(FGIC LOC)/(Original Issue
Yield: 5.40%), 5/1/2007 AAA 154,899
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 280,214
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 438,825
500,000 Lake Orion, MI, School
District, UT GO Refunding
Bonds, 5.90% (Michigan
State GTD), (AMBAC INS)
5/1/2001 AAA 514,095
2,000,000 Lake Orion, MI, School District, UT GO Refunding Bonds, 6.05%
(Michigan State LOC), (AMBAC INS)
5/1/2002 AAA 2,088,740
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 1,348,715
750,000 Livonia, MI, Public School
District, UT GO Bonds
(Series I),
6.00%, 5/1/2001 AA+ 772,343
1,710,000 Marquette, MI, Hospital
Finance Authority,
Hospital Revenue
Refunding Bonds (1996
Series D), 5.30%
(Marquette General
Hospital, MI), 4/1/2005 AAA 1,754,323
1,290,000 Marquette, MI, Hospital
Finance Authority,
Hospital Revenue
Refunding Bonds (1996
Series D), 5.40%
(Marquette General
Hospital, MI), 4/1/2006 AAA 1,326,817
1,350,000 Michigan Higher Education
Student Loan Authority,
Student Loan Revenue
Bonds, Series XVII-A,
5.65% (AMBAC LOC),
6/1/2010 AAA 1,381,860
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING 1 VALUE
<S> <C> <C> <C>
LONG-TERM MUNICIPALS-
continued
MICHIGAN-CONTINUED
$ 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+ $ 1,564,845
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- 3,121,860
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- 1,031,170
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- 1,051,270
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 1,860,760
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 940,070
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- 1,277,022
415,000 Michigan State Hospital
Finance Authority, Revenue
Bonds (Series A), 6.15%
(Crittenton Hospital, MI),
3/1/2001 A+ 425,421
440,000 Michigan State Hospital
Finance Authority, Revenue
Bonds (Series A), 6.25%
(Crittenton Hospital, MI),
3/1/2002 A+ 457,226
1,000,000 Michigan State Hospital
Finance Authority, Revenue
Bonds, 5.25% (St. John
Hospital, MI)/(Original
Issue Yield: 5.65%),
5/15/2026 AAA 927,590
500,000 Michigan State Hospital
Finance Authority, Revenue
Bonds,
Providence Hospital, 7.00%
(Daughters of
Charity)/(Original Issue
Yield: 7.04%), 11/1/2021 NR 538,075
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+ 1,526,850
800,000 Michigan State Hospital
Finance Authority, Revenue
Refunding Bonds, 5.95%
(Oakwood Obligated
Group)/(Original Issue
Yield: 6.05%), 5/1/2002 AAA 830,112
575,000 Michigan State Hospital
Finance Authority, Revenue
Refunding Bonds, 6.30%
(Sparrow Obligated Group,
MI)/(MBIA INS), 11/15/2003 AAA 606,269
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING 1 VALUE
<C> <S> <C> <C>
LONG-TERM MUNICIPALS-
continued
MICHIGAN-CONTINUED
$ 1,000,000 Michigan State Housing
Development Authority,
(Series A), Rental Housing
Revenue Bonds, 5.55%,
4/1/2004 AAA $ 1,025,480
500,000 Michigan State Housing
Development Authority,
Revenue Bonds (Series A),
5.90%, 12/1/2005 AA+ 520,565
430,000 Michigan State Housing
Development Authority,
Revenue Bonds (Series A),
6.25%, 6/1/2002 AA+ 443,833
200,000 Michigan State Housing
Development Authority,
Revenue Bonds (Series A),
7.00%, 12/1/2005 AA+ 206,898
280,000 Michigan State Housing
Development Authority,
Revenue Bonds (Series B),
6.30%, 12/1/2003 AA+ 291,976
1,000,000 Michigan State Housing
Development Authority,
Revenue Bonds (Series E),
5.55%, 12/1/2007 AA+ 1,018,580
95,000 Michigan State Housing
Development Authority,
Single Family Mortgage
Revenue Bonds (Series B),
6.95%, 12/1/2020 AA+ 98,294
1,000,000 Michigan State, UT GO
Recreation Program Bonds,
5.75% (Original Issue
Yield: 5.80%), 11/1/2001 AA+ 1,034,130
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 281,743
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 456,310
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 4,551,538
1,000,000 Novi, MI, Community School
District, UT GO Bonds, Q-
SBLF, 5.45% (Original
Issue Yield: 5.50%),
5/1/2003 AA+ 1,033,250
300,000 Oakland & Washtenaw
Counties, MI, Revenue
Bonds, 6.65% (Oakland
Community College
District, MI)/(Original
Issue Yield: 6.743%),
5/1/2011 AA- 321,030
1,765,000 Oakland County, MI, EDC,
Limited Obligation Revenue
Bonds (Series 1997), 5.50%
(Lutheran Social Services
of Michigan)/(First of
America Bank LOC),
6/1/2014 NR 1,730,794
250,000 Oakland County, MI, LT GO
Bonds, Evergreen-
Farmington Sewer Disposal,
6.30%, 5/1/2005 AAA 258,778
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING 1 VALUE
<C> <S> <C> <C>
LONG-TERM MUNICIPALS-
continued
MICHIGAN-CONTINUED
$ 610,000 Okemos, MI, Public School
District, UT GO Refunding
Bonds, Q-SBLF, 6.00%,
5/1/2002 AA+ $ 637,310
100,000 Ottawa County, MI,, LT GO
Bonds, Northwest Ottawa
Water System, 6.85%,
5/1/2000 AA 100,487
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 907,450
400,000 Plymouth-Canton, MI,
Community School District,
UT GO Bonds (Series C), Q-
SBLF, 6.00% (Original
Issue Yield: 6.10%),
5/1/2003 AA+ 424,336
500,000 Plymouth-Canton, MI,
Community School District,
UT GO Refunding Bonds
(Series B), Q-SBLF, 6.80%
(United States Treasury
PRF)/(Original Issue
Yield: 6.90%), 5/1/2017
(@101) AA+ 525,855
615,000 Riverview, MI, Community
School District, UT GO
Bonds, 6.20% (United
States Treasury PRF),
5/1/2004 (@101.5) AAA 653,376
570,000 Riverview, MI, Community
School District, UT GO
Bonds, 6.20% (United
States Treasury PRF),
5/1/2003 (@101.5) AAA 605,568
350,000 Rochester, MI, Community
School District, UT GO
Bonds, 6.50% (United
States Treasury
PRF)/(Original Issue
Yield: 6.60%), 5/1/2007
(@100) AA+ 369,404
250,000 Rochester, MI, Community
School District, UT GO
Bonds, 6.50% (United
States Treasury
PRF)/(Original Issue
Yield: 6.75%), 5/1/2011
(@100) AA+ 263,860
270,000 Shelby Charter Townships,
MI, Building Authority,
Revenue Bonds, 6.25%
(Original Issue Yield:
6.45%), 11/1/2006 AAA 286,815
230,000 Shelby Charter Townships,
MI, Building Authority,
Revenue Bonds, 6.25%
(Original Issue Yield:
6.50%), 11/1/2007 AAA 244,323
250,000 University of Michigan,
Hospital Revenue Bonds,
7.00% (United States
Treasury PRF)/ (Original
Issue Yield: 7.25%),
12/1/2021 (@102) AA 263,834
1,500,000 University of Michigan,
Hospital Revenue Refunding
Bonds (Series A), 5.70%
(Original Issue Yield:
5.80%), 12/1/2004 AA 1,581,345
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 1,024,280
1,000,000 Wayne County, MI, Airport
Revenue Bonds (Series
1998A), 5.00% (Detroit
Metropolitan Wayne County
Airport)/(Original Issue
Yield: 5.29%), 12/1/2019 AAA 902,560
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 1,023,410
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING 1 VALUE
<C> <S> <C> <C>
LONG-TERM MUNICIPALS-
continued
MICHIGAN-CONTINUED
$ 2,000,000 Wayne State University,
MI, General Revenue Bonds
(Series 1999), 5.375%,
11/15/2014 AAA $ 1,995,720
885,000 Wyandotte, MI, Electric
Authority, Revenue
Refunding Bonds,
6.10%, 10/1/2002 AAA 931,204
1,000,000 Yale, MI, Public Schools
District, UT GO Bonds,
5.25% (FSA INS)/(Original
Issue Yield: 5.30%),
5/1/2017 NR 965,870
1,000,000 Ypsilanti, MI, School District, UT GO Refunding Bonds (Series
1998), 4.95% (Q-SBLF GTD)/(FGIC INS)/(Original Issue
Yield: 4.97%), 5/1/2015 AAA 930,640
TOTAL 71,511,474
TOTAL INVESTMENT
(IDENTIFIED COST
$70,288,865) 2 $ 71,511,474
</TABLE>
Securities that are subject to alternative minimum tax represent 7.1% of the
Fund's portfolio as calculated based upon total market value.
1 Please refer to the Appendix of the Statement of Additional Information for an
explanation of the credit ratings. Current credit ratings are unaudited.
2 The cost of investments for federal tax purposes amounts to $70,288,865. The
net unrealized appreciation of investments on a federal tax basis amounts to
$1,222,609 which is comprised of $2,048,448 appreciation and $825,839
depreciation at August 31, 1999.
Note: The categories of investments are shown as a percentage of net assets
($74,509,883) at August 31, 1999.
The following acronyms are used throughout this portfolio:
AMBAC -American Municipal Bond Assurance Corporation CSD -Central School
District EDC -Economic Development Commission FGIC -Financial Guaranty Insurance
Company FSA -Financial Security Assurance GO -General Obligation GTD -Guaranty
INS -Insured LOC -Letter of Credit LT -Limited Tax MBIA -Municipal Bond
Investors Assurance PCR -Pollution Control Revenue PRF -Prerefunded Q-SBLF
- -Qualified State Bond Loan Fund UT -Unlimited Tax
See Notes which are an integral part of the Financial Statements
Statement of Assets and Liabilities
AUGUST 31, 1999
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS:
Total investments in
securities, at value
(identified and tax cost
$70,288,865) $ 71,511,474
Income receivable 1,146,575
Receivable for investments
sold 3,158,341
Prepaid expenses 16,441
TOTAL ASSETS 75,832,831
LIABILITIES:
Payable for investments
purchased $ 1,000,000
Payable for shares
redeemed 58,834
Income distribution
payable 245,577
Payable to bank 18,537
TOTAL LIABILITIES 1,322,948
Net assets for 7,013,942
shares outstanding $ 74,509,883
NET ASSETS CONSIST OF:
Paid in capital $ 74,308,459
Net unrealized
appreciation of
investments 1,222,609
Accumulated net realized
loss on investments (1,021,185)
TOTAL NET ASSETS $ 74,509,883
NET ASSET VALUE, OFFERING
PRICE AND REDEMPTION
PROCEEDS PER SHARE:
Net Asset Value Per Share
($74,509,883 / 7,013,942
shares outstanding) $10.62
Offering Price Per Share
(100/97.00 of $10.62) 1 $10.95
Redemption Proceeds Per
Share (100.00/100 of
$10.62) 2 $10.62
</TABLE>
1 See "What Do Shares Cost?" in the Prospectus.
2 See "Sales Charge When You Redeem" in the Prospectus.
See Notes which are an integral part of the Financial Statements
Statement of Operations
YEAR ENDED AUGUST 31, 1999
<TABLE>
<CAPTION>
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest $ 4,222,290
EXPENSES:
Investment advisory fee $ 317,944
Administrative personnel
and services fee 125,000
Custodian fees 5,467
Transfer and dividend
disbursing agent fees and
expenses 28,359
Directors'/Trustees' fees 2,964
Auditing fees 13,927
Legal fees 5,507
Portfolio accounting fees 56,604
Shareholder services fee 198,715
Share registration costs 16,666
Printing and postage 19,057
Insurance premiums 1,391
Miscellaneous 3,237
TOTAL EXPENSES 794,838
WAIVERS:
Waiver of investment
advisory fee $ (250,823)
Waiver of shareholder
services fee (143,075)
TOTAL WAIVERS (393,898)
Net expenses 400,940
Net investment income 3,821,350
REALIZED AND UNREALIZED
LOSS ON INVESTMENTS:
Net realized loss on
investments (254,529)
Net change in unrealized
depreciation of
investments (3,186,245)
Net realized and
unrealized loss on
investments (3,440,774)
Change in net assets
resulting from operations $ 380,576
</TABLE>
See Notes which are an integral part of the Financial Statements
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31 1999 1998
<S> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS
OPERATIONS:
Net investment income $ 3,821,350 $ 3,483,095
Net realized gain (loss) on
investments (($254,529)
and $359,864,
respectively, as computed
for federal tax purposes) (254,529) 359,864
Net change in unrealized
appreciation/(depreciation) (3,186,245) 1,226,386
CHANGE IN NET ASSETS
RESULTING FROM OPERATIONS 380,576 5,069,345
DISTRIBUTIONS TO
SHAREHOLDERS:
Distributions from net
investment income (3,821,350) (3,483,095)
SHARE TRANSACTIONS:
Proceeds from sale of
shares 19,980,873 25,850,735
Net asset value of shares
issued to shareholders in
payment of
distributions declared 859,921 712,814
Cost of shares redeemed (20,621,254) (18,010,272)
CHANGE IN NET ASSETS
RESULTING FROM
SHARE TRANSACTIONS 219,540 8,553,277
Change in net assets (3,221,234) 10,139,527
NET ASSETS:
Beginning of period 77,731,117 67,591,590
End of period $ 74,509,883 $ 77,731,117
</TABLE>
See Notes which are an integral part of the Financial Statements
Notes to Financial Statements
AUGUST 31, 1999
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 six 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 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 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, 1999, the Fund, for federal tax purposes, had a capital loss
carryforward of $649,939, 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
2004 $649,939
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 1999 1998
<S> <C> <C>
Shares sold 1,815,843 2,352,166
Shares issued to
shareholders in payment of
distributions declared 78,349 64,867
Shares redeemed (1,887,770) (1,639,057)
NET CHANGE RESULTING FROM
SHARE TRANSACTIONS 6,422 777,976
</TABLE>
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE
Federated Investment Management Company, 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.
SHAREHOLDER SERVICES FEE
Under the terms of a Shareholder Services Agreement with Federated Shareholder
Services Company ("FSSC"), the Fund will pay FSSC up to 0.25% of average daily
net assets of the Fund for the period. The fee paid to FSSC is used to finance
certain services for shareholders and to maintain shareholder accounts. FSSC may
voluntarily choose to waive any portion of its fee. FSSC 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 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, 1999, the Trust engaged in purchase and sales
transactions with funds that have a common investment adviser (or affiliated
advisers), common Directors/Trustees, and/or common officers. These purchase and
sales transactions were made at current market value pursuant to Rule 17a-7
under the Act amounting to $19,400,000 and $22,000,000, 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, 1999, were as follows:
Purchases $ 13,449,748
Sales $ 14,005,836
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, 1999, 39.2% 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 percentage of investments insured
by or supported (backed) by a letter of credit from any one institution or
agency did not exceed 14.1% 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 FEDERATED 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, 1999, the related statement of operations for the year then
ended, the statement of changes in net assets for the years ended August 31,
1999 and 1998, 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, 1999, 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, 1999, 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
Boston, Massachusetts
October 15, 1999
[Graphic]
Federated
World-Class Investment Manager
PROSPECTUS
Federated Michigan Intermediate Municipal Trust
A Portfolio of Federated Municipal Securities Income Trust
PROSPECTUS
OCTOBER 31, 1999
A Statement of Additional Information (SAI) dated October 31, 1999, is
incorporated by reference into this prospectus. Additional information about the
Fund's investments is contained in the Fund's Annual and SemiAnnual Reports to
shareholders as they become available. The Annual Report's Management Discussion
& Analysis discusses market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year. To
obtain the SAI, Annual Report, Semi-Annual Report and other information without
charge, and make inquiries, call your investment professional or the Fund at
1-800-341-7400.
You can obtain information about the Fund (including the SAI) by writing to or
visiting the Public Reference Room in Washington, D.C. You may also access fund
information from the EDGAR Database on the SEC's Internet site at
http://www.sec.gov. You can purchase copies of this information by contacting
the SEC by email at [email protected] or by writing to the SEC's Public
Reference Section, Washington, D.C. 20549-0102. Call 1-202- 942-8090 for
information on the Public Reference Room's operations and copying fees.
[Graphic]
Federated
Federated Michigan Intermediate Municipal Trust
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
1-800-341-7400
WWW.FEDERATEDINVESTORS.COM
Federated Securities Corp., Distributor
Investment Company Act File No. 811-6165
Cusip 625922703
G01389-01 (10/99)
[Graphic]
STATEMENT OF ADDITIONAL INFORMATION
Federated Michigan Intermediate Municipal Trust
A Portfolio of Federated Municipal Securities Income Trust
This Statement of Additional Information (SAI) is not a prospectus. Read this
SAI in conjunction with the prospectus for Federated Michigan Intermediate
Municipal Trust (Fund), dated October 31, 1999. Obtain the prospectus and the
Annual Report's Management Discussion and Analysis without charge by calling
1-800-341-7400.
OCTOBER 31, 1999
[Graphic]
Federated
World-Class Investment Manager
Federated Michigan Intermediate
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
1-800-341-7400
WWW.FEDERATEDINVESTORS.COM
Federated Securities Corp., Distributor
1041202B (10/99)
[Graphic]
CONTENTS
How is the Fund Organized? 1
Securities in Which the Fund Invests 1
What Do Shares Cost? 4
How is the Fund Sold? 5
Subaccounting Services 5
Redemption in Kind 5
Massachusetts Partnership Law 6
Account and Share Information 6
Tax Information 6
Who Manages and Provides Services to the Fund? 7
How Does the Fund Measure Performance? 10
Who is Federated Investors, Inc.? 11
Investment Ratings 13
Addresses 15
How is the Fund Organized?
The Fund is a non-diversified portfolio of Federated Municipal Securities Income
Trust (Trust). The Trust is an open-end, management investment company that was
established under the laws of the Commonwealth of Massachusetts on August 6,
1990. The Trust may offer separate series of shares representing interests in
separate portfolios of securities. The Fund changed its name from Michigan
Intermediate Municipal Trust to Federated Michigan Intermediate Municipal Trust
on March 31, 1996. Effective October 1, 1999, the Trust changed its name from
Municipal Securities Income Trust to Federated Municipal Securities Income
Trust. The Fund's investment adviser is Federated Investment Management Company
(Adviser). The Adviser, formerly known as Federated Advisers, changed its name
effective March 31, 1999.
Securities in Which the Fund Invests
The Fund's principal securities are described in its prospectus. Additional
securities, and further information regarding the principal securities, are
outlined below. In pursuing its investment strategy, the Fund may invest in the
following securities for any purpose that is consistent with its investment
objective.
SECURITIES DESCRIPTIONS AND TECHNIQUES
FIXED INCOME SECURITIES
Fixed income securities pay interest, dividends or distributions at a specified
rate. The rate may be a fixed percentage of the principal or adjusted
periodically. In addition, the issuer of a fixed income security must repay the
principal amount of the security, normally within a specified time. Fixed income
securities provide more regular income than equity securities. However, the
returns on fixed income securities are limited and normally do not increase with
the issuer's earnings. This limits the potential appreciation of fixed income
securities as compared to equity securities.
A security's yield measures the annual income earned on a security as a
percentage of its price. A security's yield will increase or decrease depending
upon whether it costs less (a discount) or more (a premium) than the principal
amount. If the issuer may redeem the security before its scheduled maturity, the
price and yield on a discount or premium security may change based upon the
probability of an early redemption. Securities with higher risks generally have
higher yields.
TAX EXEMPT SECURITIES
Tax exempt securities are fixed income securities that pay interest that is not
subject to federal regular income taxes. Typically, states, counties, cities and
other political subdivisions and authorities issue tax exempt securities. The
market categorizes tax exempt securities by their source of repayment.
MUNICIPAL NOTES
Municipal notes are short-term tax exempt securities. Many municipalities issue
such notes to fund their current operations before collecting taxes or other
municipal revenues. Municipalities may also issue notes to fund capital projects
prior to issuing long-term bonds. The issuers typically repay the notes at the
end of their fiscal year, either with taxes, other revenues or proceeds from
newly issued notes or bonds.
VARIABLE RATE DEMAND INSTRUMENTS
Variable rate demand instruments are tax exempt securities that require the
issuer or a third party, such as a dealer or bank, to repurchase the security
for its face value upon demand. The securities also pay interest at a variable
rate intended to cause the securities to trade at their face value. The Fund
treats demand instruments as short-term securities, because their variable
interest rate adjusts in response to changes in market rates, even though their
stated maturity may extend beyond 13 months.
TAX INCREMENT FINANCING BONDS
Tax increment financing (TIF) bonds are payable from increases in taxes or other
revenues attributable to projects financed by the bonds. For example, a
municipality may issue TIF bonds to redevelop a commercial area. The TIF bonds
would be payable solely from any increase in sales taxes collected from
merchants in the area. The bonds could default if merchants' sales, and related
tax collections, failed to increase as anticipated.
CREDIT ENHANCEMENT
Common types of credit enhancement include guarantees, letters of credit, bond
insurance and surety bonds. Credit enhancement also includes arrangements where
securities or other liquid assets secure payment of a fixed income security. If
a default occurs, these assets may be sold and the proceeds paid to the
security's holders. Either form of credit enhancement reduces credit risks by
providing another source of payment for a fixed income security.
DERIVATIVE CONTRACTS
Derivative contracts are financial instruments that require payments based upon
changes in the values of designated (or underlying) securities, currencies,
commodities, financial indices or other assets. Some derivative contracts (such
as futures, forwards and options) require payments relating to a future trade
involving the underlying asset. The other party to a derivative contract is
referred to as a counterparty.
Many derivative contracts are traded on securities or commodities exchanges. In
this case, the exchange sets all the terms of the contract except for the price.
Investors make payments due under their contracts through the exchange. Most
exchanges require investors to maintain margin accounts through their brokers to
cover their potential obligations to the exchange. Parties to the contract make
(or collect) daily payments to the margin accounts to reflect losses (or gains)
in the value of their contracts. This protects investors against potential
defaults by the counterparty. Trading contracts on an exchange also allows
investors to close out their contracts by entering into offsetting contracts.
For example, the Fund could close out an open contract to buy an asset at a
future date by entering into an offsetting contract to sell the same asset on
the same date. If the offsetting sale price is more than the original purchase
price, the Fund realizes a gain; if it is less, the Fund realizes a loss.
Exchanges may limit the amount of open contracts permitted at any one time. Such
limits may prevent the Fund from closing out a position. If this happens, the
Fund will be required to keep the contract open (even if it is losing money on
the contract), and to make any payments required under the contract (even if it
has to sell portfolio securities at unfavorable prices to do so). Inability to
close out a contract could also harm the Fund by preventing it from disposing of
or trading any assets it has been using to secure its obligations under the
contract.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest its assets in securities of other investment companies,
including the securities of affiliated money market funds, as an efficient means
of carrying out its investment policies and managing its uninvested cash.
TEMPORARY DEFENSIVE INVESTMENTS
The Fund may make temporary defensive investments in the following taxable
securities:
REPURCHASE AGREEMENTS
Repurchase agreements are transactions in which the Fund buys a security from a
dealer or bank and agrees to sell the security back at a mutually agreed upon
time and price. The repurchase price exceeds the sale price, reflecting the
Fund's return on the transaction. This return is unrelated to the interest rate
on the underlying security. The Fund will enter into repurchase agreements only
with banks and other recognized financial institutions, such as securities
dealers, deemed creditworthy by the Adviser.
The Fund's custodian or subcustodian will take possession of the securities
subject to repurchase agreements. The Adviser or subcustodian will monitor the
value of the underlying security each day to ensure that the value of the
security always equals or exceeds the repurchase price.
Repurchase agreements are subject to credit risks.
REVERSE REPURCHASE AGREEMENTS
Reverse repurchase agreements are repurchase agreements in which the Fund is the
seller (rather than the buyer) of the securities, and agrees to repurchase them
at an agreed upon time and price. A reverse repurchase agreement may be viewed
as a type of borrowing by the Fund. Reverse repurchase agreements are subject to
credit risks. In addition, reverse repurchase agreements create leverage risks
because the Fund must repurchase the underlying security at a higher price,
regardless of the market value of the security at the time of repurchase.
TREASURY SECURITIES
Treasury securities are direct obligations of the federal government of the
United States.
BANK INSTRUMENTS
Bank instruments are unsecured interest bearing deposits with banks. Bank
instruments include bank accounts, time deposits, certificates of deposit and
banker's acceptances.
AGENCY SECURITIES
Agency securities are issued or guaranteed by a federal agency or other
government sponsored entity acting under federal authority (a GSE). The United
States supports some GSEs with its full faith and credit. Other GSEs receive
support through federal subsidies, loans or other benefits. A few GSEs have no
explicit financial support, but are regarded as having implied support because
the federal government sponsors their activities.
CORPORATE DEBT SECURITIES
Corporate debt securities are fixed income securities issued by businesses.
Notes, bonds, debentures and commercial paper are the most prevalent types of
corporate debt securities.
COMMERCIAL PAPER
Commercial paper is an issuer's obligation with a maturity of less than nine
months. Companies typically issue commercial paper to pay for current
expenditures. Most issuers constantly reissue their commercial paper and use the
proceeds (or bank loans) to repay maturing paper. If the issuer cannot continue
to obtain liquidity in this fashion, its commercial paper may default. The short
maturity of commercial paper reduces both the market and credit risks as
compared to other debt securities of the same issuer.
INVESTMENT RISKS
There are many factors which may affect an investment in the Fund. The Fund's
principal risks are described in its prospectus. Additional risk factors are
outlined below.
CREDIT RISKS
Fixed income securities generally compensate for greater credit risk by paying
interest at a higher rate. The difference between the yield of a security and
the yield of a AAA municipal security with a comparable maturity (the spread)
measures the additional interest paid for risk. Spreads may increase generally
in response to adverse economic or market conditions. A security's spread may
also increase if the security's rating is lowered, or the security is perceived
to have an increased credit risk. An increase in the spread will cause the price
of the security to decline.
LIQUIDITY RISKS
Trading opportunities are more limited for fixed income securities that have not
received any credit ratings or are not widely held.
Limited trading opportunities may make it more difficult to sell or buy a
security at a favorable price or time. Consequently, the Fund may have to accept
a lower price to sell a security, sell other securities to raise cash or give up
an investment opportunity, any of which could have a negative effect on the
Fund's performance. Infrequent trading of securities may also lead to an
increase in their price volatility.
FUNDAMENTAL INVESTMENT OBJECTIVE
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
Michigan and Michigan municipalities. The investment objective may not be
changed by the Fund's Trustees without shareholder approval.
INVESTMENT LIMITATIONS
BORROWING MONEY AND ISSUING SENIOR SECURITIES
The Fund may borrow money, directly or indirectly, and issue senior securities
to the maximum extent permitted under the 1940 Act.
INVESTING IN REAL ESTATE
The Fund may not purchase or sell real estate, provided that this restriction
does not prevent the Fund from investing in issuers which invest, deal, or
otherwise engage in transactions in real estate or interests therein, or
investing in securities that are secured by real estate or interests therein.
The Fund may exercise its rights under agreements relating to such securities,
including the right to enforce security interests and to hold real estate
acquired by reason of such enforcement until that real estate can be liquidated
in an orderly manner.
INVESTING IN COMMODITIES
The Fund may not purchase or sell physical commodities, provided that the Fund
may purchase securities of companies that deal in commodities.
UNDERWRITING
The Fund may not underwrite the securities of other issuers, except that the
Fund may engage in transactions involving the acquisition, disposition or resale
of its portfolio securities, under circumstances where it may be considered to
be an underwriter under the Securities Act of 1933.
LENDING CASH OR SECURITIES
The Fund may not make loans, provided that this restriction does not prevent the
Fund from purchasing debt obligations, entering into repurchase agreements,
lending its assets to broker/dealers or institutional investors and investing in
loans, including assignments and participation interests.
CONCENTRATION OF INVESTMENTS
The Fund will not make investments that will result in the concentration of its
investments in the securities of issuers primarily engaged in the same industry.
Government securities, municipal securities and bank instruments will not be
deemed to constitute an industry.
THE ABOVE LIMITATIONS CANNOT BE CHANGED UNLESS AUTHORIZED BY THE BOARD AND BY
THE "VOTE OF A MAJORITY OF ITS OUTSTANDING VOTING SECURITIES," AS DEFINED BY THE
INVESTMENT COMPANY ACT 1940. THE FOLLOWING LIMITATIONS, HOWEVER, MAY BE CHANGED
BY THE BOARD WITHOUT SHAREHOLDER APPROVAL. SHAREHOLDERS WILL BE NOTIFIED BEFORE
ANY MATERIAL CHANGE IN THESE LIMITATIONS BECOMES EFFECTIVE.
BUYING ON MARGIN
The Fund will not purchase securities on margin, provided that the Fund may
obtain short-term credits necessary for the clearance of purchases and sales of
securities, and further provided that the Fund may make margin deposits in
connection with its use of financial options and futures, forward and spot
currency contracts, swap transactions and other financial contracts or
derivative instruments.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any of its assets, provided
that this shall not apply to the transfer of securities in connection with any
permissible borrowing or to collateral arrangements in connection with
permissible activities.
INVESTING IN ILLIQUID SECURITIES
The Fund will not purchase securities for which there is no readily available
market, or enter into repurchase agreements or purchase time deposits maturing
in more than seven days, if immediately after and as a result, the value of such
securities would exceed, in the aggregate, 15% of the Fund's net assets.
RESTRICTED SECURITIES
The Fund may not invest its securities subject to restrictions on resale under
the Securities Act of 1933.
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.
In applying the Fund's commodities limitation, investments in transactions
involving futures contracts and options, forward currency contracts, swap
transactions and other financial contracts that settle by payment of cash are
not deemed to be investments in commodities.
In applying the Fund's concentration restriction: (a) utility companies will be
divided according to their services, for example, gas, gas transmission,
electric and telephone will each be considered a separate industry; (b)
financial service companies will be classified according to the end users of
their services, for example, automobile finance, bank finance and diversified
finance will each be considered a separate industry; and (c) asset-backed
securities will be classified according to the underlying assets securing such
securities.
To conform to the current view of the SEC that only domestic bank instruments
may be excluded from industry concentration limitations, as a matter of
non-fundamental policy, the Fund will not exclude foreign bank instruments from
industry concentration limits as long as the policy of the SEC remains in
effect. The Fund will consider concentration to be the investment of more than
25% of the value of its total assets in any one industry.
DETERMINING MARKET VALUE OF SECURITIES
Market values of the Fund's portfolio securities are determined as follows:
* for fixed income securities, at the last sale price on a national securities
exchange, if available, otherwise, as determined by an independent pricing
service;
* futures contracts and options are generally valued at market values
established by the exchanges on which they are traded at the close of trading on
such exchanges. Options traded in the over-the-counter market are generally
valued according to the mean between the last bid and the last asked price for
the option as provided by an investment dealer or other financial institution
that deals in the option. The Board may determine in good faith that another
method of valuing such investments is necessary to appraise their fair market
value;
* for short-term obligations, according to the mean between bid and asked prices
as furnished by an independent pricing service, except that short-term
obligations with remaining maturities of less than 60 days at the time of
purchase may be valued at amortized cost or at fair market value as determined
in good faith by the Board; and
* for all other securities at fair value as determined in good faith by the
Board.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may consider institutional trading in
similar groups of securities, yield, quality, stability, risk, coupon rate,
maturity, type of issue, trading characteristics, and other market data or
factors. From time to time, when prices cannot be obtained from an independent
pricing service, securities may be valued based on quotes from broker-dealers or
other financial institutions that trade the securities.
What Do Shares Cost?
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.
REDUCING OR ELIMINATING THE FRONT-END SALES CHARGE
You can reduce or eliminate the applicable front-end sales charge, as follows:
QUANTITY DISCOUNTS
Larger purchases of the same Share class reduce or eliminate the sales charge
you pay. You can combine purchases of Shares made on the same day by you, your
spouse and your children under age 21. In addition, purchases made at one time
by a trustee or fiduciary for a single trust estate or a single fiduciary
account can be combined.
ACCUMULATED PURCHASES
If you make an additional purchase of Shares, you can count previous Share
purchases still invested in the Fund in calculating the applicable sales charge
on the additional purchase.
CONCURRENT PURCHASES
You can combine concurrent purchases of the same share class of two or more
Federated Funds in calculating the applicable sales charge.
LETTER OF INTENT
You can sign a Letter of Intent committing to purchase a certain amount of
Shares within a 13-month period to combine such purchases in calculating the
sales charge. The Fund's custodian will hold Shares in escrow equal to the
maximum applicable sales charge. If you complete the Letter of Intent, the
Custodian will release the Shares in escrow to your account. If you do not
fulfill the Letter of Intent, the Custodian will redeem the appropriate amount
from the Shares held in escrow to pay the sales charges that were not applied to
your purchases.
REINVESTMENT PRIVILEGE
You may reinvest, within 120 days, your Share redemption proceeds at the next
determined NAV without any sales charge.
PURCHASES BY AFFILIATES OF THE FUND
The following individuals and their immediate family members may buy Shares at
NAV without any sales charge because there are nominal sales efforts associated
with their purchases:
* the Trustees or Directors, employees and sales representatives of the
Fund, the Adviser, the Distributor and their affiliates;
* any associated person of an investment dealer who has a sales agreement
with the Distributor; and
* trusts, pension or profit-sharing plans for these individuals.
FEDERATED LIFE MEMBERS
Shareholders of the Fund known as "Federated Life Members" are exempt from
paying any front-end sales charge. These shareholders joined the Fund
originally:
* through the "Liberty Account," an account for Liberty Family of Funds
shareholders on February 28, 1987 (the Liberty Account and Liberty Family of
Funds are no longer marketed); or
* as Liberty Account shareholders by investing through an affinity group prior
to August 1, 1987.
REDUCING OR ELIMINATING THE CONTINGENT DEFERRED SALES CHARGE
These reductions or eliminations are offered because: no sales commissions have
been advanced to the investment professional selling Shares; the shareholder has
already paid a Contingent Deferred Sales Charge (CDSC); or nominal sales efforts
are associated with the original purchase of Shares.
Upon notification to the Distributor or the Fund's transfer agent, no CDSC will
be imposed on redemptions:
* following the death or post-purchase disability, as defined in Section
72(m)(7) of the Internal Revenue Code of 1986, of the last surviving
shareholder;
* of Shares that represent a reinvestment within 120 days of a
previous redemption;
* of Shares held by the Trustees or Directors, employees, and sales
representatives of the Fund, the Adviser, the Distributor and their affiliates;
employees of any investment professional that sells Shares according to a sales
agreement with the Distributor; and the immediate family members of the above
persons;
* of Shares originally purchased through a bank trust department, a registered
investment adviser or retirement plans where the third party administrator has
entered into certain arrangements with the Distributor or its affiliates, or any
other investment professional, to the extent that no payments were advanced for
purchases made through these entities; and
* which are involuntary redemptions processed by the Fund because the accounts
do not meet the minimum balance requirements.
How is the Fund Sold?
Under the Distributor's Contract with the Fund, the Distributor (Federated
Securities Corp.) offers Shares on a continuous, best-efforts basis.
FRONT-END SALES CHARGE REALLOWANCES
The Distributor receives a front-end sales charge on certain Share sales. The
Distributor generally pays up to 90% (and as much as 100%) of this charge to
investment professionals for sales and/or administrative services. Any payments
to investment professionals in excess of 90% of the front-end sales charge are
considered supplemental payments. The Distributor retains any portion not paid
to an investment professional.
SHAREHOLDER SERVICES
The Fund may pay Federated Shareholder Services Company, a subsidiary of
Federated Investors, Inc. (Federated), for providing shareholder services and
maintaining shareholder accounts. Federated Shareholder Services Company may
select others to perform these services for their customers and may pay them
fees.
SUPPLEMENTAL PAYMENTS
Investment professionals may be paid fees out of the assets of the Distributor
and/or Federated Shareholder Services Company (but not out of Fund assets). The
Distributor and/or Federated Shareholder Services Company may be reimbursed by
the Adviser or its affiliates.
Investment professionals receive such fees for providing
distribution-related or shareholder services such as sponsoring sales, providing
sales literature, conducting training seminars for employees, and engineering
sales-related computer software programs and systems. Also, investment
professionals may be paid cash or promotional incentives, such as reimbursement
of certain expenses relating to attendance at informational meetings about the
Fund or other special events at recreational-type facilities, or items of
material value. These payments will be based upon the amount of Shares the
investment professional sells or may sell and/or upon the type and nature of
sales or marketing support furnished by the investment professional.
In addition, the Distributor may pay investment professionals 0.25% of the
purchase price of $1 million or more of Shares that its customer has not
redeemed over the first year.
Subaccounting Services
Certain investment professionals may wish to use the transfer agent's
subaccounting system to minimize their internal recordkeeping requirements. The
transfer agent may charge a fee based on the level of subaccounting services
rendered. Investment professionals holding Shares in a fiduciary, agency,
custodial, or similar capacity may charge or pass through subaccounting fees as
part of or in addition to normal trust or agency account fees. They may also
charge fees for other services that may be related to the ownership of Shares.
This information should, therefore, be read together with any agreement between
the customer and the investment professional about the services provided, the
fees charged for those services, and any restrictions and limitations imposed.
Redemption in Kind
Although the Fund intends to pay Share redemptions in cash, it reserves the
right, as described below, to pay the redemption price in whole or in part by a
distribution of the Fund's portfolio securities.
Because the Fund has elected to be governed by Rule 18f-1 under the Investment
Company Act of 1940, the Fund is obligated to pay Share redemptions to any one
shareholder in cash only up to the lesser of $250,000 or 1% of the net assets
represented by such Share class during any 90-day period.
Any Share redemption payment greater than this amount will also be in cash
unless the Fund's Board determines that payment should be in kind. In such a
case, the Fund will pay all or a portion of the remainder of the redemption in
portfolio securities, valued in the same way as the Fund determines its NAV. The
portfolio securities will be selected in a manner that the Fund's Board deems
fair and equitable and, to the extent available, such securities will be readily
marketable.
Redemption in kind is not as liquid as a cash redemption. If redemption is made
in kind, shareholders receiving the portfolio securities and selling them before
their maturity could receive less than the redemption value of the 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 obligations of the Trust. To protect its
shareholders, the Trust has filed legal documents with Massachusetts that
expressly disclaim the liability of its shareholders for acts or obligations of
the Trust.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required by the Declaration of Trust to use its
property to protect or compensate the shareholder. On request, the Trust will
defend any claim made and pay any judgment against a shareholder for any act or
obligation of the Trust. Therefore, financial loss resulting from liability as a
shareholder will occur only if the Trust itself cannot meet its obligations to
indemnify shareholders and pay judgments against them.
Account and Share 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 the Trust have equal voting rights, except that in matters
affecting only a particular Fund or class, only Shares of that Fund or class are
entitled to vote.
Trustees may be removed by the Board or by shareholders at a special meeting. A
special meeting of shareholders will be called by the Board upon the written
request of shareholders who own at least 10% of the Trust's outstanding shares.
As of October 7, 1999, the following shareholders owned of record, beneficially,
or both, 5% or more of outstanding Shares: Enbanco, Traverse City, MI, owned
approximately 2,492,416 Shares (35.23%); First Mar & Co., Marquette, Michigan,
owned approximately 1,055,239 Shares (14.91%); Charles Schwab & Co., Inc., San
Francisco, California, owned approximately 546,500 Shares (7.72%); Shoreline
Co., South Haven, Michigan, owned approximately 535,917 Shares (7.57%); and
First Mar & Co., Marquette, Michigan, owned approximately 507,500 Shares
(7.17%).
Shareholders owning 25% or more of outstanding Shares may be in control and be
able to affect the outcome of certain matters presented for a vote of
shareholders.
Tax Information
FEDERAL INCOME TAX
The Fund intends to meet requirements of Subchapter M of the Internal Revenue
Code applicable to regulated investment companies. If these requirements are not
met, it will not receive special tax treatment and will pay federal income tax.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income earned and capital gains and losses realized by the
Trust's other portfolios will be separate from those realized by the Fund.
The Fund is entitled to a loss carryforward, which may reduce the taxable income
or gain that the Fund would realize, and to which the shareholder would be
subject, in the future.
STATE TAXES
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.
Who Manages and Provides Services to the Fund?
BOARD OF TRUSTEES
The Board is responsible for managing the Trust's business affairs and for
exercising all the Trust's powers except those reserved for the shareholders.
Information about each Board member is provided below and includes each
person's: name, address, birth date, present position(s) held with the Trust,
principal occupations for the past five years and positions held prior to the
past five years, total compensation received as a Trustee from the Trust for its
most recent fiscal year, and the total compensation received from the Federated
Fund Complex for the most recent calendar year. The Trust is comprised of six
funds and the Federated Fund Complex is comprised of 54 investment companies,
whose investment advisers are affiliated with the Fund's Adviser.
As of October 7, 1999, the Fund's Board and Officers as a group owned less than
1% of the Fund's outstanding Shares.
<TABLE>
<CAPTION>
NAME
BIRTH DATE AGGREGATE TOTAL COMPENSATION
ADDRESS PRINCIPAL OCCUPATIONS COMPENSATION FROM TRUST AND
POSITION WITH TRUST FOR PAST FIVE YEARS FROM TRUST FUND COMPLEX
<S> <C> <C> <C>
JOHN F. DONAHUE*+# Chief Executive Officer $0 $0 for the Trust and
Birth Date: July 28, 1924 and Director or Trustee of 54 other investment
Federated Investors Tower the Federated Fund companies in the
1001 Liberty Avenue Complex; Chairman and Fund Complex
Pittsburgh, PA Director, Federated
CHAIRMAN and TRUSTEE Investors, Inc.; Chairman
and Trustee, Federated Investment
Management Company; Chairman and
Director, Federated Investment
Counseling and Federated Global
Investment Management Corp.; Chairman,
Passport Research, Ltd.
THOMAS G. BIGLEY Director or Trustee of $1,305.35 $113,860.22 for the Trust
Birth Date: February 3, 1934 the Federated Fund and 54 other investment
15 Old Timber Trail Complex; Director, Member companies in the
Pittsburgh, PA of Executive Committee, Fund Complex
TRUSTEE Children's Hospital of
Pittsburgh; Director,
Robroy Industries, Inc.
(coated steel conduits/
computer storage
equipment); formerly:
Senior Partner, Ernst &
Young LLP; Director, MED
3000 Group, Inc.
(physician practice
management); Director,
Member of Executive
Committee, University of
Pittsburgh.
JOHN T. CONROY, JR. Director or Trustee of the $1,436.05 $125,264.48 for the Trust
Birth Date: June 23, 1937 Federated Fund Complex; and 54 other investment
Wood/Commercial Dept. President, Investment companies in the
John R. Wood Associates, Inc. Realtors Properties Corporation; Fund Complex
3255 Tamiami Trail North Senior Vice President,
Naples, FL John R. Wood and
TRUSTEE 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 CONSTANTAKIS Director or Trustee of some $1,305.35 $47,958.02 for the Trust
Birth Date: September 3, 1939 of the Federated Fund and 29 other investment
175 Woodshire Drive Complex; formerly: companies in the
Pittsburgh, PA Partner, Andersen Fund Complex
TRUSTEE Worldwide SC.
JOHN F. CUNNINGHAM++ Director or Trustee of some $331.87 $0 for the Trust and
Birth Date: March 5, 1943 of the Federated Fund 46 other investment
353 El Brillo Way Complex; Chairman, companies in the
Palm Beach, FL President and Chief Fund Complex
TRUSTEE Executive Officer,
Cunningham & Co., Inc.
(strategic business
consulting); Trustee
Associate, Boston College;
Director, Iperia Corp.
(communications/software);
formerly: Director,
Redgate Communications and
EMC Corporation (computer
storage systems).
Previous Positions:
Chairman of the Board and
Chief Executive Officer,
Computer Consoles, Inc.;
President and Chief
Operating Officer, Wang
Laboratories; Director,
First National Bank of
Boston; Director, Apollo
Computer, Inc.
LAWRENCE D. ELLIS, M.D.* Director or Trustee of the $1,305.35 $113,860.22 for the Trust
Birth Date: October 11, 1932 Federated Fund Complex; and 54 other investment
3471 Fifth Avenue Professor of Medicine, companies in the
Suite 1111 University of Pittsburgh; Fund Complex
Pittsburgh, PA Medical Director,
TRUSTEE University of Pittsburgh
Medical Center-Downtown; Hematologist,
Oncologist and Internist, University of
Pittsburgh Medical Center; Member,
National Board of Trustees, Leukemia
Society of America.
PETER E. MADDEN Director or Trustee of the $1,189.91 $113,860.22 for the Trust
Birth Date: March 16, 1942 Federated Fund Complex; and 54 other investment
One Royal Palm Way formerly: Representative, companies in the
100 Royal Palm Way Commonwealth of Fund Complex
Palm Beach, FL Massachusetts General
TRUSTEE Court; President, State
Street Bank and Trust
Company and State
Street Corporation.
Previous Positions:
Director, VISA USA and VISA
International; Chairman and
Director, Massachusetts
Bankers Association;
Director, Depository Trust
Corporation; Director, The
Boston Stock Exchange.
<CAPTION>
NAME
BIRTH DATE AGGREGATE TOTAL COMPENSATION
ADDRESS PRINCIPAL OCCUPATIONS COMPENSATION FROM TRUST
POSITION WITH TRUST FOR PAST FIVE YEARS FROM TRUST AND FUND COMPLEX
<S> <C> <C> <C>
CHARLES F. MANSFIELD, JR.++ Director or Trustee of some $1,016.39 $0 for the Trust and
Birth Date: April 10, 1945 of the Federated Fund 50 other investment
80 South Road Complex; Management companies in the
Westhampton Beach, NY Consultant. Fund Complex
TRUSTEE Previous Positions: Chief
Executive Officer, PBTC International
Bank; Partner, Arthur Young & Company
(now Ernst & Young LLP); Chief
Financial Officer of Retail Banking
Sector, Chase Manhattan Bank; Senior
Vice President, Marine Midland Bank;
Vice President, Citibank; Assistant
Professor of Banking and Finance, Frank
G. Zarb School of Business, Hofstra
University.
JOHN E. MURRAY, JR., J.D., S.J.D.# Director or Trustee of $1,403.80 $113,860.22 for the Trust
Birth Date: December 20, 1932 the Federated Fund and 54 other investment
President, Duquesne University Complex; President, Law companies in the
Pittsburgh, PA Professor, Duquesne Fund Complex
TRUSTEE University; Consulting
Partner, Mollica & Murray;
Director, Michael Baker
Corp. (engineering,
construction, operations
and technical services).
Previous Positions: Dean
and Professor of Law,
University of Pittsburgh
School of Law; Dean and
Professor of Law,
Villanova University
School of Law.
MARJORIE P. SMUTS Director or Trustee of the $1,305.35 $113,860.22 for the Trust
Birth Date: June 21, 1935 Federated Fund Complex; and 54 other investment
4905 Bayard Street Public Relations/ companies in the
Pittsburgh, PA Marketing/Conference Fund Complex
TRUSTEE Planning.
Previous Positions:
National Spokesperson,
Aluminum Company of
America; television
producer; business owner.
JOHN S. WALSH++ Director or Trustee of some $331.87 $0 for the Trust and
Birth Date: November 28, 1957 of the Federated Fund 48 other investment
2007 Sherwood Drive Complex; President and companies in the
Valparaiso, IN Director, Heat Wagon, Inc. Fund Complex
TRUSTEE (manufacturer of
construction temporary
heaters); President and
Director, Manufacturers
Products, Inc.
(distributor of portable
construction heaters);
President, Portable Heater
Parts, a division of
Manufacturers Products,
Inc.; Director, Walsh &
Kelly, Inc. (heavy highway
contractor); formerly:
Vice President, Walsh &
Kelly, Inc.
J. CHRISTOPHER DONAHUE*+ President or Executive $0 $0 for the Trust and
Birth Date: April 11, 1949 Vice President of the 16 other investment
Federated Investors Tower Federated Fund Complex; companies in the
1001 Liberty Avenue Director or Trustee of some Fund Complex
Pittsburgh, PA of the Funds in the
EXECUTIVE VICE PRESIDENT and TRUSTEE Federated Fund Complex;
President, Chief Executive Officer and
Director, Federated Investors, Inc.;
President and Trustee, Federated
Investment Management Company and
Federated Investment Counseling;
President and Director, Federated
Global Investment Management Corp.;
President, Passport Research, Ltd.;
Trustee, Federated Shareholder Services
Company; Director, Federated Services
Company.
EDWARD C. GONZALES Trustee or Director of some $0 $0 for the Trust and
Birth Date: October 22, 1930 of the Funds in the 1 other investment
Federated Investors Tower Federated Fund Complex; company in the
1001 Liberty Avenue President, Executive Vice Fund Complex
Pittsburgh, PA President and Treasurer of
EXECUTIVE VICE PRESIDENT some of the Funds in the
Federated Fund Complex; Vice Chairman,
Federated Investors, Inc.; Vice
President, Federated Investment
Management Company, Federated
Investment Counseling, Federated Global
Investment Management Corp. and
Passport Research, Ltd.; Executive Vice
President and Director, Federated
Securities Corp.; Trustee, Federated
Shareholder Services Company.
JOHN W. MCGONIGLE Executive Vice President $0 $0 for the Trust and
Birth Date: October 26, 1938 and Secretary of the 54 other investment
Federated Investors Tower Federated Fund Complex; companies in the
1001 Liberty Avenue Executive Vice President, Fund Complex
Pittsburgh, PA Secretary and Director,
EXECUTIVE VICE PRESIDENT Federated Investors, Inc.;
Trustee, Federated Investment
Management Company and Federated
Investment Counseling; Director,
Federated Global Investment Management
Corp., Federated Services Company and
Federated Securities Corp.
RICHARD J. THOMAS Treasurer of the Federated $0 $0 for the Trust and
Birth Date: June 17, 1954 Fund Complex; Vice 54 other investment
Federated Investors Tower President-Funds Financial companies in the
1001 Liberty Avenue Services Division, Fund Complex
Pittsburgh, PA Federated Investors, Inc.;
TREASURER formerly: various
management positions
within Funds Financial
Services Division of
Federated Investors, Inc.
RICHARD B. FISHER President or Vice $0 $0 for the Trust and
Birth Date: May 17, 1923 President of some of the 6 other investment
Federated Investors Tower Funds in the Federated Fund companies in the
1001 Liberty Avenue Complex; Director or Fund Complex
Pittsburgh, PA Trustee of some of the
PRESIDENT Funds in the Federated Fund
Complex; Executive Vice
President, Federated
Investors, Inc.; Chairman
and Director, Federated
Securities Corp.
<CAPTION>
NAME
BIRTH DATE AGGREGATE TOTAL COMPENSATION
ADDRESS PRINCIPAL OCCUPATIONS COMPENSATION FROM TRUST AND
POSITION WITH TRUST FOR PAST FIVE YEARS FROM TRUST FUND COMPLEX
<S> <C> <C> <C>
WILLIAM D. DAWSON, III Chief Investment Officer $0 $0 for the Trust and
Birth Date: March 3, 1949 of this Fund and various 41 other investment
Federated Investors Tower other Funds in the companies in the
1001 Liberty Avenue Federated Fund Complex; Fund Complex
Pittsburgh, PA Executive Vice President,
CHIEF INVESTMENT OFFICER Federated Investment
Counseling, Federated Global Investment
Management Corp., Federated Investment
Management Company and Passport
Research, Ltd.; Registered
Representative, Federated Securities
Corp.; Portfolio Manager, Federated
Administrative Services; Vice
President, Federated Investors, Inc.;
formerly: Executive Vice President and
Senior Vice President, Federated
Investment Counseling Institutional
Portfolio Management Services Division;
Senior Vice President, Federated
Investment Management Company and
Passport Research, Ltd.
J. SCOTT ALBRECHT J. Scott Albrecht has been $0 $0 for the Trust and
Birth Date: June 1, 1960 the Fund's portfolio 1 other investment
Federated Investors Tower manager since March 1995. company in the
1001 Liberty Avenue He is Vice President of the Fund Complex
Pittsburgh, PA Trust. Mr. Albrecht joined
VICE PRESIDENT Federated in 1989. He has
been a Senior Portfolio
Manager since 1997 and a
Vice President of the
Fund's investment adviser
since 1994. He was a
Portfolio Manager from
1994 to 1996. Mr. Albrecht
is a Chartered Financial
Analyst and received his
M.S. in Public Management
from Carnegie Mellon
University.
</TABLE>
* An asterisk denotes a Trustee who is deemed to be an interested person as
defined in the Investment Company Act of 1940.
# A pound sign denotes a Member of the Board's Executive Committee, which
handles the Board's responsibilities between its meetings.
+ Mr. Donahue is the father of J. Christopher Donahue, Executive Vice
President and Trustee of the Trust.
++ Mr. Mansfield became a member of the Board of Trustees on January 1,
1999. Messrs. Cunningham and Walsh became members of the Board of
Trustees on July 1, 1999. They did not earn any fees for serving the Fund
Complex since these fees are reported as of the end of the last calendar
year.
INVESTMENT ADVISER
The Adviser conducts investment research and makes investment decisions for the
Fund.
The Adviser is a wholly owned subsidiary of Federated.
The Adviser shall not be liable to the Trust or any Fund shareholder 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.
OTHER RELATED SERVICES
Affiliates of the Adviser may, from time to time, provide certain electronic
equipment and software to institutional customers in order to facilitate the
purchase of Fund Shares offered by the Distributor.
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. 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. In selecting among firms believed to meet these
criteria, the Adviser may give consideration to those firms which have sold or
are selling Shares of the Fund and other funds distributed by the Distributor
and its affiliates. The Adviser makes decisions on portfolio transactions and
selects brokers and dealers subject to review by the Fund's Board.
Investment decisions for the Fund are made independently from those of other
accounts managed by the Adviser. When the Fund and one or more of those accounts
invests in, or disposes of, the same security, available investments or
opportunities for sales will be allocated among the Fund and the account(s) in a
manner believed by the Adviser to be equitable. While the coordination and
ability to participate in volume transactions may benefit the Fund, it is
possible that this procedure could adversely impact the price paid or received
and/or the position obtained or disposed of by the Fund.
ADMINISTRATOR
Federated Services Company, a subsidiary of Federated, provides administrative
personnel and services (including certain legal and financial reporting
services) necessary to operate the Fund. Federated Services Company provides
these at the following annual rate of the average aggregate daily net assets of
all Federated Funds as specified below:
MAXIMUM AVERAGE AGGREGATE DAILY ADMINISTRATIVE FEE NET ASSETS OF THE FEDERATED
FUNDS 0.150 of 1% on the first $250 million 0.125 of 1% on the next $250 million
0.100 of 1% on the next $250 million 0.075 of 1% on assets in excess of $750
million
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 voluntarily waive a portion of its fee and may
reimburse the Fund for expenses.
Federated Services Company also provides certain accounting and recordkeeping
services with respect to the Fund's portfolio investments for a fee based on
Fund assets plus out-of-pocket expenses.
CUSTODIAN
State Street Bank and Trust Company, Boston, Massachusetts, is custodian for the
securities and cash of the Fund. Foreign instruments purchased by the Fund are
held by foreign banks participating in a network coordinated by State Street
Bank.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Federated Services Company, through its registered transfer agent subsidiary,
Federated Shareholder Services Company, maintains all necessary shareholder
records. The Fund pays the transfer agent a fee based on the size, type and
number of accounts and transactions made by
shareholders.
INDEPENDENT AUDITORS
The independent auditor for the Fund, Deloitte & Touche LLP, plans and performs
its audit so that it may provide an opinion as to whether the Fund's financial
statements and financial highlights are free of material misstatement.
FEES PAID BY THE FUND FOR SERVICES
FOR THE YEAR ENDED AUGUST 31 1999 1998 1997
Advisory Fee Earned $317,944 $287,452 $257,217
Advisory Fee Reduction 250,823 264,185 257,217
Administrative Fee 125,000 125,002 125,000
SHAREHOLDER SERVICES FEE 53,640 - -
How Does the Fund Measure Performance?
The Fund may advertise Share performance by using the SEC's standard method for
calculating performance applicable to all mutual funds. The SEC also permits
this standard performance information to be accompanied by non-standard
performance information.
Share performance reflects the effect of non-recurring charges, such as maximum
sales charges, which, if excluded, would increase the total return and yield.
The performance of Shares depends upon such variables as: portfolio quality;
average portfolio maturity; type and value of portfolio securities; changes in
interest rates; changes or differences in the Fund's or any class of Shares'
expenses; and various other factors.
Share performance fluctuates on a daily basis largely because net earnings
fluctuate daily. Both net earnings and offering price per Share are factors in
the computation of yield and total return.
AVERAGE ANNUAL TOTAL RETURNS AND YIELD
Total returns are given for the one-year, five-year and Start of Performance
periods ended August 31, 1999.
Yield and Tax-Equivalent Yield are given for the 30-day period ended August 31,
1999.
<TABLE>
<CAPTION>
START OF
30-DAY PERFORMANCE ON
PERIOD 1 YEAR 5 YEARS SEPTEMBER 18, 1991
<S> <C> <C> <C> <C>
Total Return NA (2.51%) 4.49% 5.57%
Yield 4.38% NA NA NA
Tax-Equivalent Yield 7.25% NA NA NA
</TABLE>
TOTAL RETURN
Total return represents the change (expressed as a percentage) in the value of
Shares over a specific period of time, and includes the investment of income and
capital gains distributions.
The average annual total return for Shares is the average compounded rate of
return for a given period that would equate a $1,000 initial investment to the
ending redeemable value of that investment. The ending redeemable value is
computed by multiplying the number of Shares owned at the end of the period by
the NAV 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 annual reinvestment of all
dividends and distributions.
YIELD AND TAX-EQUIVALENT YIELD
The yield of Shares is calculated by dividing: (i) the net investment income per
Share earned by the Shares over a 30-day period; by (ii) the maximum offering
price per Share on the last day of the period. This number is then annualized
using semi-annual compounding. This means that the amount of income generated
during the 30-day period is assumed to be generated each month over a 12-month
period and is reinvested every six months. 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 the actual yield, assuming a
specific tax rate. The yield and tax-equivalent yield do not necessarily reflect
income actually earned by Shares because of certain adjustments required by the
SEC and, therefore, may not correlate to the dividends or other distributions
paid to shareholders.
To the extent investment professionals and broker/dealers charge fees in
connection with services provided in conjunction with an investment in Shares,
the Share performance is lower for shareholders paying those fees.
TAX EQUIVALENCY TABLE
Set forth below is a sample of a tax-equivalency table that may be used in
advertising and sales literature. This table is for illustrative purposes only
and is not representative of past or future performance of the Fund. The
interest earned by the municipal securities owned by the Fund generally remains
free from federal regular income tax and is often free from state and local
taxes as well. However, some of the Fund's income may be subject to the federal
alternative minimum tax and state and/or local taxes.
TAX EQUIVALENCY TABLE
<TABLE>
<CAPTION>
TAXABLE YIELD EQUIVALENT FOR 1999 STATE OF MICHIGAN
FEDERAL TAX BRACKET: 15.00% 28.00% 31.00% 36.00% 39.60%
COMBINED FEDERAL AND STATE INCOME TAX BRACKET: 19.400% 32.400% 35.400% 40.400% 44.000%
<S> <C> <C> <C> <C> <C>
Joint Return $1-43,050 $43,051-104,050 $104,051-158,550 $158,551-283,150 OVER 283,150
Single Return $1-25,750 $25,751-62,450 $62,451-130,250 $130,251-283,150 OVER 283,150
TAX-EXEMPT YIELD:
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.
PERFORMANCE COMPARISONS
Advertising and sales literature may include:
* references to ratings, rankings, and financial publications and/or
performance comparisons of Shares to certain indices;
* charts, graphs and illustrations using the Fund's returns, or returns in
general, that demonstrate investment concepts such as tax-deferred compounding,
dollar-cost averaging and systematic investment;
* discussions of economic, financial and political developments and their impact
on the securities market, including the portfolio manager's views on how such
developments could impact the Fund; and
* information about the mutual fund industry from sources such as the Investment
Company Institute.
The Fund may compare its performance, or performance for the types of securities
in which it invests, to a variety of other investments, including federally
insured bank products such as bank savings accounts, certificates of deposit,
and Treasury bills.
The Fund may quote information from reliable sources regarding individual
countries and regions, world stock exchanges, and economic and demographic
statistics.
You may use financial publications and/or indices to obtain a more complete view
of Share performance. When comparing performance, you should consider all
relevant factors such as the composition of the 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
Lehman Brothers Seven Year State General Obligation Bond Index, an index of
general obligation bonds rated A or better with 6-8 years to maturity.
LIPPER ANALYTICAL SERVICES, INC.
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.
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.
Who is Federated Investors, Inc.?
Federated is dedicated to meeting investor needs by making structured,
straightforward and consistent investment decisions. Federated investment
products have a history of competitive performance and have gained the
confidence of thousands of financial institutions and individual investors.
Federated's disciplined investment selection process is rooted in sound
methodologies backed by fundamental and technical research. At Federated,
success in investment management does not depend solely on the skill of a single
portfolio manager. It is a fusion of individual talents and state- of-the-art
industry tools and resources. Federated's investment process involves teams of
portfolio managers and analysts, and investment decisions are executed by
traders who are dedicated to specific market sectors and who handle trillions of
dollars in annual trading volume.
FEDERATED FUNDS OVERVIEW
MUNICIPAL FUNDS
In the municipal sector, as of December 31, 1998, Federated managed 10 bond
funds with approximately $2.2 billion in assets and 23 money market funds with
approximately $12.5 billion in total assets. In 1976, Federated introduced one
of the first municipal bond mutual funds in the industry and is now one of the
largest institutional buyers of municipal securities. The Funds may quote
statistics from organizations including The Tax Foundation and the National
Taxpayers Union regarding the tax obligations of Americans.
EQUITY FUNDS
In the equity sector, Federated has more than 28 years' experience. As of
December 31, 1998, Federated managed 27 equity funds totaling approximately
$14.9 billion in assets across growth, value, equity income, international,
index and sector (i.e. utility) styles. Federated's value- oriented management
style combines quantitative and qualitative analysis and features a structured,
computer-assisted composite modeling system that was developed in the 1970s.
CORPORATE BOND FUNDS
In the corporate bond sector, as of December 31, 1998, Federated managed 9 money
market funds and 15 bond funds with assets approximating $22.8 billion and $7.1
billion, respectively. Federated's corporate bond decision making-based on
intensive, diligent credit analysis-is backed by over 26 years of experience in
the corporate bond sector. In 1972, Federated introduced one of the first
high-yield bond funds in the industry. In 1983, Federated was one of the first
fund managers to participate in the asset backed securities market, a market
totaling more than $209 billion.
GOVERNMENT FUNDS
In the government sector, as of December 31, 1998, Federated managed 9 mortgage
backed, 5 government/agency and 19 government money market mutual funds, with
assets approximating $5.3 billion, $1.8 billion and $41.6 billion, respectively.
Federated trades approximately $425 million in U.S. government and mortgage
backed securities daily and places approximately $25 billion in repurchase
agreements each day. Federated introduced the first U.S. government fund to
invest in U.S. government bond securities in 1969. Federated has been a major
force in the short- and intermediate-term government markets since 1982 and
currently manages approximately $43.2 billion in government funds within these
maturity ranges.
MONEY MARKET FUNDS
In the money market sector, Federated gained prominence in the mutual fund
industry in 1974 with the creation of the first institutional money market fund.
Simultaneously, the company pioneered the use of the amortized cost method of
accounting for valuing shares of money market funds, a principal means used by
money managers today to value money market fund shares. Other innovations
include the first institutional tax-free money market fund. As of December 31,
1998, Federated managed more than $76.7 billion in assets across 52 money market
funds, including 19 government, 9 prime and 23 municipal with assets
approximating $41.6 billion, $22.8 billion and $12.5 billion, respectively.
The Chief Investment Officers responsible for oversight of the various
investment sectors within Federated 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 $5 trillion to the more than 7,300 funds available,
according to the Investment Company Institute.
FEDERATED CLIENTS OVERVIEW
Federated distributes mutual funds through its subsidiaries for a variety of
investment purposes. Specific markets include:
INSTITUTIONAL CLIENTS
Federated meets the needs of approximately 900 institutional clients nationwide
by managing and servicing separate accounts and mutual funds for a variety of
purposes, 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 advisers. The marketing effort
to these institutional clients is headed by John B. Fisher, President,
Institutional Sales Division, Federated Securities Corp.
BANK MARKETING
Other institutional clients include 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,
Broker/Dealer Sales Division, Federated Securities Corp.
Investment Ratings
STANDARD AND POOR'S LONG-TERM DEBT RATING DEFINITIONS
AAA-Debt rated AAA has the highest rating assigned by Standard & Poor's.
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 or 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 BB 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.
MOODY'S INVESTORS SERVICE LONG-TERM BOND RATING DEFINITIONS
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 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.
FITCH IBCA, INC. LONG-TERM DEBT RATING DEFINITIONS
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 credit 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 obligor's 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 imminent default in payment of interest or principal.
MOODY'S INVESTORS SERVICE COMMERCIAL PAPER RATINGS
PRIME-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 structure 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.
PRIME-2-Issuers rated Prime-1 (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.
STANDARD AND POOR'S COMMERCIAL PAPER RATINGS
A-1-This designation 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.
FITCH IBCA, INC. COMMERCIAL PAPER RATING DEFINITIONS
FITCH-1-(Highest Grade) Commercial paper assigned this rating is regarded as
having the strongest degree of assurance for timely payment.
FITCH-2-(Very Good Grade) Issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than the strongest issues.
Addresses
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 Investment Management Company
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
200 Berkeley Street
Boston, MA 02116
MANAGEMENT DISCUSSION AND ANALYSIS
Federated North Carolina Municipal Income Fund
(Formerly, CCB North Carolina Municipal Securities Fund)
Annual Report for the Fiscal Year Ended August 31, 1999 1
THE FUND'S FISCAL YEAR SAW FEDERAL RESERVE BOARD POLICY CHANGE FROM ONE OF
"EASING," OR REDUCING RATES, TO "TIGHTENING," OR INCREASING RATES. WHILE BOND
PRICES IN GENERAL HAVE DECLINED AS A RESULT, MUNICIPAL BONDS REMAINED ATTRACTIVE
RELATIVE TO TREASURIES FROM A PRICE AND YIELD PERSPECTIVE. WHAT ARE YOUR
COMMENTS ON THE MUNICIPAL BOND MARKETPLACE OVER THE REPORTING PERIOD?
From a total return standpoint, the reporting period was relatively difficult,
reflecting a rise in interest rates across the maturity spectrum after October
1998. The continued strong growth of the domestic economy and diminished
concerns about international economic problems were the primary reasons for this
rise in yields. Yields on the 30-year Treasury moved up 0.95% since August 1998,
while the Bond Buyer's Revenue Bond Index (RBI) was up 0.58% over the same
period.
The reduced appetite for tax exempt securities from traditional crossover buyers
(corporations and insurance companies) was also a driver of the upward trend in
municipal yields. Demand was weak from cross-over buyers due to the glut of
pre-Year 2000 (Y2K) corporate debt issuance which has created attractive
relative value opportunities in the corporate market. Bond fund cash flow also
has been weak. Although direct retail demand has been powerful, it is not able
to support the trading of larger blocks of municipal bonds to support prices.
Municipal yields as a percentage of Treasury yields were down from last year
record levels, but remained high when compared to any year except 1998. The
RBI/30-Year Treasury ratio was 94% compared to an historical average of about
88%. We believe at these levels municipal bonds offer attractive relative value.
HOW DID THE FUND PERFORM WITH RESPECT TO TOTAL RETURN FOR THE REPORTING PERIOD
ENDED AUGUST 31, 1999?
On a relative basis the Fund's total return substantially outperformed the North
Carolina Municipal Debt Funds Average tracked by Lipper Inc. For the 12-month
reporting period ended August 31,1999, the Fund returned a (0.07%) based on net
asset value1 while the Lipper peer group was a (1.49%).2 Two factors led to the
Fund's superior price performance relative to the Lipper peer group. First,
yield spreads (or risk premium) between high grade municipal bonds and lower
rated or non-investment grade municipal bonds widened considerably during the
reporting period. When credit spreads increased, higher quality fixed-income
securities exhibit better price performance relative to lower rated municipal
bonds. The Fund maintained a greater percentage of assets of high quality
securities than the Lipper peer group. Although it is very difficult to
determine the Lipper peer group duration, the Fund's duration appeared to be
shorter than the peer group. This was a positive factor in a rising interest
rate environment. A portfolio with a shorter duration generally has less
interest rate risk than a portfolio with a longer duration.
IN THIS ENVIRONMENT, HOW DID THE FUND PERFORM WITH RESPECT TO INCOME OVER THE
REPORT ING PERIOD?
The 30-day current SEC yield on August 31, 1999 was 4.07% based on the offering
price. 1 The SEC yield increased from 3.86% at the beginning of the reporting
period as a result of a general increase in interest rates and portfolio
turnover. To maximize tax exempt income, the Fund rolled into higher coupons as
rates were rising.
WHAT WERE THE FUND'S TOP FIVE HOLDINGS AS OF AUGUST 31, 1999?
<TABLE>
<CAPTION>
ISSUER Maturity Coupon Rate Value
<S> <C> <C> <C>
North Carolina Municipal
Power Agency- Catawba
Electric (Prerefunded) 01/01/10 10.50% $2.4 million
Martin County, NC
Industrial Finance
Authority-Weyerhaeuser Co. 11/01/25 6.00% $2.0 million
Wilmington, NC
Certificates of
Participation 06/01/24 5.35% $2.0 million
Pitt County, NC-Pitt
County Memorial Hospital
(Prerefunded) 12/01/21 5.25% $1.4 million
Charlotte, NC-Water and
Sewer System Revenue Bonds 06/01/24 5.25% $1.4 million
</TABLE>
These five holdings comprised 22.43% of the Fund's total assets.
1 For the period prior to July 23, 1999, performance shown reflects historical
performance data for the CCB North Carolina Municipal Securities Fund ("Former
Fund"). On July 23, 1999, the Former Fund was reorganized into the Fund, which
is a newly created portfolio of Federated Municipal Securities Income Trust. The
pre-July 23, 1999 performance data reflects the actual total operating expenses
of the Former Fund, which are less than the anticipated expenses for the Fund.
Performance quoted represents past performance and is not indicative of future
results. Investment return and principal value will fluctuate, so that an
investor's shares when redeemed, may be worth more or less than their original
cost. Total return for the period based on offering price was (4.58%).
2 Lipper figures represent the average of the total returns reported by all of
the mutual funds designated by Lipper Analytical Services, Inc., as falling into
the category indicated. Lipper figures do not reflect sales charges.
HOW ARE THE FUND'S ASSETS CURRENTLY ALLOCATED IN TERMS OF CREDIT QUALITY?
The portfolio's average quality is AAA, with the allocation as follows.
<TABLE>
<CAPTION>
PERCENTAGE OF
NET ASSETS
<S> <C>
AAA 67.0%
AA 26.4%
A 10.0%
</TABLE>
HOW STRONG IS NORTH CAROLINA IN TERMS OF THE CREDIT QUALITY OF ITS MUNICIPAL
SECURI TIES?
Credit quality of North Carolina municipal sector is generally strong. Within
the general obligation sector, most issuers have underlying ratings no lower
than A. Factors contributing to the healthy credit environment include a growing
economy and the oversight efforts of the North Carolina Local Government
Commission.
Revenue bond sectors show a wider distribution of credit quality, but most
issuers are still rated in the A category. Although the health care sector has
not escaped the revenue pressures associated with the Balanced Budget Act and
managed care, the most of the state's largest systems have managed to maintain
their strong ratings.
In the state's public power sector, the credit quality of the two larger
issuers, North Carolina Municipal Power (A3/BBB+) and North Carolina Eastern
(Baa1/BBB), reflect their high cost structure and rates and potential
vulnerability to electrical deregulation.
WHAT KIND OF ENVIRONMENT DO YOU SEE AHEAD FOR MUNICIPAL BONDS?
The municipal bond market is technically driven by supply and demand imbalances
which are created by changes in interest rates, coupon payment period cycles and
economic conditions. The municipal market has recently experienced a demand
shift away from institutional buyers (insurance companies, corporations and
arbitrageurs) toward retail buyers (individuals) of municipal bonds. The ratio
of municipal bond yields to Treasury bond yields has widened from highs near
100%, which has caused many crossover buyers to unwind their municipal
positions. Crossover buyers purchase municipal bonds on a relative valuation
basis and not necessarily because of the tax exempt income. Y2K spending by
municipal governments is a potential credit factor which must be taken into
consideration as far as both the cost and the effectiveness of their Y2K
preparedness. However, the market does not expect any material interruptions in
the supply of necessary municipal services. However, there remains the potential
for some state functions to suffer temporary disruptions. The approach of the
presidential election cycle will bring potential federal tax law changes back
into the news. Potential impacts such as the introduction of a flat tax or
significant changes to the top marginal brackets could effect the trading value
of municipal debt relative to taxable fixed income alternatives, such as
corporate and Treasury securities.
CLASS A SHARES
GROWTH OF $10,000 INVESTED IN FEDERATED NORTH CAROLINA MUNICIPAL INCOME FUND
[Graphic] - See Appendix F.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN 1 FOR THE PERIOD ENDED AUGUST 31, 1999
<S> <C>
1 Year (4.58)%
5 Years 4.52%
Start of Performance (7/22/92) 4.71%
</TABLE>
The graph above illustrates the hypothetical investment of $10,000 2 in the
Federated North Carolina Municipal Income Fund (Class A Shares) from July 22,
1992 (start of performance) to August 31, 1999, compared to the Lehman Brothers
State General Obligation Bond Index ("LBSGOBI"),3 the Lehman Brothers Municipal
Bond Index ("LBMBI")3and the Lipper North
Carolina Municipal Debt Funds Average ("LNCMDF").3
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF
OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
This report must be preceded or accompanied by the Fund's prospectus dated
October 31, 1999, and, together with financial statements contained therein,
constitutes the Fund's annual report.
1 Total return quoted reflects all applicable sales charges.
2 Represents a hypothetical investment of $10,000 in the Fund after deducting
the maximum sales charge of 4.50% ($10,000 investment minus $450 sales charge =
$9,550). The Fund's performance assumes the reinvestment of all dividends and
distributions. The LBSGOBI, LBMBI and LNCMDF have been adjusted to reflect
reinvestment of dividends on securities in the indexes. These indexes are
unmanaged.
3 The LBSGOBI, LBMBI and LNCMDF are not adjusted to reflect sales charges,
expenses or other fees that the SEC requires to be reflected in the Fund's
performance. The investment adviser has elected to change the benchmark of the
Fund from LBSGOBI to LBMBI. The LBMBI is more representative of the securities
typically held by the Fund.
4 Federated North Carolina Municipal Income Fund is the successor to CCB North
Carolina Municipal Securities Fund. The quoted perfomance data includes
performance of the CCB North Carolina Municipal Securities Fund for the period
from 7/22/92 to 7/23/99, when the Fund first commenced operations, as adjusted
to reflect the Fund's anticipated expenses. Subsequently, the Fund changed its
fiscal year end from May 31 to August 31.
[Graphic]
Federated
Federated North Carolina Municipal Income Fund
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
1-800-341-7400
WWW.FEDERATEDINVESTORS.COM
Federated Securities Corp., Distributor
Cusip 625922810
G02671-03 (10/99)
[Graphic]
PROSPECTUS
Federated North Carolina
Municipal Income Fund
(formerly CCB North Carolina Municipal Securities Fund)
A Portfolio of Federated Municipal Securities Income Trust
CLASS A SHARES
A mutual fund seeking current income exempt from federal regular income tax and
the personal income taxes imposed by the state of North Carolina by investing
primarily in a portfolio of long-term, investment grade North Carolina tax
exempt securities.
As with all mutual funds, the Securities and Exchange Commission (SEC) has not
approved or disapproved these securities or passed upon the adequacy of this
prospectus. Any representation to the contrary is a criminal offense.
OCTOBER 31, 1999
CONTENTS
Risk/Return Summary 1
What are the Fund's Fees and Expenses? 4
What are the Fund's Investment Strategies? 5
What are the Principal Securities in Which the
Fund Invests? 6
What are the Specific Risks of Investing in the Fund? 9
What Do Shares Cost? 10
How is the Fund Sold? 12
How to Purchase Shares 12
How to Redeem and Exchange Shares 13
Account and Share Information 15
Who Manages the Fund? 16
Financial Information 17
Independent Auditors' Report 30
Risk/Return Summary
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
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 North
Carolina. While there is no assurance that the Fund will achieve its investment
objective, it endeavors to do so by following the strategies and policies
described in this prospectus.
WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?
The Fund invests in a portfolio of tax exempt securities 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 North Carolina. Interest from the
Fund's investments may be subject to the federal alternative minimum tax for
individuals and corporations (AMT). The Fund's portfolio securities will be
primarily long-term, investment grade securities.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?
All mutual funds take investment risks. Therefore, it is possible to lose money
by investing in the Fund.
The primary factors that may reduce the Fund's returns include:
INTEREST RATE RISKS
Prices of tax exempt securities generally fall when interests rates rise.
Interest rate changes have a greater effect on the price of fixed income
securities with longer durations.
CREDIT RISKS
Issuers of tax exempt securities may default on the payment of interest or
principal when due.
CALL RISKS
Issuers of tax exempt securities may redeem the securities prior to maturity at
a price below its current market value.
SECTOR RISKS
Since the Fund invests primarily in issuers from North Carolina, the Fund may be
subject to additional risks compared to funds that invest in multiple states.
North Carolina's economy is heavily dependent upon certain industries, such as
agriculture, manufacturing and tourism. Any downturn in these and other
industries may adversely affect the economy of the state.
The Fund is non-diversified. Compared to diversified mutual funds, it may invest
a higher percentage of its assets among fewer issuers of portfolio securities.
This increases the Fund's risk by magnifying the impact (positively or
negatively) that any one issuer has on the Fund's Share price and performance.
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 or
guaranteed by the U.S. government, the Federal Deposit Insurance Corporation,
the Federal Reserve Board or any other government agency.
RISK/RETURN BAR CHART AND TABLE
The Bar Chart and Performance Table below reflect historical performance data
for CCB North Carolina Municipal Securities Fund (the "Former Fund") prior to
its reorganization. On July 23, 1999, the Former Fund was reorganized as a
portfolio of Municipal Securities Income Trust and renamed Federated North
Carolina Municipal Income Fund. As a result of the reorganization, the Fund has
a different investment adviser than the Former Fund. The performance data below
reflects the actual total operating expenses of the Former Fund, which are less
than the anticipated expenses for the Fund.
[Graphic]
The bar chart shows the variability of the Former Fund's total returns on a
calendar year-end basis.
The total returns displayed for the Former Fund do not reflect the payment of
any sales charges or recurring shareholder account fees. If these charges or
fees had been included, the returns shown would have been lowered.
The Former Fund's total return for the nine-month period from January 1, 1999 to
September 30, 1999 was (2.29%).
Within the period shown in the Chart, the Former Fund's highest quarterly return
was 6.84% (quarter ended March 31, 1995). Its lowest quarterly return was
(5.19%) (quarter ended March 31, 1994).
AVERAGE ANNUAL TOTAL RETURN TABLE
The following table represents the Former Fund's Average Annual Total Returns,
reduced to reflect applicable sales charges, for the calendar periods ended
December 31, 1998.
The table shows the Former Fund's total returns averaged over a period of years
relative to the Lehman Brothers State General Obligation Bond Index (LBSGOBI)
and the Lehman Brothers Municipal Bond Index (LBMBI), both broad-based market
indexes, and Lipper North Carolina Municipal Debt Funds Index (LNCMDFI), an
average of funds with similar investment objectives. Total returns for the
indexes shown do not reflect sales charges, expenses or other fees that the SEC
requires to be reflected in the Fund's performance. The investment adviser has
elected to change the benchmark of the Fund from the LBSGOBI to the LBMBI. The
LBMBI is more representative of the securities typically held by the Fund.
Indexes are unmanaged, and it is not possible to invest directly in an index.
<TABLE>
<CAPTION>
CALENDAR PERIOD FORMER FUND LBSGOBI LNCMDF LBMBI
<S> <C> <C> <C> <C>
1 Year 1.28% 6.50% 5.56% 6.20%
5 Years 4.26% 5.96% 5.13% 6.22%
Start of Performance 1 5.52% 6.71% 6.12% 7.43%
</TABLE>
1 The Former Fund's start of performance date was July 22, 1992.
Past performance does not necessarily predict future performance. This
information provides you with historical performance information so that you can
analyze whether the Fund's investment risks are balanced by its potential
returns.
What are the Fund's Fees and Expenses?
FEDERATED NORTH CAROLINA MUNICIPAL INCOME FUND
(Formerly, CCB North Carolina Municipal Securities Fund)
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
Shares of the Fund.
<TABLE>
<CAPTION>
SHAREHOLDER FEES
<S> <C>
Fees Paid Directly From
Your Investment
Maximum Sales Charge
(Load) Imposed on
Purchases (as a percentage
of offering price) 4.50%
Maximum Deferred Sales
Charge (Load) (as a
percentage of original
purchase price or
redemption proceeds,
as applicable) None
Maximum Sales Charge
(Load) Imposed on
Reinvested Dividends (and
other Distributions)
(as a percentage of
offering price) None
Redemption Fee (as a
percentage of amount
redeemed, if applicable) None
Exchange Fee None
ANNUAL FUND OPERATING
EXPENSES (Before Waivers)
1
Expenses That are Deducted
From Fund Assets (as a
percentage of average net
assets)
Management Fee 2 0.40%
Distribution (12b-1) Fee 3 0.25%
Shareholder Services Fee 0.25%
Other Expenses 0.39%
Total Annual Fund
Operating Expenses 4 1.29%
1 Although not contractually obligated to do so, the adviser and distributor
expect to waive certain amounts through the fiscal year ending August 31, 2000.
These are shown below along with the net expenses the Fund expects to actually
pay through the fiscal year ending August 31, 2000.
Total Waivers of Fund
Expenses 0.50%
Total Actual Annual Fund
Operating Expenses (after
waivers) 4 0.79% 2 The adviser expects to voluntarily waive a portion of the
Management Fee through the fiscal year ending August 31, 2000. The adviser can
terminate this anticipated voluntary waiver at any time. The Management Fee paid
by the Fund (after the anticipated voluntary waiver) is expected to be 0.15%
through the fiscal year ending August 31, 2000. 3 The Fund does not expect to
pay or accrue the Distribution (12b-1) Fee through the fiscal year ending August
31, 2000. The distributor can elect to accrue or charge the Distribution (12b-1)
Fee, and thereby terminate this voluntary waiver at any time. The Distribution
(12b-1) Fee paid by the Fund (after the anticipated voluntary waiver) is
expected to be 0.00% through the fiscal year ending August 31, 2000. 4 For the
fiscal year ended May 31, 1998 (prior to its reorganization into the Fund), CCB
North Carolina Municipal Securities Fund's Total Annual Fund Operating Expenses
and Total Actual Annual Fund Operating Expenses (after waivers) were 1.27% and
0.52%, respectively.
</TABLE>
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund's
Shares with the cost of investing in other mutual funds. The Example also
reflects the yearly totals of the Former Fund for comparative purposes.
The Example assumes that you invest $10,000 in the Fund's Shares and Former
Fund's Shares for the time periods indicated and then redeem all of your Shares
at the end of those periods. The Example also assumes that your investment has a
5% return each year and that the Fund's Shares and Former Fund's Shares
operating expenses are BEFORE WAIVERS as shown in the table and remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
Federated North Carolina Municipal Income Fund $575 $841 $1,126 $1,936
CCB North Carolina Municipal Securities Fund $574 $835 $1,116 $1,915
</TABLE>
What are the Fund's Investment Strategies?
The Fund invests in a portfolio of tax exempt securities 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 North Carolina. As a matter of
operating policy, the Fund ordinarily will attempt to invest so that 100% of its
annual interest income is exempt from such taxes. Interest income from the
Fund's investments may be subject to AMT.
The Fund invests at least 65% of its portfolio in investment grade securities.
The Fund does not limit itself to securities of a particular maturity range, but
currently focuses on long-term securities with maturities greater than ten
years. The Fund's investment adviser (Adviser) actively manages the Fund's
portfolio, seeking to manage the interest rate risk and credit risk assumed by
the Fund and to provide superior levels of after tax total return.
The Adviser manages the Fund's interest rate risk by adjusting the duration of
its portfolio. "Duration" measures the sensitivity of a security's price to
changes in interest rates. The greater a portfolio's duration, the greater the
change in the portfolio's value in response to a change in market interest
rates. The Adviser will increase or reduce the Fund's portfolio duration based
on its interest rate outlook. When the Adviser expects interest rates to fall,
it will maintain a longer portfolio duration. When the Adviser expects interest
rates to increase, it will shorten the duration. The Adviser considers a variety
of factors, including the following:
* current and expected U.S. economic growth;
* current and expected interest rates and inflation;
* the Federal Reserve's monetary policy; and
* supply and demand factors related to the municipal market and the effect they
may have on the returns offered for various bond maturities.
The Adviser manages credit risk by performing a fundamental credit analysis on
tax exempt securities before the Fund purchases such securities. The Adviser
considers various factors, including the following:
* the economic feasibility of revenue bond financings and general purpose
financings;
* the financial condition of the issuer or guarantor; and
* political developments that may affect credit quality.
The Adviser monitors the credit risks of all portfolio securities on an ongoing
basis by reviewing periodic financial data and ratings of nationally recognized
ratings services.
The Adviser attempts to provide superior levels of after tax total return. After
tax total return consists of two components: (1) income received from the Fund's
portfolio securities; and (2) changes in the market value of the Fund's
portfolio securities and attendant increase or decrease in the market value of
Fund shares. The Adviser seeks total return on an after tax basis, so that it
will try to maximize tax exempt income distributions; make no ordinary income
distributions; and minimize or eliminate capital gains distributions.
HEDGING
Hedging transactions are intended to reduce specific risks. For example, to
protect the Fund against circumstances that would normally cause the Fund's
portfolio securities to decline in value, the Fund may buy or sell a futures
contract that would normally increase in value under the same circumstances. The
Fund may also attempt to hedge by using combinations of different futures
contracts, or futures contracts and securities. The Fund's ability to hedge may
be limited by the costs of the futures contracts. The Fund may attempt to lower
the cost of hedging by entering into transactions that provide only limited
protection, including transactions that: (1) hedge only a portion of its
portfolio; (2) use futures contracts that cover a narrow range of circumstances;
or (3) involve the sale of futures contracts with different terms. Consequently,
hedging transactions will not eliminate risk even if they work as intended. In
addition, hedging strategies are not always successful, and could result in
increased expenses and losses to the Fund.
TEMPORARY DEFENSIVE INVESTMENTS
The Fund may temporarily depart from its principal investment strategies by
investing its assets in securities subject to federal regular income tax and the
income tax imposed by the state of North Carolina. It may do this to minimize
potential losses and maintain liquidity to meet shareholder redemptions during
adverse market conditions. This may cause the Fund to receive and distribute
taxable income to investors.
What are the Principal Securities in Which the Fund Invests?
TAX EXEMPT SECURITIES
Tax exempt securities are fixed income securities that pay interest that is not
subject to federal regular income taxes. Fixed income securities pay interest,
dividends or distributions at a specified rate. The rate may be a fixed
percentage of the principal or adjusted periodically.
Typically, states, counties, cities and other political subdivisions and
authorities issue tax exempt securities. The market categorizes tax exempt
securities by their source of repayment.
GENERAL OBLIGATION BONDS
General obligation bonds are supported by the issuer's power to exact property
or other taxes. The issuer must impose and collect taxes sufficient to pay
principal and interest on the bonds. However, the issuer's authority to impose
additional taxes may be limited by its charter or state law.
SPECIAL REVENUE BONDS
Special revenue bonds are payable solely from specific revenues received by the
issuer such as specific taxes, assessments, tolls or fees. Bondholders may not
collect from the municipality's general taxes or revenues. For example, a
municipality may issue bonds to build a toll road, and pledge the tolls to repay
the bonds. Therefore, a shortfall in the tolls normally would result in a
default on the bonds.
PRIVATE ACTIVITY BONDS
Private activity bonds are special revenue bonds used to finance private
entities. For example, a municipality may issue bonds to finance a new factory
to improve its local economy. The municipality would lend the proceeds from its
bonds to the company using the factory, and the company would agree to make loan
payments sufficient to repay the bonds. The bonds would be payable solely from
the company's loan payments, not from any other revenues of the municipality.
Therefore, any default on the loan normally would result in a default on the
bonds.
The interest on many types of private activity bonds is subject to AMT. The Fund
may invest in bonds subject to AMT.
MUNICIPAL LEASES
Municipalities may enter into leases for equipment or facilities. In order to
comply with state public financing laws, these leases are typically subject to
annual appropriation. In other words, a municipality may end a lease, without
penalty, by not providing for the lease payments in its annual budget. After the
lease ends, the lessor can resell the equipment or facility but may lose money
on the sale.
The Fund may invest in securities supported by pools of municipal leases. The
most common type of lease backed securities are certificates of participation
(COPs). However, the Fund may also invest directly in individual leases.
ZERO COUPON SECURITIES
Zero coupon securities do not pay interest or principal until final maturity
unlike debt securities that provide periodic payments of interest (referred to
as a coupon payment). Investors buy zero coupon securities at a price below the
amount payable at maturity. The difference between the purchase price and the
amount paid at maturity represents interest on the zero coupon security.
Investors must wait until maturity to receive interest and principal, which
increases the interest rate risks and credit risks of a zero coupon security.
INVERSE FLOATERS
An inverse floater has a floating or variable interest rate that moves in the
opposite direction of market interest rates. When market interest rates go up,
the interest rate paid on the inverse floater goes down; when market interest
rates go down, the interest rate paid on the inverse floater goes up. Inverse
floaters generally respond more rapidly to market interest rate changes than
fixed rate tax exempt securities. Inverse floaters are subject to interest rate
risks and leverage risks.
CREDIT ENHANCEMENT
Credit enhancement consists of an arrangement in which a company agrees to pay
amounts due on a fixed income security if the issuer defaults. In some cases the
company providing credit enhancement makes all payments directly to the security
holders and receives reimbursement from the issuer. Normally, the credit
enhancer has greater financial resources and liquidity than the issuer. For this
reason, the Adviser usually evaluates the credit risk of a fixed income security
based solely upon its credit enhancement.
FUTURES CONTRACTS
Futures contracts, which are a type of derivative contract, provide for the
future sale by one party and purchase by another party of a specified amount of
an underlying asset at a specified price, date and time. Entering into a
contract to buy an underlying asset is commonly referred to as buying a contract
or holding a long position in the asset. Entering into a contract to sell an
underlying asset is commonly referred to as selling a contract or holding a
short position in the asset. Futures contracts are considered to be commodity
contracts.
The Fund may buy and sell interest rate and index financial futures contracts.
Depending upon how the Fund uses futures contracts and the relationships between
the market value of a futures contract and the underlying asset, futures
contracts may increase or decrease the Fund's exposure to interest rate risks,
and may also expose the Fund to liquidity risks and leverage risks.
SPECIAL TRANSACTIONS
DELAYED DELIVERY TRANSACTIONS
Delayed delivery transactions, including when-issued transactions, are
arrangements in which the Fund buys securities for a set price, with payment and
delivery of the securities scheduled for a future time. During the period
between purchase and settlement, no payment is made by the Fund to the issuer
and no interest accrues to the Fund. The Fund records the transaction when it
agrees to buy the securities and reflects their value in determining the price
of its shares. Settlement dates may be a month or more after entering into these
transactions so that the market values of the securities bought may vary from
the purchase prices. Therefore, delayed delivery transactions create interest
rate risks for the Fund. Delayed delivery transactions also involve credit risks
in the event of a counterparty default.
ASSET COVERAGE
In order to secure its obligations in connection with futures contracts or
special transactions, the Fund will either own the underlying assets, enter into
an offsetting transaction or set aside readily marketable securities with a
value that equals or exceeds the Fund's obligations. Unless the Fund has other
readily marketable assets to set aside, it cannot trade assets used to secure
such obligations without entering into an offsetting futures contract or
terminating a special transaction. This may cause the Fund to miss favorable
trading opportunities or to realize losses on futures contracts or special
transactions.
INVESTMENT RATINGS FOR INVESTMENT GRADE SECURITIES
The Adviser will determine whether a security is investment grade based upon the
credit ratings given by one or more nationally recognized rating services. For
example, Standard and Poor's, a rating service, assigns ratings to investment
grade securities (AAA, AA, A and BBB) based on its assessment of the likelihood
of the issuer's inability to pay interest or principal (default) when due on
each security. Lower credit ratings correspond to higher credit risk. If a
security has not received a rating, the Fund must rely entirely upon the
Adviser's credit assessment that the security is comparable to investment grade.
If a security is downgraded below the minimum quality grade discussed above, the
Adviser will reevaluate the security, but will not be required to sell it.
What are the Specific Risks of Investing in the Fund?
INTEREST RATE RISKS
Prices of fixed income securities rise and fall in response to changes in the
interest rates paid by similar securities. Generally, when interest rates rise,
prices of fixed income securities fall. However, market factors, such as the
demand for particular fixed income securities, may cause the price of certain
fixed income securities to fall while the prices of other securities rise or
remain unchanged.
Interest rate changes have a greater effect on the price of fixed income
securities with longer durations. Duration measures the price sensitivity of a
fixed income security to changes in interest rates.
CREDIT RISKS
Credit risk is the possibility that an issuer will default on a security by
failing to pay interest or principal when due. If an issuer defaults, the Fund
will lose money.
Many fixed income securities receive credit ratings from services such as
Standard & Poor's and Moody's Investors Service. These services assign ratings
to securities by assessing the likelihood of issuer default. Lower credit
ratings correspond to higher credit risk. If a security has not received a
rating, the Fund must rely entirely upon the Adviser's credit assessment.
Credit risk includes the possibility that a party to a transaction involving the
Fund will fail to meet its obligations. This could cause the Fund to lose the
benefit of the transaction or prevent the Fund from selling or buying other
securities to implement its investment strategy.
CALL RISKS
Call risk is the possibility that an issuer may redeem a fixed income security
before maturity (a call) at a price below its current market price. An increase
in the likelihood of a call may reduce the security's price.
If a fixed income security is called, the Fund may have to reinvest the proceeds
in other fixed income securities with lower interest rates, higher credit risks
or other less favorable characteristics.
SECTOR RISKS
A substantial part of the Fund's portfolio may be comprised of securities issued
by North Carolina issuers or credit enhanced by insurance companies with similar
characteristics or credit enhanced by private insurance companies, by issuers
located in the same state, or with other similar characteristics. As a result,
the Fund will be more susceptible to any economic, business, political, or other
developments which generally affect these entities.
North Carolina's economy is heavily dependent upon certain industries, such as
agriculture, manufacturing and tourism. Any downturn in these and other
industries may adversely affect the economy of the state. Since the Fund invests
primarily in issuers from a single state, the Fund may be subject to additional
risks compared to funds that invests in multiple states.
TAX RISKS
In order to be tax exempt, tax exempt securities must meet certain legal
requirements. Failure to meet such requirements may cause the interest received
and distributed by the Fund to shareholders to be taxable.
Changes or proposed changes in federal tax laws may cause the prices of tax
exempt securities to fall.
Income from the Fund may be subject to AMT.
LEVERAGE RISKS
Leverage risk is created when an investment exposes the Fund to a level of risk
that exceeds the amount invested. Changes in the value of such an investment
magnify the Fund's risk of loss and potential for gain.
Investments can have these same results if their returns are based on a multiple
of a specified index, security or other benchmark.
RISKS ASSOCIATED WITH NONINVESTMENT GRADE SECURITIES
Securities rated below investment grade, also known as junk bonds, generally
entail greater market, credit and liquidity risks than investment grade
securities. For example, their prices are more volatile, economic downturns and
financial setbacks may affect their prices more negatively, and their trading
market may be more limited. The Fund may invest up to 35% of its assets in
noninvestment grade securities.
LIQUIDITY RISKS
Trading opportunities are more limited for fixed income securities that have not
received any credit ratings, have received ratings below investment grade or are
not widely held.
Liquidity risk also refers to the possibility that the Fund may not be able to
sell a security or close out a futures contract when it wants to. If this
happens, the Fund will be required to continue to hold the security or keep the
position open, and the Fund could incur losses.
What Do Shares Cost?
You can purchase, redeem or exchange Shares any day the New York Stock Exchange
(NYSE) is open. When the Fund receives your transaction request in proper form
(as described in the prospectus), it is processed at the next calculated net
asset value (NAV) plus any applicable front-end sales charge (public offering
price). NAV is determined at the end of regular trading (normally 4:00 p.m.
Eastern time) each day the NYSE is open. The Fund generally values fixed income
securities at the last sale price on a national securities exchange, if
available, otherwise, as determined by an independent pricing service.
The Fund's current NAV and public offering price may be found in the mutual
funds section of certain local newspapers under "Federated" and the appropriate
class designation listing.
The following table summarizes the minimum required investment amount and the
maximum sales charge, if any, that you will pay on an investment in the Fund.
Keep in mind that investment professionals may charge you fees for their
services in connection with your Share transactions.
<TABLE>
<CAPTION>
MAXIMUM SALES CHARGE
MINIMUM INITIAL/ CONTINGENT
SUBSEQUENT FRONT-END DEFERRED
SHARES INVESTMENT SALES SALES
OFFERED AMOUNTS 1 CHARGE 2 CHARGE 3
<S> <C> <C> <C>
Class A $1,500/$100 4.50% 0.00%
</TABLE>
1 The minimum subsequent investment amounts for Systematic Investment Programs
is $50. Investment professionals may impose higher or lower minimum investment
requirements on their customers than those imposed by the Fund.
2 Front-End Sales Charge is expressed as a percentage of public offering
price. See "Sales Charge When You Purchase."
3 See "Sales Charge When You Redeem." To determine whether your Contingent
Deferred Sales Charge may be waived, see "Eliminating the Contingent Deferred
Sales Charge" in the Fund's Statement of Additional Information.
SALES CHARGE WHEN YOU PURCHASE
<TABLE>
<CAPTION>
CLASS A SHARES
Sales Charge
as a Sales Charge
Percentage as a
of Public Percentage
Purchase Amount Offering Price of NAV
<S> <C> <C>
Less than $100,000 4.50% 4.71%
$100,000 but less than $250,000 3.75% 3.90%
$250,000 but less than $500,000 2.50% 2.56%
$500,000 but less than $1 million 2.00% 2.04%
$1 million or greater 1 0.00% 0.00%
</TABLE>
1 A contingent deferred sales charge of 0.75% of the redemption amount applies
to Class A Shares redeemed up to 24 months after purchase under certain
investment programs where an investment professional received an advance payment
on the transaction. To determine whether your Contingent Deferred Sales Charge
may be waived, see "Eliminating the Contingent Deferred Sales Charge" in the
Fund's Statement of Additional Information.
THE SALES CHARGE AT PURCHASE MAY BE ELIMINATED BY:
* purchasing Shares in greater quantities to reduce the applicable sales
charge;
* combining concurrent purchases of Shares:
- - by you, your spouse, and your children under age 21; or
- - of the same share class of two or more Federated Funds (other than money
market funds);
* accumulating purchases (in calculating the sales charge on an additional
purchase, include the current value of previous Share purchases still invested
in the Fund); or
* signing a letter of intent to purchase a specific dollar amount of Shares
within 13 months (call your investment professional or the Fund for more
information).
THE SALES CHARGE WILL BE ELIMINATED WHEN YOU PURCHASE SHARES:
* within 120 days of redeeming Shares of an equal or lesser amount;
* by exchanging shares from the same share class of another Federated Fund
(other than a money market fund);
* through wrap accounts or other investment programs where you pay the
investment professional directly for services;
* through investment professionals that receive no portion of the sales
charge;
* as a Federated Life Member (Class A Shares only) and their immediate
family members;
* as a Trustee, Director or employee of the Fund, the Adviser, the Distributor
and their affiliates, and the immediate family members of these individuals; or
* through financial intermediaries that do not receive sales charge dealer
concessions.
If your investment qualifies for a reduction or elimination of the sales charge,
you or your investment professional should notify the Fund's Distributor,
Federated Securities Corp., at the time of purchase. If the Distributor is not
notified, you will receive the reduced sales charge only on additional
purchases, and not retroactively on previous purchases.
SALES CHARGE WHEN YOU REDEEM
Your redemption proceeds may be reduced by a sales charge, commonly referred to
as a contingent deferred sales charge (CDSC).
CLASS A SHARES
A CDSC of 0.75% of the redemption amount applies to Class A Shares redeemed up
to 24 months after purchase under certain investment programs where an
investment professional received an advance payment on the transaction. To
determine whether your Contingent Deferred Sales Charge may be waived, see
"Eliminating the Contingent Deferred Sales Charge" in the Fund's Statement of
Additional Information.
How is the Fund Sold?
The Fund's Distributor, Federated Securities Corp., markets the Shares described
in this prospectus to customers of financial institutions such as
broker/dealers, banks, fiduciaries and investment advisers, or to individuals,
directly or through investment professionals. The Fund may not be a suitable
investment for retirement plans or for non-North Carolina taxpayers because it
invests in North Carolina municipal securities.
When the Distributor receives marketing fees and sales charges, it may pay some
or all of them to investment professionals. The Distributor and its affiliates
may pay out of their assets other amounts (including items of material value) to
investment professionals for marketing and servicing Shares. The Distributor is
a subsidiary of Federated Investors, Inc.
(Federated).
RULE 12B-1 PLAN
The Fund has adopted a Rule 12b-1 Plan, which allows it to pay marketing fees to
the Distributor and investment professionals for the sale, distribution and
customer servicing of the Fund's Class A Shares. Because these Shares pay
marketing fees on an ongoing basis, your investment cost may be higher over time
than other shares with different sales charges and marketing fees.
How to Purchase Shares
You may purchase Shares through an investment professional, directly from the
Fund, or through an exchange from another Federated Fund. The Fund reserves the
right to reject any request to purchase or exchange Shares.
THROUGH AN INVESTMENT PROFESSIONAL
* Establish an account with the investment professional; and
* Submit your purchase order to the investment professional before the end of
regular trading on the NYSE (normally 4:00 p.m. Eastern time). You will receive
the next calculated NAV if the investment professional forwards the order to the
Fund on the same day and the Fund receives payment within three business days.
You will become the owner of Shares and receive dividends when the Fund receives
your payment.
Investment professionals should send payments according to the instructions in
the sections "By Wire" or "By Check."
DIRECTLY FROM THE FUND
* Establish your account with the Fund by submitting a completed New
Account Form; and
* Send your payment to the Fund by Federal Reserve wire or check.
You will become the owner of Shares and your Shares will be priced at the next
calculated NAV after the Fund receives your wire or your check. If your check
does not clear, your purchase will be canceled and you could be liable for any
losses or fees incurred by the Fund or Federated Shareholder Services Company,
the Fund's transfer agent.
An institution may establish an account and place an order by calling the Fund
and the Shares will be priced at the next calculated NAV after the Fund receives
the order.
BY WIRE
Send your wire to:
State Street Bank and Trust Company
Boston, MA
Dollar Amount of Wire
ABA Number 011000028
Attention: EDGEWIRE
Wire Order Number, Dealer Number or Group Number
Nominee/Institution Name
Fund Name and Number and Account Number
You cannot purchase Shares by wire on holidays when wire transfers are
restricted.
BY CHECK
Make your check payable to THE FEDERATED FUNDS, note your account number on the
check, and mail it to:
Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600
If you send your check by a PRIVATE COURIER OR OVERNIGHT DELIVERY SERVICE that
requires a street address, mail it to:
Federated Shareholder Services Company
1099 Hingham Street
Rockland, MA 02370-3317
Payment should be made in U.S. dollars and drawn on a U.S. bank. The Fund
will not accept third-party checks (checks originally payable to someone
other than you or The Federated Funds).
THROUGH AN EXCHANGE
You may purchase Shares through an exchange from the same Share class of another
Federated Fund. You must meet the minimum initial investment requirement for
purchasing Shares and both accounts must have identical registrations.
BY SYSTEMATIC INVESTMENT PROGRAM
Once you have opened an account, you may automatically purchase additional
Shares on a regular basis by completing the Systematic Investment Program
section of the New Account Form or by contacting the Fund or your investment
professional.
BY AUTOMATED CLEARING HOUSE (ACH)
Once you have opened an account, you may purchase additional Shares through a
depository institution that is an ACH member. This purchase option can be
established by completing the appropriate sections of the New Account Form.
How to Redeem and Exchange Shares
You should redeem or exchange Shares:
* through an investment professional if you purchased Shares through an
investment professional; or
* directly from the Fund if you purchased Shares directly from the Fund.
THROUGH AN INVESTMENT PROFESSIONAL
Submit your redemption or exchange request to your investment professional by
the end of regular trading on the NYSE (normally 4:00 p.m. Eastern time). The
redemption amount you will receive is based upon the next calculated NAV after
the Fund receives the order from your investment professional.
DIRECTLY FROM THE FUND
BY TELEPHONE
You may redeem or exchange Shares by calling the Fund at 1-800-341-7400 once you
have completed the appropriate authorization form for telephone transactions. If
you call before the end of regular trading on the NYSE (normally 4:00 p.m.
Eastern time) you will receive a redemption amount based on that day's NAV.
BY MAIL
You may redeem or exchange Shares by mailing a written request to the Fund.
You will receive a redemption amount based on the next calculated NAV after the
Fund receives your written request in proper form.
Send requests by mail to:
Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600
Send requests by PRIVATE COURIER OR OVERNIGHT DELIVERY SERVICE to:
Federated Shareholder Services Company
1099 Hingham Street
Rockland, MA 02370-3317
All requests must include:
* Fund Name and Share Class, account number and account registration;
* amount to be redeemed or exchanged;
* signatures of all shareholders exactly as registered; and
* IF EXCHANGING, the Fund Name and Share Class, account number and account
registration into which you are exchanging.
Call your investment professional or the Fund if you need special instructions.
SIGNATURE GUARANTEES
Signatures must be guaranteed if:
* your redemption will be sent to an address other than the address of
record;
* your redemption will be sent to an address of record that was changed
within the last 30 days;
* a redemption is payable to someone other than the shareholder(s) of
record; or
* IF EXCHANGING (transferring) into another fund with a different shareholder
registration.
A signature guarantee is designed to protect your account from fraud. Obtain a
signature guarantee from a bank or trust company, savings association, credit
union or broker, dealer, or securities exchange member. A NOTARY PUBLIC CANNOT
PROVIDE A SIGNATURE GUARANTEE.
PAYMENT METHODS FOR REDEMPTIONS
Your redemption proceeds will be mailed by check to your address of record. The
following payment options are available if you complete the appropriate section
of the New Account Form or an Account Service Options Form. These payment
options require a signature guarantee if they were not established when the
account was opened:
* an electronic transfer to your account at a financial institution that is
an ACH member; or
* wire payment to your account at a domestic commercial bank that is a Federal
Reserve System member.
REDEMPTION IN KIND
Although the Fund intends to pay Share redemptions in cash, it reserves the
right to pay the redemption price in whole or in part by a distribution of the
Fund's portfolio securities.
LIMITATIONS ON REDEMPTION PROCEEDS
Redemption proceeds normally are wired or mailed within one business day after
receiving a request in proper form. Payment may be delayed up to seven days:
* to allow your purchase to clear;
* during periods of market volatility; or
* when a shareholder's trade activity or amount adversely impacts the Fund's
ability to manage its assets.
You will not accrue interest or dividends on uncashed checks from the Fund if
those checks are undeliverable and returned to the Fund.
EXCHANGE PRIVILEGE
You may exchange Shares of the Fund into Shares of the same class of another
Federated Fund. To do this, you must:
* ensure that the account registrations are identical;
* meet any minimum initial investment requirements; and
* receive a prospectus for the fund into which you wish to exchange.
An exchange is treated as a redemption and a subsequent purchase, and is a
taxable transaction.
The Fund may modify or terminate the exchange privilege at any time. The Fund's
management or investment adviser may determine from the amount, frequency and
pattern of exchanges that a shareholder is engaged in excessive trading that is
detrimental to the Fund and other shareholders. If this occurs, the Fund may
terminate the availability of exchanges to that shareholder and may bar that
shareholder from purchasing other Federated Funds.
SYSTEMATIC WITHDRAWAL/EXCHANGE PROGRAM
You may automatically redeem or exchange Shares in a minimum amount of $100 on a
regular basis. Complete the appropriate section of the New Account Form or an
Account Service Options Form or contact your investment professional or the
Fund. Your account value must meet the minimum initial investment amount at the
time the program is established. This program may reduce, and eventually
deplete, your account. Payments should not be considered yield or income.
Generally, it is not advisable to continue to purchase Class A Shares subject to
a sales charge while redeeming Shares using this program.
ADDITIONAL CONDITIONS
TELEPHONE TRANSACTIONS
The Fund will record your telephone instructions. If the Fund does not follow
reasonable procedures, it may be liable for losses due to unauthorized or
fraudulent telephone instructions.
SHARE CERTIFICATES
The Fund does not issue share certificates. If you are redeeming or exchanging
Shares represented by certificates previously issued by the Fund, you must
return the certificates with your written redemption or exchange request. For
your protection, send your certificates by registered or certified mail, but do
not endorse them.
Account and Share Information
CONFIRMATIONS AND ACCOUNT STATEMENTS
You will receive confirmation of purchases, redemptions and exchanges. In
addition, you will receive periodic statements reporting all account activity,
including systematic transactions, dividends and capital gains paid.
DIVIDENDS AND CAPITAL GAINS
The Fund declares any dividends daily and pays them monthly to shareholders. If
you purchase Shares by wire, you begin earning dividends on the day your wire is
received. If you purchase Shares by check, you begin earning dividends on the
business day after the Fund receives your check. In either case, you earn
dividends through the day your redemption request is received.
In addition, the Fund pays any capital gains at least annually. Your dividends
and capital gains distributions will be automatically reinvested in additional
Shares without a sales charge, unless you elect cash payments.
If you purchase Shares just before a Fund declares a capital gain distribution,
you will pay the full price for the Shares and then receive a portion of the
price back in the form of a taxable distribution, whether or not you reinvest
the distribution in Shares. Therefore, you should consider the tax implications
of purchasing Shares shortly before the Fund declares a capital gain. Contact
your investment professional or the Fund for information concerning when
dividends and capital gains will be paid.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, accounts may be
closed if redemptions or exchanges cause the account balance to fall below the
minimum initial investment amount. Before an account is closed, you will be
notified and allowed 30 days to purchase additional Shares to meet the minimum.
TAX INFORMATION
The Fund sends an annual statement of your account activity to assist you in
completing your federal, state and local tax returns. It is anticipated that
Fund distributions will be primarily dividends that are exempt from federal
income tax, although a portion of the Fund's dividends may not be exempt.
Dividends may be subject to state and local taxes, although the Federated North
Carolina Municipal Income Fund's dividends will be exempt from the North
Carolina taxes discussed above to the extent they are derived from interest on
obligations exempt from such taxes. Capital gains and non-exempt dividends are
taxable whether paid in cash or reinvested in the Fund. Redemptions and
exchanges are taxable sales. Fund distributions may be subject to AMT. Please
consult your tax adviser regarding your federal, state and local tax liability.
Who Manages the Fund?
The Board of Trustees governs the Fund. The Board selects and oversees the
Adviser, Federated Investment Management Company. The Adviser manages the Fund's
assets, including buying and selling portfolio securities. The Adviser's address
is Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, PA 15222-3779.
The Adviser and other subsidiaries of Federated advise approximately 175 mutual
funds and separate accounts, which total approximately $111 billion in assets as
of December 31, 1998. Federated was established in 1955 and is one of the
largest mutual fund investment managers in the United States with approximately
1,900 employees. More than 4,000 investment professionals make Federated Funds
available to their customers.
THE FUND'S PORTFOLIO MANAGERS ARE:
J. SCOTT ALBRECHT
J. Scott Albrecht has been the Fund's portfolio manager since March 1995. He is
Vice President of the Fund. Mr. Albrecht joined Federated in 1989. He has been a
Senior Portfolio Manager since 1997 and a Vice President of the Fund's Adviser
since 1994. He was a Portfolio Manager from 1994 to 1996. Mr. Albrecht is a
Chartered Financial Analyst and received his M.S. in Public Management from
Carnegie Mellon University.
MARY JO OCHSON
Mary Jo Ochson has been the Fund's portfolio manager since April 1997. She
is Vice President of the Fund. Ms. Ochson joined Federated in 1982 and has
been a Senior Portfolio Manager and a Senior Vice President of the Fund's
Adviser since 1996. From 1988 through 1995, Ms. Ochson served as a
Portfolio Manager and a Vice President of the Fund's Adviser. Ms. Ochson is
a Chartered Financial Analyst and received her M.B.A. in Finance from the
University of Pittsburgh.
ADVISORY FEES
The Adviser receives an annual investment advisory fee of 0.40% of the Fund's
average daily net assets. The Adviser may voluntarily waive a portion of its fee
or reimburse the Fund for certain operating expenses.
YEAR 2000 READINESS (UNAUDITED)
The "Year 2000" problem is the potential for computer errors or failures because
certain computer systems may be unable to interpret dates after December 31,
1999 or experience other date-related problems. The Year 2000 problem may cause
systems to process information incorrectly and could disrupt businesses, such as
the Fund, that rely on computers.
While it is impossible to determine in advance all of the risks to the Fund, the
Fund could experience interruptions in basic financial and operational
functions. Fund shareholders could experience errors or disruptions in Fund
share transactions or Fund communications.
The Fund's service providers are making changes to their computer systems to fix
any Year 2000 problems. In addition, they are working to gather information from
third-party providers to determine their Year 2000 readiness.
Year 2000 problems would also increase the risks of the Fund's investments. To
assess the potential effect of the Year 2000 problem, the Adviser is reviewing
information regarding the Year 2000 readiness of issuers of securities the Fund
may purchase. The financial impact of these issues for the Fund is still being
determined. There can be no assurance that potential Year 2000 problems would
not have a material adverse effect on the Fund.
Financial Information
FINANCIAL HIGHLIGHTS
The following financial highlights will help you understand the Fund's financial
performance for its past five fiscal years. Some of the information is presented
on a per share basis. Total returns represent the rate an investor would have
earned (or lost) on an investment in the Fund, assuming reinvestment of any
dividends and capital gains.
This information has been audited by Deloitte & Touche LLP, whose report, along
with the Fund's audited financial statements, is included in this prospectus.
Financial Highlights
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 30.
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED
AUGUST 31, YEAR ENDED MAY 31,
1999 1 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $10.72 $10.89 $10.57 $10.34 $10.44 $10.17
INCOME FROM
INVESTMENT OPERATIONS:
Net investment income 0.11 0.47 0.45 0.49 0.49 0.48
Net realized and
unrealized gain (loss) on
investments (0.28) (0.07) 0.32 0.23 (0.10) 0.27
TOTAL FROM
INVESTMENT OPERATIONS (0.17) 0.40 0.77 0.72 0.39 0.75
LESS DISTRIBUTIONS:
Distributions from net
investment income (0.11) (0.47) (0.45) (0.49) (0.49) (0.48)
Distributions from net
realized gain
on investments - (0.10) - - - -
TOTAL DISTRIBUTIONS (0.11) (0.57) (0.45) (0.49) (0.49) (0.48)
NET ASSET VALUE,
END OF PERIOD $10.44 $10.72 $10.89 $10.57 $10.34 $10.44
TOTAL RETURN 2 (1.56%) 3.65% 7.77% 7.13% 3.72% 7.71%
RATIOS TO AVERAGE NET
ASSETS:
Expenses 3 1.86% 4 1.27% 1.26% 1.38% 1.27% 1.32%
Net investment income 3 3.05% 4 3.53% 3.75% 3.85% 3.98% 4.07%
Expenses (after waivers
and reimbursements) 0.64% 4 0.52% 0.51% 0.63% 0.52% 0.57%
Net investment income
(after waivers
and reimbursements) 4.27% 4 4.28% 4.50% 4.60% 4.73% 4.82%
SUPPLEMENTAL DATA:
Net assets, end of period
(000 omitted) $41,182 $40,177 $36,013 $35,892 $36,872 $39,803
Portfolio turnover 40% 18% 41% 30% 61% 47%
</TABLE>
1 On July 23, 1999, the CCB North Carolina Municipal Securities Fund was
reorganized as a portfolio of Municipal Securities Income Trust and was renamed
Federated North Carolina Municipal Income Fund. In addition, the Fund changed
its fiscal year end from May 31 to August 31.
2 Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
3 During the period, certain fees were voluntarily waived and reimbursed. If
such waivers and reimbursements had not occurred, the ratios would have been as
indicated.
4 Computed on an annualized basis.
See Notes which are an integral part of the Financial Statements
Portfolio of Investments
AUGUST 31, 1999
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING 1 VALUE
<S> <C> <C> <C>
LONG-TERM MUNICIPALS-98.8%
NORTH CAROLINA-98.8%
$ 500,000 Buncombe County, NC,
Certificate Participation
Refunding Bonds, 4.75%
(AMBAC INS), 12/1/2011 AAA $ 472,610
250,000 Catawba County, NC, GO UT
Bonds, 5.70%, 6/1/2003 AA- 261,975
500,000 Catawba County, NC, GO UT
Bonds, 5.75%, 6/1/2007 AA- 527,325
500,000 Catawba County, NC,
Hospital Revenue Refunding
Bond, 5.85% (Catawba
Memorial Hospital)/(United
States Treasury
GTD)/(Original Issue
Yield: 5.90%), 10/1/2004 AAA 531,505
500,000 Catawba County, NC,
Hospital Revenue Refunding
Bonds, 5.95% (Catawba
Memorial Hospital)/(United
States Treasury
GTD)/(Original Issue
Yield: 6.00%), 10/1/2005 AAA 532,935
750,000 Catawba County, NC,
Revenue Refunding Bonds,
4.50%, 10/1/2009 Aaa 713,985
1,500,000 Charlotte, NC, Water &
Sewer System, Revenue
Bonds, 5.25% (Original
Issue Yield: 5.66%),
6/1/2024 AA+ 1,417,545
500,000 Charlotte, NC, GO UT Public Improvement Bonds, 4.75% (Original
Issue Yield:
4.83%), 2/1/2013 AAA 474,500
500,000 Charlotte, NC, GO UT Public
Improvement Bonds, 5.30%,
4/1/2008 AAA 518,285
500,000 Chatham County, NC, GO UT
Bonds, 5.40%, 4/1/2007 A+ 520,435
500,000 Chatham County, NC, GO UT
Bonds, 5.40%, 4/1/2010 A+ 514,395
465,000 Chatham County, NC, GO UT
Refunding Bonds, 5.25%
(Original Issue Yield:
5.35%), 5/1/2010 A+ 472,756
1,000,000 Craven County, NC, GO UT
Bonds, 5.50%, 6/1/2010 AAA 1,039,000
500,000 Cumberland County, NC, GO
UT Refunding Bonds, 5.00%
(FGIC INS), 2/1/2013 AAA 489,695
480,000 Cumberland County, NC, GO UT, 5.00% (MBIA INS)/(Original Issue
Yield: 5.15%), 3/1/2015 AAA 463,186
1,200,000 Dare County, NC, Utility
System Revenue Bonds
(Series A), 5.25%,
6/1/2016 AAA 1,175,688
470,000 Duplin County, NC, GO UT
Bonds, 5.30% (MBIA
INS)/(Original Issue
Yield: 5.40%), 4/1/2007 AAA 486,746
500,000 Durham & Wake Counties
Special Airport District,
NC, GO UT Refunding Bonds,
5.75% (Original Issue
Yield: 5.80%), 4/1/2002 AAA 519,200
250,000 Fayetteville, NC, Public
Works Commission, Revenue
Bonds (Series B), 5.90%
(FSA INS)/(Original Issue
Yield: 6.00%), 3/1/2007 AAA 262,625
500,000 Fayetteville, NC, Public
Works Commission, Revenue
Bonds, 5.40% (AMBAC
INS)/(Original Issue
Yield: 5.50%), 3/1/2009 AAA 513,480
500,000 Forsyth County, NC, GO UT,
4.75% (Original Issue
Yield: 5.00%), 2/1/2013 AAA 474,500
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING 1 VALUE
<C> <S> <C> <C>
LONG-TERM MUNICIPALS-
continued
NORTH CAROLINA-CONTINUED
$ 400,000 Forsyth County, NC, School
Improvements, 4.50%
(Original Issue Yield:
4.55%), 8/1/2013 AAA $ 367,468
500,000 Gastonia, NC, GO UT, 5.50%
(MBIA INS)/(Original Issue
Yield: 5.55%), 5/1/2013 AAA 510,820
500,000 Guilford County, NC, GO UT
Bonds, 5.30% (Original
Issue Yield: 5.40%),
5/1/2010 AA+ 513,290
500,000 Guilford County, NC, GO UT
Bonds, 5.30%, 5/1/2009 AA+ 516,190
500,000 Guilford County, NC, GO UT
Bonds, 5.40% (Original
Issue Yield: 5.55%),
4/1/2009 AA+ 516,760
500,000 Guilford County, NC, GO UT,
5.40% (Original Issue
Yield: 5.55%), 5/1/2012 AA+ 511,255
575,000 High Point, NC, Revenue
Bonds, 5.60% (Original
Issue Yield: 5.85%),
3/1/2014 AA 591,847
500,000 Iredell County, NC,
Certificates of
Participation, 5.50% (FGIC
INS)/(Original Issue
Yield: 5.60%), 6/1/2001 AAA 511,630
350,000 Iredell County, NC,
Certificates of
Participation, 6.125%
(FGIC INS)/(Original Issue
Yield: 6.23%), 6/1/2007 AAA 370,909
1,250,000 Johnston County, NC,
Finance Corp., Installment
Payment Revenue Bonds,
5.25% (Johnston County,
NC)/(FSA INS)/(Original
Issue Yield: 5.377%),
8/1/2021 AAA 1,188,287
2,000,000 Martin County, NC, IFA,
(Series 1995) Solid Waste
Disposal Revenue Bonds,
6.00% (Weyerhaeuser Co.),
11/1/2025 A 1,995,880
350,000 Mecklenburg County, NC, GO
UT, 5.50% (Original Issue
Yield: 5.60%), 4/1/2011 AAA 360,546
1,000,000 Moore County, NC, GO UT
Bonds, 4.90% (MBIA INS),
6/1/2013 AAA 961,680
500,000 Mooresville, NC, Grade
School District Facilities
Corp., Certificates of
Participation, 6.30%
(AMBAC INS)/(Original
Issue Yield: 6.348%),
10/1/2009 AAA 535,535
500,000 Morganton, NC, GO UT
Revenue Bonds, 5.60% (FGIC
INS), 6/1/2007 AAA 525,585
500,000 Morganton, NC, Water &
Sewer GO UT Revenue Bonds,
5.60% (FGIC INS), 6/1/2008 AAA 524,915
1,000,000 New Hanover County, NC,
Hospital, Health,
Hospital, Nursing Revenue
Bonds, 5.25%, 10/1/2012 AAA 993,880
500,000 New Hanover County, NC,
Hospital, Revenue Bonds,
5.25% (MBIA INS)/(Original
Issue Yield: 4.544%),
10/1/2011 AAA 502,420
500,000 New Hanover County, NC,
(Project R-5) GO UT Bonds,
5.40% (Original Issue
Yield: 5.45%), 3/1/2009 AA- 517,080
500,000 New Hanover County, NC, GO
UT Bonds, 5.30% (Original
Issue Yield: 5.50%),
5/1/2014 AA- 498,295
500,000 New Hanover County, NC, GO
UT Bonds, 5.50% (Original
Issue Yield: 5.70%),
3/1/2012 AA- 512,965
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING 1 VALUE
<C> <S> <C> <C>
LONG-TERM MUNICIPALS-
continued
NORTH CAROLINA-CONTINUED
$ 750,000 North Carolina Educational
Facilities Finance Agency,
Revenue Bonds, 6.625%
(Duke University),
10/1/2008 AA+ $ 796,380
1,000,000 North Carolina HFA, Home
Ownership Revenue Bonds
(Series 5-A), 5.55%,
1/1/2019 AA 977,900
625,000 North Carolina Medical
Care Commission, Health
Care Facilities Revenue
Bonds, 5.50% (Scotland
Memorial Hospital)/(Asset
Guaranty INS)/(Original
Issue Yield: 5.593%),
10/1/2019 AA 596,831
200,000 North Carolina Medical
Care Commission, Revenue
Bonds, 5.95% (Presbyterian
Health Services
Corp)/(Original Issue
Yield: 6.00%), 10/1/2007 AA 213,174
1,850,000 North Carolina Municipal
Power Agency No. 1, Revenue
Bonds, 10.50% (Catawba
Electric)/(United States
Treasury COL), 1/1/2010 AAA 2,425,147
500,000 North Carolina Municipal
Power Agency No. 1, Revenue
Refunding Bonds, 5.25%
(Catawba Electric)/(AMBAC
INS)/(Original Issue
Yield: 5.55%), 1/1/2008 AAA 508,230
500,000 North Carolina Municipal
Power Agency No. 1, Revenue
Refunding Bonds, 5.75%
(Catawba Electric)/(AMBAC
INS)/(Original Issue
Yield: 5.80%), 1/1/2002 AAA 514,835
1,000,000 North Carolina State, GO
UT, 4.75% (Original Issue
Yield: 4.88%), 4/1/2013 AAA 948,570
500,000 North Carolina State, GO
UT, 4.75% (Original Issue
Yield: 4.93%), 4/1/2014 AAA 468,665
500,000 North Carolina State, GO
UT, 5.10%, 3/1/2008 AAA 511,245
1,500,000 Pitt County, NC, Refunding
Bonds, 5.25% (Pitt County
Memorial Hospital)/(United
States Treasury
GTD)/(Original Issue
Yield: 5.85%), 12/1/2021 Aaa 1,425,870
500,000 Rowan County, NC, GO UT
Bonds, 5.60% (MBIA INS),
4/1/2009 AAA 523,900
250,000 Stokes County, NC, GO UT Bonds, 4.90% (FGIC INS),
6/1/2012 AAA 242,668
1,000,000 Union County, NC, UT GO Bonds (Series 1999B), 5.25% (Original
Issue
Yield: 5.50%), 3/1/2020 AAA 985,980
600,000 Wake County, NC,
Industrial Facilities &
PCFA, Revenue Bonds, 6.90%
(Carolina Power & Light
Co.), 4/1/2009 A 620,868
2,050,000 Wilmington, NC,
Certificates of
Participation (Series A),
5.35% (MBIA INS)/(Original
Issue Yield: 5.45%),
6/1/2024 AAA 1,972,325
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING 1 VALUE
<S> <C> <C> <C>
LONG-TERM MUNICIPALS-
continued
NORTH CAROLINA-CONTINUED
$ 500,000 Winston-Salem, NC, GO UT
Bonds, 5.40% (Original
Issue Yield: 5.30%),
6/1/2009 AAA $ 519,745
500,000 Winston-Salem, NC, GO UT
Bonds, 5.40% (Original
Issue Yield: 5.50%),
6/1/2011 AAA 513,760
TOTAL LONG-TERM MUNICIPALS
(IDENTIFIED COST
$40,599,830) 40,675,701
SHORT-TERM MUNICIPALS-4.6%
NORTH CAROLINA-4.6%
700,000 Person County, NC,
Industrial Facilities &
Pollution Control
Financing Authority Daily
VRDNs (Carolina Power &
Light Co.)/(SunTrust Bank,
Atlanta LOC) Aa3 700,000
1,200,000 Wake County, NC,
Industrial Facilities &
PCFA, (Series 1990B) Daily
VRDNs (Carolina Power &
Light Co.)/(Bank of New
York, New York LOC) AA- 1,200,000
TOTAL SHORT-TERM
MUNICIPALS (AT AMORTZED
COST $1,900,000) 1,900,000
TOTAL INVESTMENTS
(IDENTIFIED COST
$42,499,830) 2 $ 42,575,701
</TABLE>
Securities that are subject to alternative minimum tax represent 8.6% of the
Fund's portfolio based upon total portfolio market value.
1 Please refer to the Appendix of the Statement of Additional Information for an
explanation of the credit ratings. Current credit ratings are unaudited.
2 The cost of investments for federal tax purposes amounts to $42,499,830. The
net unrealized appreciation of investments on a federal tax basis amounts to
$75,871 which is comprised of $564,190 appreciation and $488,319 depreciation at
August 31, 1999.
Note: The categories of investments are shown as a percentage of net assets
($41,181,875) at August 31, 1999.
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 GO
- -General Obligation GTD -Guaranty HFA -Housing Finance Authority IFA -Industrial
Finance Authority INS -Insured LOC -Letter of Credit MBIA -Municipal Bond
Investors Assurance PCFA -Pollution Control Finance Authority UT -Unlimited Tax
VRDNs -Variable Rate Demand Notes
See Notes which are an integral part of the Financial Statements
Statement of Assets and Liabilities
AUGUST 31, 1999
<TABLE>
<S> <C> <C>
ASSETS:
Total investments in
securities, at value
(identified and tax cost
$42,499,830) $ 42,575,701
Cash 36,993
Income receivable 681,763
Receivable for investments
sold 5,829,310
Receivable for shares sold 96,228
TOTAL ASSETS 49,219,995
LIABILITIES:
Payable for investments
purchased $ 7,885,670
Payable for shares
redeemed 14,678
Income distribution
payable 137,772
TOTAL LIABILITIES 8,038,120
Net assets for 3,943,813
shares outstanding $ 41,181,875
NET ASSETS CONSIST OF:
Paid in capital $ 41,208,691
Net unrealized
appreciation of
investments 75,871
Accumulated net realized
loss on investments (103,607)
Undistributed net
investment income 920
TOTAL NET ASSETS $ 41,181,875
NET ASSET VALUE, OFFERING
PRICE AND REDEMPTION
PROCEEDS PER SHARE:
Net Asset Value Per Share
($41,181,875 / 3,943,813
shares outstanding) $10.44
Offering Price Per Share
(100/95.50 of $10.44) 1 $10.93
Redemption Proceeds Per
Share (100.00/100 of
$10.44) 2 $10.44
</TABLE>
1 See "What Do Shares Cost?" in the Prospectus.
2 See "Contingent Deferred Sales Charge" in the Prospectus.
See Notes which are an integral part of the Financial Statements
Statement of Operations
THREE MONTHS ENDED AUGUST 31, 1999 1
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest $ 501,645
EXPENSES:
Investment advisory fee $ 61,865
Administrative personnel
and services fee 21,725
Custodian fees 2,472
Transfer and dividend
disbursing agent fees and
expenses 25,380
Directors'/Trustees' fees 750
Auditing fees 16,500
Legal fees 14,879
Portfolio accounting fees 13,138
Distribution services fee 10,375
Shareholder services fee 10,375
Share registration costs 7,545
Printing and postage 4,635
Miscellaneous 261
TOTAL EXPENSES 189,900
WAIVERS AND
REIMBURSEMENTS:
Waiver of investment
advisory fee $ (61,865)
Waiver of distribution
services fee (10,375)
Reimbursement of other
operating expenses (51,879)
TOTAL WAIVERS AND
REIMBURSEMENTS (124,119)
Net expenses 65,781
Net investment income 435,864
REALIZED AND UNREALIZED
GAIN (LOSS) ON
INVESTMENTS:
Net realized loss on
investments (159,344)
Net change in unrealized
appreciation
(depreciation) of
investments (903,157)
Net realized and
unrealized loss on
investments (1,062,501)
Change in net assets
resulting from operations $ (626,637)
</TABLE>
1 On July 23, 1999, the CCB North Carolina Municipal Securities Fund was
reorganized as a portfolio of Municipal Securities Income Trust and was renamed
Federated North Carolina Municipal Income Fund. In addition, the Fund changed
its fiscal year end from May 31 to August 31.
See Notes which are an integral part of the Financial Statements
Statement of Operations
YEAR ENDED MAY 31, 1999
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest $ 1,931,609
EXPENSES:
Investment advisory fee $ 301,408
Administrative personnel
and services fee 58,580
Custodian fees 13,069
Transfer and dividend
disbursing agent fees and
expenses 35,198
Directors'/Trustees' fees 4,761
Auditing fees 12,827
Legal fees 5,934
Portfolio accounting fees 45,190
Share registration costs 18,120
Printing and postage 8,748
Insurance premiums 339
Taxes 859
Miscellaneous 5,063
TOTAL EXPENSES 510,096
WAIVERS:
Waiver of investment
advisory fee (301,408)
Net expenses 208,688
Net investment income 1,722,921
REALIZED AND UNREALIZED
GAIN (LOSS) ON
INVESTMENTS:
Net realized gain on
investments 181,395
Net change in unrealized
appreciation of
investments (440,652)
Net realized and
unrealized loss on
investments (259,257)
Change in net assets
resulting from operations $ 1,463,664
</TABLE>
See Notes which are an integral part of the Financial Statements
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED
AUGUST 31, YEAR ENDED MAY 31,
1999 1 1999 1998
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS
OPERATIONS:
Net investment income $ 435,864 $ 1,722,921 $ 1,656,571
Net realized gain (loss) on
investments ($(159,344),
$181,395, and $562,076,
respectively, as computed
for federal tax purposes) (159,344) 181,395 562,076
Net change in unrealized
appreciation
(depreciation) (903,157) (440,652) 543,069
CHANGE IN NET ASSETS
RESULTING FROM OPERATIONS (626,637) 1,463,664 2,761,716
DISTRIBUTIONS TO
SHAREHOLDERS:
Distributions from net
investment income (435,689) (1,722,921) (1,656,571)
Distributions from net
realized gains - (367,968) -
CHANGE IN NET ASSETS
RESULTING FROM
DISTRIBUTIONS TO
SHAREHOLDERS (435,689) (2,090,889) (1,656,571)
SHARE TRANSACTIONS:
Proceeds from sale of
shares 3,798,955 10,238,583 5,401,737
Net asset value of shares
issued to shareholders in
payment of distributions
declared 34,404 188,967 169,069
Cost of shares redeemed (1,766,138) (5,636,038) (6,554,865)
CHANGE IN NET ASSETS
RESULTING FROM
SHARE TRANSACTIONS 2,067,221 4,791,512 (984,059)
Change in net assets 1,004,895 4,164,287 121,086
NET ASSETS:
Beginning of period 40,176,980 36,012,693 35,891,607
End of period (including
undistributed net
investment income of $920
and $745, respectively for
the three months ended
August 31, 1999 and the
year ended May 31, 1999) $ 41,181,875 $ 40,176,980 $ 36,012,693
</TABLE>
1 On July 23, 1999, the CCB North Carolina Municipal Securities Fund was
reorganized as a portfolio of Municipal Securities Income Trust and was renamed
Federated North Carolina Municipal Income Fund. In addition, the Fund changed
its fiscal year end from May 31 to August 31.
See Notes which are an integral part of the Financial Statements
Notes to Financial Statements
AUGUST 31, 1999
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 six portfolios. The
financial statements included herein are only those of Federated North Carolina
Municipal Income Fund (formerly CCB North Carolina Municipal Securities 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 North Carolina.
REORGANIZATION
On July 23, 1999, the CCB North Carolina Municipal Securities Fund was
reorganized as a portfolio of Federated Municipal Securities Income Trust and
was renamed Federated North Carolina Municpal Income Fund. In addition, the Fund
changed its fiscal year end from May 31 to August 31.
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.
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 ("the Trustees") to issue an
unlimited number of full and fractional shares of beneficial (without par
value). Transactions in Shares were as follows:
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED
AUGUST 31, YEAR ENDED MAY 31,
1999 1 1999 1998
<S> <C> <C> <C>
Shares sold 360,848 939,308 501,030
Shares issued to
shareholders in payment of
distributions declared 3,277 17,279 15,643
Shares redeemed (167,597) (516,525) (605,325)
NET CHANGE RESULTING FROM
FUND SHARE TRANSACTION 196,528 440,062 (88,652)
</TABLE>
1 The Fund changed its fiscal year end from May 31 to August 31.
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE
Federated Investment Management Company, 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 and/or
reimbursement at any time at its sole discretion
Federated Investment Management Company became the Fund's investment adviser on
July 23, 1999. Prior to July 23, 1999, Central Carolina Bank and Trust Company
served as the Fund's investment adviser and received for its services an annual
investment advisory fee equal to 0.75% of the Fund's average daily net assets.
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 0.25% of
the average daily net assets of the Fund shares, 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.
Prior to July 23, 1999, the CCB North Carolina Municipal Securities Fund did not
pay or accrue a distribution services fee.
SHAREHOLDER SERVICES FEE
Under the terms of a Shareholder Services Agreement with Federated Shareholder
Services Company ("FSSC"), the Fund will pay FSSC up to 0.25% of average daily
net assets of the Fund for the period. The fee paid to FSSC is used to finance
certain services for shareholders and to maintain shareholder accounts. FSSC may
voluntarily choose to waive any portion of its fee. FSSC can modify or terminate
this voluntary waiver at any time at its sole discretion.
Prior to July 23, 1999, the CCB North Carolina Municipal Securities Income Fund
did not pay or accrue a shareholder services fee.
TRANSFER AND DIVIDEND DISBURSING AGENT AND EXPENSES
FServ, through its subsidiary 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 three months ended August 31, 1999, 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 $10,728,434 and $9,476,320,
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
three months ended August 31, 1999, were as follows:
<TABLE>
<S> <C>
Purchases $11,823,279
Sales $11,057,720
</TABLE>
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, 1999, 33.2% 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 percentage of investments insured
by or supported (backed) by a letter of credit from any one institution or
agency did not exceed 12.8% 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
FEDERATED MUNICIPAL SECURITIES INCOME TRUST
AND SHAREHOLDERS OF
FEDERATED NORTH CAROLINA MUNICIPAL INCOME FUND:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments of Federated North Carolina Municipal Income Fund
as of August 31, 1999, the related statement of operations, the statement of
changes in net assets, 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. The financial
statements of Federated North Carolina Municipal Income Fund, formerly CCB North
Carolina Municipal Securities Fund, for the year ended May 31, 1999, were
audited by other auditors whose report dated July 9, 1999, express an
unqualified opinion on those statements.
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, 1999, by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Federated North
Carolina Municipal Income Fund as of August 31, 1999, and the results of its
operations, the changes in its net assets and its financial highlights for the
three months then ended in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Boston, Massachusetts
October 15, 1999
[Graphic]
Federated
World-Class Investment Manager
PROSPECTUS
Federated North Carolina Municipal
Income Fund
(formerly CCB North Carolina Municipal Securities Fund)
A Portfolio of Federated Municipal Securities Income Trust
CLASS A SHARES
OCTOBER 31, 1999
A Statement of Additional Information (SAI) dated October 31, 1999, is
incorporated by reference into this prospectus. Additional information about the
Fund's investments is contained in the Fund's Annual and SemiAnnual Reports to
shareholders as they become available. The Annual Report's Management Discussion
and Analysis discusses market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year. To
obtain the SAI, the Annual Report, the Semi-Annual Report and other information
without charge, and make inquiries, call your investment professional or the
Fund at 1-800-341- 7400.
You can obtain information about the Fund (including the SAI) by writing to or
visiting the Public Reference Room in Washington, D.C. You may also access fund
information from the EDGAR Database on the SEC's Internet site at
http://www.sec.gov. You can purchase copies of this information by contacting
the SEC by email at [email protected], or by writing to the SEC's Public
Reference Section, Washington, D.C. 20549-0102. Call 1-202- 942-8090 for
information on the Public Reference Room's operations and copying fees.
[Graphic]
Federated
Federated North Carolina
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
1-800-341-7400
WWW.FEDERATEDINVESTORS.COM
Federated Securities Corp., Distributor
Investment Company Act File No. 811-6165
Cusip 625922810
G02671-01 (10/99)
[Graphic]
STATEMENT OF ADDITIONAL INFORMATION
Federated North Carolina Municipal
Income Fund
(Formerly CCB North Carolina Municipal Securities Fund)
A Portfolio of Federated Municipal Securities Income Trust
CLASS A SHARES
This Statement of Additional Information (SAI) is not a prospectus. Read this
SAI in conjunction with the prospectus for Federated North Carolina Municipal
Income Fund Class A Shares (Fund), dated October 31, 1999. Obtain the prospectus
and the Annual Report's Management Discussion and Analysis without charge by
calling 1-800-341-7400.
OCTOBER 31, 1999
[Graphic]
Federated
World-Class Investment Manager
Federated North Carolina Municipal
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
1-800-341-7400
WWW.FEDERATEDINVESTORS.COM
Federated Securities Corp., Distributor
G02671-02 (10/99)
[Graphic]
CONTENTS
How is the Fund Organized? 1
Securities in Which the Fund Invests 1
What Do Shares Cost? 4
How is the Fund Sold? 5
Subaccounting Services 6
Redemption in Kind 6
Massachusetts Partnership Law 6
Account and Share Information 6
Tax Information 6
Who Manages and Provides Services to the Fund? 7
How Does the Fund Measure Performance? 10
Who is Federated Investors, Inc.? 13
Investment Ratings 14
Addresses 16
How is the Fund Organized?
The Fund is a non-diversified portfolio of Federated Municipal Securities Income
Trust (Trust). The Trust is an open-end, management investment company that was
established under the laws of the Commonwealth of Massachusetts on August 6,
1990. The Trust may offer separate series of shares representing interests in
separate portfolios of securities. Effective October 1, 1999, the Trust changed
its name from Municipal Securities Income Trust to Federated Municipal
Securities Income Trust. The CCB North Carolina Municipal Securities Fund (the
"Former Fund") was established on July 22, 1992, and was reorganized as a
portfolio of the Trust on July 23, 1999. The Fund's investment adviser is
Federated Investment Management Company (Adviser).
Securities in Which the Fund Invests
The Fund's principal securities are described in its prospectus. Additional
securities and further information regarding the principal securities, are
outlined below. In pursuing its investment strategy, the Fund may invest in the
following securities for any purpose that is consistent with its investment
objective.
SECURITIES DESCRIPTIONS AND TECHNIQUES
FIXED INCOME SECURITIES
Fixed income securities pay interest, dividends or distributions at a specified
rate. The rate may be a fixed percentage of the principal or adjusted
periodically. In addition, the issuer of a fixed income security must repay the
principal amount of the security, normally within a specified time. Fixed income
securities provide more regular income than equity securities. However, the
returns on fixed income securities are limited and normally do not increase with
the issuer's earnings. This limits the potential appreciation of fixed income
securities as compared to equity securities.
A security's yield measures the annual income earned on a security as a
percentage of its price. A security's yield will increase or decrease depending
upon whether it costs less (a discount) or more (a premium) than the principal
amount. If the issuer may redeem the security before its scheduled maturity, the
price and yield on a discount or premium security may change based upon the
probability of an early redemption. Securities with higher risks generally have
higher yields.
TAX EXEMPT SECURITIES
Tax exempt securities are fixed income securities that pay interest that is not
subject to federal regular income taxes. Typically, states, counties, cities and
other political subdivisions and authorities issue tax exempt securities. The
market categorizes tax exempt securities by their source of repayment.
MUNICIPAL NOTES
Municipal notes are short-term tax exempt securities. Many municipalities issue
such notes to fund their current operations before collecting taxes or other
municipal revenues. Municipalities may also issue notes to fund capital projects
prior to issuing long-term bonds. The issuers typically repay the notes at the
end of their fiscal year, either with taxes, other revenues or proceeds from
newly issued notes or bonds.
VARIABLE RATE DEMAND INSTRUMENTS
Variable rate demand instruments are tax exempt securities that require the
issuer or a third party, such as a dealer or bank, to repurchase the security
for its face value upon demand. The securities also pay interest at a variable
rate intended to cause the securities to trade at their face value. The Fund
treats demand instruments as short-term securities, because their variable
interest rate adjusts in response to changes in market rates, even though their
stated maturity may extend beyond 13 months.
TAX INCREMENT FINANCING BONDS
Tax increment financing (TIF) bonds are payable from increases in taxes or other
revenues attributable to projects financed by the bonds. For example, a
municipality may issue TIF bonds to redevelop a commercial area. The TIF bonds
would be payable solely from any increase in sales taxes collected from
merchants in the area. The bonds could default if merchants' sales, and related
tax collections, failed to increase as anticipated.
CREDIT ENHANCEMENT
Common types of credit enhancement include guarantees, letters of credit, bond
insurance and surety bonds. Credit enhancement also includes arrangements where
securities or other liquid assets secure payment of a fixed income security. If
a default occurs, these assets may be sold and the proceeds paid to security's
holders. Either form of credit enhancement reduces credit risks by providing
another source of payment for a fixed income security.
DERIVATIVE CONTRACTS
Derivative contracts are financial instruments that require payments based upon
changes in the values of designated (or underlying) securities, currencies,
commodities, financial indices or other assets. Some derivative contracts (such
as futures, forwards and options) require payments relating to a future trade
involving the underlying asset. The other party to a derivative contract is
referred to as a counterparty.
Many derivative contracts are traded on securities or commodities exchanges. In
this case, the exchange sets all the terms of the contract except for the price.
Investors make payments due under their contracts through the exchange. Most
exchanges require investors to maintain margin accounts through their brokers to
cover their potential obligations to the exchange. Parties to the contract make
(or collect) daily payments to the margin accounts to reflect losses (or gains)
in the value of their contracts. This protects investors against potential
defaults by the counterparty. Trading contracts on an exchange also allows
investors to close out their contracts by entering into offsetting contracts.
For example, the Fund could close out an open contract to buy an asset at a
future date by entering into an offsetting contract to sell the same asset on
the same date. If the offsetting sale price is more than the original purchase
price, the Fund realizes a gain; if it is less, the Fund realizes a loss.
Exchanges may limit the amount of open contracts permitted at any one time. Such
limits may prevent the Fund from closing out a position. If this happens, the
Fund will be required to keep the contract open (even if it is losing money on
the contract), and to make any payments required under the contract (even if it
has to sell portfolio securities at unfavorable prices to do so). Inability to
close out a contract could also harm the Fund by preventing it from disposing of
or trading any assets it has been using to secure its obligations under the
contract.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest its assets in securities of other investment companies,
including the securities of affiliated money market funds, as an efficient means
of carrying out its investment policies and managing its uninvested cash.
TEMPORARY DEFENSIVE INVESTMENTS
The Fund may make temporary defensive investments in the following taxable
securities:
REPURCHASE AGREEMENTS
Repurchase agreements are transactions in which the Fund buys a security from a
dealer or bank and agrees to sell the security back at a mutually agreed upon
time and price. The repurchase price exceeds the sale price, reflecting the
Fund's return on the transaction. This return is unrelated to the interest rate
on the underlying security. The Fund will enter into repurchase agreements only
with banks and other recognized financial institutions, such as securities
dealers, deemed creditworthy by the Adviser.
The Fund's custodian or subcustodian will take possession of the securities
subject to repurchase agreements. The Adviser or subcustodian will monitor the
value of the underlying security each day to ensure that the value of the
security always equals or exceeds the repurchase price.
Repurchase agreements are subject to credit risks.
REVERSE REPURCHASE AGREEMENTS
Reverse repurchase agreements are repurchase agreements in which the Fund is the
seller (rather than the buyer) of the securities, and agrees to repurchase them
at an agreed upon time and price. A reverse repurchase agreement may be viewed
as a type of borrowing by the Fund. Reverse repurchase agreements are subject to
credit risks. In addition, reverse repurchase agreements create leverage risks
because the Fund must repurchase the underlying security at a higher price,
regardless of the market value of the security at the time of repurchase.
TREASURY SECURITIES
Treasury securities are direct obligations of the federal government of the
United States.
BANK INSTRUMENTS
Bank instruments are unsecured interest bearing deposits with banks. Bank
instruments include bank accounts, time deposits, certificates of deposit and
banker's acceptances.
AGENCY SECURITIES
Agency securities are issued or guaranteed by a federal agency or other
government sponsored entity acting under federal authority (a GSE). The United
States supports some GSEs with its full faith and credit. Other GSEs receive
support through federal subsidies, loans or other benefits. A few GSEs have no
explicit financial support, but are regarded as having implied support because
the federal government sponsors their activities.
CORPORATE DEBT SECURITIES
Corporate debt securities are fixed income securities issued by businesses.
Notes, bonds, debentures and commercial paper are the most prevalent types of
corporate debt securities.
COMMERCIAL PAPER
Commercial paper is an issuer's obligation with a maturity of less than nine
months. Companies typically issue commercial paper to pay for current
expenditures. Most issuers constantly reissue their commercial paper and use the
proceeds (or bank loans) to repay maturing paper. If the issuer cannot continue
to obtain liquidity in this fashion, its commercial paper may default. The short
maturity of commercial paper reduces both the market and credit risks as
compared to other debt securities of the same issuer.
INVESTMENT RISKS
There are many factors which may affect an investment in the Fund. The Fund's
principal risks are described in its prospectus. Additional risk factors are
outlined below.
CREDIT RISKS
Fixed income securities generally compensate for greater credit risk by paying
interest at a higher rate. The difference between the yield of a security and
the yield of a AAA municipal security with a comparable maturity (the spread)
measures the additional interest paid for risk. Spreads may increase generally
in response to adverse economic or market conditions. A security's spread may
also increase if the security's rating is lowered, or the security is perceived
to have an increased credit risk. An increase in the spread will cause the price
of the security to decline.
LIQUIDITY RISKS
Limited trading opportunities may make it more difficult to sell or buy a
security at a favorable price or time. Consequently, the Fund may have to accept
a lower price to sell a security, sell other securities to raise cash or give up
an investment opportunity, any of which could have a negative effect on the
Fund's performance. Infrequent trading of securities may also lead to an
increase in their price volatility.
INVESTMENT LIMITATIONS
BORROWING MONEY AND ISSUING SENIOR SECURITIES
The Fund may borrow money, directly or indirectly, and issue senior securities
to the maximum extent permitted under the 1940 Act.
UNDERWRITING
The Fund may not underwrite the securities of other issuers, except that the
Fund may engage in transactions involving the acquisition, disposition or resale
of its portfolio securities, under circumstances where it may be considered to
be an underwriter under the Securities Act of 1933.
INVESTING IN REAL ESTATE
The Fund may not purchase or sell real estate, provided that this restriction
does not prevent the Fund from investing in issuers which invest, deal, or
otherwise engage in transactions in real estate or interests therein, or
investing in securities that are secured by real estate or interests therein.
The Fund may exercise its rights under agreements relating to such securities,
including the right to enforce security interests and to hold real estate
acquired by reason of such enforcement until that real estate can be liquidated
in an orderly manner.
INVESTING IN COMMODITIES
The Fund may not purchase or sell physical commodities, provided that the Fund
may purchase securities of companies that deal in commodities.
LENDING CASH OR SECURITIES
The Fund may not make loans, provided that this restriction does not prevent the
Fund from purchasing debt obligations, entering into repurchase agreements,
lending its assets to broker/dealers or institutional investors and investing in
loans, including assignments and participation interests.
CONCENTRATION OF INVESTMENTS
The Fund will not make investments that will result in the concentration of its
investments in the securities of issuers primarily engaged in the same industry.
Government securities, municipal securities and bank instruments will not be
deemed to constitute an industry. As an operating policy, bank instruments will
be limited to instruments of domestic banks.
THE ABOVE LIMITATIONS CANNOT BE CHANGED UNLESS AUTHORIZED BY THE BOARD OF
TRUSTEES (BOARD) AND BY THE "VOTE OF A MAJORITY OF ITS OUTSTANDING VOTING
SECURITIES," AS DEFINED BY THE INVESTMENT COMPANY ACT. THE FOLLOWING
LIMITATIONS, HOWEVER, MAY BE CHANGED BY THE BOARD WITHOUT SHAREHOLDER APPROVAL.
SHAREHOLDERS WILL BE NOTIFIED BEFORE ANY MATERIAL CHANGE IN THESE LIMITATIONS
BECOMES EFFECTIVE.
BUYING ON MARGIN
The Fund will not purchase any securities on margin, provided that the Fund may
obtain short-term credits necessary for the clearance of purchases and sales of
securities, and further provided that the Fund may make margin deposits in
connection with its use of financial options and futures, forward and spot
currency contracts, swap transactions and other financial contracts or
derivative instruments.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any of its assets, provided
that this shall not apply to the transfer of securities in connection with any
permissible borrowing or to collateral arrangements in connection with
permissible activities.
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, over-the-counter options and certain restricted
securities and municipal leases determined by the Board of Trustees not to be
liquid.
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.
In applying the Fund's commodities limitation, investments in transactions
involving futures contracts and options, forward currency contracts, swap
transactions and other financial contracts that settle by payment of cash are
not deemed to be investments in commodities.
In applying the Fund's concentration limitation: (1) utility companies will be
divided according to their services, for example, gas, gas transmission,
electric and telephone will each be considered a separate industry; (2)
financial service companies will be classified according to the end users of
their services, for example, automobile finance, bank finance and diversified
finance will each be considered a separate industry; and (3) asset-backed
securities will be classified according to the underlying assets securing such
securities. To conform to the current view of the Securities and Exchange
Commission (SEC) staff that only domestic bank instruments may be excluded from
industry concentration limitations, the Fund will not exclude foreign bank
instruments from industry concentration tests as long as the policy of the SEC
remains in effect. The Fund will consider concentration to be the investment of
more than 25% of the value of its total assets in any one industry.
DETERMINING MARKET VALUE OF SECURITIES
Market values of the Fund's portfolio securities are determined as follows:
* for fixed income securities, at the last sale price on a national securities
exchange, if available, otherwise, as determined by an independent pricing
service;
* futures contracts and options are generally valued at market values
established by the exchanges on which they are traded at the close of trading on
such exchanges. Options traded in the over-the-counter market are generally
valued according to the mean between the last bid and the last asked price for
the option as provided by an investment dealer or other financial institution
that deals in the option. The Board may determine in good faith that another
method of valuing such investments is necessary to appraise their fair market
value;
* for short-term obligations, according to the mean between bid and asked prices
as furnished by an independent pricing service, except that short-term
obligations with remaining maturities of less than 60 days at the time of
purchase may be valued at amortized cost or at fair market value as determined
in good faith by the Board; and
* for all other securities at fair value as determined in good faith by the
Board.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may consider institutional trading in
similar groups of securities, yield, quality, stability, risk, coupon rate,
maturity, type of issue, trading characteristics, and other market data or
factors. From time to time, when prices cannot be obtained from an independent
pricing service, securities may be valued based on quotes from broker-dealers or
other financial institutions that trade the securities.
What Do Shares Cost?
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.
REDUCING OR ELIMINATING THE FRONT-END SALES CHARGE
You can reduce or eliminate the applicable front-end sales charge, as follows:
QUANTITY DISCOUNTS
Larger purchases of the same Share class reduce or eliminate the sales charge
you pay. You can combine purchases of Shares made on the same day by you, your
spouse and your children under age 21. In addition, purchases made at one time
by a trustee or fiduciary for a single trust estate or a single fiduciary
account can be combined.
ACCUMULATED PURCHASES
If you make an additional purchase of Shares, you can count previous Share
purchases still invested in the Fund in calculating the applicable sales charge
on the additional purchase.
CONCURRENT PURCHASES
You can combine concurrent purchases of the same share class of two or more
Federated Funds in calculating the applicable sales charge.
LETTER OF INTENT CLASS A SHARES
You can sign a Letter of Intent committing to purchase a certain amount of the
same class of Shares within a 13-month period to combine such purchases in
calculating the sales charge. The Fund's custodian will hold Shares in escrow
equal to the maximum applicable sales charge. If you complete the Letter of
Intent, the Custodian will release the Shares in escrow to your account. If you
do not fulfill the Letter of Intent, the Custodian will redeem the appropriate
amount from the Shares held in escrow to pay the sales charges that were not
applied to your purchases.
REINVESTMENT PRIVILEGE
You may reinvest, within 120 days, your Share redemption proceeds at the next
determined NAV without any sales charge.
PURCHASES BY AFFILIATES OF THE FUND
The following individuals and their immediate family members may buy Shares at
NAV without any sales charge because there are nominal sales efforts associated
with their purchases:
* the Trustees or Directors, employees and sales representatives of the
Fund, the Adviser, the Distributor and their affiliates;
* Employees of State Street Bank Pittsburgh who started their employment on
January 1, 1998, and were employees of Federated Investors, Inc.
(Federated) on December 31, 1997;
* any associated person of an investment dealer who has a sales agreement
with the Distributor; and
* trusts, pension or profit-sharing plans for these individuals.
FEDERATED LIFE MEMBERS
Shareholders of the Fund known as "Federated Life Members" are exempt from
paying any front-end sales charge. These shareholders joined the Fund
originally:
* through the "Liberty Account," an account for Liberty Family of Funds
shareholders on February 28, 1987 (the Liberty Account and Liberty Family of
Funds are no longer marketed); or
* as Liberty Account shareholders by investing through an affinity group prior
to August 1, 1987.
ELIMINATING THE CONTINGENT DEFERRED SALES CHARGE
Upon notification to the Distributor or the Fund's transfer agent, no CDSC will
be imposed on certain redemptions as listed below. If your redemption qualifies,
you or your investment professional should notify the Distributor at the time of
redemption to eliminate the CDSC. If the Distributor is not notified, the CDSC
will apply. Based on these conditions, no CDSC will be imposed on redemptions of
Shares:
* purchased with reinvested dividends or capital gains;
* purchased within 120 days of redeeming Shares of an equal or lesser
amount;
* that you exchanged into the same share class of another Federated Fund if the
shares were held for the applicable CDSC holding period (other than a money
market fund);
* following the death or post-purchase disability, as defined in Section
72(m)(7) of the Internal Revenue Code of 1986, of the last surviving
shareholder;
* 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;
* of Shares held by the Trustees or Director, employees, and sales
representatives of the Fund, the Adviser, the Distributor and their affiliates;
employees of any investment professional that sells Shares according to a sales
agreement with the Distributor; and the immediate family members of the above
persons;
* of Shares originally purchased through a bank trust department, a registered
investment adviser or retirement plans where the third party administrator has
entered into certain arrangements with the Distributor or its affiliates, or any
other investment professional, to the extent that no payments were advanced for
purchases made through these entities; and
* which are involuntary redemptions processed by the Fund because the accounts
do not meet the minimum balance requirements.
TO KEEP THE SALES CHARGE AS LOW AS POSSIBLE, THE FUND REDEEMS YOUR SHARES IN
THIS ORDER:
* Shares that are not subject to a CDSC; and
* Shares held the longest (to determine the number of years your Shares have
been held, include the time you held shares of other Federated Funds that have
been exchanged for Shares of this Fund).
The CDSC is then calculated using the share price at the time of purchase or
redemption, whichever is lower.
How is the Fund Sold?
Under the Distributor's Contract with the Fund, the Distributor (Federated
Securities Corp.) offers Shares on a continuous, best-efforts basis.
FRONT-END SALES CHARGE REALLOWANCES
The Distributor receives a front-end sales charge on certain Share sales. The
Distributor generally pays up to 90% (and as much as 100%) of this charge to
investment professionals for sales and/or administrative services. Any payments
to investment professionals in excess of 90% of the front-end sales charge are
considered supplemental payments. The Distributor retains any portion not paid
to an investment professional.
RULE 12B-1 PLAN
As a compensation-type plan, the Rule 12b-1 Plan is designed to pay the
Distributor (who may then pay investment professionals such as banks,
broker/dealers, trust departments of banks, and registered investment advisers)
for marketing activities (such as advertising, printing and distributing
prospectuses, and providing incentives to investment professionals) to promote
sales of Shares so that overall Fund assets are maintained or increased. This
helps the Fund achieve economies of scale, reduce per share expenses, and
provide cash for orderly portfolio management and Share redemptions. In
addition, the Fund's service providers that receive asset-based fees also
benefit from stable or increasing Fund assets.
The Fund may compensate the Distributor more or less than its actual marketing
expenses. In no event will the Fund pay for any expenses of the Distributor that
exceed the maximum Rule 12b-1 Plan fee.
The maximum Rule 12b-1 Plan fee that can be paid in any one year may not be
sufficient to cover the marketing-related expenses the Distributor has incurred.
Therefore, it may take the Distributor a number of years to recoup these
expenses.
SHAREHOLDER SERVICES
The Fund may pay Federated Shareholder Services Company, a subsidiary of
Federated, for providing shareholder services and maintaining shareholder
accounts. Federated Shareholder Services Company may select others to perform
these services for their customers and may pay them fees.
SUPPLEMENTAL PAYMENTS
Investment professionals may be paid fees out of the assets of the Distributor
and/or Federated Shareholder Services Company (but not out of Fund assets). The
Distributor and/or Federated Shareholder Services Company may be reimbursed by
the Adviser or its affiliates.
Investment professionals receive such fees for providing distribution- related
or shareholder services such as sponsoring sales, providing sales literature,
conducting training seminars for employees, and engineering sales-related
computer software programs and systems. Also, investment professionals may be
paid cash or promotional incentives, such as reimbursement of certain expenses
relating to attendance at informational meetings about the Fund or other special
events at recreational-type facilities, or items of material value. These
payments will be based upon the amount of Shares the investment professional
sells or may sell and/or upon the type and nature of sales or marketing support
furnished by the investment professional.
CLASS A SHARES
Investment professionals purchasing Class A Shares for their customers are
eligible to receive an advance payment from the Distributor based on the
following breakpoints:
ADVANCE PAYMENTS
AS A PERCENTAGE OF
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 advance payments reset
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 advance payments will be paid only on
those purchases that were not previously subject to a front-end sales charge and
dealer advance payments. Certain retirement accounts may not be eligible for
this program.
A contingent deferred sales charge of 0.75% of the redemption amount applies to
Class A Shares redeemed up to 24 months after purchase. The CDSC does not apply
under certain investment programs where the investment professional does not
receive an advance payment on the transaction including, but not limited to,
trust accounts and wrap programs where the investor pays an account level fee
for investment management.
Subaccounting Services
Certain investment professionals may wish to use the transfer agent's
subaccounting system to minimize their internal recordkeeping requirements. The
transfer agent may charge a fee based on the level of subaccounting services
rendered. Investment professionals holding Shares in a fiduciary, agency,
custodial, or similar capacity may charge or pass through subaccounting fees as
part of or in addition to normal trust or agency account fees. They may also
charge fees for other services that may be related to the ownership of Shares.
This information should, therefore, be read together with any agreement between
the customer and the investment professional about the services provided, the
fees charged for those services, and any restrictions and limitations imposed.
Redemption in Kind
Although the Fund intends to pay Share redemptions in cash, it reserves the
right, as described below, to pay the redemption price in whole or in part by a
distribution of the Fund's portfolio securities.
Because the Fund has elected to be governed by Rule 18f-1 under the Investment
Company Act of 1940, the Fund is obligated to pay Share redemptions to any one
shareholder in cash only up to the lesser of $250,000 or 1% of the net assets
represented by such Share class during any 90-day period.
Any Share redemption payment greater than this amount will also be in cash
unless the Fund's Board determines that payment should be in kind. In such a
case, the Fund will pay all or a portion of the remainder of the redemption in
portfolio securities, valued in the same way as the Fund determines its NAV. The
portfolio securities will be selected in a manner that the Fund's Board deems
fair and equitable and, to the extent available, such securities will be readily
marketable.
Redemption in kind is not as liquid as a cash redemption. If redemption is made
in kind, shareholders receiving the portfolio securities and selling them before
their maturity could receive less than the redemption value of the 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 obligations of the Trust. To protect its
shareholders, the Trust has filed legal documents with Massachusetts that
expressly disclaim the liability of its shareholders for acts or obligations of
the Trust.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required by the Declaration of Trust to use its
property to protect or compensate the shareholder. On request, the Trust will
defend any claim made and pay any judgment against a shareholder for any act or
obligation of the Trust. Therefore, financial loss resulting from liability as a
shareholder will occur only if the Trust itself cannot meet its obligations to
indemnify shareholders and pay judgments against them.
Account and Share 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 the Fund have equal voting rights, except that in matters
affecting only a particular Fund or class, only Shares of that Fund or class are
entitled to vote. Trustees may be removed by the Board or by shareholders at a
special meeting. A special meeting of shareholders will be called by the Board
upon the written request of shareholders who own at least 10% of the Trust's
outstanding shares of all series entitled to vote.
As of October 19, 1999, the following shareholders owned of record,
beneficially, or both, 5% or more of outstanding Shares: Central Carolina Bank &
Trust, Durham, NC, owned approximately 3,448,794 Shares (88.35%). Shareholders
owning 25% or more of outstanding Shares may be in control and be able to affect
the outcome of certain matters presented for a vote of shareholders.
Tax Information
FEDERAL INCOME TAX
The Fund intends to meet requirements of Subchapter M of the Internal Revenue
Code applicable to regulated investment companies. If these requirements are not
met, it will not receive special tax treatment and will pay federal income tax.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income earned and capital gains and losses realized by the
Trust's other portfolios will be separate from those realized by the Fund.
STATE TAXES
Under existing North Carolina laws, shareholders of the Fund will not be subject
to North Carolina income taxes on Fund dividends to the extent that such
dividends represent exempt-interest dividends as defined in the Code, which are
directly attributable to (a) interest on obligations issued by or on behalf of
the State of North Carolina, or its political subdivisions; or (b) interest on
obligations of the United States or any other issuer whose obligations are
exempt from state income taxes under federal law.
To the extent that Fund dividends are attributable to other sources, such
dividends will be subject to the state's income taxes.
Who Manages and Provides Services to the Fund?
BOARD OF TRUSTEES
The Board is responsible for managing the Trust's business affairs and for
exercising all the Trust's powers except those reserved for the shareholders.
Information about each Board member is provided below and includes each
person's: name, address, birth date, present position(s) held with the Trust,
principal occupations for the past five years and positions held prior to the
past five years, total compensation received as a Trustee from the Trust for its
most recent fiscal year, and the total compensation received from the Federated
Fund Complex for the most recent calendar year. The Trust is comprised of six
funds and the Federated Fund Complex is comprised of 54 investment companies,
whose investment advisers are affiliated with the Fund's Adviser. As of October
19, 1999, the Fund's Board and Officers as a group owned less than 1% of the
Fund's outstanding Class A Shares.
<TABLE>
<CAPTION>
NAME TOTAL
BIRTH DATE AGGREGATE COMPENSATION
ADDRESS PRINCIPAL OCCUPATIONS COMPENSATION FROM TRUST AND
POSITION WITH TRUST FOR PAST FIVE YEARS FROM TRUST FUND COMPLEX
<S> <C> <C> <C>
JOHN F. DONAHUE*+# Chief Executive Officer $0 $0 for the Trust and
Birth Date: July 28, 1924 and Director or Trustee of 54 other investment
Federated Investors Tower the Federated Fund companies in the
1001 Liberty Avenue Complex; Chairman and Fund Complex
Pittsburgh, PA Director, Federated
CHAIRMAN AND TRUSTEE Investors, Inc.; Chairman
and Trustee, Federated Investment
Management Company; Chairman and
Director, Federated Investment
Counseling and Federated Global
Investment Management Corp.; Chairman,
Passport Research, Ltd.
THOMAS G. BIGLEY Director or Trustee of $1,305.35 $113,860.22 for the Trust
Birth Date: February 3, 1934 the Federated Fund and 54 other investment
15 Old Timber Trail Complex; Director, Member companies in the
Pittsburgh, PA of Executive Committee, Fund Complex
TRUSTEE Children's Hospital of
Pittsburgh; Director,
Robroy Industries, Inc.
(coated steel conduits/
computer storage
equipment); formerly:
Senior Partner, Ernst &
Young LLP; Director, MED
3000 Group, Inc.
(physician practice
management); Director,
Member of Executive
Committee, University of
Pittsburgh.
JOHN T. CONROY, JR. Director or Trustee of the $1,436.05 $125,264.48 for the Trust
Birth Date: June 23, 1937 Federated Fund Complex; and 54 other investment
Wood/Commercial Dept. President, Investment companies in the
John R. Wood Associates, Inc. Realtors Properties Corporation; Fund Complex
3255 Tamiami Trail North Senior Vice President,
Naples, FL John R. Wood and
TRUSTEE 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 CONSTANTAKIS Director or Trustee of some $1,305.35 $47,958.02 for the Trust
Birth Date: September 3, 1939 of the Federated Fund and 29 other investment
175 Woodshire Drive Complex; formerly: companies in the
Pittsburgh, PA Partner, Andersen Fund Complex
TRUSTEE Worldwide SC.
JOHN F. CUNNINGHAM++ Director or Trustee of $331.87 $0 for the Trust and
Birth Date: March 5, 1943 some of the Federated Fund 46 other investment
353 El Brillo Way Complex; Chairman, companies in the
Palm Beach, FL President and Chief Fund Complex
TRUSTEE Executive Officer,
Cunningham & Co., Inc.
(strategic business
consulting); Trustee
Associate, Boston College;
Director, Iperia Corp.
(communications/software);
formerly: Director,
Redgate Communications and
EMC Corporation (computer
storage systems).
Previous Positions:
Chairman of the Board and
Chief Executive Officer,
Computer Consoles, Inc.;
President and Chief
Operating Officer, Wang
Laboratories; Director,
First National Bank of
Boston; Director, Apollo
Computer, Inc.
LAWRENCE D. ELLIS, M.D.* Director or Trustee of the $1,305.35 $113,860.22 for the Trust
Birth Date: October 11, 1932 Federated Fund Complex; and 54 other investment
3471 Fifth Avenue Professor of Medicine, companies in the
Suite 1111 University of Pittsburgh; Fund Complex
Pittsburgh, PA Medical Director,
TRUSTEE University of Pittsburgh
Medical Center - Downtown;
Hematologist, Oncologist and Internist,
University of Pittsburgh Medical
Center; Member, National Board of
Trustees, Leukemia Society of America.
PETER E. MADDEN Director or Trustee of the $1,189.91 $113,860.22 for the Trust
Birth Date: March 16, 1942 Federated Fund Complex; and 54 other investment
One Royal Palm Way formerly: Representative, companies in the
100 Royal Palm Way Commonwealth of Fund Complex
Palm Beach, FL Massachusetts General
TRUSTEE Court; President, State
Street Bank and Trust
Company and State
Street Corporation.
Previous Positions:
Director, VISA USA and VISA
International; Chairman
and Director,
Massachusetts Bankers
Association; Director,
Depository Trust
Corporation; Director, The
Boston Stock Exchange.
<CAPTION>
NAME TOTAL
BIRTH DATE AGGREGATE COMPENSATION
ADDRESS PRINCIPAL OCCUPATIONS COMPENSATION FROM TRUST AND
POSITION WITH TRUST FOR PAST FIVE YEARS FROM TRUST FUND COMPLEX
<S> <C> <C> <C>
CHARLES F. MANSFIELD, JR.++ Director or Trustee of some $1,016.39 $0 for the Trust and
Birth Date: April 10, 1945 of the Federated Fund 50 other investment
80 South Road Complex; Management companies in the
Westhampton Beach, NY Consultant. Fund Complex
TRUSTEE Previous Positions: Chief
Executive Officer, PBTC International
Bank; Partner, Arthur Young & Company
(now Ernst & Young LLP); Chief
Financial Officer of Retail Banking
Sector, Chase Manhattan Bank; Senior
Vice President, Marine Midland Bank;
Vice President, Citibank; Assistant
Professor of Banking and Finance, Frank
G. Zarb School of Business, Hofstra
University.
JOHN E. MURRAY, JR., J.D., S.J.D.# Director or Trustee of $1,403.80 $113,860.22 for the Trust
Birth Date: December 20, 1932 the Federated Fund and 54 other investment
President, Duquesne University Complex; President, Law companies in the
Pittsburgh, PA Professor, Duquesne Fund Complex
TRUSTEE University; Consulting
Partner, Mollica & Murray;
Director, Michael Baker
Corp. (engineering,
construction, operations
and technical services).
Previous Positions: Dean
and Professor of Law,
University of Pittsburgh
School of Law; Dean and
Professor of Law,
Villanova University
School of Law.
MARJORIE P. SMUTS Director or Trustee of the $1,305.35 $113,860.22 for the Trust
Birth Date: June 21, 1935 Federated Fund Complex; and 54 other investment
4905 Bayard Street Public Relations/ companies in the
Pittsburgh, PA Marketing/Conference Fund Complex
TRUSTEE Planning.
Previous Positions:
National Spokesperson,
Aluminum Company of
America; television
producer; business owner.
JOHN S. WALSH++ Director or Trustee of some $331.87 $0 for the Trust and
Birth Date: November 28, 1957 of the Federated Fund 48 other investment
2007 Sherwood Drive Complex; President and companies in the
Valparaiso, IN Director, Heat Wagon, Inc. Fund Complex
TRUSTEE (manufacturer of
construction temporary
heaters); President and
Director, Manufacturers
Products, Inc.
(distributor of portable
construction heaters);
President, Portable Heater
Parts, a division of
Manufacturers Products,
Inc.; Director, Walsh &
Kelly, Inc. (heavy highway
contractor); formerly:
Vice President, Walsh &
Kelly, Inc.
J. CHRISTOPHER DONAHUE+ President or Executive $0 $0 for the Trust and
Birth Date: April 11, 1949 Vice President of the 16 other investment
Federated Investors Tower Federated Fund Complex; companies in the
1001 Liberty Avenue Director or Trustee of some Fund Complex
Pittsburgh, PA of the Funds in the
EXECUTIVE VICE PRESIDENT Federated Fund Complex;
and TRUSTEE President, Chief Executive
Officer and Director, Federated
Investors, Inc.; President and Trustee,
Federated Investment Management
Company; President and Trustee,
Federated Investment Counseling;
President and Director, Federated
Global Investment Management Corp.;
President, Passport Research, Ltd.;
Trustee, Federated Shareholder Services
Company; Director, Federated Services
Company.
EDWARD C. GONZALES Trustee or Director of some $0 $0 for the Trust and
Birth Date: October 22, 1930 of the Funds in the 1 other investment
Federated Investors Tower Federated Fund Complex; company in the
1001 Liberty Avenue President, Executive Vice Fund Complex
Pittsburgh, PA President and Treasurer of
EXECUTIVE VICE PRESIDENT some of the Funds in the
Federated Fund Complex; Vice Chairman,
Federated Investors, Inc.; Vice
President, Federated Investment
Management Company, Federated
Investment Counseling, Federated Global
Investment Management Corp. and
Passport Research, Ltd.; Executive Vice
President and Director, Federated
Securities Corp.; Trustee, Federated
Shareholder Services Company.
JOHN W. MCGONIGLE Executive Vice President $0 $0 for the Trust and
Birth Date: October 26, 1938 and Secretary of the 54 other investment
Federated Investors Tower Federated Fund Complex; companies in the
1001 Liberty Avenue Executive Vice President, Fund Complex
Pittsburgh, PA Secretary and Director,
EXECUTIVE VICE PRESIDENT Federated Investors, Inc.;
Trustee, Federated Investment
Management Company and Federated
Investment Counseling; Director,
Federated Global Investment Management
Corp., Federated Services Company and
Federated Securities Corp.
RICHARD J. THOMAS Treasurer of the Federated $0 $0 for the Trust and
Birth Date: June 17, 1954 Fund Complex; Vice 54 other investment
Federated Investors Tower President - Funds companies in the
1001 Liberty Avenue Financial Services Fund Complex
Pittsburgh, PA Division, Federated
TREASURER Investors, Inc.; formerly:
various management
positions within Funds
Financial Services
Division of Federated
Investors, Inc.
RICHARD B. FISHER President or Vice $0 $0 for the Trust and
Birth Date: May 17, 1923 President of some of the 6 other investment
Federated Investors Tower Funds in the Federated Fund companies in the
1001 Liberty Avenue Complex; Director or Fund Complex
Pittsburgh, PA Trustee of some of the
PRESIDENT Funds in the Federated Fund
Complex; Executive Vice
President, Federated
Investors, Inc.; Chairman
and Director, Federated
Securities Corp.
<CAPTION>
NAME TOTAL
BIRTH DATE AGGREGATE COMPENSATION
ADDRESS PRINCIPAL OCCUPATIONS COMPENSATION FROM TRUST AND
POSITION WITH TRUST FOR PAST FIVE YEARS FROM TRUST FUND COMPLEX
<S> <C> <C> <C>
WILLIAM D. DAWSON, III Chief Investment Officer $0 $0 for the Trust and
Birth Date: March 3, 1949 of this Fund and various 41 other investment
Federated Investors Tower other Funds in the companies in the
1001 Liberty Avenue Federated Fund Complex; Fund Complex
Pittsburgh, PA Executive Vice President,
CHIEF INVESTMENT OFFICER Federated Investment
Counseling, Federated Global Investment
Management Corp., Federated Investment
Management Company and Passport
Research, Ltd.; Registered
Representative, Federated Securities
Corp.; Portfolio Manager, Federated
Administrative Services; Vice
President, Federated Investors, Inc.;
formerly: Executive Vice President and
Senior Vice President, Federated
Investment Counseling Institutional
Portfolio Management Services Division;
Senior Vice President, Federated
Investment Management Company and
Passport Research, Ltd.
J. SCOTT ALBRECHT J. Scott Albrecht has been $0 $0 for the Trust and
Birth Date: June 1, 1960 the Fund's portfolio 1 other investment
Federated Investors Tower manager March 1995. He is company in the
1001 Liberty Avenue Vice President of the Fund. Fund Complex
Pittsburgh, PA Mr. Albrecht joined
VICE PRESIDENT Federated in 1989. He has
been a Senior Portfolio
Manager since 1997 and a
Vice President of the
Fund's investment adviser
since 1994. He was a
Portfolio Manager from
1994 to 1996. Mr. Albrecht
is a Chartered Financial
Analyst and received his
M.S. in Public Management
from Carnegie Mellon
University.
</TABLE>
* An asterisk denotes a Trustee who is deemed to be an interested person as
defined in the Investment Company Act of 1940.
# A pound sign denotes a Member of the Board's Executive Committee, which
handles the Board's responsibilities between its meetings.
+ Mr. Donahue is the father of J. Christopher Donahue, Executive Vice
President and Trustee of the Trust.
++ Mr. Mansfield became a member of the Board of Trustees January 1, 1999.
Messrs. Cunningham and Walsh became members of the Board of Trustees on
July 1, 1999. They did not earn any fees for serving the Fund Complex
since these fees are reported as of the end of the last calendar year.
INVESTMENT ADVISER
The Adviser conducts investment research and makes investment decisions for the
Fund.
The Adviser is a wholly owned subsidiary of Federated.
The Adviser shall not be liable to the Trust or any Fund shareholder 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.
OTHER RELATED SERVICES
Affiliates of the Adviser may, from time to time, provide certain electronic
equipment and software to institutional customers in order to facilitate the
purchase of Fund Shares offered by the Distributor.
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. 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 may select brokers and dealers
based on whether they also offer research services (as described below). In
selecting among firms believed to meet these criteria, the Adviser may give
consideration to those firms which have sold or are selling Shares of the Fund
and other funds distributed by the Distributor and its affiliates. The Adviser
makes decisions on portfolio transactions and selects brokers and dealers
subject to review by the Fund's Board.
Investment decisions for the Fund are made independently from those of other
accounts managed by the Adviser. When the Fund and one or more of those accounts
invests in, or disposes of, the same security, available investments or
opportunities for sales will be allocated among the Fund and the account(s) in a
manner believed by the Adviser to be equitable. While the coordination and
ability to participate in volume transactions may benefit the Fund, it is
possible that this procedure could adversely impact the price paid or received
and/or the position obtained or disposed of by the Fund.
ADMINISTRATOR
Federated Services Company, a subsidiary of Federated, provides administrative
personnel and services (including certain legal and financial reporting
services) necessary to operate the Fund. Federated Services Company provides
these at the following annual rate of the average aggregate daily net assets of
all Federated Funds as specified below:
MAXIMUM AVERAGE AGGREGATE DAILY ADMINISTRATIVE FEE NET ASSETS OF THE FEDERATED
FUNDS 0.150 of 1% on the first $250 million 0.125 of 1% on the next $250 million
0.100 of 1% on the next $250 million 0.075 of 1% on assets in excess of $750
million
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 voluntarily waive a portion of its fee and may
reimburse the Fund for expenses.
Federated Services Company also provides certain accounting and recordkeeping
services with respect to the Fund's portfolio investments for a fee based on
Fund assets plus out-of-pocket expenses.
CUSTODIAN
State Street Bank and Trust Company, Boston, Massachusetts, is custodian for the
securities and cash of the Fund. Foreign instruments purchased by the Fund are
held by foreign banks participating in a network coordinated by State Street
Bank.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Federated Services Company, through its registered transfer agent subsidiary,
Federated Shareholder Services Company, maintains all necessary shareholder
records. The Fund pays the transfer agent a fee based on the size, type and
number of accounts and transactions made by
shareholders.
INDEPENDENT AUDITORS
The independent auditors for the Fund, Deloitte & Touche LLP, plans and performs
its audit so that it may provide an opinion as to whether the Fund's financial
statements and financial highlights are free of material misstatement.
FEES PAID BY THE FUND FOR SERVICES
FOR THE YEAR ENDED MAY 31 1999 1998 1997
Advisory Fee Earned $301,408 $273,979 $279,921
Advisory Fee Reduction 301,408 273,979 279,921
Brokerage Commissions 0 0 0
Administrative Fee 58,580 54,052 55,986
12B-1 FEE 0 0 0
SHAREHOLDER SERVICES FEE 0 0 0
FEES PAID BY THE FUND FOR SERVICES
FOR THE PERIOD ENDED AUGUST 31 1999 1
Advisory Fee Earned $61,865
Advisory Fee Reduction 61,865
Brokerage Commissions 0
Administrative Fee 10,375
12B-1 FEE 10,375
SHAREHOLDER SERVICES FEE 0
1 For the period from June 1, 1999 to August 31, 1999.
For the fiscal years ended May 31, 1999, 1998 and 1997, fees paid by the Former
Fund for services are prior to the Former Fund's reorganization as a portfolio
of the Trust on July 23, 1999.
How Does the Fund Measure Performance?
The Fund may advertise Share performance by using the Securities and Exchange
Commission's (SEC) standard method for calculating performance applicable to all
mutual funds. The SEC also permits this standard performance information to be
accompanied by non-standard performance information. Share performance reflects
the effect of non-recurring charges, such as maximum sales charges, which, if
excluded, would increase the total return and yield. The performance of Shares
depends upon such variables as: portfolio quality; average portfolio maturity;
type and value of portfolio securities; changes in interest rates; changes or
differences in the Fund's or any class of Shares' expenses; and various other
factors.
Share performance fluctuates on a daily basis largely because net earnings
fluctuate daily. Both net earnings and offering price per Share are factors in
the computation of yield and total return.
AVERAGE ANNUAL TOTAL RETURNS AND YIELD
Total returns are given for the one-, five-year and Start of Performance periods
ended August 31, 1999.
Yield and Tax-Equivalent Yield are given for the 30-day period ended August 31,
1999.
Start of Performance information shown is prior to the Former Fund's
reorganization as a portfolio of the Trust on July 23, 1999.
Start of Performance on
FUND 1 YEAR 5 Years July 22, 1992
Total Return (4.58%) 4.52% 4.71%
Yield 4.26%
Tax-Equivalent Yield 7.05%
TOTAL RETURN
Total return represents the change (expressed as a percentage) in the value of
Shares over a specific period of time, and includes the investment of income and
capital gains distributions.
The average annual total return for Shares is the average compounded rate of
return for a given period that would equate a $1,000 initial investment to the
ending redeemable value of that investment. The ending redeemable value is
computed by multiplying the number of Shares owned at the end of the period by
the NAV 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 annual reinvestment of all
dividends and distributions.
YIELD AND TAX EQUIVALENT YIELD
The yield of Shares is calculated by dividing: (i) the net investment income per
Share earned by the Shares over a 30-day period; by (ii) the maximum offering
price per Share on the last day of the period. This number is then annualized
using semi-annual compounding. This means that the amount of income generated
during the 30-day period is assumed to be generated each month over a 12-month
period and is reinvested every six months. 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 the actual yield, assuming a
specific tax rate. The yield and tax-equivalent yield do not necessarily reflect
income actually earned by Shares because of certain adjustments required by the
SEC and, therefore, may not correlate to the dividends or other distributions
paid to shareholders.
To the extent investment professionals and broker/dealers charge fees in
connection with services provided in conjunction with an investment in Shares,
the Share performance is lower for shareholders paying those fees.
TAX EQUIVALENCY TABLE
Set forth below is a sample of a tax-equivalency table that may be used in
advertising and sales literature. This table is for illustrative purposes only
and is not representative of past or future performance of the Fund. The
interest earned by the municipal securities owned by the Fund generally remains
free from federal regular income tax and is often free from state and local
taxes as well. However, some of the Fund's income may be subject to the federal
alternative minimum tax and state and/or local taxes.
<TABLE>
<CAPTION>
TAXABLE YIELD EQUIVALENT FOR 1999 STATE OF NORTH CAROLINA
FEDERAL TAX BRACKET: 15.00% 28.00% 31.00% 36.00% 39.60%
COMBINED FEDERAL AND STATE TAX BRACKET: 22.00% 35.75% 38.75% 43.75% 47.35%
<S> <C> <C> <C> <C> <C>
Joint Return $1-43,050 $43,051-104,050 $104,051-158,880 $158,881-283,150 Over 283,150
Single Return $1-25,750 $25,751-62,450 $62,451-130,250 $130,251-283,150 Over 283,150
TAX EXEMPT YIELD: TAXABLE YIELD EQUIVALENT:
1.50% 1.92% 2.33% 2.45% 2.67% 2.85%
2.00% 2.56% 3.11% 3.27% 3.56% 3.80%
2.50% 3.21% 3.89% 4.08% 4.44% 4.75%
3.00% 3.85% 4.67% 4.90% 5.33% 5.70%
3.50% 4.49% 5.45% 5.71% 6.22% 6.65%
4.00% 5.13% 6.23% 6.53% 7.11% 7.60%
4.50% 5.77% 7.00% 7.35% 8.00% 8.55%
5.00% 6.41% 7.78% 8.16% 8.89% 9.50%
5.50% 7.05% 8.56% 8.98% 9.78% 10.45%
6.00% 7.69% 9.34% 9.80% 10.67% 11.40%
</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.
PERFORMANCE COMPARISONS
Advertising and sales literature may include:
* references to ratings, rankings, and financial publications and/or
performance comparisons of Shares to certain indices;
* charts, graphs and illustrations using the Fund's returns, or returns in
general, that demonstrate investment concepts such as tax-deferred compounding,
dollar-cost averaging and systematic investment;
* discussions of economic, financial and political developments and their impact
on the securities market, including the portfolio manager's views on how such
developments could impact the Fund; and
* information about the mutual fund industry from sources such as the Investment
Company Institute.
The Fund may compare its performance, or performance for the types of securities
in which it invests, to a variety of other investments, including federally
insured bank products such as bank savings accounts, certificates of deposit,
and Treasury bills.
The Fund may quote information from reliable sources regarding individual
countries and regions, world stock exchanges, and economic and demographic
statistics.
You may use financial publications and/or indices to obtain a more complete view
of Share performance. When comparing performance, you should consider all
relevant factors such as the composition of the 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:
LIPPER NORTH CAROLINA MUNICIPAL DEBT FUNDS INDEX
Lipper North Carolina Municipal Debt Funds Index is an index of funds that
invest at least 65% of assets in municipal debt issued in the top four credit
ratings.
LIPPER ANALYTICAL SERVICES, INC.
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 advertising and sales
literature.
MORNINGSTAR, INC.
Morningstar, Inc., and 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.
Who is Federated Investors, Inc.?
Federated is dedicated to meeting investor needs by making structured,
straightforward and consistent investment decisions. Federated investment
products have a history of competitive performance and have gained the
confidence of thousands of financial institutions and individual investors.
Federated's disciplined investment selection process is rooted in sound
methodologies backed by fundamental and technical research. At Federated,
success in investment management does not depend solely on the skill of a single
portfolio manager. It is a fusion of individual talents and state- of-the-art
industry tools and resources. Federated's investment process involves teams of
portfolio managers and analysts, and investment decisions are executed by
traders who are dedicated to specific market sectors and who handle trillions of
dollars in annual trading volume.
FEDERATED FUNDS OVERVIEW
MUNICIPAL FUNDS
In the municipal sector, as of December 31, 1998, Federated managed 10 bond
funds with approximately $2.2 billion in assets and 23 money market funds with
approximately $12.5 billion in total assets. In 1976, Federated introduced one
of the first municipal bond mutual funds in the industry and is now one of the
largest institutional buyers of municipal securities. The Funds may quote
statistics from organizations including The Tax Foundation and the National
Taxpayers Union regarding the tax obligations of Americans.
EQUITY FUNDS
In the equity sector, Federated has more than 28 years' experience. As of
December 31, 1998, Federated managed 27 equity funds totaling approximately
$14.9 billion in assets across growth, value, equity income, international,
index and sector (i.e. utility) styles. Federated's value- oriented management
style combines quantitative and qualitative analysis and features a structured,
computer-assisted composite modeling system that was developed in the 1970s.
CORPORATE BOND FUNDS
In the corporate bond sector, as of December 31, 1998, Federated managed 9 money
market funds and 15 bond funds with assets approximating $22.8 billion and $7.1
billion, respectively. Federated's corporate bond decision making-based on
intensive, diligent credit analysis-is backed by over 26 years of experience in
the corporate bond sector. In 1972, Federated introduced one of the first
high-yield bond funds in the industry. In 1983, Federated was one of the first
fund managers to participate in the asset backed securities market, a market
totaling more than $209 billion.
GOVERNMENT FUNDS
In the government sector, as of December 31, 1998, Federated managed 9 mortgage
backed, 5 government/agency and 19 government money market mutual funds, with
assets approximating $5.3 billion, $1.8 billion and $41.6 billion, respectively.
Federated trades approximately $425 million in U.S. government and mortgage
backed securities daily and places approximately $25 billion in repurchase
agreements each day. Federated introduced the first U.S. government fund to
invest in U.S. government bond securities in 1969. Federated has been a major
force in the short- and intermediate-term government markets since 1982 and
currently manages approximately $43.2 billion in government funds within these
maturity ranges.
MONEY MARKET FUNDS
In the money market sector, Federated gained prominence in the mutual fund
industry in 1974 with the creation of the first institutional money market fund.
Simultaneously, the company pioneered the use of the amortized cost method of
accounting for valuing shares of money market funds, a principal means used by
money managers today to value money market fund shares. Other innovations
include the first institutional tax-free money market fund. As of December 31,
1998, Federated managed more than $76.7 billion in assets across 52 money market
funds, including 19 government, 9 prime and 23 municipal with assets
approximating $41.6 billion, $22.8 billion and $12.5 billion, respectively.
The Chief Investment Officers responsible for oversight of the various
investment sectors within Federated 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 $5 trillion to the more than 7,300 funds available,
according to the Investment Company Institute.
FEDERATED CLIENTS OVERVIEW
Federated distributes mutual funds through its subsidiaries for a variety of
investment purposes. Specific markets include:
INSTITUTIONAL CLIENTS
Federated meets the needs of approximately 900 institutional clients nationwide
by managing and servicing separate accounts and mutual funds for a variety of
purposes, 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 advisers. The marketing effort
to these institutional clients is headed by John B. Fisher, President,
Institutional Sales Division, Federated Securities Corp.
BANK MARKETING
Other institutional clients include 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,
Broker/Dealer Sales Division, Federated Securities Corp.
Investment Ratings
STANDARD AND POOR'S LONG-TERM DEBT RATING DEFINITIONS
AAA-Debt rated AAA has the highest rating assigned by Standard & Poor's.
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 or 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 BB 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.
MOODY'S INVESTORS SERVICE LONG-TERM BOND RATING DEFINITIONS
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 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.
FITCH IBCA, INC. LONG-TERM DEBT RATING DEFINITIONS
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 credit 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 obligor's 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 imminent default in payment of interest or principal.
MOODY'S INVESTORS SERVICE COMMERCIAL PAPER RATINGS
PRIME-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 structure 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.
PRIME-2-Issuers rated Prime-1 (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.
STANDARD AND POOR'S COMMERCIAL PAPER RATINGS
A-1-This designation 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.
FITCH IBCA, INC. COMMERCIAL PAPER RATING DEFINITIONS
FITCH-1-(Highest Grade) Commercial paper assigned this rating is regarded as
having the strongest degree of assurance for timely payment.
FITCH-2-(Very Good Grade) Issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than the strongest issues.
Addresses
FEDERATED NORTH CAROLINA MUNICIPAL INCOME FUND
(Formerly CCB North Carolina Municipal Securities Fund)
Class A 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 Investment Management Company
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
125 Summer Street
Boston, MA 02110-1617
MANAGEMENT DISCUSSION AND ANALYSIS
Federated New York Municipal Income Fund
Annual Report For Fiscal Year Ended August 31, 1999
WHAT IS YOUR REVIEW OF THE MUNICIPAL BOND MARKETPLACE OVER THE REPORTING
PERIOD?
A market environment of low absolute interest rates and historically narrow
credit spreads have combined to make bond structure the most important factor in
determining performance over the reporting period. Bond coupon, effective
maturity and call protection were the relevant structural elements which
determined relative price performance in a municipal bond portfolio.
Credit spread widening did occur selectively in specific sectors of the
municipal bond market, and has been the most prevalent in the hospital sector.
The hospital sector has continued to show specific vulnerability as a result of
Medicare reimbursement reductions and the related pressure on hospital
operations. Credit spreads have widened considerably since April 1999, with BBB
category hospital spreads widening 104 basis points off the 30-year Municipal
Market Data curve.
The appetite for tax exempt securities from traditional crossover buyers
(corporations and insurance companies) has remained soft due to the
attractiveness of spread product (taxable corporate debt). The glut of pre- Year
2000 (Y2K) corporate debt issuance has created attractive relative value
opportunities in the taxable sector. Liquidity in the municipal market has also
become an issue. Retail demand is not able to support the trading of larger
blocks of municipal bonds while certain coupon structures, particularly market
discount securities, are receiving lukewarm attention from investors.
HOW HAVE NEW YORK MUNICIPAL BONDS PERFORMED OVER THE REPORTING PERIOD?
Municipal credit quality in general has benefited from the strong U.S. economy.
Municipal tax receipts, at all levels of government, have exceeded forecasts,
which has allowed municipal fund balances and reserve accounts to expand. Credit
quality continued to remain strong throughout the state of New York as
represented by strong employment growth and numerous public and private
construction projects. The state has better diversified its employment base away
from the concentration in the finance, insurance and real estate industries
which existed previously. New York municipal debt was trading with a spread of
approximately 22 basis points to the benchmark AAA municipal yield curve at the
end of August 1999. This is wider than the six-month average of 19.9 basis
points.
HOW HAS THE FEDERATED NEW YORK MUNICIPAL INCOME FUND PERFORMED WITH RESPECT TO
TOTAL RETURN AND INCOME FOR THE 12-MONTH REPORTING PERIOD ENDED AUGUST 31, 1999?
For the 12-month reporting period ended August 31, 1999, the Fund's A Shares
produced a total return of (1.11%) based on net asset value. 1 The income on the
Fund was competitive during the reporting period. On August 31, 1999, the 30-day
current net yield, or SEC yield, for Class A Shares of the Fund was 4.97% based
on the net asset value.1 The yield represents an increase from the 4.50% SEC
yield at the beginning of the reporting period.
WHAT ACCOUNTED FOR THE FUND'S PERFORMANCE?
The strategy over the reporting period included tax-swapping to generate tax
loss carry forwards which can be used to offset any realized capital gains,
while also adding incremental yield by improving the weighted average book yield
within the portfolio. The duration and average maturity of the Fund were
structured so as to take advantage of what management expected to be a trading
range for municipal interest rates over the reporting period. Due to the recent
upward bias in interest rates, the market has become especially sensitive to
slight problems. As a municipal bond approaches its low threshold, the risk of
generating ordinary income which is taxed at the holder's top marginal bracket
becomes relevant. This reality impacts the bond's liquidity and requires the
bond's duration to be calculated on a tax adjusted basis. The Fund was also
affected by spread widening in the BBB credit sector, to which it had limited
exposure. With the many questions associated with Y2K looming, the fund is
maintaining a highly liquid position which should enable management to deal with
potential disruptions which could occur around year end.
WHAT KIND OF ENVIRONMENT DO YOU SEE AHEAD FOR MUNICIPAL BONDS?
The municipal bond market is technically driven by supply and demand imbalances
which are created by changes in interest rates, coupon payment period cycles and
economic conditions. The municipal market has recently experienced a demand
shift away from institutional buyers (insurance companies, corporations and
arbitrageurs) toward retail buyers (individuals) of municipal bonds. The ratio
of municipal bond yields to Treasury bond yields has widened from highs near
100%, which has caused many crossover buyers to unwind their municipal
positions. Crossover buyers purchase municipal bonds on a relative valuation
basis and not necessarily because of the tax exempt income. Y2K spending by
municipal governments is a potential credit factor which must be taken into
consideration as far as both the cost and the effectiveness of their Y2K
preparedness. However, the market does not expect any material interruptions in
the supply of necessary municipal services. However, there remains the potential
for some state functions to suffer temporary disruptions. The approach of the
presidential election cycle will bring potential federal tax law changes back
into the news. Potential impacts such as the introduction of a flat tax or
significant changes to the top marginal brackets could affect the trading value
of municipal debt relative to taxable fixed income alternatives, such as
corporate and Treasury securities.
1 Total return for the period based on offering price was (6.47%) and the SEC
yield based on offering price was 4.74%. Performance quoted represents past
performance and is not indicative of future results. Investment return and
principal value will fluctuate, so that an investor's shares, when redeemed, may
be worth more or less than their original cost.
SHAREHOLDER MEETING RESULTS
A Special Meeting of shareholders of Federated New York Municipal Income Fund
(the "Fund") was held on June 25, 1999. On April 27, 1999, the record date for
shareholders voting at the meeting, there were 2,369,398 total outstanding
shares. The meeting was adjourned to August 11, 1999, where the following items
were considered by shareholders of the Fund and the results of their voting were
as follows:
AGENDA ITEM 1
To elect Trustees: 1
<TABLE>
<CAPTION>
FOR AGAINST
<S> <C> <C>
Thomas G. Bigley 1,767,889 64,377
Nicholas P. Constantakis 1,767,889 64,377
John F. Cunningham 1,767,889 64,377
Charles F. Mansfield, Jr. 1,767,889 64,377
John E. Murray, Jr., J.D., S.J.D. 1,767,889 64,377
John S. Walsh 1,767,889 64,377
</TABLE>
1 The following Trustees continued their terms: John F. Donahue, John T.
Conroy, J. Christopher Donahue, Lawrence D. Ellis, M.D., Peter E. Madden
and Marjorie P. Smuts.
AGENDA ITEM 2
To ratify the selection of Deloitte & Touche LLP as the Trust's independent
auditors for Federated Municipal Securities Income Trust (the "Trust").
The results of shareholders voting were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
<S> <C> <C>
1,767,889 22,805 93,796
</TABLE>
AGENDA ITEM 3
To amend the Fund's fundamental investment policies regarding borrowing money
and issuing senior securities.
The results of shareholders voting were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
<S> <C> <C>
1,268,473 136,744 58,325
</TABLE>
AGENDA ITEM 4
To amend the Fund's fundamental investment policies regarding investments in
real estate.
The results of shareholders voting were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
<S> <C> <C>
1,268,988 136,398 58,156
</TABLE>
AGENDA ITEM 5
To amend the Fund's fundamental investment policies regarding investments in
commodities.
The results of shareholders voting were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
<S> <C> <C>
1,248,765 144,871 69,906
</TABLE>
AGENDA ITEM 6
To amend the Fund's fundamental investment policies regarding underwriting
securities.
The results of shareholders voting were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
<S> <C> <C>
1,287,680 123,166 52,696
</TABLE>
AGENDA ITEM 7
To amend the Fund's fundamental investment policies regarding lending by the
Funds.
The results of shareholders voting were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
<S> <C> <C>
1,191,183 209,588 62,771
</TABLE>
AGENDA ITEM 8
To amend the Fund's fundamental investment policies regarding concentration of
the Fund's investments in the securities of companies in the same industry.
The results of shareholders voting were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
<S> <C> <C>
1,244,236 156,429 62,877
</TABLE>
AGENDA ITEM 9
To amend, and to make non-fundamental, the Fund's fundamental investment
policies regarding buying securities on margin.
The results of shareholders voting were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
<S> <C> <C>
1,190,067 213,734 59,741
</TABLE>
AGENDA ITEM 10
To amend, and to make non-fundamental, the Fund's fundamental investment
policies regarding pledging assets.
The results of shareholders voting were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
<S> <C> <C>
1,200,100 201,596 61,846
</TABLE>
AGENDA ITEM 11
To remove the Fund's fundamental investment policies regarding selling
securities short.
The results of shareholders voting were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
<S> <C> <C>
1,212,473 211,967 39,102
</TABLE>
AGENDA ITEM 12
To remove the Fund's fundamental investment policies regarding dealing in puts,
calls, straddles, spreads and any combination thereof.
The results of shareholders voting were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
<S> <C> <C>
1,200,627 216,544 46,371
</TABLE>
AGENDA ITEM 13
To approve an amendment and restatement to the Trust's Declaration of Trust to
permit the Board of Trustees to liquidate assets of the Trust without seeking
shareholder approval.
The results of shareholders voting were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
<S> <C> <C>
1,198,413 206,433 58,696
</TABLE>
CLASS A SHARES
GROWTH OF $10,000 INVESTED IN FEDERATED NEW YORK MUNICIPAL INCOME FUND
[Graphic] - See Appendix H.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN 1 FOR THE PERIOD ENDED AUGUST 31, 1999
<S> <C>
1 Year (6.47%)
5 Years 5.04%
Start of Performance (12/2/92) 5.36%
</TABLE>
The graph above illustrates the hypothetical investment of $10,000 2 in the
Federated New York Municipal Income Fund (Class A Shares) from December 2, 1992
(start of performance) to August 31, 1999 compared to the Lehman Brothers
Revenue Bond Index (LBRBI) and the Lehman Brothers Municipal
Index (LBMBI).3
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
This report must be preceded or accompanied by the Fund's prospectus dated
October 31, 1999, and, together with financial statements contained therein,
constitutes the Fund's annual report.
1 Total return quoted reflects all applicable sales charges and contingent
deferred sales charges.
2 Represents a hypothetical investment of $10,000 in the Fund after deducting
the maximum sales charge of 4.50% ($10,000 investment minus $450 sales charge =
$9,550). The Fund's performance assumes the reinvestment of all dividends and
distributions. The LBRBI and LBMBI have been adjusted to reflect reinvestment of
dividends on securities in the indexes.
3 The LBRBI and LBMBI are not adjusted to reflect sales charges, expenses, or
other fees that the SEC requires to be reflected in the Fund's performance.
These indexes are unmanaged.
[Graphic]
Federated New York Municipal Income Fund
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
1-800-341-7400
WWW.FEDERATEDINVESTORS.COM
Federated Securities Corp., Distributor
Cusip 625922208
G01057-03 (10/99)
[Graphic]
PROSPECTUS
Federated New York Municipal
Income Fund
A Portfolio of Federated Municipal Securities Income Trust
CLASS A SHARES
A mutual fund seeking 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 by investing primarily in a portfolio of long-term,
investment grade New York tax exempt securities.
As with all mutual funds, the Securities and Exchange Commission (SEC) has not
approved or disapproved these securities or passed upon the adequacy of this
prospectus. Any representation to the contrary is a criminal offense.
OCTOBER 31, 1999
CONTENTS
Risk/Return Summary 1
What are the Fund's Fees and Expenses? 3
What are the Fund's Investment Strategies? 4
What are the Principal Securities in Which the Fund Invests? 5
What are the Specific Risks of Investing in the Fund? 8
What Do Shares Cost? 9
How is the Fund Sold? 11
How to Purchase Shares 11
How to Redeem and Exchange Shares 13
Account and Share Information 15
Who Manages the Fund? 16
Financial Information 17
Independent Auditors' Report 28
Risk/Return Summary
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
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. While there is no assurance that the Fund
will achieve its investment objective, it endeavors to do so by following the
strategies and policies described in this prospectus.
WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?
The Fund invests in a portfolio of tax exempt securities 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 from the Fund's investments may be subject to the
federal alternative minimum tax for individuals and corporations (AMT). The
Fund's portfolio securities will be primarily long-term, investment grade
securities.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?
All mutual funds take investment risks. Therefore, it is possible to lose money
by investing in the Fund. The primary factors that may reduce the Fund's returns
include:
INTEREST RATE RISKS
Prices of tax exempt securities generally fall when interest rates rise.
Interest rate charges have a greater effect on the price of fiscal income
securities with longer duration.
CREDIT RISKS
Issuers of tax exempt securities may default on the payment of interest or
principal when due.
CALL RISKS
Issuers of tax exempt securities may redeem the securities prior to maturity at
a price below their current market value.
SECTOR RISKS
Since the Fund invests primarily in issuers from New York, the Fund may be
subject to additional risks compared to funds that invest in multiple states.
New York's economy is relatively diversified across the manufacturing,
agriculture and service sectors. However, New York City is a major component of
the regional economy and is more exposed to downturns in the financial, real
estate and insurance industries.
The Fund is non-diversified. Compared to diversified mutual funds, it may invest
a higher percentage of its assets among fewer issuers of portfolio securities.
This increases the Fund's risk by magnifying the impact (positively or
negatively) that any one issuer has on the Fund's Share price and performance.
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 or
guaranteed by the U.S. government, the Federal Deposit Insurance Corporation,
the Federal Reserve Board or any other government agency.
RISK/RETURN BAR CHART AND TABLE
[Graphic]
The bar chart shows the variability of the Fund's Class A Shares total returns
on a calendar year-end basis.
The total returns displayed for the Fund's Class A Shares do not reflect the
payment of any sales charges or recurring shareholder account fees. If these
charges or fees had been included, the returns shown would have been lower.
The Fund's Class A Shares total return for the nine-month period from January 1,
1999 to September 30, 1999 was (2.92%).
Within the period shown in the Chart, the Fund's Class A Shares highest
quarterly return was 8.13% (quarter ended March 31, 1995). Its lowest quarterly
return was (7.14%) (quarter ended March 31, 1994).
AVERAGE ANNUAL TOTAL RETURN TABLE
The following table represents the Fund's Class A Shares Average Annual Total
Returns, reduced to reflect applicable sales charges, for the calendar periods
ended December 31, 1998. The table shows the Fund's total returns averaged over
a period of years relative to the Lehman Brothers Revenue Bond Index (LBRBI) and
the Lehman Brothers Municipal Bond Index (LBMBI), both broad-based market
indexes. The LBRBI is a total return performance benchmark for the long-term,
investment grade, revenue bond market. The LBMBI is a broad market performance
benchmark for the tax exempt bond market. To be included in the LBMBI, bonds
must have a minimum credit rating of Baa. Total returns for the indexes shown do
not reflect sales charges, expenses or other fees that the SEC requires to be
reflected in the Fund's performance. Indexes are unmanaged, and it is not
possible to invest directly in an index.
<TABLE>
<CAPTION>
CALENDAR PERIOD FUND LBRBI LBMBI
<S> <C> <C> <C>
1 Year 0.96% 6.33% 6.22%
5 Years 4.66% 6.39% 6.49%
Start of Performance 1 6.43% 7.56% N/A
</TABLE>
1 The Fund's Class A Shares start of performance date was December 2, 1992.
Past performance does not necessarily predict future performance. This
information provides you with historical performance information so that you can
analyze whether the Fund's investment risks are balanced by its potential
returns.
What are the Fund's Fees and Expenses?
FEDERATED NEW YORK MUNICIPAL INCOME FUND
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
Class A Shares of the Fund.
<TABLE>
<CAPTION>
SHAREHOLDER FEES
<S> <C>
Fees Paid Directly From Your Investment
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) 4.50%
Maximum Deferred Sales Charge (Load) (as a percentage of original
purchase price or redemption proceeds, as applicable) None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends
(and other Distributions) (as a percentage of offering price) None
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
ANNUAL FUND OPERATING EXPENSES (Before Reimbursements/Waivers) 1
Expenses That are Deducted From Fund Assets (as a percentage of average net assets)
Management Fee 2 0.40%
Distribution (12b-1) Fee 3 0.50%
Shareholder Services Fee 4 0.25%
Other Expenses 5 1.06%
Total Annual Fund Operating Expenses 2.21%
1 Although not contractually obligated to do so, the adviser, distributor and
shareholder services provider waived and reimbursed certain amounts. These are
shown below along with the net expenses the Fund actually paid for the fiscal
year ended August 31, 1999.
Total Reimbursement and Waiver of Fund Expenses 1.51%
Total Annual Operating Expenses (after reimbursements and waivers) 0.70%
2 The adviser voluntarily waived the management fee. The adviser can terminate
this voluntary waiver at any time. The management fee paid by the Fund (after
the voluntary waiver) was 0.00% for the fiscal year ended August 31, 1999. 3 The
distributor voluntarily waived a portion of the distribution (12b-1) fee. The
distributor can terminate this voluntary waiver at any time. The distribution
(12b-1) fee paid by the Fund (after the voluntary waiver) was 0.02% for the
fiscal year ended August 31, 1999. 4 The shareholder services provider
voluntarily waived a portion of the shareholder services fee. The shareholder
services provider can terminate this voluntary waiver at any time. The
shareholder services fee paid by the Fund (after the voluntary waiver) was 0.23%
for the fiscal year ended August 31, 1999. 5 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. The other
operating expenses paid by the Fund (after the voluntary reimbursement) were
0.45% for the fiscal year ended August 31, 1999.
</TABLE>
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund's
Class A Shares with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund's Class A Shares for the
time periods indicated and then redeem all of your Shares at the end of those
periods. The Example also assumes that your investment has a 5% return each year
and that the Fund's Shares operating expenses are BEFORE WAIVERS AND
REIMBURSEMENTS as shown in the table and remain the same. Although your actual
costs may be higher or lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
<S> <C>
1 Year $ 664
3 Years $ 1,110
5 Years $ 1,581
10 Years $ 2,880
</TABLE>
What are the Fund's Investment Strategies?
The Fund invests in a portfolio of tax exempt securities 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. As a matter of operating policy, the Fund ordinarily will
attempt to invest so that 100% of its annual interest income is exempt from such
taxes. Interest income from the Fund's investments may be subject to AMT.
The Fund invests at least 65% of its assets in investment grade securities. The
Fund does not limit itself to securities of a particular maturity range, but
currently focuses on long-term securities with maturities greater than ten
years. The Fund's investment adviser (Adviser) actively manages the Fund's
portfolio, seeking to manage the interest rate risk and credit risk assumed by
the Fund and provide superior levels of after tax total return.
The Adviser manages the Fund's interest rate risk by adjusting the duration of
its portfolio. "Duration" measures the sensitivity of a security's price to
changes in interest rates. The greater a portfolio's duration, the greater the
change in the portfolio's value in response to a change in market interest
rates. The Adviser will increase or reduce the Fund's portfolio duration based
on its interest rate outlook. When the Adviser expects interest rates to fall,
it will maintain a longer portfolio duration. When the Adviser expects interest
rates to increase, it will shorten the portfolio duration. The Adviser considers
a variety of factors in formulating its interest rate outlook, including the
following:
* current and expected U.S. economic growth;
* current and expected interest rates and inflation;
* the Federal Reserve's monetary policy; and
* supply and demand factors related to the municipal market and the effect they
may have on the returns offered for various bond maturities.
The Adviser manages credit risk by performing a fundamental credit analysis on
tax exempt securities before the Fund purchases such securities. The Adviser
considers various factors, including the following:
* the economic feasibility of revenue bond financings and general purpose
financings;
* the financial condition of the issuer or guarantor;
* political developments that may affect credit quality.
The Adviser monitors the credit risks of all portfolio securities on an ongoing
basis by reviewing periodic financial data and ratings of nationally recognized
ratings services.
The Adviser attempts to provide superior levels of after tax total return. After
tax total return consists of two components: (1) income received from the Fund's
portfolio securities; and (2) changes in the market value of the Fund's
portfolio securities and attendant increase or decrease in the market value of
Fund shares. The Adviser seeks total return on an after tax basis, so that it
will try to maximize tax exempt income distributions; make no ordinary income
distributions; and minimize or eliminate capital gains distributions.
HEDGING
Hedging transactions are intended to reduce specific risks. For example, to
protect the Fund against circumstances that would normally cause the Fund's
portfolio securities to decline in value, the Fund may buy or sell a futures
contract that would normally increase in value under the same circumstances. The
Fund may also attempt to hedge by using combinations of different futures
contracts, or futures contracts and securities. The Fund's ability to hedge may
be limited by the costs of the futures contracts. The Fund may attempt to lower
the cost of hedging by entering into transactions that provide only limited
protection, including transactions that: (1) hedge only a portion of its
portfolio; (2) use futures contracts that cover a narrow range of circumstances;
or (3) involve the sale of futures contracts with different terms. Consequently,
hedging transactions will not eliminate risk even if they work as intended. In
addition, hedging strategies are not always successful, and could result in
increased expenses and losses to the Fund.
TEMPORARY DEFENSIVE INVESTMENTS
The Fund may temporarily depart from its principal investment strategies by
investing its assets in securities subject to federal regular income tax and the
income tax imposed by the state of New York and New York municipalities. It may
do this to minimize potential losses and maintain liquidity to meet shareholder
redemptions during adverse market conditions. This may cause the Fund to receive
and distribute taxable income to investors.
What are the Principal Securities in Which the Fund Invests?
TAX EXEMPT SECURITIES
Tax exempt securities are fixed income securities that pay interest that is not
subject to federal regular income taxes. Fixed income securities pay interest,
dividends or distributions at a specified rate. The rate may be a fixed
percentage of the principal or adjusted periodically.
Typically, states, counties, cities and other political subdivisions and
authorities issue tax exempt securities. The market categorizes tax exempt
securities by their source of repayment.
GENERAL OBLIGATION BONDS
General obligation bonds are supported by the issuer's power to exact property
or other taxes. The issuer must impose and collect taxes sufficient to pay
principal and interest on the bonds. However, the issuer's authority to impose
additional taxes may be limited by its charter or state law.
SPECIAL REVENUE BONDS
Special revenue bonds are payable solely from specific revenues received by the
issuer such as specific taxes, assessments, tolls or fees. Bondholders may not
collect from the municipality's general taxes or revenues. For example, a
municipality may issue bonds to build a toll road, and pledge the tolls to repay
the bonds. Therefore, a shortfall in the tolls normally would result in a
default on the bonds.
PRIVATE ACTIVITY BONDS
Private activity bonds are special revenue bonds used to finance private
entities. For example, a municipality may issue bonds to finance a new factory
to improve its local economy. The municipality would lend the proceeds from its
bonds to the company using the factory, and the company would agree to make loan
payments sufficient to repay the bonds. The bonds would be payable solely from
the company's loan payments, not from any other revenues of the municipality.
Therefore, any default on the loan normally would result in a default on the
bonds.
The interest on many types of private activity bonds is subject to AMT. The Fund
may invest in bonds subject to AMT.
MUNICIPAL LEASES
Municipalities may enter into leases for equipment or facilities. In order to
comply with state public financing laws, these leases are typically subject to
annual appropriation. In other words, a municipality may end a lease, without
penalty, by not providing for the lease payments in its annual budget. After the
lease ends, the lessor can resell the equipment or facility but may lose money
on the sale.
The Fund may invest in securities supported by pools of municipal leases. The
most common type of lease backed securities are certificates of participation
(COPs). However, the Fund may also invest directly in individual leases.
ZERO COUPON SECURITIES
Zero coupon securities do not pay interest or principal until final maturity
unlike debt securities that provide periodic payments of interest (referred to
as a coupon payment). Investors buy zero coupon securities at a price below the
amount payable at maturity. The difference between the purchase price and the
amount paid at maturity represents interest on the zero coupon security.
Investors must wait until maturity to receive interest and principal, which
increases the interest rate risks and credit risks of a zero coupon security.
INVERSE FLOATERS
An inverse floater has a floating or variable interest rate that moves in the
opposite direction of market interest rates. When market interest rates go up,
the interest rate paid on the inverse floater goes down; when market interest
rates go down, the interest rate paid on the inverse floater goes up. Inverse
floaters generally respond more rapidly to market interest rate changes than
fixed rate tax exempt securities. Inverse floaters are subject to interest rate
risks and leverage risks.
CREDIT ENHANCEMENT
Credit enhancement consists of an arrangement in which a company agrees to pay
amounts due on a fixed income security if the issuer defaults. In some cases the
company providing credit enhancement makes all payments directly to the security
holders and receives reimbursement from the issuer. Normally, the credit
enhancer has greater financial resources and liquidity than the issuer. For this
reason, the Adviser usually evaluates the credit risk of a fixed income security
based solely upon its credit enhancement.
FUTURES CONTRACTS
Futures contracts, which are a type of derivative contract, provide for the
future sale by one party and purchase by another party of a specified amount of
an underlying asset at a specified price, date and time. Entering into a
contract to buy an underlying asset is commonly referred to as buying a contract
or holding a long position in the asset. Entering into a contract to sell an
underlying asset is commonly referred to as selling a contract or holding a
short position in the asset. Futures contracts are considered to be commodity
contracts.
The Fund may buy and sell interest rate and index financial futures contracts.
Depending upon how the Fund uses futures contracts and the relationships between
the market value of a futures contract and the underlying asset, futures
contracts may increase or decrease the Fund's exposure to interest rate risks,
and may also expose the Fund to liquidity risks and leverage risks.
SPECIAL TRANSACTIONS
DELAYED DELIVERY TRANSACTIONS
Delayed delivery transactions, including when-issued transactions, are
arrangements in which the Fund buys securities for a set price, with payment and
delivery of the securities scheduled for a future time. During the period
between purchase and settlement, no payment is made by the Fund to the issuer
and no interest accrues to the Fund. The Fund records the transaction when it
agrees to buy the securities and reflects their value in determining the price
of its shares. Settlement dates may be a month or more after entering into these
transactions so that the market values of the securities bought may vary from
the purchase prices. Therefore, delayed delivery transactions create interest
rate risks for the Fund. Delayed delivery transactions also involve credit risks
in the event of a counterparty default.
ASSET COVERAGE
In order to secure its obligations in connection with futures contracts or
special transactions, the Fund will either own the underlying assets, enter into
an offsetting transaction or set aside readily marketable securities with a
value that equals or exceeds the Fund's obligations. Unless the Fund has other
readily marketable assets to set aside, it cannot trade assets used to secure
such obligations without entering into an offsetting futures contract or
terminating a special transaction. This may cause the Fund to miss favorable
trading opportunities or to realize losses on futures contracts or special
transactions.
INVESTMENT RATINGS FOR INVESTMENT GRADE SECURITIES
The Adviser will determine whether a security is investment grade based upon the
credit ratings given by one or more nationally recognized rating services. For
example, Standard and Poor's, a rating service, assigns ratings to investment
grade securities (AAA, AA, A and BBB) based on its assessment of the likelihood
of the issuer's inability to pay interest or principal (default) when due on
each security. Lower credit ratings correspond to higher credit risk. If a
security has not received a rating, the Fund must rely entirely upon the
Adviser's credit assessment that the security is comparable to investment grade.
If a security is downgraded below the minimum quality grade discussed above, the
Adviser will reevaluate the security, but will not be required to sell it.
What are the Specific Risks of Investing in the Fund?
INTEREST RATE RISKS
Prices of fixed income securities rise and fall in response to changes in the
interest rates paid by similar securities. Generally, when interest rates rise,
prices of fixed income securities fall. However, market factors, such as the
demand for particular fixed income securities, may cause the price of certain
fixed income securities to fall while the prices of other securities rise or
remain unchanged.
Interest rate changes have a greater effect on the price of fixed income
securities with longer durations. Duration measures the price sensitivity of a
fixed income security to changes in interest rates.
CREDIT RISKS
Credit risk is the possibility that an issuer will default on a security by
failing to pay interest or principal when due. If an issuer defaults, the Fund
will lose money.
Many fixed income securities receive credit ratings from services such as
Standard & Poor's and Moody's Investors Service. These services assign ratings
to securities by assessing the likelihood of issuer default. Lower credit
ratings correspond to higher credit risk. If a security has not received a
rating, the Fund must rely entirely upon the Adviser's credit assessment.
Credit risk includes the possibility that a party to a transaction involving the
Fund will fail to meet its obligations. This could cause the Fund to lose the
benefit of the transaction or prevent the Fund from selling or buying other
securities to implement its investment strategy.
CALL RISKS
Call risk is the possibility that an issuer may redeem a fixed income security
before maturity (a call) at a price below its current market price. An increase
in the likelihood of a call may reduce the security's price.
If a fixed income security is called, the Fund may have to reinvest the proceeds
in other fixed income securities with lower interest rates, higher credit risks
or other less favorable characteristics.
SECTOR RISKS
A substantial part of the Fund's portfolio may be comprised of securities issued
by New York issuers or credit enhanced by insurance companies or companies with
similar characteristics. As a result, the Fund will be more susceptible to any
economic, business, political or other developments which generally affect these
entities. New York's economy is relatively diversified across the manufacturing,
agriculture and service sectors. However, New York City is a major component of
the regional economy and is more exposed to downturns in the financial, real
estate and insurance industries.
TAX RISKS
In order to be tax exempt, tax exempt securities must meet certain legal
requirements. Failure to meet such requirements may cause the interest received
and distributed by the Fund to shareholders to be taxable.
Changes or proposed changes in federal tax laws may cause the prices of tax
exempt securities to fall.
Income from the Fund may be subject to AMT.
LEVERAGE RISKS
Leverage risk is created when an investment exposes the Fund to a level of risk
that exceeds the amount invested. Changes in the value of such an investment
magnify the Fund's risk of loss and potential for gain.
Investments can have these same results if their returns are based on a multiple
of a specified index, security or other benchmark.
RISKS ASSOCIATED WITH NONINVESTMENT GRADE SECURITIES
Securities rated below investment grade, also known as junk bonds, generally
entail greater interest rate, credit and liquidity risks than investment grade
securities. For example, their prices are more volatile, economic and financial
setbacks may affect their prices more negatively, and their trading market may
be more limited. The Fund may invest up to 35% of its assets in noninvestment
grade securities.
LIQUIDITY RISKS
Trading opportunities are more limited for fixed income securities that have not
received any credit ratings, have received ratings below investment grade or are
not widely held.
Liquidity risk also refers to the possibility that the Fund may not be able to
sell a security or close out a futures contract when it wants to. If this
happens, the Fund will be required to continue to hold the security or keep the
position open, and the Fund could incur losses.
What Do Shares Cost?
You can purchase, redeem or exchange Shares any day the New York Stock Exchange
(NYSE) is open. When the Fund receives your transaction request in proper form
(as described in the prospectus), it is processed at the next calculated net
asset value (NAV) plus any applicable front-end sales charge (public offering
price). NAV is determined at the end of regular trading (normally 4:00 p.m.
Eastern time) each day the NYSE is open. The Fund generally values fixed income
securities at the last sale price on a national securities exchange, if
available, otherwise, as determined by an independent pricing service.
The Fund's current NAV and public offering price may be found in the mutual
funds section of certain local newspapers under "Federated" and the appropriate
class designation listing.
The following table summarizes the minimum required investment amount and the
maximum sales charge, if any, that you will pay on an investment in the Fund.
Keep in mind that investment professionals may charge you fees for their
services in connection with your Share transactions.
<TABLE>
<CAPTION>
MAXIMUM SALES CHARGE
MINIMUM CONTINGENT
INITIAL/SUBSEQUENT FRONT-END DEFERRED
INVESTMENT AMOUNTS 1 SALES CHARGE 2 SALES CHARGE 3
<S> <C> <C>
$1,500/$100 4.50% 0.00%
</TABLE>
1 The minimum subsequent investment amounts for Systematic Investment Programs
is $50. Investment professionals may impose higher or lower minimum investment
requirements on their customers than those imposed by the Fund.
2 Front-End Sales Charge is expressed as a percentage of public offering
price. See "Sales Charge When You Purchase."
3 See "Sales Charge When You Redeem." To determine whether your Contingent
Deferred Sales Charge may be waived, see "Eliminating the Contingent Deferred
Sales Charge" in the Fund's Statement of Additional Information.
SALES CHARGE WHEN YOU PURCHASE
<TABLE>
<CAPTION>
Sales Charge
as a Percentage Sales Charge
of Public as a Percentage
Purchase Amount Offering Price of NAV
<S> <C> <C>
Less than $100,000 4.50% 4.71%
$100,000 but less
than $250,000 3.75% 3.90%
$250,000 but less
than $500,000 2.50% 2.56%
$500,000 but less
than $1 million 2.00% 2.04%
$1 million or greater 1 0.00% 0.00%
</TABLE>
1 A contingent deferred sales charge of 0.75% of the redemption amount applies
to Class A Shares redeemed up to 24 months after purchase under certain
investment programs where an investment professional received an advance payment
on the transaction. To determine whether your Contingent Deferred Sales Charge
may be waived, see "Eliminating the Contingent Deferred Sales Charge" in the
Fund's Statement of Additional Information.
The sales charge at purchase may be eliminated by:
* purchasing Shares in greater quantities to reduce the applicable sales
charge;
* combining concurrent purchases of Shares:
- - by you, your spouse, and your children under age 21; or
- - of the same share class of two or more Federated Funds (other than money
market funds);
* accumulating purchases (in calculating the sales charge on an additional
purchase, include the current value of previous Share purchases still invested
in the Fund); or
* signing a letter of intent to purchase a specific dollar amount of Shares
within 13 months (call your investment professional or the Fund for more
information).
The sales charge will be eliminated when you purchase Shares:
* within 120 days of redeeming Shares of an equal or lesser amount;
* by exchanging shares from the same share class of another Federated Fund
(other than a money market fund);
* through wrap accounts or other investment programs where you pay the
investment professional directly for services;
* through investment professionals that receive no portion of the sales
charge;
* as a Federated Life Member and their immediate family members; or
* as a Trustee, Director or employee of the Fund, the Adviser, the Distributor
and their affiliates and the immediate family members of these individuals.
If your investment qualifies for an elimination of the sales charge, you or your
investment professional should notify the Fund's Distributor at the time of
purchase. If the Distributor is not notified, you will receive the reduced sales
charge only on additional purchases and not retroactively on previous purchases.
SALES CHARGE WHEN YOU REDEEM
Your redemption proceeds may be reduced by a sales charge, commonly referred to
as a contingent deferred sales charge (CDSC).
CLASS A SHARES
A CDSC of 0.75% of the redemption amount applies to Class A Shares redeemed up
to 24 months after purchase under certain investment programs where an
investment professional received an advance payment on the transaction. To
determine whether your Contingent Deferred Sales Charge may be waived, see
"Eliminating the Contingent Deferred Sales Charge" in the Fund's Statement
of Additional Information.
How is the Fund Sold?
The Fund's Distributor, Federated Securities Corp., markets the Shares described
in this prospectus to customers of financial institutions, such as
broker/dealers, banks, fiduciaries or investment advisers, or to individuals,
directly or through investment professionals. The Fund may not be a suitable
investment for retirement plans or for non-New York taxpayers because it invests
in New York municipal securities.
When the Distributor receives marketing fees and sales charges, it may pay some
or all of them to investment professionals. The Distributor and its affiliates
may pay out of their assets other amounts (including items of material value) to
investment professionals for marketing and servicing Shares. The Distributor is
a subsidiary of Federated Investors, Inc.
(Federated).
RULE 12B-1 PLAN
The Fund has adopted a Rule 12b-1 Plan, which allows it to pay marketing fees to
the Distributor and investment professionals for the sale, distribution and
customer servicing of the Fund's Class A Shares. Because these Shares pay
marketing fees on an ongoing basis, your investment cost may be higher over time
than other shares with different sales charges and marketing fees.
How to Purchase Shares
You may purchase Shares through an investment professional, directly from the
Fund, or through an exchange from another Federated Fund. The Fund reserves the
right to reject any request to purchase or exchange Shares.
THROUGH AN INVESTMENT PROFESSIONAL
* Establish an account with the investment professional; and
* Submit your purchase order to the investment professional before the end of
regular trading on the NYSE (normally 4:00 p.m. Eastern time). You will receive
the next calculated NAV if the investment professional forwards the order to the
Fund on the same day and the Fund receives payment within three business days.
You will become the owner of Shares and receive dividends when the Fund receives
your payment.
Investment professionals should send payments according to the instructions in
the sections "By Wire" or "By Check."
DIRECTLY FROM THE FUND
* Establish your account with the Fund by submitting a completed New
Account Form; and
* Send your payment to the Fund by Federal Reserve wire or check.
You will become the owner of Shares and your Shares will be priced at the next
calculated NAV after the Fund receives your wire or your check. If your check
does not clear, your purchase will be canceled and you could be liable for any
losses or fees incurred by the Fund or Federated Shareholder Services Company,
the Fund's transfer agent.
An institution may establish an account and place an order by calling the Fund
and the Shares will be priced at the next calculated NAV after the Fund receives
the order.
BY WIRE
Send your wire to:
State Street Bank and Trust Company
Boston, MA
Dollar Amount of Wire
ABA Number 011000028
Attention: EDGEWIRE
Wire Order Number, Dealer Number or Group Number
Nominee/Institution Name
Fund Name and Number and Account Number
You cannot purchase Shares by wire on holidays when wire transfers are
restricted.
BY CHECK
Make your check payable to THE FEDERATED FUNDS, note your account number on the
check, and mail it to:
Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600
If you send your check by a PRIVATE COURIER OR OVERNIGHT DELIVERY SERVICE that
requires a street address, mail it to:
Federated Shareholder Services Company
1099 Hingham Street
Rockland, MA 02370-3317
Payment should be made in U.S. dollars and drawn on a U.S. bank. The Fund
will not accept third-party checks (checks originally payable to someone
other than you or The Federated Funds).
THROUGH AN EXCHANGE
You may purchase Shares through an exchange from the same Share class of another
Federated Fund. You must meet the minimum initial investment requirement for
purchasing Shares and both accounts must have identical registrations.
BY SYSTEMATIC INVESTMENT PROGRAM
Once you have opened an account, you may automatically purchase additional
Shares on a regular basis by completing the Systematic Investment Program
section of the New Account Form or by contacting the Fund or your investment
professional.
BY AUTOMATED CLEARING HOUSE (ACH)
Once you have opened an account, you may purchase additional Shares through a
depository institution that is an ACH member. This purchase option can be
established by completing the appropriate sections of the New Account Form.
How to Redeem and Exchange Shares
You should redeem or exchange Shares:
* through an investment professional if you purchased Shares through an
investment professional; or
* directly from the Fund if you purchased Shares directly from the Fund.
THROUGH AN INVESTMENT PROFESSIONAL
Submit your redemption or exchange request to your investment professional by
the end of regular trading on the NYSE (normally 4:00 p.m. Eastern time). The
redemption amount you will receive is based upon the next calculated NAV after
the Fund receives the order from your investment professional.
DIRECTLY FROM THE FUND
BY TELEPHONE
You may redeem or exchange Shares by calling the Fund at 1-800-341-7400 once you
have completed the appropriate authorization form for telephone transactions. If
you call before the end of regular trading on the NYSE (normally 4:00 p.m.
Eastern time) you will receive a redemption amount based on that day's NAV.
BY MAIL
You may redeem or exchange Shares by mailing a written request to the Fund. You
will receive a redemption amount based on the next calculated NAV after the Fund
receives your written request in proper form. Send requests by mail to:
Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600
Send requests by PRIVATE COURIER OR OVERNIGHT DELIVERY SERVICE to:
Federated Shareholder Services Company
1099 Hingham Street
Rockland, MA 02370-3317
All requests must include:
* Fund Name and Share Class, account number and account registration;
* amount to be redeemed or exchanged;
* signatures of all shareholders exactly as registered; and
* IF EXCHANGING, the Fund Name and Share Class, account number and account
registration into which you are exchanging.
Call your investment professional or the Fund if you need special instructions.
SIGNATURE GUARANTEES
Signatures must be guaranteed if:
* your redemption will be sent to an address other than the address of
record;
* your redemption will be sent to an address of record that was changed
within the last 30 days;
* a redemption is payable to someone other than the shareholder(s) of
record; or
* IF EXCHANGING (TRANSFERRING) into another fund with a different shareholder
registration.
A signature guarantee is designed to protect your account from fraud. Obtain a
signature guarantee from a bank or trust company, savings association, credit
union or broker, dealer, or securities exchange member. A NOTARY PUBLIC CANNOT
PROVIDE A SIGNATURE GUARANTEE.
PAYMENT METHODS FOR REDEMPTIONS
Your redemption proceeds will be mailed by check to your address of record. The
following payment options are available if you complete the appropriate section
of the New Account Form or an Account Service Options Form. These payment
options require a signature guarantee if they were not established when the
account was opened:
* an electronic transfer to your account at a financial institution that is
an ACH member; or
* wire payment to your account at a domestic commercial bank that is a Federal
Reserve System member.
REDEMPTION IN KIND
Although the Fund intends to pay Share redemptions in cash, it reserves the
right to pay the redemption price in whole or in part by a distribution of the
Fund's portfolio securities.
LIMITATIONS ON REDEMPTION PROCEEDS
Redemption proceeds normally are wired or mailed within one business day after
receiving a request in proper form. Payment may be delayed up to seven days:
* to allow your purchase to clear;
* during periods of market volatility; or
* when a shareholder's trade activity or amount adversely impacts the Fund's
ability to manage its assets.
You will not accrue interest or dividends on uncashed checks from the Fund if
those checks are undeliverable and returned to the Fund.
EXCHANGE PRIVILEGE
You may exchange Shares of the Fund into Shares of the same class of another
Federated Fund. To do this, you must:
* ensure that the account registrations are identical;
* meet any minimum initial investment requirements; and
* receive a prospectus for the fund into which you wish to exchange.
An exchange is treated as a redemption and a subsequent purchase, and is a
taxable transaction.
The Fund may modify or terminate the exchange privilege at any time. The Fund's
management or investment adviser may determine from the amount, frequency and
pattern of exchanges that a shareholder is engaged in excessive trading that is
detrimental to the Fund and other shareholders. If this occurs, the Fund may
terminate the availability of exchanges to that shareholder and may bar that
shareholder from purchasing other Federated Funds.
SYSTEMATIC WITHDRAWAL/EXCHANGE PROGRAM
You may automatically redeem or exchange Shares in a minimum amount of $100 on a
regular basis. Complete the appropriate section of the New Account Form or an
Account Service Options Form or contact your investment professional or the
Fund. Your account value must meet the minimum initial investment amount at the
time the program is established. This program may reduce, and eventually
deplete, your account. Payments should not be considered yield or income.
Generally, it is not advisable to continue to purchase Class A Shares subject to
a sales charge while redeeming Shares using this program.
ADDITIONAL CONDITIONS
TELEPHONE TRANSACTIONS
The Fund will record your telephone instructions. If the Fund does not follow
reasonable procedures, it may be liable for losses due to unauthorized or
fraudulent telephone instructions.
SHARE CERTIFICATES
The Fund no longer issues share certificates. If you are redeeming or exchanging
Shares represented by certificates previously issued by the Fund, you must
return the certificates with your written redemption or exchange request. For
your protection, send your certificates by registered or certified mail, but do
not endorse them.
Account and Share Information
CONFIRMATIONS AND ACCOUNT STATEMENTS
You will receive confirmation of purchases, redemptions and exchanges (except
for systematic transactions). In addition, you will receive periodic statements
reporting all account activity, including systematic transactions, dividends and
capital gains paid.
DIVIDENDS AND CAPITAL GAINS
The Fund declares any dividends daily and pays them monthly to shareholders. If
you purchase Shares by wire, you begin earning dividends on the day your wire is
received. If you purchase Shares by check, you begin earning dividends on the
business day after the Fund receives your check. In either case, you earn
dividends through the day your redemption request is received.
In addition, the Fund pays any capital gains at least annually. Your dividends
and capital gains distributions will be automatically reinvested in additional
Shares without a sales charge, unless you elect cash payments.
If you purchase Shares just before a Fund declares a capital gain distribution,
you will pay the full price for the Shares and then receive a portion of the
price back in the form of a taxable distribution, whether or not you reinvest
the distribution in Shares. Therefore, you should consider the tax implications
of purchasing Shares shortly before the Fund declares a capital gain. Contact
your investment professional or the Fund for information concerning when
dividends and capital gains will be paid.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, accounts may be
closed if redemptions or exchanges cause the account balance to fall below the
minimum initial investment amount. Before an account is closed, you will be
notified and allowed 30 days to purchase additional Shares to meet the minimum.
TAX INFORMATION
The Fund sends an annual statement of your account activity to assist you in
completing your federal, state and local tax returns. It is anticipated that
Fund distributions will be primarily dividends that are exempt from federal
income tax, although a portion of the Fund's dividends may not be exempt.
Dividends may be subject to state and local taxes, although the Federated New
York Municipal Income Fund's dividends will be exempt from the New York taxes
discussed above to the extent they are derived from interest on obligations
exempt from such taxes. Capital gains and non-exempt dividends are taxable
whether paid in cash or reinvested in the Fund. Redemptions and exchanges are
taxable sales. Please consult your tax adviser regarding your federal, state and
local tax liability.
Who Manages the Fund?
The Board of Trustees governs the Fund. The Board selects and oversees the
Adviser, Federated Investment Management Company. The Adviser manages the Fund's
assets, including buying and selling portfolio securities. The Adviser's address
is Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, PA 15222-3779.
The Adviser and other subsidiaries of Federated advise approximately 175 mutual
funds and separate accounts, which totaled approximately $111 billion in assets
as of December 31, 1998. Federated was established in 1955 and is one of the
largest mutual fund investment managers in the United States with approximately
1,900 employees. More than 4,000 investment professionals make Federated Funds
available to their customers.
THE FUND'S PORTFOLIO MANAGERS ARE:
J. SCOTT ALBRECHT
J. Scott Albrecht has been the Fund's portfolio manager since March 1995. He is
Vice President of the Fund. Mr. Albrecht joined Federated in 1989. He has been a
Senior Portfolio Manager since 1997 and a Vice President of the Fund's Adviser
since 1994. He was a Portfolio Manager from 1994 to 1996. Mr. Albrecht is a
Chartered Financial Analyst and received his M.S. in Public Management from
Carnegie Mellon University.
MARY JO OCHSON
Mary Jo Ochson has been the Fund's portfolio manager since April 1997. She
is Vice President of the Fund. Ms. Ochson joined Federated in 1982 and has
been a Senior Portfolio Manager and a Senior Vice President of the Fund's
Adviser since 1996. From 1988 through 1995, Ms. Ochson served as a
Portfolio Manager and a Vice President of the Fund's Adviser. Ms. Ochson is
a Chartered Financial Analyst and received her M.B.A. in Finance from the
University of Pittsburgh.
ADVISORY FEES
The Adviser receives an annual investment advisory fee of 0.40% of the Fund's
average daily net assets. The Adviser may voluntarily waive a portion of its fee
or reimburse the Fund for certain operating expenses.
YEAR 2000 READINESS (UNAUDITED)
The "Year 2000" problem is the potential for computer errors or failures because
certain computer systems may be unable to interpret dates after December 31,
1999 or experience other date-related problems. The Year 2000 problem may cause
systems to process information incorrectly and could disrupt businesses, such as
the Fund, that rely on computers.
While it is impossible to determine in advance all of the risks to the Fund, the
Fund could experience interruptions in basic financial and operational
functions. Fund shareholders could experience errors or disruptions in Fund
share transactions or Fund communications.
The Fund's service providers are making changes to their computer systems to fix
any Year 2000 problems. In addition, they are working to gather information from
third-party providers to determine their Year 2000 readiness.
Year 2000 problems would also increase the risks of the Fund's investments. To
assess the potential effect of the Year 2000 problem, the Adviser is reviewing
information regarding the Year 2000 readiness of issuers of securities the Fund
may purchase. The financial impact of these issues for the Fund is still being
determined. There can be no assurance that potential Year 2000 problems would
not have a material adverse effect on the Fund.
Financial Information
FINANCIAL HIGHLIGHTS
The following Financial Highlights will help you understand the Fund's financial
performance for its past five fiscal years. Some of the information is presented
on a per share basis. Total returns represent the rate an investor would have
earned (or lost) on an investment in the Fund, assuming reinvestment of any
dividends and capital gains.
This information has been audited by Deloitte & Touche LLP, whose report, along
with the Fund's audited financial statements, is included in this prospectus.
Financial Highlights
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 28.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $11.00 $10.62 $10.17 $10.13 $10.10
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income 0.53 0.54 0.56 0.58 0.57
Net realized and
unrealized gain (loss) on
investments (0.64) 0.38 0.45 0.04 0.03
TOTAL FROM INVESTMENT
OPERATIONS (0.11) 0.92 1.01 0.62 0.60
LESS DISTRIBUTIONS:
Distributions from net
investment income (0.53) (0.54) (0.56) (0.58) (0.57)
NET ASSET VALUE, END OF
PERIOD $10.36 $11.00 $10.62 $10.17 $10.13
TOTAL RETURN 1 (1.11%) 8.83% 10.13% 6.18% 6.41%
RATIOS TO AVERAGE NET
ASSETS:
Expenses 2 2.21% 2.31% 2.41% 2.53% 2.33%
Net investment income 2 3.38% 3.36% 3.59% 3.69% 4.20%
Expenses (after waivers
and reimbursements) 0.70% 0.71% 0.66% 0.60% 0.59%
Net investment income
(after waivers
and reimbursements) 4.89% 4.96% 5.34% 5.62% 5.94%
SUPPLEMENTAL DATA:
Net assets, end of period
(000 omitted) $24,347 $24,351 $22,386 $21,932 $21,600
Portfolio turnover 24% 30% 59% 11% 55%
</TABLE>
1 Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
2 During the period, certain fees were voluntarily waived and reimbursed. If
such voluntary waivers and reimbursements had not occurred, the ratios would
have been as indicated.
See Notes which are an integral part of the Financial Statements
Portfolio of Investments
AUGUST 31, 1999
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING 1 VALUE
<S> <C> <C> <C>
LONG-TERM MUNICIPALS-96.6%
NEW YORK-96.6%
$ 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 $ 971,620
500,000 Essex County, NY IDA, PCR
Refunding Revenue Bonds
(Series 1997C), 5.70%
(International Paper Co.),
7/1/2016 BBB+ 498,080
500,000 Essex County, NY IDA, Solid
Waste Disposal Revenue
Bonds (Series A), 5.80%
(International Paper Co.),
12/1/2019 BBB+ 489,460
760,000 Hamilton County, NY IDA,
Civic Facilities Revenue
Bond (Series 1998A), 5.25%
(Adirondack Historical
Association), 11/1/2018 Baa1 711,542
500,000 Long Island Power
Authority, Electric System
General Revenue Bonds
(Series 1998A), 5.50%
(Original Issue Yield:
5.57%), 12/1/2029 A- 476,285
1,000,000 Monroe County, NY IDA,
Civic Facilities Revenue
Bonds, 5.375%
(St. John Fisher
College)/(Asset Guaranty
INS)/(Original Issue
Yield: 5.55%), 6/1/2017 NR 956,920
305,000 Nassau County, NY IDA,
Civic Facility Revenue
Bonds, 6.85%
(Hofstra University),
1/1/2012 A 341,814
330,000 Nassau County, NY IDA,
Civic Facility Revenue
Bonds, 6.85%
(Hofstra University),
1/1/2013 A 369,831
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 922,240
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 1,020,430
475,000 New York City, NY IDA,
Civic Facility Revenue
Bonds, 7.00%
(Mt. St. Vincent College,
NY), 5/1/2008 NR 507,390
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 399,164
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- 379,776
400,000 New York City, NY IDA,
Revenue Bonds, 5.65%
(United Air Lines)/(Origin
al Issue Yield: 5.682%),
10/1/2032 BB+ 369,460
1,000,000 New York City, NY IDA,
Special Facilities Revenue
Bonds, 5.25%
(British Airways),
12/1/2032 A 880,100
750,000 New York City, NY IDA,
Special Facilities Revenue
Bonds, 6.90% (American
Airlines), 8/1/2024 BBB- 787,920
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING 1 VALUE
<S> <C> <C> <C>
LONG-TERM MUNICIPALS-
continued
NEW YORK-CONTINUED
$ 500,000 New York City, NY, GO UT
Bonds, 7.25% (Original
Issue Yield: 7.55%),
8/15/2019 A- $ 565,535
1,175,000 New York State Dormitory
Authority, Capital
Appreciation Revenue Bonds
(Manhattanville
College)/(MBIA
INS)/(Original Issue
Yield: 5.80%), 7/1/2022 AAA 322,808
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+ 968,814
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 967,970
500,000 New York State Dormitory
Authority, Revenue Bonds,
6.25%
(Nyack Hospital)/(Original
Issue Yield: 6.50%),
7/1/2013 Baa2 505,660
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+ 993,960
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 931,239
1,000,000 New York State HFA, (Series
1995A), Service Contract
Obligation Revenue Bonds,
6.375% (Original Issue
Yield: 6.45%), 9/15/2015 BBB+ 1,050,580
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 1,065,080
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 1,072,990
2,000,000 New York State Mortgage
Agency, Revenue Bonds
(Series 40A),
6.70%, 4/1/2025 Aaa 2,101,400
500,000 New York State Thruway
Authority, Local Highway
and Bridge Service
Contract Revenue Bonds
(Series 1995), 6.25%
(Original Issue
Yield: 6.435%), 4/1/2014 BBB+ 546,785
400,000 Niagara Falls, NY CSD,
Certificates of
Participation (Series
1998), 5.375% (Original
Issue Yield: 5.42%),
6/15/2028 BBB- 368,712
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 536,245
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING 1 VALUE
<S> <C> <C> <C>
LONG-TERM MUNICIPALS-
continued
NEW YORK-CONTINUED
$ 1,000,000 Schenectady, NY IDA, Civic
Facility Revenue Bond
(Series A), 5.375% (Union
College)/ (AMBAC
INS)/(Original Issue
Yield: 5.40%), 12/1/2019 AAA $ 969,920
500,000 Suffolk County, NY IDA,
Industrial Development Revenue Bonds (Series 1998), 5.50%
(Nissequogue Cogen Partners Facility)/ (Original Issue Yield:
5.528%), 1/1/2023 NR 466,995
TOTAL LONG-TERM MUNICIPALS
(IDENTIFIED COST
$23,156,342) 23,516,725
SHORT-TERM MUNICIPALS-1.6%
NEW YORK-1.6%
400,000 New York City, NY
Transitional Finance
Authority (1998 Subseries
A-1), Weekly VRDNs
(Commerzbank AG, Frankfurt
LIQ), 3.25%, 11/15/2028 AA 400,000
TOTAL SHORT-TERM
MUNICIPALS (AT AMORTIZED
COST) 400,000
TOTAL INVESTMENTS
(IDENTIFIED COST
$23,556,342) 2 $ 23,916,725
</TABLE>
Securities subject to alternative minimum tax represent 29.3% of the Fund's
portfolio based upon total portfolio market value.
1 Please refer to the Appendix of the Statement of Additional Information for an
explanation of the credit ratings. Current credit ratings are unaudited.
2 The cost of investments for federal tax purposes amounts to $23,556,342. The
net unrealized appreciation of investments on a federal tax basis amounts to
$360,383 which is comprised of $810,604 appreciation and $450,221 depreciation
at August 31, 1999.
Note: The categories of investments are shown as a percentage of net assets
($24,346,860) at August 31, 1999.
The following acronyms are used throughout this portfolio:
AMBAC -American Municipal Bond Assurance Corporation CSD -Central School
District FGIC -Financial Guaranty Insurance Company 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 VRDNs -Variable Rate Demand Notes
See Notes which are an integral part of the Financial Statements
Statement of Assets and Liabilities
AUGUST 31, 1999
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS:
Total investments in
securities, at value
(identified and tax cost
$23,556,342) $ 23,916,725
Cash 118,862
Income receivable 378,415
Receivable for shares sold 642
Prepaid expenses 6,401
TOTAL ASSETS 24,421,045
LIABILITIES:
Payable for shares
redeemed $ 1,231
Income distribution
payable 72,954
TOTAL LIABILITIES 74,185
Net assets for 2,350,142
shares outstanding $ 24,346,860
NET ASSETS CONSIST OF:
Paid in capital $ 25,017,680
Net unrealized
appreciation of
investments 360,383
Accumulated net realized
loss on investments (1,031,203)
TOTAL NET ASSETS $ 24,346,860
NET ASSET VALUE, OFFERING
PRICE AND REDEMPTION
PROCEEDS PER SHARE:
Net Asset Value Per Share
($24,346,860 / 2,350,142
shares outstanding) $10.36
Offering Price Per Share
(100/95.50 of $10.36) 1 $10.85
Redemption Proceeds Per
Share (100.00/100 of
$10.36) 2 $10.36
</TABLE>
1 See "What Do Shares Cost?" in the Prospectus.
2 See "Sales Charge When You Redeem" in the Prospectus.
See Notes which are an integral part of the Financial Statements
Statement of Operations
YEAR ENDED AUGUST 31, 1999
<TABLE>
<CAPTION>
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest $ 1,420,001
EXPENSES:
Investment advisory fee $ 101,464
Administrative personnel
and services fee 125,000
Custodian fees 1,712
Transfer and dividend
disbursing agent fees and
expenses 34,541
Directors'/Trustees' fees 2,591
Auditing fees 13,926
Legal fees 3,201
Portfolio accounting fees 50,620
Distribution services fee 126,831
Shareholder services fee 63,415
Share registration costs 14,537
Printing and postage 20,245
Insurance premiums 1,660
Miscellaneous 2,214
TOTAL EXPENSES 561,957
WAIVERS AND
REIMBURSEMENTS:
Waiver of investment
advisory fee $ (101,464)
Waiver of distribution
services fee (121,757)
Waiver of shareholder
services fee (5,073)
Reimbursement of other
operating expenses (155,066)
TOTAL WAIVERS AND
REIMBURSEMENTS (383,360)
Net expenses 178,597
Net investment income 1,241,404
REALIZED AND UNREALIZED
LOSS ON INVESTMENTS:
Net realized loss on
investments (43,863)
Net change in unrealized
depreciation of
investments (1,484,014)
Net realized and
unrealized loss on
investments (1,527,877)
Change in net assets
resulting from operations $ (286,473)
</TABLE>
See Notes which are an integral part of the Financial Statements
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31 1999 1998
<S> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS
OPERATIONS:
Net investment income $ 1,241,404 $ 1,145,349
Net realized gain (loss) on
investments ($(43,863) and
$146,593, respectively,
as computed for federal
tax purposes) (43,863) 146,593
Net change in unrealized
appreciation/(depreciation) (1,484,014) 660,446
CHANGE IN NET ASSETS
RESULTING FROM OPERATIONS (286,473) 1,952,388
DISTRIBUTIONS TO
SHAREHOLDERS:
Distributions from net
investment income (1,241,404) (1,145,349)
SHARE TRANSACTIONS:
Proceeds from sale of shares 5,840,749 4,905,471
Net asset value of shares
issued to shareholders in
payment of
distributions declared 551,435 548,237
Cost of shares redeemed (4,868,867) (4,295,799)
CHANGE IN NET ASSETS
RESULTING FROM SHARE
TRANSACTIONS 1,523,317 1,157,909
Change in net assets (4,560) 1,964,948
NET ASSETS:
Beginning of period 24,351,420 22,386,472
End of period $ 24,346,860 $ 24,351,420
</TABLE>
See Notes which are an integral part of the Financial Statements
Notes to Financial Statements
AUGUST 31, 1999
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 six 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.
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, 1999, the Fund, for federal tax purposes, had a capital loss
carryforward of $907,100, which will reduce the Fund's taxable income arising
from future net realized gain on investments, if any, to the extent permitted by
the Code, and thus will reduce the amount of the distributions to shareholders
which would otherwise be necessary to relieve the Fund of any liability for
federal tax. Pursuant to the Code, such capital loss carryforward will expire as
follows:
<TABLE>
<CAPTION>
EXPIRATION YEAR EXPIRATION AMOUNT
<S> <C>
2004 $907,100
</TABLE>
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 1999 1998
<S> <C> <C>
Shares sold 534,622 452,550
Shares issued to
shareholders in payment of
distributions declared 50,762 50,557
Shares redeemed (448,964) (396,777)
NET CHANGE RESULTING FROM
SHARE TRANSACTIONS 136,420 106,330
</TABLE>
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE
Federated Investment Management Company, 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 or reimburse
certain operating expenses of the Fund. The Adviser can modify or terminate this
voluntary waiver or 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 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 Company ("FSSC"), the Fund will pay FSSC up to 0.25% of average daily
net assets of the Fund for the period. The fee paid to FSSC is used to finance
certain services for shareholders and to maintain shareholder accounts. FSSC may
voluntarily choose to waive any portion of its fee. FSSC 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 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, 1999, 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 $10,400,000 and $9,700,000, 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, 1999, were as follows:
<TABLE>
<CAPTION>
<S> <C>
Purchases $7,632,800
Sales $5,835,551
</TABLE>
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, 1999, 23.7% 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 percentage of investments insured
by or supported (backed) by a letter of credit from any one institution or
agency did not exceed 8.1% 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
FEDERATED 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, 1999, the related statement of operations for the year then ended,
the statement of changes in net assets for the years ended August 31, 1999 and
1998, 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, 1999, 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 New York
Municipal Income Fund as of August 31, 1999, 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
Boston, Massachusetts
October 15, 1999
[GRAPHIC]
Federated
World-Class Investment Manager
PROSPECTUS
Federated New York Municipal Income
Fund
A Portfolio of Federated Municipal Securities Income Trust
CLASS A SHARES
OCTOBER 31, 1999
A Statement of Additional Information (SAI) dated October 31, 1999, is
incorporated by reference into this prospectus. Additional information about the
Fund's investments is contained in the Fund's Annual and SemiAnnual Reports to
shareholders as they become available. The Annual Report's Management Discussion
and Analysis discusses market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year. To
obtain the SAI, the Annual Report, the Semi-Annual Report and other information
without charge, and make inquiries, call your investment professional or the
Fund at 1-800-341- 7400.
You can obtain information about the Fund (including the SAI) by writing to or
visiting the Public Reference Room in Washington, D.C. You may also access fund
information from the EDGAR Database on the SEC's Internet site at
http://www.sec.gov. You can purchase copies of this information by contacting
the SEC by email at [email protected] or by writing to the SEC's Public
Reference Section, Washington, D.C. 20549-0102. Call 1-202- 942-8090 for
information on the Public Reference Room's operations and copying fees.
[Graphic]
Federated
Federated New York Municipal Income Fund
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
1-800-341-7400
WWW.FEDERATEDINVESTORS.COM
Federated Securities Corp., Distributor
Investment Company Act File No. 811-6165
Cusip 625922208
2092919A-FS (10/99)
[Graphic]
STATEMENT OF ADDITIONAL INFORMATION
Federated New York Municipal Income
Fund
A Portfolio of Federated Municipal Securities Income Trust
CLASS A SHARES
This Statement of Additional Information (SAI) is not a prospectus. Read this
SAI in conjunction with the prospectus for Federated New York Municipal Income
Fund Class A Shares (Fund), dated October 31, 1999. Obtain the prospectus and
the Annual Report's Management Discussion and Analysis without charge by calling
1-800-341-7400.
OCTOBER 31, 1999
[Graphic]
Federated
World-Class Investment Manager
Federated New York Municipal Income
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
1-800-341-7400
WWW.FEDERATEDINVESTORS.COM
Federated Securities Corp., Distributor
2092919B (10/99)
[Graphic]
CONTENTS
How is the Fund Organized? 1
Securities in Which the Fund Invests 1
What Do Shares Cost? 4
How is the Fund Sold? 5
Subaccounting Services 6
Redemption in Kind 6
Massachusetts Partnership Law 6
Account and Share Information 6
Tax Information 7
Who Manages and Provides Services to the Fund? 8
How Does the Fund Measure Performance? 11
Who is Federated Investors, Inc.? 13
Investment Ratings 14
Addresses 16
How is the Fund Organized?
The Fund is a non-diversified portfolio of Federated Municipal Securities Income
Trust (Trust). The Trust is an open-end, management investment company that was
established under the laws of the Commonwealth of Massachusetts on August 6,
1990. The Trust may offer separate series of shares representing interests in
separate portfolios of securities. The Fund changed its name from New York
Municipal Income Fund to Federated New York Municipal Income Fund on February
26, 1996 (effective date March 31, 1996). Effective October 1, 1999, the Trust
changed its name from Municipal Securities Income Trust to Federated Municipal
Securities Income Trust. The Fund's investment adviser is Federated Investment
Management Company (Adviser). The Adviser, formerly known as Federated Advisers,
changed its name effective March 31, 1999.
Securities in Which the Fund Invests
The Fund's principal securities are described in its prospectus. Additional
securities, and further information regarding the principal securities, are
outlined below. In pursuing its investment strategy, the Fund may invest in the
following securities for any purpose that is consistent with its investment
objective.
SECURITIES DESCRIPTIONS AND TECHNIQUES
FIXED INCOME SECURITIES
Fixed income securities pay interest, dividends or distributions at a specified
rate. The rate may be a fixed percentage of the principal or adjusted
periodically. In addition, the issuer of a fixed income security must repay the
principal amount of the security, normally within a specified time. Fixed income
securities provide more regular income than equity securities. However, the
returns on fixed income securities are limited and normally do not increase with
the issuer's earnings. This limits the potential appreciation of fixed income
securities as compared to equity securities.
A security's yield measures the annual income earned on a security as a
percentage of its price. A security's yield will increase or decrease depending
upon whether it costs less (a discount) or more (a premium) than the principal
amount. If the issuer may redeem the security before its scheduled maturity, the
price and yield on a discount or premium security may change based upon the
probability of an early redemption. Securities with higher risks generally have
higher yields.
TAX EXEMPT SECURITIES
Tax exempt securities are fixed income securities that pay interest that is not
subject to federal regular income taxes. Typically, states, counties, cities and
other political subdivisions and authorities issue tax exempt securities. The
market categorizes tax exempt securities by their source of repayment.
MUNICIPAL NOTES
Municipal notes are short-term tax exempt securities. Many municipalities issue
such notes to fund their current operations before collecting taxes or other
municipal revenues. Municipalities may also issue notes to fund capital projects
prior to issuing long-term bonds. The issuers typically repay the notes at the
end of their fiscal year, either with taxes, other revenues or proceeds from
newly issued notes or bonds.
VARIABLE RATE DEMAND INSTRUMENTS
Variable rate demand instruments are tax exempt securities that require the
issuer or a third party, such as a dealer or bank, to repurchase the security
for its face value upon demand. The securities also pay interest at a variable
rate intended to cause the securities to trade at their face value. The Fund
treats demand instruments as short-term securities, because their variable
interest rate adjusts in response to changes in market rates, even though their
stated maturity may extend beyond 13 months.
TAX INCREMENT FINANCING BONDS
Tax increment financing (TIF) bonds are payable from increases in taxes or other
revenues attributable to projects financed by the bonds. For example, a
municipality may issue TIF bonds to redevelop a commercial area. The TIF bonds
would be payable solely from any increase in sales taxes collected from
merchants in the area. The bonds could default if merchants' sales, and related
tax collections, failed to increase as anticipated.
CREDIT ENHANCEMENT
Common types of credit enhancement include guarantees, letters of credit, bond
insurance and surety bonds. Credit enhancement also includes arrangements where
securities or other liquid assets secure payment of a fixed income security. If
a default occurs, these assets may be sold and the proceeds paid to the
security's holders. Either form of credit enhancement reduces credit risks by
providing another source of payment for a fixed income security.
DERIVATIVE CONTRACTS
Derivative contracts are financial instruments that require payments based upon
changes in the values of designated (or underlying) securities, currencies,
commodities, financial indices or other assets. Some derivative contracts (such
as futures, forwards and options) require payments relating to a future trade
involving the underlying asset. The other party to a derivative contract is
referred to as a counterparty.
Many derivative contracts are traded on securities or commodities exchanges. In
this case, the exchange sets all the terms of the contract except for the price.
Investors make payments due under their contracts through the exchange. Most
exchanges require investors to maintain margin accounts through their brokers to
cover their potential obligations to the exchange. Parties to the contract make
(or collect) daily payments to the margin accounts to reflect losses (or gains)
in the value of their contracts. This protects investors against potential
defaults by the counterparty. Trading contracts on an exchange also allows
investors to close out their contracts by entering into offsetting contracts.
For example, the Fund could close out an open contract to buy an asset at a
future date by entering into an offsetting contract to sell the same asset on
the same date. If the offsetting sale price is more than the original purchase
price, the Fund realizes a gain; if it is less, the Fund realizes a loss.
Exchanges may limit the amount of open contracts permitted at any one time. Such
limits may prevent the Fund from closing out a position. If this happens, the
Fund will be required to keep the contract open (even if it is losing money on
the contract), and to make any payments required under the contract (even if it
has to sell portfolio securities at unfavorable prices to do so). Inability to
close out a contract could also harm the Fund by preventing it from disposing of
or trading any assets it has been using to secure its obligations under the
contract.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest its assets in securities of other investment companies,
including the securities of affiliated money market funds, as an efficient means
of carrying out its investment policies and managing its uninvested cash.
TEMPORARY DEFENSIVE INVESTMENTS
The Fund may make temporary defensive investments in the following taxable
securities:
REPURCHASE AGREEMENTS
Repurchase agreements are transactions in which the Fund buys a security from a
dealer or bank and agrees to sell the security back at a mutually agreed upon
time and price. The repurchase price exceeds the sale price, reflecting the
Fund's return on the transaction. This return is unrelated to the interest rate
on the underlying security. The Fund will enter into repurchase agreements only
with banks and other recognized financial institutions, such as securities
dealers, deemed creditworthy by the Adviser.
The Fund's custodian or subcustodian will take possession of the securities
subject to repurchase agreements. The Adviser or subcustodian will monitor the
value of the underlying security each day to ensure that the value of the
security always equals or exceeds the repurchase price.
Repurchase agreements are subject to credit risks.
REVERSE REPURCHASE AGREEMENTS
Reverse repurchase agreements are repurchase agreements in which the Fund is the
seller (rather than the buyer) of the securities, and agrees to repurchase them
at an agreed upon time and price. A reverse repurchase agreement may be viewed
as a type of borrowing by the Fund. Reverse repurchase agreements are subject to
credit risks. In addition, reverse repurchase agreements create leverage risks
because the Fund must repurchase the underlying security at a higher price,
regardless of the market value of the security at the time of repurchase.
TREASURY SECURITIES
Treasury securities are direct obligations of the federal government of the
United States.
BANK INSTRUMENTS
Bank instruments are unsecured interest bearing deposits with banks. Bank
instruments include bank accounts, time deposits, certificates of deposit and
banker's acceptances.
AGENCY SECURITIES
Agency securities are issued or guaranteed by a federal agency or other
government sponsored entity acting under federal authority (a GSE). The United
States supports some GSEs with its full faith and credit. Other GSEs receive
support through federal subsidies, loans or other benefits. A few GSEs have no
explicit financial support, but are regarded as having implied support because
the federal government sponsors their activities.
CORPORATE DEBT SECURITIES
Corporate debt securities are fixed income securities issued by businesses.
Notes, bonds, debentures and commercial paper are the most prevalent types of
corporate debt securities.
COMMERCIAL PAPER
Commercial paper is an issuer's obligation with a maturity of less than nine
months. Companies typically issue commercial paper to pay for current
expenditures. Most issuers constantly reissue their commercial paper and use the
proceeds (or bank loans) to repay maturing paper. If the issuer cannot continue
to obtain liquidity in this fashion, its commercial paper may default. The short
maturity of commercial paper reduces both the market and credit risks as
compared to other debt securities of the same issuer.
INVESTMENT RISKS
There are many factors which may affect an investment in the Fund. The Fund's
principal risks are described in its prospectus. Additional risk factors are
outlined below.
CREDIT RISKS
Fixed income securities generally compensate for greater credit risk by paying
interest at a higher rate. The difference between the yield of a security and
the yield of a AAA municipal security with a comparable maturity (the spread)
measures the additional interest paid for risk. Spreads may increase generally
in response to adverse economic or market conditions. A security's spread may
also increase if the security's rating is lowered, or the security is perceived
to have an increased credit risk. An increase in the spread will cause the price
of the security to decline.
LIQUIDITY RISKS
Limited trading opportunities may make it more difficult to sell or buy a
security at a favorable price or time. Consequently, the Fund may have to accept
a lower price to sell a security, sell other securities to raise cash or give up
an investment opportunity, any of which could have a negative effect on the
Fund's performance. Infrequent trading of securities may also lead to an
increase in their price volatility.
FUNDAMENTAL INVESTMENT OBJECTIVE AND POLICY
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. Under normal circumstances, the
Fund invests its assets so that at least 80% of its annual interest is exempt
from federal regular income tax and the personal income taxes imposed by the
state of New York and New York municipalities. The investment objective and
policy may not be changed by the Fund's Trustees without shareholder approval.
INVESTMENT LIMITATIONS
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund may borrow money, directly or indirectly, and issue senior securities
to the maximum extent permitted under the 1940 Act.
INVESTING IN REAL ESTATE
The Fund may not purchase or sell real estate, provided that this restriction
does not prevent the Fund from investing in issuers which invest, deal, or
otherwise engage in transactions in real estate or interests therein, or
investing in securities that are secured by real estate or interests therein.
The Fund may exercise its rights under agreements relating to such securities,
including the right to enforce security interests and to hold real estate
acquired by reason of such enforcement until that real estate can be liquidated
in an orderly manner.
INVESTING IN COMMODITIES
The Fund may not purchase or sell physical commodities, provided that the Fund
may purchase securities of companies that deal in commodities.
UNDERWRITING
The Fund may not underwrite the securities of other issuers, except that the
Fund may engage in transactions involving the acquisition, disposition or resale
of its portfolio securities, under circumstances where it may be considered to
be an underwriter under the Securities Act of 1933.
LENDING CASH OR SECURITIES
The Fund may not make loans, provided that this restriction does not prevent the
Fund from purchasing debt obligations, entering into repurchase agreements,
lending its assets to broker/dealers or institutional investors and investing in
loans, including assignments and participation interests.
CONCENTRATION OF INVESTMENTS
The Fund will not make investments that will result in the concentration of its
investments in the securities of issuers primarily engaged in the same industry.
Government securities, municipal securities and bank instruments will not be
deemed to constitute an industry.
THE ABOVE LIMITATIONS CANNOT BE CHANGED UNLESS AUTHORIZED BY THE BOARD OF
TRUSTEES (BOARD) AND BY THE "VOTE OF A MAJORITY OF ITS OUTSTANDING VOTING
SECURITIES," AS DEFINED BY THE INVESTMENT COMPANY ACT. THE FOLLOWING
LIMITATIONS, HOWEVER, MAY BE CHANGED BY THE BOARD WITHOUT SHAREHOLDER APPROVAL.
SHAREHOLDERS WILL BE NOTIFIED BEFORE ANY MATERIAL CHANGE IN THESE LIMITATIONS
BECOMES EFFECTIVE.
BUYING ON MARGIN
The Fund will not purchase securities on margin, provided that the Fund may
obtain short-term credits necessary for the clearance of purchases and sales of
securities, and further provided that the Fund may make margin deposits in
connection with its use of financial options and futures, forward and spot
currency contracts, swap transactions and other financial contracts or
derivative instruments.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any of its assets, provided
that this shall not apply to the transfer of securities in connection with any
permissible borrowing or to collateral arrangements in connection with
permissible activities.
ILLIQUID SECURITIES
The Fund will not purchase securities for which there is no readily available
market, or enter into repurchase agreements or purchase time deposits maturing
in more than seven days if immediately after and as a result, the value of such
securities would exceed, in the aggregate, 15% of the Fund's net assets.
RESTRICTED SECURITIES
The Fund may purchase securities subject to restrictions on resale under the
federal securities laws.
Except with respect to borrowing money, the Fund may borrow money, directly or
indirectly, and issue senior securities to the maximum extent permitted under
the 1940 Act.
In applying the Fund's commodities restriction, investments in transactions
involving futures contracts and options, forward currency contracts, swap
transactions and other financial contracts that settle by payment of cash are
not deemed to be investments in commodities.
In applying the Fund's concentration limitation: (a) utility companies will be
divided according to their services, for example, gas, gas transmission,
electric and telephone will each be considered a separate industry; (b)
financial service companies will be classified according to end users of their
services, for example, automobile finance, bank finance and diversified finance
will each be considered a separate industry; and (c) asset-backed securities
will be classified according to the underlying assets securing such securities.
To conform to the current view of the Securities and Exchange Commission (SEC)
staff that only domestic bank instruments may be excluded from industry
concentration limitations, the Fund will not exclude foreign bank instruments
from industry concentration tests as long as the policy of the SEC remains in
effect. The Fund will consider concentration to be the investment of more than
25% of the value of its total assets in any one industry.
DETERMINING MARKET VALUE OF SECURITIES
Market values of the Fund's portfolio securities are determined as follows:
* for fixed income securities, at the last sale price on a national securities
exchange, if available, otherwise, as determined by an independent pricing
service;
* futures contracts and options are generally valued at market values
established by the exchanges on which they are traded at the close of trading on
such exchanges. Options traded in the over-the-counter market are generally
valued according to the mean between the last bid and the last asked price for
the option as provided by an investment dealer or other financial institution
that deals in the option. The Board may determine in good faith that another
method of valuing such investments is necessary to appraise their fair market
value;
* for short-term obligations, according to the mean between bid and asked prices
as furnished by an independent pricing service, except that short-term
obligations with remaining maturities of less than 60 days at the time of
purchase may be valued at amortized cost or at fair market value as determined
in good faith by the Board; and
* for all other securities at fair value as determined in good faith by the
Board.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may consider institutional trading in
similar groups of securities, yield, quality, stability, risk, coupon rate,
maturity, type of issue, trading characteristics, and other market data or
factors. From time to time, when prices cannot be obtained from an independent
pricing service, securities may be valued based on quotes from broker-dealers or
other financial institutions that trade the securities.
What Do Shares Cost?
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.
REDUCING OR ELIMINATING THE FRONT-END SALES CHARGE
You can reduce or eliminate the applicable front-end sales charge, as follows:
QUANTITY DISCOUNTS
Larger purchases of the same Share class reduce or eliminate the sales charge
you pay. You can combine purchases of Shares made on the same day by you, your
spouse and your children under age 21. In addition, purchases made at one time
by a trustee or fiduciary for a single trust estate or a single fiduciary
account can be combined.
ACCUMULATED PURCHASES
If you make an additional purchase of Shares, you can count previous Share
purchases still invested in the Fund in calculating the applicable sales charge
on the additional purchase.
CONCURRENT PURCHASES
You can combine concurrent purchases of the same share class of two or more
Federated Funds in calculating the applicable sales charge.
LETTER OF INTENT CLASS A SHARES
You can sign a Letter of Intent committing to purchase a certain amount of the
same class of Shares within a 13-month period to combine such purchases in
calculating the sales charge. The Fund's custodian will hold Shares in escrow
equal to the maximum applicable sales charge. If you complete the Letter of
Intent, the Custodian will release the Shares in escrow to your account. If you
do not fulfill the Letter of Intent, the Custodian will redeem the appropriate
amount from the Shares held in escrow to pay the sales charges that were not
applied to your purchases.
REINVESTMENT PRIVILEGE
You may reinvest, within 120 days, your Share redemption proceeds at the next
determined NAV without any sales charge.
PURCHASES BY AFFILIATES OF THE FUND
The following individuals and their immediate family members may buy Shares at
NAV without any sales charge because there are nominal sales efforts associated
with their purchases:
* the Trustees or Directors, employees and sales representatives of the
Fund, the Adviser, the Distributor and their affiliates;
* any associated person of an investment dealer who has a sales agreement
with the Distributor; and
* trusts, pension or profit-sharing plans for these individuals.
FEDERATED LIFE MEMBERS
Shareholders of the Fund known as "Federated Life Members" are exempt from
paying any front-end sales charge. These shareholders joined the Fund
originally:
* through the "Liberty Account," an account for Liberty Family of Funds
shareholders on February 28, 1987 (the Liberty Account and Liberty Family of
Funds are no longer marketed); or
* as Liberty Account shareholders by investing through an affinity group prior
to August 1, 1987.
ELIMINATING THE CONTINGENT DEFERRED SALES CHARGE (CDSC)
Upon notification to the Distributor or the Fund's transfer agent, no CDSC will
be imposed on certain redemptions as listed below. If your redemption qualifies,
you or your investment professional should notify the Distributor at the time of
redemption to eliminate the CDSC. If the Distributor is not notified, the CDSC
will apply. Based on these conditions, no CDSC will be imposed on redemptions of
Shares:
* purchased with reinvested dividends or capital gains;
* purchased within 120 days of redeeming Shares of an equal or lesser
amount;
* that you exchanged into the same share class of another Federated Fund if the
shares were held for the applicable CDSC holding period (other than a money
market fund);
* following the death or post-purchase disability, as defined in Section
72(m)(7) of the Internal Revenue Code of 1986, of the last surviving
shareholder;
* 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;
* of Shares held by the Trustees or Directors, employees, and sales
representatives of the Fund, the Adviser, the Distributor and their affiliates;
employees of any investment professional that sells Shares according to a sales
agreement with the Distributor; and the immediate family members of the above
persons;
* of Shares originally purchased through a bank trust department, a registered
investment adviser or retirement plans where the third party administrator has
entered into certain arrangements with the Distributor or its affiliates, or any
other investment professional, to the extent that no payments were advanced for
purchases made through these entities; and
* which are involuntary redemptions processed by the Fund because the accounts
do not meet the minimum balance requirements.
TO KEEP THE SALES CHARGE AS LOW AS POSSIBLE, THE FUND REDEEMS YOUR SHARES IN
THIS ORDER:
* Shares that are not subject to a CDSC; and
* Shares held the longest (to determine the number of years your Shares have
been held, include the time you held shares of other Federated Funds that have
been exchanged for Shares of this Fund).
The CDSC is then calculated using the share price at the time of purchase or
redemption, whichever is lower.
How is the Fund Sold?
Under the Distributor's Contract with the Fund, the Distributor (Federated
Securities Corp.) offers Shares on a continuous, best-efforts basis.
FRONT-END SALES CHARGE REALLOWANCES
The Distributor receives a front-end sales charge on certain Share sales. The
Distributor generally pays up to 90% (and as much as 100%) of this charge to
investment professionals for sales and/or administrative services. Any payments
to investment professionals in excess of 90% of the front-end sales charge are
considered supplemental payments. The Distributor retains any portion not paid
to an investment professional.
RULE 12B-1 PLAN
As a compensation-type plan, the Rule 12b-1 Plan is designed to pay the
Distributor (who may then pay investment professionals such as banks,
broker/dealers, trust departments of banks, and registered investment advisers)
for marketing activities (such as advertising, printing and distributing
prospectuses, and providing incentives to investment professionals) to promote
sales of Shares so that overall Fund assets are maintained or increased. This
helps the Fund achieve economies of scale, reduce per share expenses, and
provide cash for orderly portfolio management and Share redemptions. In
addition, the Fund's service providers that receive asset-based fees also
benefit from stable or increasing Fund assets.
The Fund may compensate the Distributor more or less than its actual marketing
expenses. In no event will the Fund pay for any expenses of the Distributor that
exceed the maximum Rule 12b-1 Plan fee.
The maximum Rule 12b-1 Plan fee that can be paid in any one year may not be
sufficient to cover the marketing-related expenses the Distributor has incurred.
Therefore, it may take the Distributor a number of years to recoup these
expenses.
SHAREHOLDER SERVICES
The Fund may pay Federated Shareholder Services Company, a subsidiary of
Federated Investors, Inc. (Federated), for providing shareholder services and
maintaining shareholder accounts. Federated Shareholder Services Company may
select others to perform these services for their customers and may pay them
fees.
SUPPLEMENTAL PAYMENTS
Investment professionals may be paid fees out of the assets of the Distributor
and/or Federated Shareholder Services Company (but not out of Fund assets). The
Distributor and/or Federated Shareholder Services Company may be reimbursed by
the Adviser or its affiliates.
Investment professionals receive such fees for providing distribution- related
or shareholder services such as sponsoring sales, providing sales literature,
conducting training seminars for employees, and engineering sales-related
computer software programs and systems. Also, investment professionals may be
paid cash or promotional incentives, such as reimbursement of certain expenses
relating to attendance at informational meetings about the Fund or other special
events at recreational-type facilities, or items of material value. These
payments will be based upon the amount of Shares the investment professional
sells or may sell and/or upon the type and nature of sales or marketing support
furnished by the investment professional.
CLASS A SHARES
Investment professionals purchasing Class A Shares for their customers are
eligible to receive an advance payment from the Distributor based on the
following breakpoints:
<TABLE>
<CAPTION>
ADVANCE PAYMENTS
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 advance payments reset
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 advance payments will be paid only on
those purchases that were not previously subject to a front-end sales charge and
dealer advance payments. Certain retirement accounts may not be eligible for
this program.
A contingent deferred sales charge of 0.75% of the redemption amount applies to
Class A Shares redeemed up to 24 months after purchase. The CDSC does not apply
under certain investment programs where the investment professional does not
receive an advance payment on the transaction including, but not limited to,
trust accounts and wrap programs where the investor pays an account level fee
for investment management.
Subaccounting Services
Certain investment professionals may wish to use the transfer agent's
subaccounting system to minimize their internal recordkeeping requirements. The
transfer agent may charge a fee based on the level of subaccounting services
rendered. Investment professionals holding Shares in a fiduciary, agency,
custodial, or similar capacity may charge or pass through subaccounting fees as
part of or in addition to normal trust or agency account fees. They may also
charge fees for other services that may be related to the ownership of Shares.
This information should, therefore, be read together with any agreement between
the customer and the investment professional about the services provided, the
fees charged for those services, and any restrictions and limitations imposed.
Redemption in Kind
Although the Fund intends to pay Share redemptions in cash, it reserves the
right, as described below, to pay the redemption price in whole or in part by a
distribution of the Fund's portfolio securities.
Because the Fund has elected to be governed by Rule 18f-1 under the Investment
Company Act of 1940, the Fund is obligated to pay Share redemptions to any one
shareholder in cash only up to the lesser of $250,000 or 1% of the net assets
represented by such Share class during any 90-day period.
Any Share redemption payment greater than this amount will also be in cash
unless the Fund's Board determines that payment should be in kind. In such a
case, the Fund will pay all or a portion of the remainder of the redemption in
portfolio securities, valued in the same way as the Fund determines its NAV. The
portfolio securities will be selected in a manner that the Fund's Board deems
fair and equitable and, to the extent available, such securities will be readily
marketable.
Redemption in kind is not as liquid as a cash redemption. If redemption is made
in kind, shareholders receiving the portfolio securities and selling them before
their maturity could receive less than the redemption value of the 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 obligations of the Trust. To protect its
shareholders, the Trust has filed legal documents with Massachusetts that
expressly disclaim the liability of its shareholders for acts or obligations of
the Trust.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required by the Declaration of Trust to use its
property to protect or compensate the shareholder. On request, the Trust will
defend any claim made and pay any judgment against a shareholder for any act or
obligation of the Trust. Therefore, financial loss resulting from liability as a
shareholder will occur only if the Trust itself cannot meet its obligations to
indemnify shareholders and pay judgments against them.
Account and Share 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 the Trust have
equal voting rights, except that in matters affecting only a particular Fund or
class, only Shares of that Fund or class are entitled to vote. Trustees may be
removed by the Board or by shareholders at a special meeting. A special meeting
of shareholders will be called by the Board upon the written request of
shareholders who own at least 10% of the Trust's outstanding shares.
As of October 5, 1999, the following shareholders owned of record, beneficially,
or both, 5% or more of outstanding Shares: North Fork Bank, Mattituck, NY, owned
approximately 225,144 Shares (9.60%); and Merrill Lynch Pierce Fenner & Smith
(as record owner holding Shares for its clients), Jacksonville, FL, owned
approximately 726,543 Shares (30.99%).
Shareholders owning 25% or more of outstanding Shares may be in control and be
able to affect the outcome of certain matters presented for a vote of
shareholders.
Tax Information
FEDERAL INCOME TAX
The Fund intends to meet requirements of Subchapter M of the Internal Revenue
Code applicable to regulated investment companies. If these requirements are not
met, it will not receive special tax treatment and will pay federal income tax.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income earned and capital gains and losses realized by the
Trust's other portfolios will be separate from those realized by the Fund. The
Fund is entitled to a loss carryforward, which may reduce the taxable income or
gain that the Fund would realize, and to which the shareholder would be subject,
in the future.
STATE 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.
Who Manages and Provides Services to the Fund?
BOARD OF TRUSTEES
The Board is responsible for managing the Trust's business affairs and for
exercising all the Trust's powers except those reserved for the shareholders.
Information about each Board member is provided below and includes each
person's: name, address, birth date, present position(s) held with the Trust,
principal occupations for the past five years and positions held prior to the
past five years, total compensation received as a Trustee from the Trust for its
most recent fiscal year, and the total compensation received from the Federated
Fund Complex for the most recent calendar year. The Trust is comprised of six
funds and the Federated Fund Complex is comprised of 54 investment companies,
whose investment advisers are affiliated with the Fund's Adviser. As of October
5, 1999, the Fund's Board and Officers as a group owned less than 1% of the
Fund's outstanding Class A Shares.
<TABLE>
<CAPTION>
NAME TOTAL
BIRTH DATE AGGREGATE COMPENSATION
ADDRESS PRINCIPAL OCCUPATIONS COMPENSATION FROM TRUST AND
POSITION WITH TRUST FOR PAST FIVE YEARS FROM TRUST FUND COMPLEX
<S> <C> <C> <C>
JOHN F. DONAHUE*+# Chief Executive Officer $0 $0 for the Trust and
Birth Date: July 28, 1924 and Director or Trustee of 54 other investment
Federated Investors Tower the Federated Fund companies in the
1001 Liberty Avenue Complex; Chairman and Fund Complex
Pittsburgh, PA Director, Federated
CHAIRMAN AND TRUSTEE Investors, Inc.; Chairman
and Trustee, Federated Investment
Management Company; Chairman and
Director, Federated Investment
Counseling and Federated Global
Investment Management Corp.; Chairman,
Passport Research, Ltd.
THOMAS G. BIGLEY Director or Trustee of $1,305.35 $113,860.22 for the Trust
Birth Date: February 3, 1934 the Federated Fund and 54 other investment
15 Old Timber Trail Complex; Director, Member companies in the
Pittsburgh, PA of Executive Committee, Fund Complex
TRUSTEE Children's Hospital of
Pittsburgh; Director,
Robroy Industries, Inc.
(coated steel conduits/
computer storage
equipment); formerly:
Senior Partner, Ernst &
Young LLP; Director, MED
3000 Group, Inc.
(physician practice
management); Director,
Member of Executive
Committee, University of
Pittsburgh.
JOHN T. CONROY, JR. Director or Trustee of the $1,436.05 $125,264.48 for the Trust
Birth Date: June 23, 1937 Federated Fund Complex; and 54 other investment
Wood/Commercial Dept. President, Investment companies in the
John R. Wood Associates, Inc. Realtors Properties Corporation; Fund Complex
3255 Tamiami Trail North Senior Vice President,
Naples, FL John R. Wood and
TRUSTEE 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 CONSTANTAKIS Director or Trustee of some $1,305.35 $47,958.02 for the Trust
Birth Date: September 3, 1939 of the Federated Fund and 29 other investment
175 Woodshire Drive Complex; formerly: companies in the
Pittsburgh, PA Partner, Andersen Fund Complex
TRUSTEE Worldwide SC.
JOHN F. CUNNINGHAM++ Director or Trustee of some $331.87 $0 for the Trust and
Birth Date: March 5, 1943 of the Federated Fund 46 other investment
353 El Brillo Way Complex; companies in the
Palm Beach, FL Chairman, President and Fund Complex
TRUSTEE Chief Executive Officer,
Cunningham & Co., Inc.
(strategic business
consulting); Trustee
Associate, Boston College;
Director, Iperia Corp.
(communications/software);
formerly: Director,
Redgate Communications and
EMC Corporation (computer
storage systems).
Previous Positions:
Chairman of the Board and
Chief Executive Officer,
Computer Consoles, Inc.;
President and Chief
Operating Officer,
Wang Laboratories;
Director, First National
Bank of Boston; Director,
Apollo Computer, Inc.
LAWRENCE D. ELLIS, M.D.* Director or Trustee of the $1,305.35 $113,860.22 for the Trust
Birth Date: October 11, 1932 Federated Fund Complex; and 54 other investment
3471 Fifth Avenue Professor of Medicine, companies in the
Suite 1111 University of Pittsburgh; Fund Complex
Pittsburgh, PA Medical Director,
TRUSTEE University of Pittsburgh
Medical Center - Downtown;
Hematologist, Oncologist and Internist,
University of Pittsburgh Medical
Center; Member, National Board of
Trustees, Leukemia Society of America.
PETER E. MADDEN Director or Trustee of the $1,189.91 $113,860.22 for the Trust
Birth Date: March 16, 1942 Federated Fund Complex; and 54 other investment
One Royal Palm Way formerly: Representative, companies in the
100 Royal Palm Way Commonwealth of Fund Complex
Palm Beach, FL Massachusetts General
TRUSTEE Court; President, State
Street Bank and Trust
Company and State
Street Corporation.
Previous Positions:
Director, VISA USA and VISA
International; Chairman
and Director,
Massachusetts Bankers
Association; Director,
Depository Trust
Corporation; Director, The
Boston Stock Exchange.
<CAPTION>
NAME TOTAL
BIRTH DATE AGGREGATE COMPENSATION
ADDRESS PRINCIPAL OCCUPATIONS COMPENSATION FROM TRUST AND
POSITION WITH TRUST FOR PAST FIVE YEARS FROM TRUST FUND COMPLEX
<S> <C> <C> <C>
CHARLES F. MANSFIELD, JR.++ Director or Trustee of some $1,016.39 $0 for the Trust and
Birth Date: April 10, 1945 of the Federated Fund 50 other investment
80 South Road Complex; Management companies in the
Westhampton Beach, NY Consultant. Fund Complex
TRUSTEE Previous Positions: Chief
Executive Officer, PBTC International
Bank; Partner, Arthur Young & Company
(now Ernst & Young LLP); Chief
Financial Officer of Retail Banking
Sector, Chase Manhattan Bank; Senior
Vice President, Marine Midland Bank;
Vice President, Citibank; Assistant
Professor of Banking and Finance, Frank
G. Zarb School of Business, Hofstra
University.
JOHN E. MURRAY, JR., J.D., S.J.D.# Director or Trustee of $1,403.80 $113,860.22 for the Trust
Birth Date: December 20, 1932 the Federated Fund and 54 other investment
President, Duquesne University Complex; President, Law companies in the
Pittsburgh, PA Professor, Duquesne Fund Complex
TRUSTEE University; Consulting
Partner, Mollica & Murray;
Director, Michael Baker
Corp. (engineering,
construction, operations
and technical services).
Previous Positions: Dean
and Professor of Law,
University of Pittsburgh
School of Law; Dean and
Professor of Law,
Villanova University
School of Law.
MARJORIE P. SMUTS Director or Trustee of the $1,305.35 $113,860.22 for the Trust
Birth Date: June 21, 1935 Federated Fund Complex; and 54 other investment
4905 Bayard Street Public Relations/ companies in the
Pittsburgh, PA Marketing/Conference Fund Complex
TRUSTEE Planning.
Previous Positions:
National Spokesperson,
Aluminum Company of
America; television
producer; business owner.
JOHN S. WALSH++ Director or Trustee of some $331.87 $0 for the Trust and
Birth Date: November 28, 1957 of the Federated Fund 48 other investment
2007 Sherwood Drive Complex; President and companies in the
Valparaiso, IN Director, Heat Wagon, Inc. Fund Complex
TRUSTEE (manufacturer of
construction temporary
heaters); President and
Director, Manufacturers
Products, Inc.
(distributor of portable
construction heaters);
President, Portable Heater
Parts, a division of
Manufacturers Products,
Inc.; Director, Walsh &
Kelly, Inc. (heavy highway
contractor); formerly:
Vice President, Walsh &
Kelly, Inc.
J. CHRISTOPHER DONAHUE+ President or Executive $0 $0 for the Trust and
Birth Date: April 11, 1949 Vice President of the 16 other investment
Federated Investors Tower Federated Fund Complex; companies in the
1001 Liberty Avenue Director or Trustee of some Fund Complex
Pittsburgh, PA of the Funds in the
EXECUTIVE VICE PRESIDENT Federated Fund Complex;
AND TRUSTEE President, Chief Executive
Officer and Director, Federated
Investors, Inc.; President and Trustee,
Federated Investment Management
Company; President and Trustee,
Federated Investment Counseling;
President and Director, Federated
Global Investment Management Corp.;
President, Passport Research, Ltd.;
Trustee, Federated Shareholder Services
Company; Director, Federated Services
Company.
EDWARD C. GONZALES Trustee or Director of some $0 $0 for the Trust and
Birth Date: October 22, 1930 of the Funds in the 1 other investment
Federated Investors Tower Federated Fund Complex; company in the
1001 Liberty Avenue President, Executive Vice Fund Complex
Pittsburgh, PA President and Treasurer of
EXECUTIVE VICE PRESIDENT some of the Funds in the
Federated Fund Complex; Vice Chairman,
Federated Investors, Inc.; Vice
President, Federated Investment
Management Company, Federated
Investment Counseling, Federated Global
Investment Management Corp. and
Passport Research, Ltd.; Executive Vice
President and Director, Federated
Securities Corp.; Trustee, Federated
Shareholder Services Company.
JOHN W. MCGONIGLE Executive Vice President $0 $0 for the Trust and
Birth Date: October 26, 1938 and Secretary of the 54 other investment
Federated Investors Tower Federated Fund Complex; companies in the
1001 Liberty Avenue Executive Vice President, Fund Complex
Pittsburgh, PA Secretary and Director,
EXECUTIVE VICE PRESIDENT Federated Investors, Inc.;
Trustee, Federated Investment
Management Company and Federated
Investment Counseling; Director,
Federated Global Investment Management
Corp, Federated Services Company and
Federated Securities Corp.
RICHARD J. THOMAS Treasurer of the Federated $0 $0 for the Trust and
Birth Date: June 17, 1954 Fund Complex; Vice 54 other investment
Federated Investors Tower President-Funds Financial companies in the
1001 Liberty Avenue Services Division, Fund Complex
Pittsburgh, PA Federated Investors, Inc.;
TREASURER formerly: various
management positions
within Funds Financial
Services Division of
Federated Investors, Inc.
RICHARD B. FISHER President or Vice $0 $0 for the Trust and
Birth Date: May 17, 1923 President of some of the 6 other investment
Federated Investors Tower Funds in the Federated Fund companies in the
1001 Liberty Avenue Complex; Director or Fund Complex
Pittsburgh, PA Trustee of some of the
PRESIDENT Funds in the Federated Fund
Complex; Executive Vice
President, Federated
Investors, Inc.; Chairman
and Director, Federated
Securities Corp.
<CAPTION>
NAME TOTAL
BIRTH DATE AGGREGATE COMPENSATION
ADDRESS PRINCIPAL OCCUPATIONS COMPENSATION FROM TRUST AND
POSITION WITH TRUST FOR PAST FIVE YEARS FROM TRUST FUND COMPLEX
<S> <C> <C> <C>
WILLIAM D. DAWSON, III Chief Investment Officer $0 $0 for the Trust and
Birth Date: March 3, 1949 of this Fund and various 41 other investment
Federated Investors Tower other Funds in the companies in the
1001 Liberty Avenue Federated Fund Complex; Fund Complex
Pittsburgh, PA Executive Vice President,
CHIEF INVESTMENT OFFICER Federated Investment
Counseling, Federated Global Investment
Management Corp., Federated Investment
Management Company and Passport
Research, Ltd.; Registered
Representative, Federated Securities
Corp.; Portfolio Manager, Federated
Administrative Services; Vice
President, Federated Investors, Inc.;
formerly: Executive Vice President and
Senior Vice President, Federated
Investment Counseling Institutional
Portfolio Management Services Division;
Senior Vice President, Federated
Investment Management Company and
Passport Research, Ltd.
J. SCOTT ALBRECHT J. Scott Albrecht has been $0 $0 for the Trust and
Birth Date: June 1, 1960 the Fund's portfolio 1 other investment
Federated Investors Tower manager March 1995. He is company in the
1001 Liberty Avenue Vice President of the Fund. Fund Complex
Pittsburgh, PA Mr. Albrecht joined
VICE PRESIDENT Federated in 1989. He has
been a Senior Portfolio
Manager since 1997 and a
Vice President of the
Fund's investment adviser
since 1994. He was a
Portfolio Manager from
1994 to 1996. Mr. Albrecht
is a Chartered Financial
Analyst and received his
M.S. in Public Management
from Carnegie Mellon
University.
</TABLE>
* An asterisk denotes a Trustee who is deemed to be an interested person as
defined in the Investment Company Act of 1940.
# A pound sign denotes a Member of the Board's Executive Committee, which
handles the Board's responsibilities between its meetings.
+ Mr. Donahue is the father of J. Christopher Donahue, Executive Vice
President and Trustee of the Trust.
++ Mr. Mansfield became a member of the Board of Trustees January 1, 1999.
Messrs. Cunningham and Walsh became members of the Board of Trustees on
July 1, 1999. They did not earn any fees for serving the Fund Complex
since these fees are reported as of the end of the last calendar year.
INVESTMENT ADVISER
The Adviser conducts investment research and makes investment decisions for the
Fund.
The Adviser is a wholly owned subsidiary of Federated.
The Adviser shall not be liable to the Trust or any Fund shareholder 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.
OTHER RELATED SERVICES
Affiliates of the Adviser may, from time to time, provide certain electronic
equipment and software to institutional customers in order to facilitate the
purchase of Fund Shares offered by the Distributor.
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. 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. In selecting among firms believed to meet these
criteria, the Adviser may give consideration to those firms which have sold or
are selling Shares of the Fund and other funds distributed by the Distributor
and its affiliates. The Adviser makes decisions on portfolio transactions and
selects brokers and dealers subject to review by the Fund's Board.
Investment decisions for the Fund are made independently from those of other
accounts managed by the Adviser. When the Fund and one or more of those accounts
invests in, or disposes of, the same security, available investments or
opportunities for sales will be allocated among the Fund and the account(s) in a
manner believed by the Adviser to be equitable. While the coordination and
ability to participate in volume transactions may benefit the Fund, it is
possible that this procedure could adversely impact the price paid or received
and/or the position obtained or disposed of by the Fund.
ADMINISTRATOR
Federated Services Company, a subsidiary of Federated, provides administrative
personnel and services (including certain legal and financial reporting
services) necessary to operate the Fund. Federated Services Company provides
these at the following annual rate of the average aggregate daily net assets of
all Federated Funds as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY
ADMINISTRATIVE FEE NET ASSETS OF THE FEDERATED FUNDS
<S> <C>
0.150 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.100 of 1% on the next $250 million
0.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of Shares.
Federated Services Company may voluntarily waive a portion of its fee and may
reimburse the Fund for expenses.
Federated Services Company also provides certain accounting and recordkeeping
services with respect to the Fund's portfolio investments for a fee based on
Fund assets plus out-of-pocket expenses.
CUSTODIAN
State Street Bank and Trust Company, Boston, Massachusetts, is custodian for the
securities and cash of the Fund. Foreign instruments purchased by the Fund are
held by foreign banks participating in a network coordinated by State Street
Bank.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Federated Services Company, through its registered transfer agent subsidiary,
Federated Shareholder Services Company, maintains all necessary shareholder
records. The Fund pays the transfer agent a fee based on the size, type, and
number of accounts and transactions made by
shareholders.
INDEPENDENT AUDITORS
The independent auditor for the Fund, Deloitte & Touche LLP, plans and performs
its audit so that it may provide an opinion as to whether the Fund's financial
statements and financial highlights are free of material misstatement.
FEES PAID BY THE FUND FOR SERVICES
<TABLE>
<CAPTION>
FOR THE YEAR ENDED AUGUST 31 1999 1998 1997
<S> <C> <C> <C>
Advisory Fee Earned $101,464 $ 92,417 $ 91,304
Advisory Fee Waiver 101,464 110,901 4,621
Administrative Fee 125,000 125,000 125,000
12B-1 FEE 5,074 - -
Shareholder Services Fee 58,342 - -
</TABLE>
How Does the Fund Measure Performance?
The Fund may advertise Share performance by using the SEC's standard method for
calculating performance applicable to all mutual funds. The SEC also permits
this standard performance information to be accompanied by non-standard
performance information. Share performance reflects the effect of non-recurring
charges, such as maximum sales charges, which, if excluded, would increase the
total return and yield. The performance of Shares depends upon such variables
as: portfolio quality; average portfolio maturity; type and value of portfolio
securities; changes in interest rates; changes or differences in the Fund's or
any class of Shares' expenses; and various other factors.
Share performance fluctuates on a daily basis largely because net earnings
fluctuate daily. Both net earnings and offering price per Share are factors in
the computation of yield and total return.
AVERAGE ANNUAL TOTAL RETURNS AND YIELD
Total returns are given for the one-year, five-year and Start of Performance
periods ended August 31, 1999.
Yield and Tax-Equivalent Yield are given for the 30-day period August 31, 1999.
<TABLE>
<CAPTION>
30-DAY START OF PERFORMANCE
PERIOD 1 YEAR 5 YEARS ON DECEMBER 2, 1992
<S> <C> <C> <C> <C>
CLASS A SHARES
Total Return - (6.47%) 5.04% 5.36%
Yield 4.97% - - -
Tax-Equivalent Yield 8.22% - - -
</TABLE>
TOTAL RETURN
Total return represents the change (expressed as a percentage) in the value of
Shares over a specific period of time, and includes the investment of income and
capital gains distributions.
The average annual total return for Shares is the average compounded rate of
return for a given period that would equate a $1,000 initial investment to the
ending redeemable value of that investment. The ending redeemable value is
computed by multiplying the number of Shares owned at the end of the period by
the NAV 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 annual reinvestment of all
dividends and distributions.
YIELD AND TAX-EQUIVALENT YIELD
The yield of Shares is calculated by dividing: (i) the net investment income per
Share earned by the Shares over a 30-day period; by (ii) the maximum offering
price per Share on the last day of the period. This number is then annualized
using semi-annual compounding. This means that the amount of income generated
during the 30-day period is assumed to be generated each month over a 12-month
period and is reinvested every six months. 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 the actual yield, assuming a
specific tax rate. The yield and tax-equivalent yield do not necessarily reflect
income actually earned by Shares because of certain adjustments required by the
SEC and, therefore, may not correlate to the dividends or other distributions
paid to shareholders.
To the extent investment professionals and broker/dealers charge fees in
connection with services provided in conjunction with an investment in Shares,
the Share performance is lower for shareholders paying those fees.
TAX EQUIVALENCY TABLE
Set forth below is a sample of a tax-equivalency table that may be used in
advertising and sales literature. This table is for illustrative purposes only
and is not representative of past or future performance of the Fund. The
interest earned by the municipal securities owned by the Fund generally remains
free from federal regular income tax and is often free from state and local
taxes as well. However, some of the Fund's income may be subject to the federal
alternative minimum tax and state and/or local taxes.
TAX EQUIVALENCY TABLE
<TABLE>
<CAPTION>
TAXABLE YIELD EQUIVALENT FOR 1999 STATE OF NEW YORK
FEDERAL TAX BRACKET: 15.00% 28.00% 31.00% 36.00% 39.60%
COMBINED FEDERAL AND STATE INCOME TAX BRACKET: 21.850% 34.850% 37.850% 42.850% 46.450%
<S> <C> <C> <C> <C> <C>
Joint Return $1-43,050 $43,051-104,050 $104,051-158,550 $158,551-283,150 OVER $283,150
Single Return $1-25,750 $25,751-62,450 $62,451-130,250 $130,251-283,150 OVER $283,150
<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.
PERFORMANCE COMPARISONS
Advertising and sales literature may include:
* references to ratings, rankings, and financial publications and/or
performance comparisons of Shares to certain indices;
* charts, graphs and illustrations using the Fund's returns, or returns in
general, that demonstrate investment concepts such as tax-deferred compounding,
dollar-cost averaging and systematic investment;
* discussions of economic, financial and political developments and their impact
on the securities market, including the portfolio manager's views on how such
developments could impact the Fund; and
* information about the mutual fund industry from sources such as the Investment
Company Institute.
The Fund may compare its performance, or performance for the types of securities
in which it invests, to a variety of other investments, including federally
insured bank products such as bank savings accounts, certificates of deposit,
and Treasury bills.
The Fund may quote information from reliable sources regarding individual
countries and regions, world stock exchanges, and economic and demographic
statistics.
You may use financial publications and/or indices to obtain a more complete view
of Share performance. When comparing performance, you should consider all
relevant factors such as the composition of the 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
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.
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.
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.
Who is Federated Investors, Inc.?
Federated is dedicated to meeting investor needs by making structured,
straightforward and consistent investment decisions. Federated investment
products have a history of competitive performance and have gained the
confidence of thousands of financial institutions and individual investors.
Federated's disciplined investment selection process is rooted in sound
methodologies backed by fundamental and technical research. At Federated,
success in investment management does not depend solely on the skill of a single
portfolio manager. It is a fusion of individual talents and state- of-the-art
industry tools and resources. Federated's investment process involves teams of
portfolio managers and analysts, and investment decisions are executed by
traders who are dedicated to specific market sectors and who handle trillions of
dollars in annual trading volume.
FEDERATED FUNDS OVERVIEW
MUNICIPAL FUNDS
In the municipal sector, as of December 31, 1998, Federated managed 10 bond
funds with approximately $2.2 billion in assets and 23 money market funds with
approximately $12.5 billion in total assets. In 1976, Federated introduced one
of the first municipal bond mutual funds in the industry and is now one of the
largest institutional buyers of municipal securities. The Funds may quote
statistics from organizations including The Tax Foundation and the National
Taxpayers Union regarding the tax obligations of Americans.
EQUITY FUNDS
In the equity sector, Federated has more than 28 years' experience. As of
December 31, 1998, Federated managed 27 equity funds totaling approximately
$14.9 billion in assets across growth, value, equity income, international,
index and sector (i.e. utility) styles. Federated's value- oriented management
style combines quantitative and qualitative analysis and features a structured,
computer-assisted composite modeling system that was developed in the 1970s.
CORPORATE BOND FUNDS
In the corporate bond sector, as of December 31, 1998, Federated managed 9 money
market funds and 15 bond funds with assets approximating $22.8 billion and $7.1
billion, respectively. Federated's corporate bond decision making-based on
intensive, diligent credit analysis-is backed by over 26 years of experience in
the corporate bond sector. In 1972, Federated introduced one of the first
high-yield bond funds in the industry. In 1983, Federated was one of the first
fund managers to participate in the asset backed securities market, a market
totaling more than $209 billion.
GOVERNMENT FUNDS
In the government sector, as of December 31, 1998, Federated managed 9 mortgage
backed, 5 government/agency and 19 government money market mutual funds, with
assets approximating $5.3 billion, $1.8 billion and $41.6 billion, respectively.
Federated trades approximately $425 million in U.S. government and mortgage
backed securities daily and places approximately $25 billion in repurchase
agreements each day. Federated introduced the first U.S. government fund to
invest in U.S. government bond securities in 1969. Federated has been a major
force in the short- and intermediate-term government markets since 1982 and
currently manages approximately $43.2 billion in government funds within these
maturity ranges.
MONEY MARKET FUNDS
In the money market sector, Federated gained prominence in the mutual fund
industry in 1974 with the creation of the first institutional money market fund.
Simultaneously, the company pioneered the use of the amortized cost method of
accounting for valuing shares of money market funds, a principal means used by
money managers today to value money market fund shares. Other innovations
include the first institutional tax-free money market fund. As of December 31,
1998, Federated managed more than $76.7 billion in assets across 52 money market
funds, including 19 government, 9 prime and 23 municipal with assets
approximating $41.6 billion, $22.8 billion and $12.5 billion, respectively.
The Chief Investment Officers responsible for oversight of the various
investment sectors within Federated 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 $5 trillion to the more than 7,300 funds available,
according to the Investment Company Institute.
FEDERATED CLIENTS OVERVIEW
Federated distributes mutual funds through its subsidiaries for a variety of
investment purposes. Specific markets include:
INSTITUTIONAL CLIENTS
Federated meets the needs of approximately 900 institutional clients nationwide
by managing and servicing separate accounts and mutual funds for a variety of
purposes, 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 advisers. The marketing effort
to these institutional clients is headed by John B. Fisher, President,
Institutional Sales Division, Federated Securities Corp.
BANK MARKETING
Other institutional clients include 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,
Broker/Dealer Sales Division, Federated Securities Corp.
Investment Ratings
STANDARD AND POOR'S LONG-TERM DEBT RATING DEFINITIONS
AAA-Debt rated AAA has the highest rating assigned by Standard & Poor's.
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 or 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 BB 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.
MOODY'S INVESTORS SERVICE LONG-TERM BOND RATING DEFINITIONS
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 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.
FITCH IBCA, INC. LONG-TERM DEBT RATING DEFINITIONS
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 credit 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 obligor's 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 imminent default in payment of interest or principal.
MOODY'S INVESTORS SERVICE COMMERCIAL PAPER RATINGS
PRIME-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 structure 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.
PRIME-2-Issuers rated Prime-1 (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.
STANDARD AND POOR'S COMMERCIAL PAPER RATINGS
A-1-This designation 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.
FITCH IBCA, INC. COMMERCIAL PAPER RATING DEFINITIONS
FITCH-1-(Highest Grade) Commercial paper assigned this rating is regarded as
having the strongest degree of assurance for timely payment.
FITCH-2-(Very Good Grade) Issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than the strongest issues.
Addresses
FEDERATED NEW YORK MUNICIPAL INCOME FUND
Class A 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 Investment Management Company
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
200 Berkeley Street
Boston, MA 02116
MANAGEMENT DISCUSSION AND ANALYSIS
Federated Ohio Municipal Income Fund
ANNUAL REPORT FOR FISCAL YEAR ENDED AUGUST 31, 1999
CLASS F SHARES
WHAT IS YOUR REVIEW OF THE MUNICIPAL BOND MARKETPLACE OVER THE
REPORTING PERIOD?
A market environment of low absolute interest rates and historically narrow
credit spreads have combined to make bond structure the most important factor in
determining performance over the reporting period. Bond coupon, effective
maturity and call protection were the relevant structural elements which
determined relative price performance in a municipal bond portfolio.
Credit spread widening did occur selectively in specific sectors of the
municipal bond market, and has been the most prevalent in the hospital sector.
The hospital sector has continued to show specific vulnerability as a result of
Medicare reimbursement reductions and the related pressure on hospital
operations. Credit spreads have widened considerably since April 1999, with BBB
category hospital spreads widening 104 basis points off the 30-year Municipal
Market Data curve.
The appetite for tax exempt securities from traditional crossover buyers
(corporations and insurance companies) has remained soft due to the
attractiveness of spread product (taxable corporate debt). The glut of pre- Year
2000 (Y2K) corporate debt issuance has created attractive relative value
opportunities in the taxable sector. Liquidity in the municipal market has also
become an issue. Retail demand is not able to support the trading of larger
blocks of municipal bonds while certain coupon structures, particularly market
discount securities, are receiving lukewarm attention from investors.
HOW HAVE OHIO MUNICIPAL BONDS PERFORMED OVER THE REPORTING PERIOD?
Municipal credit quality in general has benefited from the strong U.S. economy.
Municipal tax receipts, at all levels of government, have exceeded forecasts,
which has allowed municipal fund balances and reserve accounts to expand. Credit
quality continued to remain strong throughout the state of Ohio as represented
by strong employment growth and numerous public and private construction
projects. The state has better diversified its employment base away from the
concentration in the automobile and tire industries which existed in the 1980s.
Ohio municipal debt trades very close to the national municipal debt market.
This reflects the state's top marginal tax rate of 6.7% on unearned income and
the generally high credit quality within the state of Ohio.
HOW HAS THE FEDERATED OHIO MUNICIPAL INCOME FUND PERFORMED WITH RESPECT TO
TOTAL RETURN AND INCOME FOR THE 12-MONTH REPORTING PERIOD ENDED
AUGUST 31, 1999?
For the 12-month reporting period ended August 31, 1999, the Fund's F shares
produced a total return of (1.14%) based on net asset value. 1 The income on the
Fund was competitive during the reporting period. On August 31, 1999, the Fund's
30-day current net yield, or SEC yield, on August 31, 1999 was 4.48% for Class F
Shares based on the net asset value.1 The yield represents an increase from the
4.20% SEC yield at the beginning of the reporting period.
WHAT ACCOUNTED FOR THE FUND'S PERFORMANCE?
The strategy over the reporting period included tax-swapping to generate tax
loss carryforwards which can be used to offset any realized capital gains, while
also adding incremental yield by improving the weighted average book yield
within the portfolio. The duration and average maturity of the Fund were
structured so as to take advantage of what management expected to be a trading
range for municipal interest rates over the reporting period. Due to the recent
upward bias in interest rates, the market has become especially sensitive to
slight problems. As a municipal bond approaches its low threshold, the risk of
generating ordinary income, which is taxed at the holder's top marginal bracket,
becomes relevant. This reality impacts the bond's liquidity and requires the
bond's duration to be calculated on a tax adjusted basis. The Fund was also
affected by spread widening in the BBB credit sector, to which it had limited
exposure. With the many questions associated with Y2K looming, the Fund is
maintaining a highly liquid position which will enable management to deal with
potential disruptions which could occur around year end.
WHAT KIND OF ENVIRONMENT DO YOU SEE AHEAD FOR MUNICIPAL BONDS?
The municipal bond market is technically driven by supply and demand imbalances
which are created by changes in interest rates, coupon payment period cycles and
economic conditions. The municipal market has recently experienced a demand
shift away from institutional buyers (insurance companies, corporations and
arbitrageurs) toward retail buyers (individuals) of municipal bonds. The ratio
of municipal bond yields to Treasury bond yields has widened from highs near
100%, which has caused many crossover buyers to unwind their municipal
positions. Crossover buyers purchase municipal bonds on a relative valuation
basis and not necessarily because of the tax exempt income. Y2K spending by
municipal governments is a potential credit factor which must be taken into
consideration as far as both the cost and the effectiveness of their Y2K
preparedness. The market does not expect any material interruptions in the
supply of necessary municipal services. However, there remains the potential for
some state functions to suffer temporary disruptions. The approach of the
presidential election cycle will bring potential federal tax law changes back
into the news. Potential impacts such as the introduction of a flat tax or
significant changes to the top marginal brackets could affect the trading value
of municipal debt relative to taxable fixed income alternatives, such as
corporate and Treasury securities.
1 Total return and SEC yield for Class F Shares, based on offering price, for
the reporting period were (3.05%) and 4.43%. Performance quoted represents past
performance and is not indicative of future results. Investment return and
principal value will fluctuate so that an investor's shares, when redeemed, may
be worth more or less than their original cost.
SHAREHOLDER MEETING RESULTS
A Special Meeting of shareholders of Ohio Municipal Income Fund (the "Fund"), a
portfolio of Federated Municipal Securities Income Trust (the "Trust") was held
on June 25, 1999. On April 27, 1999, the record date for shareholders voting at
the meeting, there were 7,005,269 total outstanding shares. The following items
were considered by shareholders of the Fund and the results of their voting were
as follows:
AGENDA ITEM 1
To elect Trustees: 1
<TABLE>
<CAPTION>
WITHHELD
AUTHORITY
FOR TO VOTE
<S> <C> <C>
Thomas G. Bigley 5,582,186 68,374
Nicholas P. Constantakis 5,582,731 67,829
John F. Cunningham 5,582,731 67,829
Charles F. Mansfield, Jr. 5,582,731 67,829
John E. Murray, Jr., J.D., S.J.D. 5,582,731 67,829
John S. Walsh 5,582,731 67,829
</TABLE>
1 The following Trustees continued their terms: John F. Donahue, John T.
Conroy, J. Christopher Donahue, Lawrence D. Ellis, M.D., Peter E. Madden
and Marjorie P. Smuts.
AGENDA ITEM 2
To ratify the selection of Deloitte & Touche LLP as the independent auditors for
the Trust. The results of shareholders voting were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
<S> <C> <C>
5,492,372 24,250 133,938
</TABLE>
AGENDA ITEM 3
To amend the Fund's fundamental investment policies regarding borrowing money
and issuing senior securities. The results of shareholders voting were as
follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
<S> <C> <C>
4,292,118 164,388 259,467
</TABLE>
AGENDA ITEM 4
To amend the Fund's fundamental investment policies regarding investments in
real estate. The results of shareholders voting were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
<S> <C> <C>
4,295,169 178,887 241,916
</TABLE>
AGENDA ITEM 5
To amend the Fund's fundamental investment policies regarding investments in
commodities. The results of shareholders voting were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
<S> <C> <C>
4,254,685 212,342 248,945
</TABLE>
AGENDA ITEM 6
To amend the Fund's fundamental investment policies regarding underwriting
securities. The results of shareholders voting were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
<S> <C> <C>
4,336,142 125,994 253,836
</TABLE>
AGENDA ITEM 7
To amend the Fund's fundamental investment policies regarding lending by the
Funds. The results of shareholders voting were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
<S> <C> <C>
4,285,094 190,516 240,362
</TABLE>
AGENDA ITEM 8
To amend the Fund's fundamental investment policies regarding concentration of
the Fund's investments in the securities of companies in the same industry. The
results of shareholders voting were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
<S> <C> <C>
4,304,668 123,728 287,576
</TABLE>
AGENDA ITEM 9
To amend, and to make non-fundamental, the Fund's fundamental investment
policies regarding buying securities on margin. The results of shareholders
voting were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
<S> <C> <C>
4,236,885 185,872 293,215
</TABLE>
AGENDA ITEM 10
To amend, and to make non-fundamental, the Fund's fundamental investment
policies regarding pledging assets. The results of shareholders voting were as
follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
<S> <C> <C>
4,263,059 181,028 271,885
</TABLE>
AGENDA ITEM 11
To remove the Fund's fundamental investment policies regarding selling
securities short. The results of shareholders voting were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
<S> <C> <C>
4,261,578 182,706 271,688
</TABLE>
AGENDA ITEM 12
To remove the Fund's fundamental investment policies regarding dealing in puts,
calls, straddles, spreads and any combination thereof. The results of
shareholders voting were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
<S> <C> <C>
4,208,745 197,551 394,588
</TABLE>
AGENDA ITEM 13
To remove the Fund's fundamental investment policies regarding investing in
restricted securities. The results of shareholders voting were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
<S> <C> <C>
4,227,483 215,521 272,968
</TABLE>
AGENDA ITEM 14
To approve an amendment and restatement to the Trust's Declaration of Trust to
permit the Board of Trustees to liquidate assets of the Trust without seeking
shareholder approval. The results of shareholders voting were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
<S> <C> <C>
4,224,961 253,333 237,678
</TABLE>
CLASS F SHARES
GROWTH OF $10,000 INVESTED IN FEDERATED OHIO MUNICIPAL INCOME FUND
[Graphic] - See Appendix G.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN 1 FOR THE PERIOD ENDED AUGUST 31, 1999
<S> <C>
1 Year (3.05%)
5 Years 5.48%
Start of Performance (10/12/90) 6.72%
</TABLE>
The graph above illustrates the hypothetical investment of $10,000 2 in the
Federated Ohio Municipal Income Fund (Class F Shares) from October 12, 1990
(start of performance) to August 31, 1999 compared to the Lehman Brothers
Revenue Bond Index (LBRBI) and the Lehman Brothers Municipal Bond Index
(LBMBI).3
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
This report must be preceded or accompanied by the Fund's prospectus dated
October 31, 1999, and, together with financial statements contained therein,
constitutes the Fund's annual report.
1 Total return quoted reflects all applicable sales charges and contingent
deferred sales charges.
2 Represents a hypothetical investment of $10,000 in the Fund after deducting
the maximum sales charge of 1.00% ($10,000 investment minus $100 sales charge =
$9,900). The ending value of the Fund reflects a 1.00% contingent deferred sales
charge on any redemption less than four years from the purchase date. The Fund's
performance assumes the reinvestment of all dividends and distributions. The
LBRBI and LBMBI have been adjusted to reflect reinvestment of dividends on
securities in the indexes.
3 The LBRBI and LBMBI are not adjusted to reflect sales charges, expenses or
other fees that the SEC requires to be reflected in the Fund's performance.
These indexes are unmanaged.
[Graphic]
Federated
Federated Ohio Municipal Income Fund
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
1-800-341-7400
WWW.FEDERATEDINVESTORS.COM
Federated Securities Corp., Distributor
Cusip 625922307
G00579-01 (10/99)
[Graphic]
PROSPECTUS
Federated Ohio Municipal Income Fund
A Portfolio of Federated Municipal Securities Income Trust
CLASS F SHARES
A mutual fund seeking to provide current income exempt from federal regular
income tax and the personal income taxes imposed by the state of Ohio and Ohio
municipalities by investing primarily in a portfolio of long-term, investment
grade Ohio tax exempt securities.
As with all mutual funds, the Securities and Exchange Commission (SEC) has not
approved or disapproved these securities or passed upon the adequacy of this
prospectus. Any representation to the contrary is a criminal offense.
OCTOBER 31, 1999
CONTENTS
Risk/Return Summary 1
What are the Fund's Fees and Expenses? 3
What are the Fund's Investment Strategies? 4
What are the Principal Securities in Which the
Fund Invests? 5
What are the Specific Risks of Investing in the Fund? 8
What Do Shares Cost? 9
How is the Fund Sold? 11
How to Purchase Shares 11
How to Redeem and Exchange Shares 13
Account and Share Information 15
Who Manages the Fund? 16
Financial Information 17
Independent Auditors' Report 30
Risk/Return Summary
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
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 Ohio
and Ohio municipalities. While there is no assurance that the Fund will achieve
its investment objective, it endeavors to do so by following the strategies and
policies described in this prospectus.
WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?
The Fund invests in a portfolio of tax exempt securities 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 from the Fund's investments may be subject to the federal alternative
minimum tax for individuals and corporations (AMT). The Fund's portfolio
securities will be primarily long-term, investment grade securities.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?
All mutual funds take investment risks. Therefore, it is possible to lose money
by investing in the Fund. The primary factors that may reduce the Fund's returns
include:
INTEREST RATE RISKS
Prices of tax exempt securities generally fall when interest rates rise.
Interest rate risk changes have a greater effect on the price of fixed income
securities with longer durations.
CREDIT RISKS
Issuers of tax exempt securities may default on the payment of interest or
principal when due.
CALL RISKS
Issuers of tax exempt securities may redeem the securities prior to maturity at
a price below their current market value.
SECTOR RISKS
Since the Fund invests primarily in issuers from Ohio, the Fund may be subject
to additional risks compared to funds that invest in multiple states.
Ohio's economy is relatively diversified across the manufacturing, agriculture
and service sectors. However, the automobile and tire industries are still major
employers within Ohio and expose the state to the economic dislocations which
occur within cyclical industries.
The Fund is non-diversified. Compared to diversified mutual funds, it may invest
a higher percentage of its assets among fewer issuers of portfolio securities.
This increases the Fund's risk by magnifying the impact (positively or
negatively) that any one issuer has on the Fund's Share price and performance.
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 or
guaranteed by the U.S. government, the Federal Deposit Insurance Corporation,
the Federal Reserve Board or any other government agency.
RISK/RETURN BAR CHART AND TABLE
[Graphic]
The bar chart shows the variability of the Fund's Class F Shares total returns
on a calendar year-end basis.
The total returns displayed for the Fund do not reflect the payment of any sales
charges or recurring shareholder account fees. If these charges or fees had been
included, the returns shown would have been lower.
The Fund's Class F Shares total return for the nine-month period from January 1,
1999 to September 30, 1999 was (2.93%).
Within the period shown in the Chart, the Fund's Class F Shares highest
quarterly return was 7.23% (quarter ended March 31, 1995). Its lowest quarterly
return was (5.94%) (quarter ended March 31, 1994).
AVERAGE ANNUAL TOTAL RETURN TABLE
The following table represents the Fund's Class F Shares Average Annual Total
Returns, reduced to reflect applicable sales charges, for the calendar periods
ended December 31, 1998. The table shows the Fund's total returns averaged over
a period of years relative to the Lehman Brothers Revenue Bond Index (LBRBI) and
the Lehman Brothers Municipal Bond Index (LBMBI), both broad-based market
indexes. The LBRBI is a total return performance benchmark for the long-term,
investment grade, revenue bond market. The LBMBI is a broad market performance
benchmark for the tax exempt bond market. To be included in the LBMBI, bonds
must have a minimum credit rating of Baa. Total returns for the indexes shown do
not reflect sales charges, expenses or other fees that the SEC requires to be
reflected in the Fund's performance. Indexes are unmanaged, and it is not
possible to invest directly in an index.
<TABLE>
<CAPTION>
CALENDAR PERIOD FUND LBRBI LBMBI
<S> <C> <C> <C>
1 Year 4.00% 6.33% 6.22%
5 Years 5.39% 6.39% 6.49%
Start of Performance 1 7.63% 8.19% N/A
</TABLE>
1 The Fund's Class F Shares start of performance date was October 12, 1990.
Past performance does not necessarily predict future performance. This
information provides you with historical performance information so that you can
analyze whether the Fund's investment risks are balanced by its potential
returns.
What are the Fund's Fees and Expenses?
FEDERATED OHIO MUNICIPAL INCOME FUND
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
Class F Shares of the Fund.
<TABLE>
<CAPTION>
SHAREHOLDER FEES
<S> <C>
Fees Paid Directly From
Your Investment
Maximum Sales Charge
(Load) Imposed on
Purchases (as a percentage
of offering price) 1.00%
Maximum Deferred Sales
Charge (Load) (as a
percentage of original
purchase price or
redemption proceeds,
as applicable) 1.00%
Maximum Sales Charge
(Load) Imposed on
Reinvested Dividends (and
other Distributions) (as a
percentage
of offering price) None
Redemption Fee (as a
percentage of amount
redeemed, if applicable) None
Exchange Fee None
ANNUAL FUND OPERATING
EXPENSES (Before Waivers)
1
Expenses That are Deducted
From Fund Assets (as a
percentage of average net
assets)
Management Fee 2 0.40%
Distribution (12b-1) Fee 3 0.40%
Shareholder Services Fee 4 0.25%
Other Expenses 0.36%
Total Annual Fund
Operating Expenses 1.41%
1 Although not contractually obligated to do so, the adviser, distributor and
shareholder services provider waived certain amounts. These are shown below along
with the net expenses the Fund actually paid for the fiscal year ended August 31,
1999.
Total Waiver of Fund
Expenses 0.51%
Total Actual Annual Fund
Operating Expenses (after
waivers) 0.90%
2 The adviser voluntarily waived a portion of the management fee. The adviser can
terminate this voluntary waiver at any time. The management fee paid by the Fund
(after the voluntary waiver) was 0.14% for the fiscal year ended August 31, 1999.
3 The distributor voluntarily waived a portion of the distribution (12b-1) fee.
The distributor can terminate this voluntary waiver at any time. The distribution
(12b-1) fee paid by the Fund (after the voluntary waiver) was 0.16% for the
fiscal year ended August 31, 1999.
4 The shareholder services provider voluntarily waived a portion of the
shareholder services fee. The shareholder services provider can terminate this
voluntary waiver at any time. The shareholder services fee paid by the Fund
(after the voluntary waiver) was 0.24% for the fiscal year ended August 31, 1999.
</TABLE>
EXAMPLE
The following Example is intended to help you compare the cost of investing in
the Fund's Class F Shares with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund's Class F Shares for the
time periods indicated and then redeem all of your Shares at the end of those
periods. Expenses assuming no redemption are also shown. The Example also
assumes that your investment has a 5% return each year and that the Fund's
Shares operating expenses are BEFORE WAIVERS as shown in the table and remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
Expenses assuming redemption $342 $642 $863 $1,774
Expenses assuming no redemption $242 $542 $863 $1,774
</TABLE>
What are the Fund's Investment Strategies?
The Fund invests in a portfolio of tax exempt securities 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. As a
matter of operating policy, the Fund ordinarily will invest so that 100% of its
annual interest income is exempt from such taxes. Interest income from the
Fund's investments may be subject to AMT.
The Fund invests at least 65% of its assets in investment grade securities. The
Fund does not limit itself to securities of a particular maturity range, but
currently focuses on long-term securities with maturities greater than ten
years. The Fund's investment adviser (Adviser) actively manages the Fund's
portfolio, seeking to manage the interest rate risk and credit risk assumed by
the Fund and provide superior levels of after tax total return.
The Adviser manages the Fund's interest rate risk by adjusting the duration of
its portfolio. "Duration" measures the sensitivity of a security's price to
changes in interest rates. The greater a portfolio's duration, the greater the
change in the portfolio's value in response to a change in market interest
rates. The Adviser will increase or reduce the Fund's portfolio duration based
on its interest rate outlook. When the Adviser expects interest rates to fall,
it will maintain a longer portfolio duration. When the Adviser expects interest
rates to increase, it will shorten the portfolio duration. The Adviser considers
a variety of factors in formulating its interest rate outlook, including the
following:
* current and expected U.S. economic growth;
* current and expected interest rates and inflation;
* the Federal Reserve's monetary policy; and
* supply and demand factors related to the municipal market and the effect they
may have on the returns offered for various bond maturities.
The Adviser manages credit risk by performing a fundamental credit analysis on
tax exempt securities before the Fund purchases such securities. The Adviser
considers various factors, including the following:
* the economic feasibility of revenue bond financings and general purpose
financings;
* the financial condition of the issuer or guarantor;
* political developments that may affect credit quality.
The Adviser monitors the credit risks of all portfolio securities on an ongoing
basis by reviewing periodic financial data and ratings of nationally recognized
ratings services.
The Adviser attempts to provide superior levels of after tax total return. After
tax total return consists of two components: (1) income received from the Fund's
portfolio securities; and (2) changes in the market value of the Fund's
portfolio securities and attendant increase or decrease in the market value of
Fund shares. The Adviser seeks total return on an after tax basis, so that it
will try to maximize tax exempt income distributions; make no ordinary income
distributions; and minimize or eliminate capital gains distributions.
HEDGING
Hedging transactions are intended to reduce specific risks. For example, to
protect the Fund against circumstances that would normally cause the Fund's
portfolio securities to decline in value, the Fund may buy or sell a futures
contract that would normally increase in value under the same circumstances. The
Fund may also attempt to hedge by using combinations of different futures
contracts, or futures contracts and securities. The Fund's ability to hedge may
be limited by the costs of the futures contracts. The Fund may attempt to lower
the cost of hedging by entering into transactions that provide only limited
protection, including transactions that: (1) hedge only a portion of its
portfolio; (2) use futures contracts that cover a narrow range of circumstances;
or (3) involve the sale of futures contracts with different terms. Consequently,
hedging transactions will not eliminate risk even if they work as intended. In
addition, hedging strategies are not always successful, and could result in
increased expenses and losses to the Fund.
TEMPORARY DEFENSIVE INVESTMENTS
The Fund may temporarily depart from its principal investment strategies by
investing its assets in securities subject to federal regular income tax and the
income tax imposed by the state of Ohio and Ohio municipalities. It may do this
to minimize potential losses and maintain liquidity to meet shareholder
redemptions during adverse market conditions. This may cause the Fund to receive
and distribute taxable income to investors.
What are the Principal Securities in Which the Fund Invests?
TAX EXEMPT SECURITIES
Tax exempt securities are fixed income securities that pay interest that is not
subject to federal regular income taxes. Fixed income securities pay interest,
dividends or distributions at a specified rate. The rate may be a fixed
percentage of the principal or adjusted periodically.
Typically, states, counties, cities and other political subdivisions and
authorities issue tax exempt securities. The market categorizes tax exempt
securities by their source of repayment.
GENERAL OBLIGATION BONDS
General obligation bonds are supported by the issuer's power to exact property
or other taxes. The issuer must impose and collect taxes sufficient to pay
principal and interest on the bonds. However, the issuer's authority to impose
additional taxes may be limited by its charter or state law.
SPECIAL REVENUE BONDS
Special revenue bonds are payable solely from specific revenues received by the
issuer such as specific taxes, assessments, tolls or fees. Bondholders may not
collect from the municipality's general taxes or revenues. For example, a
municipality may issue bonds to build a toll road, and pledge the tolls to repay
the bonds. Therefore, a shortfall in the tolls normally would result in a
default on the bonds.
PRIVATE ACTIVITY BONDS
Private activity bonds are special revenue bonds used to finance private
entities. For example, a municipality may issue bonds to finance a new factory
to improve its local economy. The municipality would lend the proceeds from its
bonds to the company using the factory, and the company would agree to make loan
payments sufficient to repay the bonds. The bonds would be payable solely from
the company's loan payments, not from any other revenues of the municipality.
Therefore, any default on the loan normally would result in a default on the
bonds.
The interest on many types of private activity bonds is subject to AMT. The Fund
may invest in bonds subject to AMT.
MUNICIPAL LEASES
Municipalities may enter into leases for equipment or facilities. In order to
comply with state public financing laws, these leases are typically subject to
annual appropriation. In other words, a municipality may end a lease, without
penalty, by not providing for the lease payments in its annual budget. After the
lease ends, the lessor can resell the equipment or facility but may lose money
on the sale.
The Fund may invest in securities supported by pools of municipal leases. The
most common type of lease backed securities are certificates of participation
(COPs). However, the Fund may also invest directly in individual leases.
ZERO COUPON SECURITIES
Zero coupon securities do not pay interest or principal until final maturity
unlike debt securities that provide periodic payments of interest (referred to
as a coupon payment). Investors buy zero coupon securities at a price below the
amount payable at maturity. The difference between the purchase price and the
amount paid at maturity represents interest on the zero coupon security.
Investors must wait until maturity to receive interest and principal, which
increases the interest rate risks and credit risks of a zero coupon security.
INVERSE FLOATERS
An inverse floater has a floating or variable interest rate that moves in the
opposite direction of market interest rates. When market interest rates go up,
the interest rate paid on the inverse floater goes down; when market interest
rates go down, the interest rate paid on the inverse floater goes up. Inverse
floaters generally respond more rapidly to market interest rate changes than
fixed rate tax exempt securities. Inverse floaters are subject to interest rate
risks and leverage risks.
CREDIT ENHANCEMENT
Credit enhancement consists of an arrangement in which a company agrees to pay
amounts due on a fixed income security if the issuer defaults. In some cases the
company providing credit enhancement makes all payments directly to the security
holders and receives reimbursement from the issuer. Normally, the credit
enhancer has greater financial resources and liquidity than the issuer. For this
reason, the Adviser usually evaluates the credit risk of a fixed income security
based solely upon its credit enhancement.
FUTURES CONTRACTS
Futures contracts, which are a type of derivative contract, provide for the
future sale by one party and purchase by another party of a specified amount of
an underlying asset at a specified price, date and time. Entering into a
contract to buy an underlying asset is commonly referred to as buying a contract
or holding a long position in the asset. Entering into a contract to sell an
underlying asset is commonly referred to as selling a contract or holding a
short position in the asset. Futures contracts are considered to be commodity
contracts.
The Fund may buy and sell interest rate and index financial futures contracts.
Depending upon how the Fund uses futures contracts and the relationships between
the market value of a futures contract and the underlying asset, futures
contracts may increase or decrease the Fund's exposure to interest rate risks,
and may also expose the Fund to liquidity risks and leverage risks.
SPECIAL TRANSACTIONS
DELAYED DELIVERY TRANSACTIONS
Delayed delivery transactions, including when-issued transactions, are
arrangements in which the Fund buys securities for a set price, with payment and
delivery of the securities scheduled for a future time. During the period
between purchase and settlement, no payment is made by the Fund to the issuer
and no interest accrues to the Fund. The Fund records the transaction when it
agrees to buy the securities and reflects their value in determining the price
of its shares. Settlement dates may be a month or more after entering into these
transactions so that the market values of the securities bought may vary from
the purchase prices. Therefore, delayed delivery transactions create interest
rate risks for the Fund. Delayed delivery transactions also involve credit risks
in the event of a counterparty default.
ASSET COVERAGE
In order to secure its obligations in connection with futures contracts or
special transactions, the Fund will either own the underlying assets, enter into
an offsetting transaction or set aside readily marketable securities with a
value that equals or exceeds the Fund's obligations. Unless the Fund has other
readily marketable assets to set aside, it cannot trade assets used to secure
such obligations without entering into an offsetting futures contract or
terminating a special transaction. This may cause the Fund to miss favorable
trading opportunities or to realize losses on futures contracts or special
transactions.
INVESTMENT RATINGS FOR INVESTMENT GRADE SECURITIES
The Adviser will determine whether a security is investment grade based upon the
credit ratings given by one or more nationally recognized rating services. For
example, Standard and Poor's, a rating service, assigns ratings to investment
grade securities (AAA, AA, A and BBB) based on its assessment of the likelihood
of the issuer's inability to pay interest or principal (default) when due on
each security. Lower credit ratings correspond to higher credit risk. If a
security has not received a rating, the Fund must rely entirely upon the
Adviser's credit assessment that the security is comparable to investment grade.
If a security is downgraded below the minimum quality grade discussed above, the
Adviser will reevaluate the security, but will not be required to sell it.
What are the Specific Risks of Investing in the Fund?
INTEREST RATE RISKS
Prices of fixed income securities rise and fall in response to changes in the
interest rates paid by similar securities. Generally, when interest rates rise,
prices of fixed income securities fall. However, market factors, such as the
demand for particular fixed income securities, may cause the price of certain
fixed income securities to fall while the prices of other securities rise or
remain unchanged.
Interest rate changes have a greater effect on the price of fixed income
securities with longer durations. Duration measures the price sensitivity of a
fixed income security to changes in interest rates.
CREDIT RISKS
Credit risk is the possibility that an issuer will default on a security by
failing to pay interest or principal when due. If an issuer defaults, the Fund
will lose money.
Many fixed income securities receive credit ratings from services such as
Standard & Poor's and Moody's Investors Service. These services assign ratings
to securities by assessing the likelihood of issuer default. Lower credit
ratings correspond to higher credit risk. If a security has not received a
rating, the Fund must rely entirely upon the Adviser's credit assessment.
Credit risk includes the possibility that a party to a transaction involving the
Fund will fail to meet its obligations. This could cause the Fund to lose the
benefit of the transaction or prevent the Fund from selling or buying other
securities to implement its investment strategy.
CALL RISKS
Call risk is the possibility that an issuer may redeem a fixed income security
before maturity (a call) at a price below its current market price. An increase
in the likelihood of a call may reduce the security's price.
If a fixed income security is called, the Fund may have to reinvest the proceeds
in other fixed income securities with lower interest rates, higher credit risks
or other less favorable characteristics.
SECTOR RISKS
A substantial part of the Fund's portfolio may be comprised of securities issued
by Ohio issuers or credit enhanced by insurance companies or companies similar
characteristics. As a result, the Fund will be more susceptible to any economic,
business, political or other developments which generally affect these entities.
Ohio's economy is relatively diversified across the manufacturing, agriculture
and service sectors. However, the automobile and tire industries are still major
employers within Ohio and expose the state to the economic dislocations which
occur within cyclical industries.
TAX RISKS
In order to be tax exempt, tax exempt securities must meet certain legal
requirements. Failure to meet such requirements may cause the interest received
and distributed by the Fund to shareholders to be taxable.
Changes or proposed changes in federal tax laws may cause the prices of tax
exempt securities to fall.
Income from the Fund may be subject to AMT.
LEVERAGE RISKS
Leverage risk is created when an investment exposes the Fund to a level of risk
that exceeds the amount invested. Changes in the value of such an investment
magnify the Fund's risk of loss and potential for gain.
Investments can have these same results if their returns are based on a multiple
of a specified index, security or other benchmark.
RISKS ASSOCIATED WITH NONINVESTMENT GRADE SECURITIES
Securities rated below investment grade, also known as junk bonds, generally
entail greater interest rate, credit and liquidity risks than investment grade
securities. For example, their prices are more volatile, economic and financial
setbacks may affect their prices more negatively, and their trading market may
be more limited. The Fund may invest up to 35% of its assets in noninvestment
grade securities.
LIQUIDITY RISKS
Trading opportunities are more limited for fixed income securities that have not
received any credit ratings, have received ratings below investment grade or are
not widely held.
Liquidity risk also refers to the possibility that the Fund may not be able to
sell a security or close out a futures contract when it wants to. If this
happens, the Fund will be required to continue to hold the security or keep the
position open, and the Fund could incur losses.
What Do Shares Cost?
You can purchase, redeem or exchange Shares any day the New York Stock Exchange
(NYSE) is open. When the Fund receives your transaction request in proper form
(as described in the prospectus), it is processed at the next calculated net
asset value (NAV) plus any applicable front-end sales charge (public offering
price). NAV is determined at the end of regular trading (normally 4:00 p.m.
Eastern time) each day the NYSE is open. The Fund generally values fixed income
securities at the last sale price on a national securities exchange, if
available, otherwise, as determined by an independent pricing service.
The Fund's current NAV and public offering price may be found in the mutual
funds section of certain local newspapers under "Federated" and the appropriate
class designation listing.
The following table summarizes the minimum required investment amount and the
maximum sales charge, if any, that you will pay on an investment in the Fund.
Keep in mind that investment professionals may charge you fees for their
services in connection with your Share transactions.
<TABLE>
<CAPTION>
MAXIMUM SALES CHARGE
CONTINGENT
MINIMUM FRONT-END DEFERRED
INITIAL/SUBSEQUENT SALES SALES
INVESTMENT AMOUNTS 1 CHARGE 2 CHARGE 3
<S> <C> <C>
$1,500/$100 1.00% 1.00%
</TABLE>
1 The minimum subsequent investment amount for Systematic Investment Programs is
$50. Investment professionals may impose higher or lower minimum investment
requirements on their customers than those imposed by the Fund.
2 Front-End Sales Charge is expressed as a percentage of public offering
price. See "Sales Charge When You Purchase."
3 See "Sales Charge When You Redeem."
SALES CHARGE WHEN YOU PURCHASE
<TABLE>
<CAPTION>
SALES CHARGE
AS A SALES CHARGE
PERCENTAGE AS A
OF PUBLIC PERCENTAGE
PURCHASE AMOUNT OFFERING PRICE OF NAV
<S> <C> <C>
Less than $1 million 1.00% 1.01%
$1 million or greater 0.00% 0.00%
</TABLE>
THE SALES CHARGE AT PURCHASE MAY BE ELIMINATED BY:
* purchasing Shares in greater quantities to reduce the applicable sales
charge;
* combining concurrent purchases of Shares:
- - by you, your spouse, and your children under age 21; or
- - of the same share class of two or more Federated Funds (other than money
market funds);
* accumulating purchases (in calculating the sales charge on an additional
purchase, include the current value of previous Share purchases still invested
in the Fund); or
* signing a letter of intent to purchase a specific dollar amount of Shares
within 13 months (call your investment professional or the Fund for more
information).
THE SALES CHARGE WILL BE ELIMINATED WHEN YOU PURCHASE SHARES:
* within 120 days of redeeming Shares of an equal or lesser amount;
* when the Fund's Distributor does not advance payment to the investment
professional for your purchase;
* by exchanging shares from the same share class of another Federated Fund;
* for trusts or pension or profit-sharing plans where the third-party
administrator has an arrangement with the Fund's Distributor or its affiliates
to purchase shares without a sales charge; or
* through investment professionals that receive no portion of the sales
charge.
If your investment qualifies for an elimination of the sales charge, you or your
investment professional should notify the Fund's Distributor at the time of
purchase. If the Distributor is not notified, you will receive the reduced sales
charge only on additional purchases, and not retroactively on previous
purchases.
SALES CHARGE WHEN YOU REDEEM
Your redemption proceeds may be reduced by a sales charge, commonly referred to
as a contingent deferred sales charge (CDSC).
<TABLE>
<CAPTION>
PURCHASE AMOUNT SHARES HELD CDSC
<S> <C> <C>
Up to $2 million 4 years or less 1.00%
$2 - $5 million 2 years or less 0.50%
$5 million or more 1 year or less 0.25%
</TABLE>
YOU WILL NOT BE CHARGED A CDSC WHEN REDEEMING SHARES:
* purchased with reinvested dividends or capital gains;
* purchased within 120 days of redeeming Shares of an equal or lesser
amount;
* that you exchanged into the same share class of another Federated Fund if the
shares were held for the applicable CDSC holding period (other than a money
market fund);
* purchased through investment professionals who did not receive advanced
sales payments;
* if, after you purchase Shares, you become disabled as defined by the IRS;
* if the Fund redeems your Shares and closes your account for not meeting
the minimum balance requirement;
* if your redemption is a required retirement plan distribution; or
* upon the death of the last surviving shareholder of the account.
If your redemption qualifies, you or your investment professional should notify
the Distributor at the time of redemption to eliminate the CDSC. If the
Distributor is not notified, the CDSC will apply.
TO KEEP THE SALES CHARGE AS LOW AS POSSIBLE, THE FUND REDEEMS YOUR SHARES IN
THIS ORDER:
* Shares that are not subject to a CDSC; and
* Shares held the longest (to determine the number of years your Shares have
been held, include the time you held shares of other Federated Funds that have
been exchanged for Shares of this Fund).
The CDSC is then calculated using the share price at the time of purchase or
redemption, whichever is lower.
How is the Fund Sold?
The Fund's Distributor, Federated Securities Corp., markets the Shares described
in this prospectus to customers of financial institutions, such as
broker/dealers, banks, fiduciaries and investment advisers, or to individuals,
directly or through investment professionals. The Fund may not be a suitable
investment for retirement plans or for non-Ohio taxpayers because it invests in
Ohio municipal securities.
When the Distributor receives marketing fees and sales charges, it may pay some
or all of them to investment professionals. The Distributor and its affiliates
may pay out of their assets other amounts (including items of material value) to
investment professionals for marketing and servicing Shares. The Distributor is
a subsidiary of Federated Investors, Inc.
(Federated).
RULE 12B-1 PLAN
The Fund has adopted a Rule 12b-1 Plan, which allows it to pay marketing fees to
the Distributor and investment professionals for the sale, distribution and
customer servicing of the Fund's Class F Shares. Because these Shares pay
marketing fees on an ongoing basis, your investment cost may be higher over time
than other shares with different sales charges and marketing fees.
How to Purchase Shares
You may purchase Shares through an investment professional, directly from the
Fund, or through an exchange from another Federated Fund. The Fund reserves the
right to reject any request to purchase or exchange Shares.
THROUGH AN INVESTMENT PROFESSIONAL
* Establish an account with the investment professional; and
* Submit your purchase order to the investment professional before the end of
regular trading on the NYSE (normally 4:00 p.m. Eastern time). You will receive
the next calculated NAV if the investment professional forwards the order to the
Fund on the same day and the Fund receives payment within three business days.
You will become the owner of Shares and receive dividends when the Fund receives
your payment.
Investment professionals should send payments according to the instructions in
the sections "By Wire" or "By Check."
DIRECTLY FROM THE FUND
* Establish your account with the Fund by submitting a completed New
Account Form; and
* Send your payment to the Fund by Federal Reserve wire or check.
You will become the owner of Shares and your Shares will be priced at the next
calculated NAV after the Fund receives your wire or your check. If your check
does not clear, your purchase will be canceled and you could be liable for any
losses or fees incurred by the Fund or Federated Shareholder Services Company,
the Fund's transfer agent.
An institution may establish an account and place an order by calling the Fund
and the Shares will be priced at the next calculated NAV after the Fund receives
the order.
BY WIRE
Send your wire to:
State Street Bank and Trust Company
Boston, MA
Dollar Amount of Wire
ABA Number 011000028
Attention: EDGEWIRE
Wire Order Number, Dealer Number or Group Number
Nominee/Institution Name
Fund Name and Number and Account Number
You cannot purchase Shares by wire on holidays when wire transfers are
restricted.
BY CHECK
Make your check payable to THE FEDERATED FUNDS, note your account number on the
check, and mail it to:
Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600
If you send your check by a PRIVATE COURIER OR OVERNIGHT DELIVERY SERVICE that
requires a street address, mail it to:
Federated Shareholder Services Company
1099 Hingham Street
Rockland, MA 02370-3317
Payment should be made in U.S. dollars and drawn on a U.S. bank. The Fund
will not accept third-party checks (checks originally payable to someone
other than you or The Federated Funds).
THROUGH AN EXCHANGE
You may purchase Shares through an exchange from the same Share class of another
Federated Fund. You must meet the minimum initial investment requirement for
purchasing Shares and both accounts must have identical registrations.
BY SYSTEMATIC INVESTMENT PROGRAM
Once you have opened an account, you may automatically purchase additional
Shares on a regular basis by completing the Systematic Investment Program
section of the New Account Form or by contacting the Fund or your investment
professional.
BY AUTOMATED CLEARING HOUSE (ACH)
Once you have opened an account, you may purchase additional Shares through a
depository institution that is an ACH member. This purchase option can be
established by completing the appropriate sections of the New Account Form.
How to Redeem and Exchange Shares
You should redeem or exchange Shares:
* through an investment professional if you purchased Shares through an
investment professional; or
* directly from the Fund if you purchased Shares directly from the Fund.
THROUGH AN INVESTMENT PROFESSIONAL
Submit your redemption or exchange request to your investment professional by
the end of regular trading on the NYSE (normally 4:00 p.m. Eastern time). The
redemption amount you will receive is based upon the next calculated NAV after
the Fund receives the order from your investment professional.
DIRECTLY FROM THE FUND
BY TELEPHONE
You may redeem or exchange Shares by calling the Fund at 1-800-341-7400 once you
have completed the appropriate authorization form for telephone transactions. If
you call before the end of regular trading on the NYSE (normally 4:00 p.m.
Eastern time) you will receive a redemption amount based on that day's NAV.
BY MAIL
You may redeem or exchange Shares by mailing a written request to the Fund. You
will receive a redemption amount based on the next calculated NAV after the Fund
receives your written request in proper form.
Send requests by mail to:
Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600
Send requests by PRIVATE COURIER OR OVERNIGHT DELIVERY SERVICE to:
Federated Shareholder Services Company
1099 Hingham Street
Rockland, MA 02370-3317
All requests must include:
* Fund Name and Share Class, account number and account registration;
* amount to be redeemed or exchanged;
* signatures of all shareholders exactly as registered; and
* IF EXCHANGING, the Fund Name and Share Class, account number and account
registration into which you are exchanging.
Call your investment professional or the Fund if you need special instructions.
SIGNATURE GUARANTEES
Signatures must be guaranteed if:
* your redemption will be sent to an address other than the address of
record;
* your redemption will be sent to an address of record that was changed
within the last 30 days;
* a redemption is payable to someone other than the shareholder(s) of
record; or
* if exchanging (transferring) into another fund with a different shareholder
registration.
A signature guarantee is designed to protect your account from fraud. Obtain a
signature guarantee from a bank or trust company, savings association, credit
union or broker, dealer, or securities exchange member. A NOTARY PUBLIC CANNOT
PROVIDE A SIGNATURE GUARANTEE.
PAYMENT METHODS FOR REDEMPTIONS
Your redemption proceeds will be mailed by check to your address of record. The
following payment options are available if you complete the appropriate section
of the New Account Form or an Account Service Options Form. These payment
options require a signature guarantee if they were not established when the
account was opened:
* an electronic transfer to your account at a financial institution that is
an ACH member; or
* wire payment to your account at a domestic commercial bank that is a Federal
Reserve System member.
REDEMPTION IN KIND
Although the Fund intends to pay Share redemptions in cash, it reserves the
right to pay the redemption price in whole or in part by a distribution of the
Fund's portfolio securities.
LIMITATIONS ON REDEMPTION PROCEEDS
Redemption proceeds normally are wired or mailed within one business day after
receiving a request in proper form. Payment may be delayed up to seven days:
* to allow your purchase to clear;
* during periods of market volatility; or
* when a shareholder's trade activity or amount adversely impacts the Fund's
ability to manage its assets.
You will not accrue interest or dividends on uncashed checks from the Fund if
those checks are undeliverable and returned to the Fund.
EXCHANGE PRIVILEGE
You may exchange Shares of the Fund into shares of Ohio Municipal Cash Trust or
Class F Shares of other Federated Funds. To do this, you must:
* ensure that the account registrations are identical;
* meet any minimum initial investment requirements; and
* receive a prospectus for the fund into which you wish to exchange.
An exchange is treated as a redemption and a subsequent purchase, and is a
taxable transaction.
The Fund may modify or terminate the exchange privilege at any time. The Fund's
management or investment adviser may determine from the amount, frequency and
pattern of exchanges that a shareholder is engaged in excessive trading that is
detrimental to the Fund and other shareholders. If this occurs, the Fund may
terminate the availability of exchanges to that shareholder and may bar that
shareholder from purchasing other Federated Funds.
SYSTEMATIC WITHDRAWAL/EXCHANGE PROGRAM
You may automatically redeem or exchange Shares in a minimum amount of $100 on a
regular basis. Complete the appropriate section of the New Account Form or an
Account Service Options Form or contact your investment professional or the
Fund. Your account value must meet the minimum initial investment amount at the
time the program is established. This program may reduce, and eventually
deplete, your account. Payments should not be considered yield or income.
Generally, it is not advisable to continue to purchase Class F Shares subject to
a sales charge while redeeming Shares using this program.
ADDITIONAL CONDITIONS
TELEPHONE TRANSACTIONS
The Fund will record your telephone instructions. If the Fund does not follow
reasonable procedures, it may be liable for losses due to unauthorized or
fraudulent telephone instructions.
SHARE CERTIFICATES
The Fund no longer issues share certificates. If you are redeeming or exchanging
Shares represented by certificates previously issued by the Fund, you must
return the certificates with your written redemption or exchange request. For
your protection, send your certificates by registered or certified mail, but do
not endorse them.
Account and Share Information
CONFIRMATIONS AND ACCOUNT STATEMENTS
You will receive confirmation of purchases, redemptions and exchanges (except
for systematic transactions). In addition, you will receive periodic statements
reporting all account activity, including systematic transactions, dividends and
capital gains paid.
DIVIDENDS AND CAPITAL GAINS
The Fund declares and pays any dividends monthly to shareholders. Dividends are
paid to all shareholders invested in the Fund on the record date. The record
date is the date on which a shareholder just officially own Shares in order to
earn a dividend.
In addition, the Fund pays any capital gains at least annually. Your dividends
and capital gains distributions will be automatically reinvested in additional
Shares without a sales charge, unless you elect cash payments.
If you purchase Shares just before a Fund declares a capital gain distribution,
you will pay the full price for the Shares and then receive a portion of the
price back in the form of a taxable distribution, whether or not you reinvest
the distribution in Shares. Therefore, you should consider the tax implications
of purchasing Shares shortly before the Fund declares a capital gain. Contact
your investment professional or the Fund for information concerning when
dividends and capital gains will be paid.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, accounts may be
closed if redemptions or exchanges cause the account balance to fall below the
minimum initial investment amount. Before an account is closed, you will be
notified and allowed 30 days to purchase additional Shares to meet the minimum.
TAX INFORMATION
The Fund sends an annual statement of your account activity to assist you in
completing your federal, state and local tax returns. It is anticipated that
Fund distributions will be primarily dividends that are exempt from federal
income tax, although a portion of the Fund's dividends may not be exempt.
Dividends may be subject to state and local taxes, although the Federated Ohio
Municipal Income Fund's dividends will be exempt from the Ohio state taxes
discussed above to the extent they are derived from interest on obligations
exempt from such taxes. Capital gains and non-exempt dividends are taxable
whether paid in cash or reinvested in the Fund. Redemptions and exchanges are
taxable sales. Please consult your tax adviser regarding your federal, state and
local tax liability.
Who Manages the Fund?
The Board of Trustees governs the Fund. The Board selects and oversees the
Adviser, Federated Investment Management Company. The Adviser manages the Fund's
assets, including buying and selling portfolio securities. The Adviser's address
is Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, PA 15222-3779.
The Adviser and other subsidiaries of Federated advise approximately 175 mutual
funds and separate accounts, which totaled approximately $111 billion in assets
as of December 31, 1998. Federated was established in 1955 and is one of the
largest mutual fund investment managers in the United States with approximately
1,900 employees. More than 4,000 investment professionals make Federated Funds
available to their customers.
THE FUND'S PORTFOLIO MANAGERS ARE:
J. SCOTT ALBRECHT
J. Scott Albrecht has been the Fund's portfolio manager since March 1995. He is
Vice President of the Fund. Mr. Albrecht joined Federated in 1989. He has been a
Senior Portfolio Manager since 1997 and a Vice President of the Fund's Adviser
since 1994. He was a Portfolio Manager from 1994 to 1996. Mr. Albrecht is a
Chartered Financial Analyst and received his M.S. in Public Management from
Carnegie Mellon University.
MARY JO OCHSON
Mary Jo Ochson has been the Fund's portfolio manager since April 1997. She
is Vice President of the Fund. Ms. Ochson joined Federated in 1982 and has
been a Senior Portfolio Manager and a Senior Vice President of the Fund's
Adviser since 1996. From 1988 through 1995, Ms. Ochson served as a
Portfolio Manager and a Vice President of the Fund's Adviser. Ms. Ochson is
a Chartered Financial Analyst and received her M.B.A. in Finance from the
University of Pittsburgh.
ADVISORY FEES
The Adviser receives an annual investment advisory fee of 0.40% of the Fund's
average daily net assets. The Adviser may voluntarily waive a portion of its fee
or reimburse the Fund for certain operating expenses.
YEAR 2000 READINESS (UNAUDITED)
The "Year 2000" problem is the potential for computer errors or failures because
certain computer systems may be unable to interpret dates after December 31,
1999 or experience other date-related problems. The Year 2000 problem may cause
systems to process information incorrectly and could disrupt businesses, such as
the Fund, that rely on computers.
While it is impossible to determine in advance all of the risks to the Fund, the
Fund could experience interruptions in basic financial and operational
functions. Fund shareholders could experience errors or disruptions in Fund
share transactions or Fund communications.
The Fund's service providers are making changes to their computer systems to fix
any Year 2000 problems. In addition, they are working to gather information from
third-party providers to determine their Year 2000 readiness.
Year 2000 problems would also increase the risks of the Fund's investments. To
assess the potential effect of the Year 2000 problem, the Adviser is reviewing
information regarding the Year 2000 readiness of issuers of securities the Fund
may purchase. The financial impact of these issues for the Fund is still being
determined. There can be no assurance that potential Year 2000 problems would
not have a material adverse effect on the Fund.
Financial Information
FINANCIAL HIGHLIGHTS
The following Financial Highlights will help you understand the Fund's financial
performance for its past five fiscal years. Some of the information is presented
on a per share basis. Total returns represent the rate an investor would have
earned (or lost) on an investment in the Fund, assuming reinvestment of any
dividends and capital gains.
This information has been audited by Deloitte & Touche LLP, whose report, along
with the Fund's audited financial statements, is included in this prospectus.
Financial Highlights
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 30.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $11.91 $11.53 $11.21 $11.22 $11.01
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income 0.55 0.56 0.59 0.60 0.60
Net realized and
unrealized gain (loss) on
investments (0.67) 0.40 0.32 (0.01) 0.20
TOTAL FROM INVESTMENT
OPERATIONS (0.12) 0.96 0.91 0.59 0.80
LESS DISTRIBUTIONS:
Distributions from net
investment income (0.57) (0.56) (0.59) (0.60) (0.59)
Distributions from net
realized gain on
investments (0.07) (0.02) - - -
Distributions in excess of
net realized gains
on investments (0.04) - - - -
TOTAL DISTRIBUTIONS (0.68) (0.58) (0.59) (0.60) (0.59)
NET ASSET VALUE, END OF
PERIOD $11.11 $11.91 $11.53 $11.21 $11.22
TOTAL RETURN 1 (1.14%) 8.56% 8.34% 5.34% 7.65%
RATIOS TO AVERAGE NET
ASSETS:
Expenses 2 1.41% 1.41% 1.48% 1.48% 1.50%
Net investment income 2 4.20% 4.29% 4.61% 4.70% 4.93%
Expenses (after waivers
and reimbursements) 0.90% 0.90% 0.90% 0.90% 0.90%
Net investment income
(after waivers
and reimbursements) 4.71% 4.80% 5.19% 5.28% 5.53%
SUPPLEMENTAL DATA:
Net assets, end of period
(000 omitted) $82,202 $80,274 $75,506 $70,568 $70,352
Portfolio turnover 19% 23% 38% 11% 33%
</TABLE>
1 Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
2 During the period, certain fees were voluntarily waived and reimbursed. If
such voluntary waivers and reimbursements had not occurred, the ratios would
have been as indicated.
See Notes which are an integral part of the Financial Statements
Portfolio of Investments
AUGUST 31, 1999
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING 1 VALUE
<C> <S> <C> <C>
LONG-TERM MUNICIPALS-89.4%
OHIO-84.4%
$ 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 $ 954,560
300,000 Bellefontaine, OH, Storm
Water Utility, UT GO Bonds,
7.05%, 6/1/2011 A 317,766
500,000 Brunswick, OH, UT GO Bonds,
7.35% (Original Issue
Yield: 7.446%), 12/1/2010 A2 531,115
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 987,580
1,000,000 Cleveland, OH, Airport
System, Revenue Bonds
(Series 1997A), 5.125%
(FSA INS)/(Original Issue
Yield: 5.41%), 1/1/2022 AAA 920,100
2,500,000 Cleveland, OH, Airport
System, Revenue Bonds
(Series A), 6.00% (FGIC
INS)/(Original Issue
Yield: 6.378%), 1/1/2024 AAA 2,526,600
2,000,000 Cleveland, OH, Public
Power System, Revenue
Bonds, First
Mortgage/(MBIA INS)(United
State Treasury PRF (Series
A), 7.00% (Original Issue
Yield: 7.15%), 11/15/2024 AAA 2,265,780
2,600,000 Columbus, OH, Municipal
Airport Authority,
Improvement Revenue Bonds,
6.25% (Port Columbus
International
Airport)/(Original Issue
Yield: 6.35%), 1/1/2024 AAA 2,676,960
1,000,000 Columbus, OH, Tax
Increment Financing Bonds
(Series 1999), 5.30%
(Easton Project)/(AMBAC
INS)/(Original Issue
Yield: 5.33%), 12/1/2019 AAA 967,250
500,000 Cuyahoga County, OH,
Health Care Facilities,
Revenue Refunding Bonds,
5.50% (Benjamin Rose
Institute)/(Original Issue
Yield: 5.75%), 12/1/2028 NR 440,175
1,500,000 Cuyahoga County, OH,
Hospital Authority,
Improvement & Refunding
Revenue Bonds (Series A),
5.625% (University
Hospitals Health System,
Inc.)/(Original Issue
Yield: 5.90%), 1/15/2026 AAA 1,469,610
1,500,000 Cuyahoga County, OH,
Hospital Authority,
Revenue Bonds, 6.25%
(Meridia Health
System)/(Original Issue
Yield: 6.80%), 8/15/2024 AAA 1,653,390
2,000,000 Evergreen, OH, Local
School District, UT GO
Bonds, 5.625% (FGIC
INS)/(Original Issue
Yield: 5.72%), 12/1/2024 AAA 1,981,180
1,000,000 Forest Hills, OH, Local
School District, UT GO
Bonds, 5.70% (MBIA INS),
12/1/2016 AAA 1,018,680
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 1,380,195
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 521,900
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING 1 VALUE
<C> <S> <C> <C>
LONG-TERM MUNICIPALS-
continued
OHIO-CONTINUED
$ 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 $ 1,979,520
1,000,000 Franklin County, OH,
Revenue Bonds (Series
1998A), 5.20% (OCLC Online
Computer Library Center,
Inc.), 10/1/2020 A 924,170
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 1,405,716
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- 743,218
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 2,091,340
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 896,670
1,580,000 Hancock County, OH, LT GO
Bonds (Series 1997),
5.45%, 12/1/2017 AA- 1,567,407
1,000,000 Lake County, OH, Hospital
Facilities Revenue Bonds,
5.00% (Lake Hospital
System, Inc.)/(AMBAC
INS)/(Original Issue
Yield: 5.15%), 8/15/2023 AAA 898,890
440,000 Lakewood, OH, Hospital
Improvement Authority, Revenue Refunding Bonds (Series One),
6.00% (Lakewood Hospital, OH)/(Original Issue Yield:
6.90%), 2/15/2010 AAA 440,726
1,500,000 Lorain County, OH, Health Care Facilities Revenue Refunding
Bonds (Series 1998A), 5.25% (Kendal at Oberlin)/(MBIA
INS)(Original Issue Yield:
5.53%), 2/1/2021 BBB 1,306,605
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 3,009,090
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 993,910
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+ 1,008,840
420,000 Marysville, OH, LT Sewer
System GO Bonds, 7.15%,
12/1/2011 A2 445,561
1,000,000 Mason, OH, City School
District, UT GO Bonds,
5.30%, 12/1/2017 Aa3 981,460
2,185,000 Medina, OH, City School District, LT GO Bonds (Series 1999),
5.125% (FGIC INS)/(Original Issue
Yield: 5.30%), 12/1/2019 NR 2,059,035
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING 1 VALUE
<C> <S> <C> <C>
LONG-TERM MUNICIPALS-
continued
OHIO-CONTINUED
$ 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 $ 992,400
1,500,000 Montgomery County, OH,
Health Care Facilities,
Revenue Refunding Bonds
(Series 1997), 5.50%
(Franciscan Medical
Center-Dayton
Campus)/(Original Issue
Yield: 5.551%), 7/1/2018 BBB 1,359,405
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 1,107,790
9,540,000 Ohio HFA, Residential
Mortgage Revenue Bonds
(Series B-2), 6.70% (GNMA
COL), 3/1/2025 AAA 9,911,678
110,000 Ohio HFA, SFM Revenue Bonds (Series A), 7.80% (GNMA
COL), 3/1/2030 AAA 112,836
500,000 Ohio State Air Quality
Development Authority, PCR
Refunding Bonds (Series
A), 7.45% (Ohio Edison
Co.)/(FGIC INS), 3/1/2016 AAA 517,890
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 3,119,130
1,500,000 Ohio State, Education Loan
Revenue Bonds (Series
1997A), 5.85%, 12/1/2019 AAA 1,504,815
1,500,000 Ohio State, Solid Waste
Disposal Revenue Bonds,
6.05% (USG Corp.),
8/1/2034 BBB+ 1,473,165
2,000,000 Olentangy, OH, Local
School District, UT GO
Bonds, 5.25% (Original
Issue Yield: 5.46%),
12/1/2017 AA- 1,925,960
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- 896,040
730,000 Reynoldsburg, OH, City
School District, UT GO
Capital Appreciation
Refunding Bonds (FGIC
INS)/(Original Issue
Yield: 5.30%), 12/1/2011 AAA 383,243
500,000 Tiffin, OH, LT GO Bonds,
7.10%, 12/1/2011 A3 536,840
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 2,037,300
1,000,000 University of Akron, OH,
General Receipts Revenue
Bonds (Series 1999), 5.70%
(Original Issue Yield:
5.74%), 1/1/2024 AAA 1,001,980
1,115,000 Warren County, OH, Special
Assessment UT GO Bonds,
5.50%, 12/1/2017 Aa2 1,116,093
TOTAL 69,361,564
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING 1 VALUE
<C> <S> <C> <C>
LONG-TERM MUNICIPALS-
continued
PUERTO RICO-4.2%
$ 1,200,000 Puerto Rico Electric Power
Authority, Revenue Bonds
(Series T), 6.375%
(Original Issue Yield:
6.58%), 7/1/2024 BBB+ $ 1,323,480
1,000,000 Puerto Rico Highway and
Transportation Authority,
Residual Interest Tax-
Exempt Securites (Series
PA 331A), 7.202% (AMBAC
INS), 7/1/2013 NR 1,057,520
1,000,000 Puerto Rico Highway and
Transportation Authority,
Residual Interest Tax-
Exempt Securities (Series
PA 331B), 7.202% (AMBAC
INS), 7/1/2014 NR 1,049,900
TOTAL 3,430,900
VIRGIN ISLANDS-0.8%
670,000 Virgin Islands HFA, SFM Revenue Refunding Bonds (Series A),
6.50% (GNMA COL)/(Original Issue
Yield: 6.522%), 3/1/2025 AAA 692,854
TOTAL LONG-TERM MUNICIPALS
(IDENTIFIED $72,066,553) 73,485,318
SHORT-TERM MUNICIPALS-9.5%
OHIO-8.2%
2,000,000 Ohio State Air Quality
Development Authority,
(Series 1985A), Daily
VRDNs (Cincinnati Gas and
Electric Co.)/(UBS AG
LOC), 3.00%, 12/1/2015 AA+ 2,000,000
1,900,000 Ohio State Air Quality
Development Authority,
(Series B), Daily VRDNs
(Cincinnati Gas and
Electric Co.)/(Canadian
Imperial Bank of Commerce
LOC), 2.90%, 9/1/2030 AA- 1,900,000
800,000 Ohio State Air Quality
Development Authority,
Revenue Bonds (Series B),
Daily VRDNs (Cincinnati
Gas and Electric
Co.)/(J.P. Morgan
Delaware, Wilmington LOC),
3.00%, 12/1/2015 AAA 800,000
2,000,000 Stark County, OH, IDR
Weekly VRDNs (Shearer's
Foods, Inc.)/(Bank One,
Ohio, N.A. LOC), 3.42%,
12/1/2003 NR 2,000,000
TOTAL 6,700,000
PUERTO RICO-1.3%
1,100,000 Puerto Rico Commonwealth
Infrastructure Financing
Authority, Floater
Certificates (Series 1998-
139) Weekly VRDNs (AMBAC
INS)/(Morgan Stanley, Dean
Witter Municipal Funding,
Inc. LIQ), 2.99%, 7/1/2028 AAA 1,100,000
TOTAL SHORT-TERM
MUNICIPALS (AMORTIZED
COST) 7,800,000
TOTAL INVESTMENTS
(IDENTIFIED COST
$79,866,553) 2 $ 81,285,318
</TABLE>
Securities that are subject to alternative minimum tax represent 31.7% of the
Fund's portfolio as calculated based upon total portfolio market value.
1 Please refer to the Appendix of the Statement of Additional Information for an
explanation of the credit ratings. Current credit ratings are unaudited.
2 The cost of investments for federal tax purposes amounts to $79,866,553. The
net unrealized appreciation of investments on a federal tax basis amounts to
$1,418,765 which is comprised of $2,600,819 appreciation and $1,182,054
depreciation at August 31, 1999.
Note: The categories of investments are shown as a percentage of net assets
($82,202,243) at August 31, 1999.
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 IDR -Industrial Development Revenue INS -Insured LIQ
- -Liquidity Agreement LOC -Letter of Credit LT -Limited Tax MBIA -Municipal Bond
Investors Assurance PCR -Pollution Control Revenue 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
AUGUST 31, 1999
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS:
Total investments in
securities, at value
(identified and tax cost
$79,866,553) $ 81,285,318
Cash 14,263
Income receivable 1,232,506
Receivable for investments
sold 1,858,700
Receivable for shares sold 40,104
TOTAL ASSETS 84,430,891
LIABILITIES:
Payable for investments
purchased $ 1,974,580
Payable for shares
redeemed 75,122
Income distribution
payable 162,203
Accrued expenses 16,743
TOTAL LIABILITIES 2,228,648
Net assets for 7,397,723
shares outstanding $ 82,202,243
NET ASSETS CONSIST OF:
Paid in capital $ 81,310,529
Net unrealized
appreciation of
investments 1,418,765
Accumulated net realized
loss on investments (417,129)
Distributions in excess of
net investment income (109,922)
TOTAL NET ASSETS $ 82,202,243
NET ASSET VALUE, OFFERING
PRICE AND REDEMPTION
PROCEEDS PER SHARE:
Net Asset Value Per Share
($82,202,243 / 7,397,723
shares outstanding) $11.11
Offering Price Per Share
(100/99.00 of $11.11) 1 $11.22
Redemption Proceeds Per
Share (99.00/100 of
$11.11) 2 $11.00
</TABLE>
1 See "What Do Shares Cost?" in the Prospectus.
2 See "Sales Charge When You Redeem" in the Prospectus.
See Notes which are an integral part of the Financial Statements
Statement of Operations
YEAR ENDED AUGUST 31, 1999
<TABLE>
<CAPTION>
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest $ 4,610,834
EXPENSES:
Investment advisory fee $ 328,560
Administrative personnel
and services fee 125,000
Custodian fees 4,242
Transfer and dividend
disbursing agent fees and
expenses 43,443
Directors'/Trustees' fees 3,957
Auditing fees 13,927
Legal fees 6,250
Portfolio accounting fees 51,684
Distribution services fee 328,560
Shareholder services fee 205,350
Share registration costs 18,199
Printing and postage 28,197
Insurance premiums 1,652
Miscellaneous 3,694
TOTAL EXPENSES 1,162,715
WAIVERS:
Waiver of investment
advisory fee $ (214,493)
Waiver of distribution
services fee (197,136)
Waiver of shareholder
services fee (8,214)
TOTAL WAIVERS (419,843)
Net expenses 742,872
Net investment income 3,867,962
REALIZED AND UNREALIZED
LOSS ON INVESTMENTS:
Net realized loss on
investments (118,811)
Net change in unrealized
appreciation of
investments (4,645,424)
Net realized and
unrealized loss on
investments (4,764,235)
Change in net assets
resulting from operations $ (896,273)
</TABLE>
See Notes which are an integral part of the Financial Statements
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31 1999 1998
<S> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS
OPERATIONS:
Net investment income $ 3,867,962 $ 3,674,204
Net realized loss on
investments ($(118,811)
and $780,245,
respectively, as computed
for federal tax purposes) (118,811) 780,248
Net change in unrealized
appreciation (4,645,424) 1,810,941
CHANGE IN NET ASSETS
RESULTING FROM OPERATIONS (896,273) 6,265,393
DISTRIBUTIONS TO
SHAREHOLDERS:
Distributions from net
investment income (3,987,825) (3,668,894)
Distributions from net
realized gains (484,220) (134,059)
Distributions in excess of
net realized gains (298,322) -
CHANGE IN NET ASSETS
RESULTING FROM
DISTRIBUTIONS
TO SHAREHOLDERS (4,770,367) (3,802,953)
SHARE TRANSACTIONS:
Proceeds from sale of
shares 16,135,809 13,003,558
Net asset value of shares
issued to shareholders in
payment of
distributions declared 2,707,727 2,205,539
Cost of shares redeemed (11,249,058) (12,903,472)
CHANGE IN NET ASSETS
RESULTING FROM SHARE
TRANSACTIONS 7,594,478 2,305,625
Change in net assets 1,927,838 4,768,065
NET ASSETS:
Beginning of period 80,274,405 75,506,340
End of period $ 82,202,243 $ 80,274,405
</TABLE>
See Notes which are an integral part of the Financial Statements
Notes to Financial Statements
AUGUST 31, 1999
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 six 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 (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.
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.
Distributions are determined in accordance with income tax regulations which may
differ from the generally accepted accounting principals. These distributions do
not represent a return of capital for federal income tax purposes.
The following reclassifications have been made to the financial statements:
<TABLE>
<CAPTION>
INCREASE (DECREASE)
UNDISTRIBUTED NET
PAID-IN CAPITAL ACCUMULATED GAIN (LOSS) INVESTMENT INCOME
<S> <C> <C>
($4,635) $66,195 ($61,560)
</TABLE>
Net investment income, net realized gains/losses and net assets are 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 their income. Accordingly, no provisions for federal tax
are necessary.
Additionally, net capital losses of $417,129 attributable to security
transactions incurred after October 31, 1998, are treated as arising on
September 1, 1999, the first day of the fund's next taxable year.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Funds may engage in when-issued or delayed delivery transactions. The Fund
records when-issued securities on the trade date and maintain 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 1999 1998
<S> <C> <C>
Shares sold 1,386,959 1,105,266
Shares issued to
shareholders in payment of
distributions declared 232,018 187,876
Shares redeemed (962,035) (1,101,260)
NET CHANGE RESULTING FROM
SHARE TRANSACTIONS 656,942 191,882
</TABLE>
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE
Federated Investment Management Company, 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 Funds have adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1
under the Act. Under the terms of the Plan, the Funds will compensate Federated
Securities Corp. ("FSC"), the principal distributor, from the net assets of the
Funds to finance activities intended to result in the sale of the Fund's shares.
The Plan provides that the Funds 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 Company ("FSSC"), the Fund will pay FSSC up to 0.25% of average daily
net assets of the Fund for the period. The fee paid to FSSC is used to finance
certain services for shareholders and to maintain shareholder accounts. FSSC may
voluntarily choose to waive any portion of its fee. FSSC 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 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, 1999, 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 $21,800,000 and $17,900,000, 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, 1999, were as follows:
<TABLE>
<CAPTION>
<S> <C>
Purchases $14,653,406
Sales $15,422,715
</TABLE>
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, 1999, 42.2% 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 percentage of investments insured
by or supported (backed) by a letter of credit from any one institution or
agency did not exceed 14.1% 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 FEDERATED 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 (the
"Fund") as of August 31, 1999, the related statement of operations for the year
then ended, the statement of changes in net assets for the years ended August
31, 1999 and 1998 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, 1999, 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, 1999, 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
Boston, Massachusetts
October 15, 1999
[Graphic]
Federated
World-Class Investment Manager
PROSPECTUS
Federated Ohio Municipal Income Fund
A Portfolio of Federated Municipal Securities Income Trust
CLASS F SHARES
OCTOBER 31, 1999
A Statement of Additional Information (SAI) dated October 31, 1999, is
incorporated by reference into this prospectus. Additional information about the
Fund's investments is contained in the Fund's Annual and SemiAnnual Reports to
shareholders as they become available. The Annual Report's Management Discussion
and Analysis discusses market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year. To
obtain the SAI, the Annual Report, the Semi-Annual Report and other information
without charge, and make inquiries, call your investment professional or the
Fund at 1-800-341- 7400.
You can obtain information about the Fund (including the SAI) by writing to or
visiting the Public Reference Room in Washington, D.C. You may also access fund
information from the EDGAR Database on the SEC's Internet site at
http://www.sec.gov. You can purchase copies of this information by contacting
the SEC by email at [email protected], or by writing to the SEC's Public
Reference Section, Washington, D.C. 20549-0102. Call 1-202- 942-8090 for
information on the Public Reference Room's operations and copying fees.
[Graphic]
Federated
Federated Ohio Municipal Income Fund
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
1-800-341-7400
WWW.FEDERATEDINVESTORS.COM
Federated Securities Corp., Distributor
Investment Company Act File No. 811-6165
Cusip 625922307
0090702A-F (10/99)
[Graphic]
STATEMENT OF ADDITIONAL INFORMATION
Federated Ohio Municipal Income Fund
A Portfolio of Federated Municipal Securities Income Trust
CLASS F SHARES
This Statement of Additional Information (SAI) is not a prospectus. Read this
SAI in conjunction with the prospectus for Federated Ohio Municipal Income Fund
Class F Shares (Fund), dated October 31, 1999. Obtain the prospectus and the
Annual Report's Management Discussion & Analysis without charge by calling
1-800-341-7400.
OCTOBER 31, 1999
[Graphic]
Federated
World-Class Investment Manager
Federated Ohio Municipal Income Fund
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
1-800-341-7400
WWW.FEDERATEDINVESTORS.COM
Federated Securities Corp., Distributor
0090702B (10/99)
[Graphic]
CONTENTS
How is the Fund Organized? 1
Securities in Which the Fund Invests 1
What Do Shares Cost? 4
How is the Fund Sold? 5
Subaccounting Services 5
Redemption in Kind 6
Massachusetts Partnership Law 6
Account and Share Information 6
Tax Information 6
Who Manages and Provides Services to the Fund? 7
How Does the Fund Measure Performance? 10
Who is Federated Investors, Inc.? 12
Investment Ratings 13
Addresses 15
How is the Fund Organized?
The Fund is a non-diversified portfolio of Federated Municipal Securities Income
Trust (Trust). The Trust is an open-end, management investment company that was
established under the laws of the Commonwealth of Massachusetts on August 6,
1990. The Trust may offer separate series of shares representing interests in
separate portfolios of securities. The Fund changed its name from Ohio Municipal
Income Fund to Federated Ohio Municipal Fund on February 26, 1996 (effective
date March 31, 1996). Effective October 1, 1999, the Trust changed its name from
Municipal Securities Income Trust to Federated Municipal Securities Income
Trust. The Fund's investment adviser is Federated Investment Management Company
(Adviser). The Adviser, formerly known as Federated Advisers, changed its name
effective March 31, 1999.
Securities in Which the Fund Invests
The Fund's principal securities are described in its prospectus. Additional
securities, and further information regarding the principal securities, are
outlined below. In pursuing its investment strategy, the Fund may invest in the
following securities for any purpose that is consistent with its investment
objective.
SECURITIES DESCRIPTIONS AND TECHNIQUES
FIXED INCOME SECURITIES
Fixed income securities pay interest, dividends or distributions at a specified
rate. The rate may be a fixed percentage of the principal or adjusted
periodically. In addition, the issuer of a fixed income security must repay the
principal amount of the security, normally within a specified time. Fixed income
securities provide more regular income than equity securities. However, the
returns on fixed income securities are limited and normally do not increase with
the issuer's earnings. This limits the potential appreciation of fixed income
securities as compared to equity securities.
A security's yield measures the annual income earned on a security as a
percentage of its price. A security's yield will increase or decrease depending
upon whether it costs less (a discount) or more (a premium) than the principal
amount. If the issuer may redeem the security before its scheduled maturity, the
price and yield on a discount or premium security may change based upon the
probability of an early redemption. Securities with higher risks generally have
higher yields.
TAX EXEMPT SECURITIES
Tax exempt securities are fixed income securities that pay interest that is not
subject to federal regular income taxes. Typically, states, counties, cities and
other political subdivisions and authorities issue tax exempt securities. The
market categorizes tax exempt securities by their source of repayment.
MUNICIPAL NOTES
Municipal notes are short-term tax exempt securities. Many municipalities issue
such notes to fund their current operations before collecting taxes or other
municipal revenues. Municipalities may also issue notes to fund capital projects
prior to issuing long-term bonds. The issuers typically repay the notes at the
end of their fiscal year, either with taxes, other revenues or proceeds from
newly issued notes or bonds.
VARIABLE RATE DEMAND INSTRUMENTS
Variable rate demand instruments are tax exempt securities that require the
issuer or a third party, such as a dealer or bank, to repurchase the security
for its face value upon demand. The securities also pay interest at a variable
rate intended to cause the securities to trade at their face value. The Fund
treats demand instruments as short-term securities, because their variable
interest rate adjusts in response to changes in market rates, even though their
stated maturity may extend beyond 13 months.
TAX INCREMENT FINANCING BONDS
Tax increment financing (TIF) bonds are payable from increases in taxes or other
revenues attributable to projects financed by the bonds. For example, a
municipality may issue TIF bonds to redevelop a commercial area. The TIF bonds
would be payable solely from any increase in sales taxes collected from
merchants in the area. The bonds could default if merchants' sales, and related
tax collections, failed to increase as anticipated.
CREDIT ENHANCEMENT
Common types of credit enhancement include guarantees, letters of credit, bond
insurance and surety bonds. Credit enhancement also includes arrangements where
securities or other liquid assets secure payment of a fixed income security. If
a default occurs, these assets may be sold and the proceeds paid to the
security's holders. Either form of credit enhancement reduces credit risks by
providing another source of payment for a fixed income security.
DERIVATIVE CONTRACTS
Derivative contracts are financial instruments that require payments based upon
changes in the values of designated (or underlying) securities, currencies,
commodities, financial indices or other assets. Some derivative contracts (such
as futures, forwards and options) require payments relating to a future trade
involving the underlying asset. The other party to a derivative contract is
referred to as a counterparty.
Many derivative contracts are traded on securities or commodities exchanges. In
this case, the exchange sets all the terms of the contract except for the price.
Investors make payments due under their contracts through the exchange. Most
exchanges require investors to maintain margin accounts through their brokers to
cover their potential obligations to the exchange. Parties to the contract make
(or collect) daily payments to the margin accounts to reflect losses (or gains)
in the value of their contracts. This protects investors against potential
defaults by the counterparty. Trading contracts on an exchange also allows
investors to close out their contracts by entering into offsetting contracts.
For example, the Fund could close out an open contract to buy an asset at a
future date by entering into an offsetting contract to sell the same asset on
the same date. If the offsetting sale price is more than the original purchase
price, the Fund realizes a gain; if it is less, the Fund realizes a loss.
Exchanges may limit the amount of open contracts permitted at any one time. Such
limits may prevent the Fund from closing out a position. If this happens, the
Fund will be required to keep the contract open (even if it is losing money on
the contract), and to make any payments required under the contract (even if it
has to sell portfolio securities at unfavorable prices to do so). Inability to
close out a contract could also harm the Fund by preventing it from disposing of
or trading any assets it has been using to secure its obligations under the
contract.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest its assets in securities of other investment companies,
including the securities of affiliated money market funds, as an efficient means
of carrying out its investment policies and managing its uninvested cash.
TEMPORARY DEFENSIVE INVESTMENTS
The Fund may make temporary defensive investments in the following taxable
securities:
REPURCHASE AGREEMENTS
Repurchase agreements are transactions in which the Fund buys a security from a
dealer or bank and agrees to sell the security back at a mutually agreed upon
time and price. The repurchase price exceeds the sale price, reflecting the
Fund's return on the transaction. This return is unrelated to the interest rate
on the underlying security. The Fund will enter into repurchase agreements only
with banks and other recognized financial institutions, such as securities
dealers, deemed creditworthy by the Adviser.
The Fund's custodian or subcustodian will take possession of the securities
subject to repurchase agreements. The Adviser or subcustodian will monitor the
value of the underlying security each day to ensure that the value of the
security always equals or exceeds the repurchase price.
Repurchase agreements are subject to credit risks.
REVERSE REPURCHASE AGREEMENTS
Reverse repurchase agreements are repurchase agreements in which the Fund is the
seller (rather than the buyer) of the securities, and agrees to repurchase them
at an agreed upon time and price. A reverse repurchase agreement may be viewed
as a type of borrowing by the Fund. Reverse repurchase agreements are subject to
credit risks. In addition, reverse repurchase agreements create leverage risks
because the Fund must repurchase the underlying security at a higher price,
regardless of the market value of the security at the time of repurchase.
TREASURY SECURITIES
Treasury securities are direct obligations of the federal government of the
United States.
BANK INSTRUMENTS
Bank instruments are unsecured interest bearing deposits with banks. Bank
instruments include bank accounts, time deposits, certificates of deposit and
banker's acceptances.
AGENCY SECURITIES
Agency securities are issued or guaranteed by a federal agency or other
government sponsored entity acting under federal authority (a "GSE"). The United
States supports some GSEs with its full faith and credit. Other GSEs receive
support through federal subsidies, loans or other benefits. A few GSEs have no
explicit financial support, but are regarded as having implied support because
the federal government sponsors their activities.
CORPORATE DEBT SECURITIES
Corporate debt securities are fixed income securities issued by businesses.
Notes, bonds, debentures and commercial paper are the most prevalent types of
corporate debt securities.
COMMERCIAL PAPER
Commercial paper is an issuer's obligation with a maturity of less than nine
months. Companies typically issue commercial paper to pay for current
expenditures. Most issuers constantly reissue their commercial paper and use the
proceeds (or bank loans) to repay maturing paper. If the issuer cannot continue
to obtain liquidity in this fashion, its commercial paper may default. The short
maturity of commercial paper reduces both the market and credit risks as
compared to other debt securities of the same issuer.
INVESTMENT RISKS
There are many factors which may affect an investment in the Fund. The Fund's
principal risks are described in its prospectus. Additional risk factors are
outlined below.
CREDIT RISKS
Fixed income securities generally compensate for greater credit risk by paying
interest at a higher rate. The difference between the yield of a security and
the yield of a AAA municipal security with a comparable maturity (the spread)
measures the additional interest paid for risk. Spreads may increase generally
in response to adverse economic or market conditions. A security's spread may
also increase if the security's rating is lowered, or the security is perceived
to have an increased credit risk. An increase in the spread will cause the price
of the security to decline.
LIQUIDITY RISKS
Limited trading opportunities may make it more difficult to sell or buy a
security at a favorable price or time. Consequently, the Fund may have to accept
a lower price to sell a security, sell other securities to raise cash or give up
an investment opportunity, any of which could have a negative effect on the
Fund's performance. Infrequent trading of securities may also lead to an
increase in their price volatility.
FUNDAMENTAL INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide current income exempt from
federal regular income tax and the personal income tax imposed by the state of
Ohio and Ohio municipalities. The investment objective may not be changed by the
Fund's Trustees without shareholder approval.
INVESTMENT LIMITATIONS
BORROWING MONEY AND ISSUING SENIOR SECURITIES
The Fund may borrow money, directly or indirectly, and issue senior securities
to the maximum extent permitted under the 1940 Act.
UNDERWRITING
The Fund may not underwrite the securities of other issuers, except that the
Fund may engage in transactions involving the acquisition, disposition or resale
of its portfolio securities, under circumstances where it may be considered to
be an underwriter under the Securities Act of 1933.
INVESTING IN REAL ESTATE
The Fund may not purchase or sell real estate, provided that this restriction
does not prevent the Fund from investing in issuers which invest, deal, or
otherwise engage in transactions in real estate or interests therein, or
investing in securities that are secured by real estate or interests therein.
The Fund may exercise its rights under agreements relating to such securities,
including the right to enforce security interests and to hold real estate
acquired by reason of such enforcement until that real estate can be liquidated
in an orderly manner.
INVESTING IN COMMODITIES
The Fund may not purchase or sell physical commodities, provided that the Fund
may purchase securities of companies that deal in commodities.
LENDING CASH OR SECURITIES
The Fund may not make loans, provided that this restriction does not prevent the
Fund from purchasing debt obligations, entering into repurchase agreements,
lending its assets to broker/dealers or institutional investors and investing in
loans, including assignments and participation interests.
CONCENTRATION OF INVESTMENTS
The Fund will not make investments that will result in the concentration of its
investments in the securities of issuers primarily engaged in the same industry.
Government securities, municipal securities and bank instruments will not be
deemed to constitute an industry.
THE ABOVE LIMITATIONS CANNOT BE CHANGED UNLESS AUTHORIZED BY THE BOARD OF
TRUSTEES (BOARD) AND BY THE "VOTE OF A MAJORITY OF ITS OUTSTANDING VOTING
SECURITIES," AS DEFINED BY THE INVESTMENT COMPANY ACT OF 1940. THE FOLLOWING
LIMITATIONS, HOWEVER, MAY BE CHANGED BY THE BOARD WITHOUT SHAREHOLDER APPROVAL.
SHAREHOLDERS WILL BE NOTIFIED BEFORE ANY MATERIAL CHANGE IN THESE LIMITATIONS
BECOMES EFFECTIVE.
BUYING ON MARGIN
The Fund will not purchase securities on margin, provided that the Fund may
obtain short-term credits necessary for the clearance of purchases and sales of
securities, and further provided that the Fund may make margin deposits in
connection with its use of financial options and futures, forward and spot
currency contracts, swap transactions and other financial contracts or
derivative instruments.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any of its assets, provided
that this shall not apply to the transfer of securities in connection with any
permissible borrowing or to collateral arrangements in connection with
permissible activities.
ILLIQUID SECURITIES
The Fund will not purchase securities for which there is no readily available
market, or enter into repurchase agreements or purchase time deposits maturing
in more than seven days if immediately after and as a result, the value of such
securities would exceed, in the aggregate, 15% of the Fund's net assets.
RESTRICTED SECURITIES
The Fund may invest its securities subject to restrictions or resale under the
Securities Act of 1933.
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.
In applying the Fund's commodities restriction, investments in transactions
involving futures contracts and options, forward currency contracts, swap
transactions and other financial contracts that settle by payment of cash are
not deemed to be investments in commodities.
In applying the Fund's concentration limitation: (a) utility companies will be
divided according to their services, for example, gas, gas transmission,
electric and telephone will each be considered a separate industry; (b)
financial service companies will be classified according to end users of their
services, for example, automobile finance, bank finance and diversified finance
will each be considered a separate industry; and (c) asset-backed securities
will be classified according to the underlying assets securing such securities.
To conform to the current view of the Securities and Exchange Commission (SEC)
staff that only domestic bank instruments may be excluded from industry
concentration limitations, the Fund will not exclude foreign bank instruments
from industry concentration tests as long as the policy of the SEC remains in
effect. The Fund will consider concentration to be the investment of more than
25% of the value of its total assets in any one industry.
DETERMINING MARKET VALUE OF SECURITIES
Market values of the Fund's portfolio securities are determined as follows:
* for fixed income securities, at the last sale price on a national securities
exchange, if available, otherwise, as determined by an independent pricing
service;
* futures contracts and options are generally valued at market values
established by the exchanges on which they are traded at the close of trading on
such exchanges. Options traded in the over-the-counter market are generally
valued according to the mean between the last bid and the last asked price for
the option as provided by an investment dealer or other financial institution
that deals in the option. The Board may determine in good faith that another
method of valuing such investments is necessary to appraise their fair market
value;
* for short-term obligations, according to the mean between bid and asked prices
as furnished by an independent pricing service, except that short-term
obligations with remaining maturities of less than 60 days at the time of
purchase may be valued at amortized cost or at fair market value as determined
in good faith by the Board; and
* for all other securities at fair value as determined in good faith by the
Board.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may consider institutional trading in
similar groups of securities, yield, quality, stability, risk, coupon rate,
maturity, type of issue, trading characteristics, and other market data or
factors. From time to time, when prices cannot be obtained from an independent
pricing service, securities may be valued based on quotes from broker/dealers or
other financial institutions that trade the securities.
What Do Shares Cost?
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.
ELIMINATING THE FRONT-END SALES CHARGE
You can eliminate the applicable front-end sales charge, as follows:
QUANTITY DISCOUNTS
Larger purchases of the same Share class eliminate the sales charge you pay. You
can combine purchases of Shares made on the same day by you, your spouse and
your children under age 21. In addition, purchases made at one time by a trustee
or fiduciary for a single trust estate or a single fiduciary account can be
combined.
ACCUMULATED PURCHASES
If you make an additional purchase of Shares, you can count previous Share
purchases still invested in the Fund in calculating the applicable sales charge
on the additional purchase.
CONCURRENT PURCHASES
You can combine concurrent purchases of the same share class of two or more
Federated Funds in calculating the applicable sales charge.
LETTER OF INTENT
You can sign a Letter of Intent committing to purchase a certain amount of the
same class of Shares within a 13-month period to combine such purchases in
calculating the sales charge. The Fund's custodian will hold Shares in escrow
equal to the maximum applicable sales charge. If you complete the Letter of
Intent, the Custodian will release the Shares in escrow to your account. If you
do not fulfill the Letter of Intent, the Custodian will redeem the appropriate
amount from the Shares held in escrow to pay the sales charges that were not
applied to your purchases.
REINVESTMENT PRIVILEGE
You may reinvest, within 120 days, your Share redemption proceeds at the next
determined NAV without any sales charge.
PURCHASES BY AFFILIATES OF THE FUND
The following individuals and their immediate family members may buy Shares at
NAV without any sales charge because there are nominal sales efforts associated
with their purchases:
* the Trustees or Directors, employees and sales representatives of the
Fund, the Adviser, the Distributor and their affiliates;
* any associated person of an investment dealer who has a sales agreement
with the Distributor; and
* trusts, pension or profit-sharing plans for these individuals.
REDUCING OR ELIMINATING THE CONTINGENT DEFERRED SALES CHARGE
These reductions or eliminations are offered because: no sales commissions have
been advanced to the investment professional selling Shares; the shareholder has
already paid a Contingent Deferred Sales Charge (CDSC); or nominal sales efforts
are associated with the original purchase of Shares.
Upon notification to the Distributor or the Fund's transfer agent, no CDSC will
be imposed on redemptions:
* following the death or post-purchase disability, as defined in Section
72(m)(7) of the Internal Revenue Code of 1986, of the last surviving
shareholder;
* 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;
* of Shares that represent a reinvestment within 120 days of a
previous redemption;
* of Shares held by the Trustees or Directors, employees, and sales
representatives of the Fund, the Adviser, the Distributor and their affiliates;
employees of any investment professional that sells Shares according to a sales
agreement with the Distributor; and the immediate family members of the above
persons;
* of Shares originally purchased through a bank trust department, a registered
investment adviser or retirement plans where the third party administrator has
entered into certain arrangements with the Distributor or its affiliates, or any
other investment professional, to the extent that no payments were advanced for
purchases made through these entities;
* which are involuntary redemptions processed by the Fund because the
accounts do not meet the minimum balance requirements; and
* representing a total or partial distribution from a qualified plan. A total or
partial distribution does not include an account transfer, rollover or other
redemption made for purposes of reinvestment. A qualified plan does not include
an Individual Retirement Account, Keogh Plan, or a custodial account, following
retirement.
How is the Fund Sold?
Under the Distributor's Contract with the Fund, the Distributor (Federated
Securities Corp.) offers Shares on a continuous, best-efforts basis.
FRONT-END SALES CHARGE REALLOWANCES
The Distributor receives a front-end sales charge on certain Share sales. The
Distributor generally pays up to 90% (and as much as 100%) of this charge to
investment professionals for sales and/or administrative services. Any payments
to investment professionals in excess of 90% of the front-end sales charge are
considered supplemental payments. The Distributor retains any portion not paid
to an investment professional.
RULE 12B-1 PLAN
As a compensation-type plan, the Rule 12b-1 Plan is designed to pay the
Distributor (who may then pay investment professionals such as banks,
broker/dealers, trust departments of banks, and registered investment advisers)
for marketing activities (such as advertising, printing and distributing
prospectuses, and providing incentives to investment professionals) to promote
sales of Shares so that overall Fund assets are maintained or increased. This
helps the Fund achieve economies of scale, reduce per share expenses, and
provide cash for orderly portfolio management and Share redemptions. In
addition, the Fund's service providers that receive asset-based fees also
benefit from stable or increasing Fund assets.
The Fund may compensate the Distributor more or less than its actual marketing
expenses. In no event will the Fund pay for any expenses of the Distributor that
exceed the maximum Rule 12b-1 Plan fee. The maximum Rule 12b-1 Plan fee that can
be paid in any one year may not be sufficient to cover the marketing-related
expenses the Distributor has incurred. Therefore, it may take the Distributor a
number of years to recoup these expenses.
SHAREHOLDER SERVICES
The Fund may pay Federated Shareholder Services Company, a subsidiary of
Federated Investors, Inc. (Federated), for providing shareholder services and
maintaining shareholder accounts. Federated Shareholder Services Company may
select others to perform these services for their customers and may pay them
fees.
SUPPLEMENTAL PAYMENTS
Investment professionals may be paid fees out of the assets of the Distributor
and/or Federated Shareholder Services Company (but not out of Fund assets). The
Distributor and/or Federated Shareholder Services Company may be reimbursed by
the Adviser or its affiliates.
Investment professionals receive such fees for providing distribution- related
or shareholder services such as sponsoring sales, providing sales literature,
conducting training seminars for employees, and engineering sales-related
computer software programs and systems. Also, investment professionals may be
paid cash or promotional incentives, such as reimbursement of certain expenses
relating to attendance at informational meetings about the Fund or other special
events at recreational-type facilities, or items of material value. These
payments will be based upon the amount of Shares the investment professional
sells or may sell and/or upon the type and nature of sales or marketing support
furnished by the investment professional.
When an investment professional's customer purchases shares, the investment
professional may receive:
* an amount on the NAV of Class F Shares purchased as follows: up to 1% on
purchases below $2 million; 0.50% on purchases from $2 million but below $5
million; and 0.25% on purchases of $5 million or more.
In addition, the Distributor may pay investment professionals 0.25% of the
purchase price of $1 million or more of Class F Shares that its customer has not
redeemed over the first year.
Investment professionals purchasing Class F Shares for their customers are
eligible to receive an advance payment from the Distributor of 0.25% of the
purchase price.
Subaccounting Services
Certain investment professionals may wish to use the transfer agent's
subaccounting system to minimize their internal recordkeeping requirements. The
transfer agent may charge a fee based on the level of subaccounting services
rendered. Investment professionals holding Shares in a fiduciary, agency,
custodial, or similar capacity may charge or pass through subaccounting fees as
part of or in addition to normal trust or agency account fees. They may also
charge fees for other services that may be related to the ownership of Shares.
This information should, therefore, be read together with any agreement between
the customer and the investment professional about the services provided, the
fees charged for those services, and any restrictions and limitations imposed.
Redemption in Kind
Although the Fund intends to pay Share redemptions in cash, it reserves the
right, as described below, to pay the redemption price in whole or in part by a
distribution of the Fund's portfolio securities.
Because the Fund has elected to be governed by Rule 18f-1 under the Investment
Company Act of 1940, the Fund is obligated to pay Share redemptions to any one
shareholder in cash only up to the lesser of $250,000 or 1% of the net assets
represented by such Share class during any 90-day period.
Any Share redemption payment greater than this amount will also be in cash
unless the Fund's Board determines that payment should be in kind. In such a
case, the Fund will pay all or a portion of the remainder of the redemption in
portfolio securities, valued in the same way as the Fund determines its NAV. The
portfolio securities will be selected in a manner that the Fund's Board deems
fair and equitable and, to the extent available, such securities will be readily
marketable.
Redemption in kind is not as liquid as a cash redemption. If redemption is made
in kind, shareholders receiving the portfolio securities and selling them before
their maturity could receive less than the redemption value of the 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 obligations of the Trust. To protect its
shareholders, the Trust has filed legal documents with Massachusetts that
expressly disclaim the liability of its shareholders for acts or obligations of
the Trust.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required by the Declaration of Trust to use its
property to protect or compensate the shareholder. On request, the Trust will
defend any claim made and pay any judgment against a shareholder for any act or
obligation of the Trust. Therefore, financial loss resulting from liability as a
shareholder will occur only if the Trust itself cannot meet its obligations to
indemnify shareholders and pay judgments against them.
Account and Share 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 the Trust have
equal voting rights, except that in matters affecting only a particular Fund or
class, only Shares of that Fund or class are entitled to vote. Trustees may be
removed by the Board or by shareholders at a special meeting. A special meeting
of shareholders will be called by the Board upon the written request of
shareholders who own at least 10% of the Trust's outstanding shares.
As of October 5, 1999, the following shareholders owned of record, beneficially,
or both, 5% or more of outstanding Shares: Milards & Co., c/ o SEI Trust
Company, Oaks, PA, owned approximately 675,507 Shares (9.13%); and Merrill Lynch
Pierce Fenner & Smith (as record owner holding Shares for its clients),
Jacksonville, FL, owned approximately 1,932,787 Shares (26.12%).
Shareholders owning 25% or more of outstanding Shares may be in control and be
able to affect the outcome of certain matters presented for a vote of
shareholders.
Tax Information
FEDERAL INCOME TAX
The Fund intends to meet requirements of Subchapter M of the Internal Revenue
Code applicable to regulated investment companies. If these requirements are not
met, it will not receive special tax treatment and will pay federal income tax.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income earned and capital gains and losses realized by the
Trust's other portfolios will be separate from those realized by the Fund.
STATE 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 sub-divisions 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).
Who Manages and Provides Services to the Fund?
BOARD OF TRUSTEES
The Board is responsible for managing the Trust's business affairs and for
exercising all the Trust's powers except those reserved for the shareholders.
Information about each Board member is provided below and includes each
person's: name, address, birth date, present position(s) held with the Trust,
principal occupations for the past five years and positions held prior to the
past five years, total compensation received as a Trustee from the Trust for its
most recent fiscal year, and the total compensation received from the Federated
Fund Complex for the most recent calendar year. The Trust is comprised of six
funds and the Federated Fund Complex is comprised of 54 investment companies,
whose investment advisers are affiliated with the Fund's Adviser.
As of October 5, 1999, the Fund's Board and Officers as a group owned less than
1% of the Fund's outstanding Class F Shares.
<TABLE>
<CAPTION>
NAME TOTAL
BIRTH DATE AGGREGATE COMPENSATION
ADDRESS PRINCIPAL OCCUPATIONS COMPENSATION FROM TRUST
POSITION WITH TRUST FOR PAST FIVE YEARS FROM TRUST AND FUND COMPLEX
<S> <C> <C> <C>
JOHN F. DONAHUE*+# Chief Executive Officer $0 $0 for the Trust and
Birth Date: July 28, 1924 and Director or Trustee of 54 other investment
Federated Investors Tower the Federated Fund companies in the
1001 Liberty Avenue Complex; Chairman and Fund Complex
Pittsburgh, PA Director, Federated
CHAIRMAN AND TRUSTEE Investors, Inc.; Chairman
and Trustee, Federated Investment
Management Company; Chairman and
Director, Federated Investment
Counseling and Federated Global
Investment Management Corp.; Chairman,
Passport Research, Ltd.
THOMAS G. BIGLEY Director or Trustee of $1,305.35 $113,860.22 for the Trust
Birth Date: February 3, 1934 the Federated Fund and 54 other investment
15 Old Timber Trail Complex; Director, Member companies in the
Pittsburgh, PA of Executive Committee, Fund Complex
TRUSTEE Children's Hospital of
Pittsburgh; Director,
Robroy Industries, Inc.
(coated steel conduits/
computer storage
equipment); formerly:
Senior Partner, Ernst &
Young LLP; Director, MED
3000 Group, Inc.
(physician practice
management); Director,
Member of Executive
Committee, University of
Pittsburgh.
JOHN T. CONROY, JR. Director or Trustee of the $1,436.05 $125,264.48 for the Trust
Birth Date: June 23, 1937 Federated Fund Complex; and 54 other investment
Wood/Commercial Dept. President, Investment companies in the
John R. Wood Associates, Inc. Realtors Properties Corporation; Fund Complex
3255 Tamiami Trail North Senior Vice President,
Naples, FL John R. Wood and
TRUSTEE 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 CONSTANTAKIS Director or Trustee of some $1,305.35 $47,958.02 for the Trust
Birth Date: September 3, 1939 of the Federated Fund and 29 other investment
175 Woodshire Drive Complex; formerly: companies in the
Pittsburgh, PA Partner, Andersen Fund Complex
TRUSTEE Worldwide SC.
JOHN F. CUNNINGHAM++ Director or Trustee of some $331.87 $0 for the Trust and
Birth Date: March 5, 1943 of the Federated Fund 46 other investment
353 El Brillo Way Complex; Chairman, companies in the
Palm Beach, FL President and Chief Fund Complex
TRUSTEE Executive Officer,
Cunningham & Co., Inc.
(strategic business
consulting); Trustee
Associate, Boston College;
Director, Iperia Corp.
(communications/software);
formerly: Director,
Redgate Communications and
EMC Corporation (computer
storage systems).
Previous Positions:
Chairman of the Board and
Chief Executive Officer,
Computer Consoles, Inc.;
President and Chief
Operating Officer, Wang
Laboratories; Director,
First National Bank of
Boston; Director, Apollo
Computer, Inc.
LAWRENCE D. ELLIS, M.D.* Director or Trustee of the $1,305.35 $113,860.22 for the Trust
Birth Date: October 11, 1932 Federated Fund Complex; and 54 other investment
3471 Fifth Avenue Professor of Medicine, companies in the
Suite 1111 University of Pittsburgh; Fund Complex
Pittsburgh, PA Medical Director,
TRUSTEE University of Pittsburgh
Medical Center - Downtown;
Hematologist, Oncologist and Internist,
University of Pittsburgh Medical
Center; Member, National Board of
Trustees, Leukemia Society of America.
PETER E. MADDEN Director or Trustee of the $1,189.91 $113,860.22 for the Trust
Birth Date: March 16, 1942 Federated Fund Complex; and 54 other investment
One Royal Palm Way formerly: Representative, companies in the
100 Royal Palm Way Commonwealth of Fund Complex
Palm Beach, FL Massachusetts General
TRUSTEE Court; President, State
Street Bank and Trust
Company and State
Street Corporation.
Previous Positions:
Director, VISA USA and VISA
International; Chairman
and Director,
Massachusetts Bankers
Association; Director,
Depository Trust
Corporation; Director, The
Boston Stock Exchange.
<CAPTION>
NAME TOTAL
BIRTH DATE AGGREGATE COMPENSATION
ADDRESS PRINCIPAL OCCUPATIONS COMPENSATION FROM TRUST
POSITION WITH TRUST FOR PAST FIVE YEARS FROM TRUST AND FUND COMPLEX
<S> <C> <C> <C>
CHARLES F. MANSFIELD, JR.++ Director or Trustee of some $1,016.39 $0 for the Trust and
Birth Date: April 10, 1945 of the Federated Fund 50 other investment
80 South Road Complex; Management companies in the
Westhampton Beach, NY Consultant. Fund Complex
TRUSTEE Previous Positions: Chief
Executive Officer, PBTC International
Bank; Partner, Arthur Young & Company
(now Ernst & Young LLP); Chief
Financial Officer of Retail Banking
Sector, Chase Manhattan Bank; Senior
Vice President, Marine Midland Bank;
Vice President, Citibank; Assistant
Professor of Banking and Finance, Frank
G. Zarb School of Business, Hofstra
University.
JOHN E. MURRAY, JR., J.D., S.J.D.# Director or Trustee of $1,403.80 $113,860.22 for the Trust
Birth Date: December 20, 1932 the Federated Fund and 54 other investment
President, Duquesne University Complex; President, Law companies in the
Pittsburgh, PA Professor, Duquesne Fund Complex
TRUSTEE University; Consulting
Partner, Mollica & Murray;
Director, Michael Baker
Corp. (engineering,
construction, operations
and technical services).
Previous Positions: Dean
and Professor of Law,
University of Pittsburgh
School of Law; Dean and
Professor of Law,
Villanova University
School of Law.
MARJORIE P. SMUTS Director or Trustee of the $1,305.35 $113,860.22 for the Trust
Birth Date: June 21, 1935 Federated Fund Complex; and 54 other investment
4905 Bayard Street Public Relations/ companies in the
Pittsburgh, PA Marketing/Conference Fund Complex
TRUSTEE Planning.
Previous Positions:
National Spokesperson,
Aluminum Company of
America; television
producer; business owner.
JOHN S. WALSH++ Director or Trustee of some $331.87 $0 for the Trust and
Birth Date: November 28, 1957 of the Federated Fund 48 other investment
2007 Sherwood Drive Complex; President and companies in the
Valparaiso, IN Director, Heat Wagon, Inc. Fund Complex
TRUSTEE (manufacturer of
construction temporary
heaters); President and
Director, Manufacturers
Products,
Inc. (distributor of
portable construction
heaters); President,
Portable Heater Parts, a
division of Manufacturers
Products, Inc.; Director,
Walsh & Kelly, Inc. (heavy
highway contractor);
formerly: Vice President,
Walsh & Kelly, Inc.
J. CHRISTOPHER DONAHUE+ President or Executive $0 $0 for the Trust and
Birth Date: April 11, 1949 Vice President of the 16 other investment
Federated Investors Tower Federated Fund Complex; companies in the
1001 Liberty Avenue Director or Trustee of some Fund Complex
Pittsburgh, PA of the Funds in the
EXECUTIVE VICE PRESIDENT Federated Fund Complex;
AND TRUSTEE President, Chief Executive
Officer and Director, Federated
Investors, Inc.; President and Trustee,
Federated Investment Management
Company; President and Trustee,
Federated Investment Counseling,
President and Director, Federated
Global Investment Management Corp.;
President, Passport Research, Ltd.;
Trustee, Federated Shareholder Services
Company; Director, Federated Services
Company.
EDWARD C. GONZALES Trustee or Director of some $0 $0 for the Trust and
Birth Date: October 22, 1930 of the Funds in the 1 other investment
Federated Investors Tower Federated Fund Complex; company in the
1001 Liberty Avenue President, Executive Vice Fund Complex
Pittsburgh, PA President and Treasurer of
EXECUTIVE VICE PRESIDENT some of the Funds in the
Federated Fund Complex; Vice Chairman,
Federated Investors, Inc.; Vice
President, Federated Investment
Management Company, Federated
Investment Counseling, Federated Global
Investment Management Corp. and
Passport Research, Ltd.; Executive Vice
President and Director, Federated
Securities Corp.; Trustee, Federated
Shareholder Services Company.
JOHN W. MCGONIGLE Executive Vice President $0 $0 for the Trust and
Birth Date: October 26, 1938 and Secretary of the 54 other investment
Federated Investors Tower Federated Fund Complex; companies in the
1001 Liberty Avenue Executive Vice President, Fund Complex
Pittsburgh, PA Secretary and Director,
EXECUTIVE VICE PRESIDENT Federated Investors, Inc.;
AND SECRETARY Trustee, Federated
Investment Management Company and
Federated Investment Counseling;
Director, Federated Global Investment
Management Corp., Federated Services
Company and Federated Securities Corp.
RICHARD J. THOMAS Treasurer of the Federated $0 $0 for the Trust and
Birth Date: June 17, 1954 Fund Complex; Vice 54 other investment
Federated Investors Tower President - Funds companies in the
1001 Liberty Avenue Financial Services Fund Complex
Pittsburgh, PA Division, Federated
TREASURER Investors, Inc.; formerly:
various management
positions within Funds
Financial Services
Division of Federated
Investors, Inc.
RICHARD B. FISHER President or Vice $0 $0 for the Trust and
Birth Date: May 17, 1923 President of some of the 6 other investment
Federated Investors Tower Funds in the Federated Fund companies in the
1001 Liberty Avenue Complex; Director or Fund Complex
Pittsburgh, PA Trustee of some of the
PRESIDENT Funds in the Federated Fund
Complex; Executive Vice
President, Federated
Investors, Inc.; Chairman
and Director, Federated
Securities Corp.
<CAPTION>
NAME TOTAL
BIRTH DATE AGGREGATE COMPENSATION
ADDRESS PRINCIPAL OCCUPATIONS COMPENSATION FROM TRUST
POSITION WITH TRUST FOR PAST FIVE YEARS FROM TRUST AND FUND COMPLEX
<S> <C> <C> <C>
WILLIAM D. DAWSON, III Chief Investment Officer $0 $0 for the Trust and
Birth Date: March 3, 1949 of this Fund and various 41 other investment
Federated Investors Tower other Funds in the companies in the
1001 Liberty Avenue Federated Fund Complex; Fund Complex
Pittsburgh, PA Executive Vice President,
CHIEF INVESTMENT OFFICER Federated Investment
Counseling, Federated Global Investment
Management Corp., Federated Investment
Management Company and Passport
Research, Ltd.; Registered
Representative, Federated Securities
Corp.; Portfolio Manager, Federated
Administrative Services; Vice
President, Federated Investors, Inc.;
formerly: Executive Vice President and
Senior Vice President, Federated
Investment Counseling Institutional
Portfolio Management Services Division;
Senior Vice President, Federated
Investment Management Company and
Passport Research, Ltd.
J. SCOTT ALBRECHT J. Scott Albrecht has been $0 $0 for the Trust and
Birth Date: June 1, 1960 the Fund's portfolio 1 other investment
Federated Investors Tower manager March 1995. He is company in the
1001 Liberty Avenue Vice President of the Fund. Fund Complex
Pittsburgh, PA Mr. Albrecht joined
VICE PRESIDENT Federated in 1989. He has
been a Senior Portfolio
Manager since 1997 and a
Vice President of the
Fund's investment adviser
since 1994. He was a
Portfolio Manager from
1994 to 1996. Mr. Albrecht
is a Chartered Financial
Analyst and received his
M.S. in Public Management
from Carnegie Mellon
University.
</TABLE>
* An asterisk denotes a Trustee who is deemed to be an interested person as
defined in the Investment Company Act of 1940.
# A pound sign denotes a Member of the Board's Executive Committee, which
handles the Board's responsibilities between its meetings.
+ Mr. Donahue is the father of J. Christopher Donahue, Executive Vice
President and Trustee of the Trust.
++ Mr. Mansfield became a member of the Board of Trustees January 1, 1999.
Messrs. Cunningham and Walsh became members of the Board of Trustees on
July 1, 1999. They did not earn any fees for serving the Fund Complex
since these fees are reported as of the end of the last calendar year.
INVESTMENT ADVISER
The Adviser conducts investment research and makes investment decisions for the
Fund.
The Adviser is a wholly owned subsidiary of Federated.
The Adviser shall not be liable to the Trust or any Fund shareholder 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.
OTHER RELATED SERVICES
Affiliates of the Adviser may, from time to time, provide certain electronic
equipment and software to institutional customers in order to facilitate the
purchase of Fund Shares offered by the Distributor.
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. 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. In selecting among firms believed to meet these
criteria, the Adviser may give consideration to those firms which have sold or
are selling Shares of the Fund and other funds distributed by the Distributor
and its affiliates. The Adviser makes decisions on portfolio transactions and
selects brokers and dealers subject to review by the Fund's Board.
Investment decisions for the Fund are made independently from those of other
accounts managed by the Adviser. When the Fund and one or more of those accounts
invests in, or disposes of, the same security, available investments or
opportunities for sales will be allocated among the Fund and the account(s) in a
manner believed by the Adviser to be equitable. While the coordination and
ability to participate in volume transactions may benefit the Fund, it is
possible that this procedure could adversely impact the price paid or received
and/or the position obtained or disposed of by the Fund.
ADMINISTRATOR
Federated Services Company, a subsidiary of Federated, provides administrative
personnel and services (including certain legal and financial reporting
services) necessary to operate the Fund. Federated Services Company provides
these at the following annual rate of the average aggregate daily net assets of
all Federated Funds as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY
ADMINISTRATIVE FEE NET ASSETS OF THE FEDERATED FUNDS
<S> <C>
0.150 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.100 of 1% on the next $250 million
0.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of Shares.
Federated Services Company may voluntarily waive a portion of its fee and may
reimburse the Fund for expenses.
Federated Services Company also provides certain accounting and recordkeeping
services with respect to the Fund's portfolio investments for a fee based on
Fund assets plus out-of-pocket expenses.
CUSTODIAN
State Street Bank and Trust Company, Boston, Massachusetts, is custodian for the
securities and cash of the Fund. Foreign instruments purchased by the Fund are
held by foreign banks participating in a network coordinated by State Street
Bank.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Federated Services Company, through its registered transfer agent subsidiary,
Federated Shareholder Services Company, maintains all necessary shareholder
records. The Fund pays the transfer agent a fee based on the size, type and
number of accounts and transactions made by
shareholders.
INDEPENDENT AUDITORS
The independent auditor for the Fund, Deloitte & Touche LLP, plans and performs
their audit so that they may provide an opinion as to whether the Fund's
financial statements and financial highlights are free of material misstatement.
FEES PAID BY THE FUND FOR SERVICES
<TABLE>
<CAPTION>
FOR THE YEAR ENDED AUGUST 31 1999 1998 1997
<S> <C> <C> <C>
Advisory Fee Earned $328,560 $306,125 $277,606
Advisory Fee Waiver 214,493 196,943 230,268
Brokerage Commissions None None None
Administrative Fee 125,000 125,002 125,000
12B-1 FEE 131,424 - -
SHAREHOLDER SERVICES FEE 197,136 - -
</TABLE>
How Does the Fund Measure Performance?
The Fund may advertise Share performance by using the SEC's standard method for
calculating performance applicable to all mutual funds. The SEC also permits
this standard performance information to be accompanied by non-standard
performance information. Share performance reflects the effect of non-recurring
charges, such as maximum sales charges, which, if excluded, would increase the
total return and yield. The performance of Shares depends upon such variables
as: portfolio quality; average portfolio maturity; type and value of portfolio
securities; changes in interest rates; changes or differences in the Fund's or
any class of Shares' expenses; and various other factors.
Share performance fluctuates on a daily basis largely because net earnings
fluctuate daily. Both net earnings and offering price per Share are factors in
the computation of yield and total return.
AVERAGE ANNUAL TOTAL RETURNS AND YIELD
Total returns are given for the one-year, five-year and Start of Performance
periods ended August 31, 1999.
Yield and Tax-Equivalent Yield are given for the 30-day period August 31, 1999.
<TABLE>
<CAPTION>
START OF
30-DAY PERFORMANCE ON
PERIOD 1 YEAR 5 YEARS OCTOBER 12, 1990
<S> <C> <C> <C> <C>
CLASS F SHARES
Total Return NA (3.05%) 5.48% 6.72%
Yield 4.48% NA NA NA
Tax-Equivalent Yield 7.41% NA NA NA
</TABLE>
TOTAL RETURN
Total return represents the change (expressed as a percentage) in the value of
Shares over a specific period of time, and includes the investment of income and
capital gains distributions.
The average annual total return for Shares is the average compounded rate of
return for a given period that would equate a $1,000 initial investment to the
ending redeemable value of that investment. The ending redeemable value is
computed by multiplying the number of Shares owned at the end of the period by
the NAV 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 annual reinvestment of all
dividends and distributions.
YIELD AND TAX-EQUIVALENT YIELD
The yield of Shares is calculated by dividing: (i) the net investment income per
Share earned by the Shares over a 30-day period; by (ii) the maximum offering
price per Share on the last day of the period. This number is then annualized
using semi-annual compounding. This means that the amount of income generated
during the 30-day period is assumed to be generated each month over a 12-month
period and is reinvested every six months. 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 the actual yield, assuming a
specific tax rate. The yield and tax-equivalent yield do not necessarily reflect
income actually earned by Shares because of certain adjustments required by the
SEC and, therefore, may not correlate to the dividends or other distributions
paid to shareholders.
To the extent investment professionals and broker/dealers charge fees in
connection with services provided in conjunction with an investment in Shares,
the Share performance is lower for shareholders paying those fees.
TAX EQUIVALENCY TABLE
Set forth below is a sample of a tax-equivalency table that may be used in
advertising and sales literature. This table is for illustrative purposes only
and is not representative of past or future performance of the Fund. The
interest earned by the municipal securities owned by the Fund generally remains
free from federal regular income tax and is often free from state and local
taxes as well. However, some of the Fund's income may be subject to the federal
alternative minimum tax and state and/or local taxes.
TAX EQUIVALENCY TABLE
<TABLE>
<CAPTION>
TAXABLE YIELD EQUIVALENT FOR 1999 - 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 TAX BRACKET: 19.040% 34.715% 37.255% 42.799% 46.399%
Single Return $1-25,750 $25,751-62,450 $62,451-130,250 $130,251-283,150 Over
TAX EXEMPT YIELD: TAXABLE YIELD EQUIVALENT: $283,150
1.50% 1.85% 2.23% 2.39% 2.62% 2.80%
2.00% 2.47% 2.97% 3.19% 3.50% 3.73%
2.50% 3.09% 3.72% 3.98% 4.37% 4.66%
3.00% 3.71% 4.46% 4.78% 5.24% 5.60%
3.50% 4.32% 5.20% 5.58% 6.12% 6.53%
4.00% 4.94% 5.94% 6.38% 6.99% 7.46%
4.50% 5.56% 6.69% 7.17% 7.87% 8.40%
5.00% 6.18% 7.43% 7.97% 8.74% 9.33%
5.50% 6.79% 8.17% 8.77% 9.62% 10.26%
6.00% 7.41% 8.92% 9.56% 10.49% 11.19%
</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 1999 - 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 TAX BRACKET: 19.715% 34.255% 37.255% 42.799% 46.399%
Joint Return $1-43,050 $43,051-104,050 $104,051-158,550 $158,551-283,150 Over $283,150
TAX EXEMPT YIELD: TAXABLE YIELD EQUIVALENT:
1.50% 1.87% 2.28% 2.39% 2.62% 2.80%
2.00% 2.49% 3.04% 3.19% 3.50% 3.73%
2.50% 3.11% 3.80% 3.98% 4.37% 4.66%
3.00% 3.74% 4.56% 4.78% 5.24% 5.60%
3.50% 4.36% 5.32% 5.58% 6.12% 6.53%
4.00% 4.98% 6.08% 6.38% 6.99% 7.46%
4.50% 5.61% 6.84% 7.17% 7.87% 8.40%
5.00% 6.23% 7.61% 7.97% 8.74% 9.33%
5.50% 6.85% 8.37% 8.77% 9.62% 10.26%
6.00% 7.47% 9.13% 9.56% 10.49% 11.19%
</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.
PERFORMANCE COMPARISONS
Advertising and sales literature may include:
* references to ratings, rankings, and financial publications and/or
performance comparisons of Shares to certain indices;
* charts, graphs and illustrations using the Fund's returns, or returns in
general, that demonstrate investment concepts such as tax-deferred compounding,
dollar-cost averaging and systematic investment;
* discussions of economic, financial and political developments and their impact
on the securities market, including the portfolio manager's views on how such
developments could impact the Fund; and
* information about the mutual fund industry from sources such as the Investment
Company Institute.
The Fund may compare its performance, or performance for the types of securities
in which it invests, to a variety of other investments, including federally
insured bank products such as bank savings accounts, certificates of deposit,
and Treasury bills.
The Fund may quote information from reliable sources regarding individual
countries and regions, world stock exchanges, and economic and demographic
statistics.
You may use financial publications and/or indices to obtain a more complete view
of Share performance. When comparing performance, you should consider all
relevant factors such as the composition of the 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
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.
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.
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.
Who is Federated Investors, Inc.?
Federated is dedicated to meeting investor needs by making structured,
straightforward and consistent investment decisions. Federated investment
products have a history of competitive performance and have gained the
confidence of thousands of financial institutions and individual investors.
Federated's disciplined investment selection process is rooted in sound
methodologies backed by fundamental and technical research. At Federated,
success in investment management does not depend solely on the skill of a single
portfolio manager. It is a fusion of individual talents and state- of-the-art
industry tools and resources. Federated's investment process involves teams of
portfolio managers and analysts, and investment decisions are executed by
traders who are dedicated to specific market sectors and who handle trillions of
dollars in annual trading volume.
FEDERATED FUNDS OVERVIEW
MUNICIPAL FUNDS
In the municipal sector, as of December 31, 1998, Federated managed 10 bond
funds with approximately $2.2 billion in assets and 23 money market funds with
approximately $12.5 billion in total assets. In 1976, Federated introduced one
of the first municipal bond mutual funds in the industry and is now one of the
largest institutional buyers of municipal securities. The Funds may quote
statistics from organizations including The Tax Foundation and the National
Taxpayers Union regarding the tax obligations of Americans.
EQUITY FUNDS
In the equity sector, Federated has more than 28 years' experience. As of
December 31, 1998, Federated managed 27 equity funds totaling approximately
$14.9 billion in assets across growth, value, equity income, international,
index and sector (i.e. utility) styles. Federated's value- oriented management
style combines quantitative and qualitative analysis and features a structured,
computer-assisted composite modeling system that was developed in the 1970s.
CORPORATE BOND FUNDS
In the corporate bond sector, as of December 31, 1998, Federated managed 9 money
market funds and 15 bond funds with assets approximating $22.8 billion and $7.1
billion, respectively. Federated's corporate bond decision making-based on
intensive, diligent credit analysis-is backed by over 26 years of experience in
the corporate bond sector. In 1972, Federated introduced one of the first
high-yield bond funds in the industry. In 1983, Federated was one of the first
fund managers to participate in the asset backed securities market, a market
totaling more than $209 billion.
GOVERNMENT FUNDS
In the government sector, as of December 31, 1998, Federated managed 9 mortgage
backed, 5 government/agency and 19 government money market mutual funds, with
assets approximating $5.3 billion, $1.8 billion and $41.6 billion, respectively.
Federated trades approximately $425 million in U.S. government and mortgage
backed securities daily and places approximately $25 billion in repurchase
agreements each day. Federated introduced the first U.S. government fund to
invest in U.S. government bond securities in 1969. Federated has been a major
force in the short- and intermediate-term government markets since 1982 and
currently manages approximately $43.2 billion in government funds within these
maturity ranges.
MONEY MARKET FUNDS
In the money market sector, Federated gained prominence in the mutual fund
industry in 1974 with the creation of the first institutional money market fund.
Simultaneously, the company pioneered the use of the amortized cost method of
accounting for valuing shares of money market funds, a principal means used by
money managers today to value money market fund shares. Other innovations
include the first institutional tax-free money market fund. As of December 31,
1998, Federated managed more than $76.7 billion in assets across 52 money market
funds, including 19 government, 9 prime and 23 municipal with assets
approximating $41.6 billion, $22.8 billion and $12.5 billion, respectively.
The Chief Investment Officers responsible for oversight of the various
investment sectors within Federated 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 $5 trillion to the more than 7,300 funds available,
according to the Investment Company Institute.
FEDERATED CLIENTS OVERVIEW
Federated distributes mutual funds through its subsidiaries for a variety of
investment purposes. Specific markets include:
INSTITUTIONAL CLIENTS
Federated meets the needs of approximately 900 institutional clients nationwide
by managing and servicing separate accounts and mutual funds for a variety of
purposes, 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 advisers. The marketing effort
to these institutional clients is headed by John B. Fisher, President,
Institutional Sales Division, Federated Securities Corp.
BANK MARKETING
Other institutional clients include 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,
Broker/Dealer Sales Division, Federated Securities Corp.
Investment Ratings
STANDARD AND POOR'S LONG-TERM DEBT RATING DEFINITIONS
AAA-Debt rated AAA has the highest rating assigned by Standard & Poor's.
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 or 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 BB 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.
MOODY'S INVESTORS SERVICE LONG-TERM BOND RATING DEFINITIONS
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 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.
FITCH IBCA, INC. LONG-TERM DEBT RATING DEFINITIONS
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 credit 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 obligor's 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 imminent default in payment of interest or principal.
MOODY'S INVESTORS SERVICE COMMERCIAL PAPER RATINGS
PRIME-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 structure 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.
PRIME-2-Issuers rated Prime-1 (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.
STANDARD AND POOR'S COMMERCIAL PAPER RATINGS
A-1-This designation 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.
FITCH IBCA, INC. COMMERCIAL PAPER RATING DEFINITIONS
FITCH-1-(Highest Grade) Commercial paper assigned this rating is regarded as
having the strongest degree of assurance for timely payment.
FITCH-2-(Very Good Grade) Issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than the strongest issues.
Addresses
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 Investment Management Company
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
200 Berkeley Street
Boston, MA 02116
MANAGEMENT DISCUSSION AND ANALYSIS
Federated Pennsylvania Municipal Income Fund
ANNUAL REPORT FOR FISCAL YEAR ENDED AUGUST 31, 1999
CLASS A SHARES
CLASS B SHARES
WHAT IS YOUR REVIEW OF THE MUNICIPAL BOND MARKETPLACE OVER THE REPORTING PERIOD?
A market environment of low absolute interest rates and historically narrow
credit spreads have combined to make bond structure the most important factor in
determining performance over the reporting period. Bond coupon, effective
maturity and call protection were the relevant structural elements which
determined relative price performance in a municipal bond portfolio.
Credit spread widening did occur selectively in specific sectors of the
municipal bond market, and has been the most prevalent in the hospital sector.
The hospital sector has continued to show specific vulnerability as a result of
Medicare reimbursement reductions and the related pressure on hospital
operations. Credit spreads have widened considerably since April 1999, with BBB
category hospital spreads widening 104 basis points off the 30-year Municipal
Market Data curve.
The appetite for tax exempt securities from traditional crossover buyers
(corporations and insurance companies) has remained soft due to the
attractiveness of spread product (taxable corporate debt). The glut of pre- Year
2000 (Y2K) corporate debt issuance has created attractive relative value
opportunities in the taxable sector. Liquidity in the municipal market has also
become an issue. Retail demand is not able to support the trading of larger
blocks of municipal bonds while certain coupon structures, particularly market
discount securities, are receiving lukewarm attention from investors.
HOW HAVE PENNSYLVANIA MUNICIPAL BONDS PERFORMED OVER THE REPORTING PERIOD?
Municipal credit quality in general has benefited from the strong U.S. economy.
Municipal tax receipts, at all levels of government, have exceeded forecasts,
which has allowed municipal fund balances and reserve accounts to expand. Credit
quality continued to remain strong throughout the Commonwealth of Pennsylvania
as represented by strong employment growth and numerous public and private
construction projects. There have been sectors of the Pennsylvania bond market
which have experienced credit weakness. The hospital sector in particular has
experienced credit downgrades as a result of the AHERF (Allegheny Health and
Education Research Foundation) bankruptcy and reductions in Medicare
reimbursement from the Federal government. Pennsylvania municipal debt was
trading with a spread of approximately 21 basis points to the benchmark AAA
municipal yield curve at the end of August 1999. This is wider than the
six-month average of 16.4 basis points.
HOW HAS THE FEDERATED PENNSYLVANIA MUNICIPAL INCOME FUND PERFORMED WITH RESPECT
TO TOTAL RETURN AND INCOME FOR THE 12-MONTH REPORTING PERIOD ENDED AUGUST 31,
1999?
For the 12-month reporting period ended August 31, 1999, the fund's Class A
Shares produced a total return of (2.05%) based on net asset value. 1 The income
on the fund was competitive during the reporting period. On August 31, 1999, the
fund's 30-day current net yield, or SEC yield was 4.64% for Class A Shares based
on the net asset value. The yield represents an increase from the 4.40% SEC
yield at the beginning of the reporting period.1
WHAT ACCOUNTED FOR THE FUND'S PERFORMANCE?
The strategy over the reporting period included tax-swapping to generate tax
loss carryforwards which can be used to offset any realized capital gains, while
also adding incremental yield by improving the weighted average book yield
within the portfolio. The duration and average maturity of the fund were
structured so as to take advantage of what management expected to be a trading
range for municipal interest rates over the reporting period. Due to the recent
upward bias in interest rates, the market has become especially sensitive to
slight problems. As a municipal bond approaches its low threshold, the risk of
generating ordinary income, which is taxed at the holder's top marginal bracket,
becomes relevant. This reality impacts the bond's liquidity and requires the
bond's duration to be calculated on a tax adjusted basis. The fund was also
affected by spread widening in the BBB credit sector, to which it had limited
exposure. With the many questions associated with Y2K looming, the fund is
maintaining a highly liquid position which will enable management to deal with
potential disruptions which could occur around year end.
WHAT KIND OF ENVIRONMENT DO YOU SEE AHEAD FOR MUNICIPAL BONDS?
The municipal bond market is technically driven by supply and demand imbalances
which are created by changes in interest rates, coupon payment period cycles and
economic conditions. The municipal market has recently experienced a demand
shift away from institutional buyers (insurance companies, corporations and
arbitrageurs) toward retail buyers (individuals) of municipal bonds. The ratio
of municipal bond yields to Treasury bond yields has widened from highs near
100%, which has caused many crossover buyers to unwind their municipal
positions. Crossover buyers purchase municipal bonds on a relative valuation
basis and not necessarily because of the tax exempt income. Y2K spending by
municipal governments is a potential credit factor which must be taken into
consideration as far as both the cost and the effectiveness of their Y2K
preparedness. The market does not expect any material interruptions in the
supply of necessary municipal services. However, there remains the potential for
some state functions to suffer temporary disruptions. The approach of the
presidential election cycle will bring potential federal tax law changes back
into the news. Potential impacts such as the introduction of a flat tax or
significant changes to the top marginal brackets could affect the trading value
of municipal debt relative to taxable fixed income alternatives, such as
corporate and Treasury securities.
1 The total return and SEC yield for Class A Shares, based on offering price,
for the reporting period were (6.46%) and 4.43%, respectively. Performance
quoted represents past performance and is not indicative of future results.
Investment return and principal value will fluctuate, so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
LAST MEETING OF SHAREHOLDERS
A Special Meeting of Shareholders of Federated Pennsylvania Municipal Income
Fund (the "Fund"), a portfolio of Federated Municipal Securities Income Trust
(the "Trust"), was held on June 25, 1999. On April 27, 1999, the record date for
shareholders voting at the meeting, there were 23,338,861 total outstanding
shares. The following items were considered by shareholders of the Fund and the
results of their voting were as follows:
AGENDA ITEM 1
To elect Trustees. 1
<TABLE>
<CAPTION>
WITHHELD
AUTHORITY
FOR TO VOTE
<S> <C> <C>
Thomas G. Bigley 15,082,514 628,062
Nicholas P. Constantakis 15,091,796 618,780
John F. Cunningham 15,091,769 618,807
Charles F. Mansfield, Jr. 15,103,185 607,391
John E. Murray, Jr., J.D., S.J.D. 15,101,521 609,055
John S. Walsh 15,097,737 612,839
</TABLE>
1 The following Trustees continued their terms: John F. Donahue, John T.
Conroy, J. Christopher Donahue, Lawrence D. Ellis, M.D., Peter E. Madden
and Marjorie P. Smuts.
AGENDA ITEM 2
To ratify the selection of Deloitte & Touche LLP as the independent auditors for
the Trust.
The results of shareholders voting were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
<S> <C> <C>
15,015,142 89,043 606,390
</TABLE>
AGENDA ITEM 3
To amend the Fund's fundamental investment policies regarding borrowing money
and issuing senior securities.
The results of shareholders voting were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
<S> <C> <C>
11,450,706 690,592 808,607
</TABLE>
AGENDA ITEM 4
To amend the Fund's fundamental investment policies regarding investments in
real estate.
The results of shareholders voting were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
<S> <C> <C>
11,572,536 608,771 768,597
</TABLE>
AGENDA ITEM 5
To amend the Fund's fundamental investment policies regarding investments in
commodities.
The results of shareholders voting were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
<S> <C> <C>
11,355,459 785,575 808,870
</TABLE>
AGENDA ITEM 6
To amend the Fund's fundamental investment policies regarding underwriting
securities.
The results of shareholders voting were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
<S> <C> <C>
11,519,396 614,708 815,800
</TABLE>
AGENDA ITEM 7
To amend the Fund's fundamental investment policies regarding lending by the
Funds.
The results of shareholders voting were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
<S> <C> <C>
11,402,560 722,303 825,041
</TABLE>
AGENDA ITEM 8
To amend the Fund's fundamental investment policies regarding concentration of
the Fund's investments in the securities of companies in the same industry.
The results of shareholders voting were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
<S> <C> <C>
11,516,142 667,475 766,287
</TABLE>
AGENDA ITEM 9
To amend, and to make non-fundamental, the Fund's fundamental investment
policies regarding buying securities on margin.
The results of shareholders voting were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
<S> <C> <C>
11,181,517 930,046 838,342
</TABLE>
AGENDA ITEM 10
To amend, and to make non-fundamental, the Fund's fundamental investment
policies regarding pledging assets.
The results of shareholders voting were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
<S> <C> <C>
11,213,336 823,936 912,583
</TABLE>
AGENDA ITEM 11
To remove the Fund's fundamental investment policies regarding selling
securities short.
The results of shareholders voting were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
<S> <C> <C>
11,182,141 860,049 907,715
</TABLE>
AGENDA ITEM 12
To remove the Fund's fundamental investment policies regarding dealing in puts,
calls, straddles, spreads and any combination thereof.
The results of shareholders voting were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
<S> <C> <C>
11,210,294 864,997 874,613
</TABLE>
AGENDA ITEM 13
To remove the Fund's fundamental investment policies regarding investing in
restricted securities.
The results of shareholders voting were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
<S> <C> <C>
11,353,917 790,565 805,423
</TABLE>
AGENDA ITEM 14
To approve an amendment and restatement to the Trust's Declaration of Trust to
permit the Board of Trustees to liquidate assets of the Trust without seeking
shareholder approval.
The results of shareholders voting were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
<S> <C> <C>
11,068,582 1,056,962 824,361
</TABLE>
CLASS A SHARES
GROWTH OF $10,000 INVESTED IN FEDERATED PENNSYLVANIA MUNICIPAL INCOME FUND
[Graphic] - See Appendix A.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN 1 FOR THE PERIOD ENDED AUGUST 31, 1999
<S> <C>
1 Year (6.46%)
5 Years 5.24%
Start of Performance (10/11/90) 6.60%
</TABLE>
The graph above illustrates the hypothetical investment of $10,000 2 in the
Federated Pennsylvania Municipal Income Fund (Class A Shares) (the "Fund") from
October 11, 1990 (start of performance) to August 31, 1999 compared to the
Lehman Brothers Revenue Bond Index (LBRBI) and the Lehman Brothers Municipal
Bond Index (LBMBI).3
Past performance is not predictive of future performance. Your investment return
and principal value will fluctuate so when shares are redeemed, they may be
worth more or less than their original cost. Mutual funds are not obligations of
or guaranteed by any bank and are not federally insured.
This report must be preceded or accompanied by the Fund's prospectus dated
October 31, 1999, and, together with financial statements contained therein,
constitutes the Fund's annual report.
1 Total return quoted reflects all applicable sales charges and contingent
deferred sales charges.
2 Represents a hypothetical investment of $10,000 in the Fund after deducting
the maximum sales charge of 3.00% ($10,000 investment minus $300 sales charge =
$9,700) which was effective on October 11, 1990. Effective November 1, 1996, the
maximum sales charge has been increased to 4.50%. The ending value of the Fund
reflects a 0.75% contingent deferred sales charge on any redemption less than
two years from the purchase date. The Fund's performance assumes the
reinvestment of all dividends and distributions. The LBRBI and LBMBI have been
adjusted to reflect reinvestment of dividends on securities in the indexes.
3 The LBRBI and the LBMBI are not adjusted to reflect sales charges, expenses or
other fees that the SEC requires to be reflected in the Fund's performance.
These indexes are unmanaged.
CLASS B SHARES
GROWTH OF $10,000 INVESTED IN FEDERATED PENNSYLVANIA MUNICIPAL INCOME FUND
[Graphic] - See Appendix B.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN 1 FOR THE PERIOD ENDED AUGUST 31, 1999
<S> <C>
1 Year (7.80%)
Start of Performance (3/4/97) 2.26%
</TABLE>
The graph above illustrates the hypothetical investment of $10,000 2 in the
Federated Pennsylvania Municipal Income Fund (Class B Shares) (the "Fund") from
March 4, 1997 (start of performance) to August 31, 1999 compared to the Lehman
Brothers Revenue Bond Index (LBRBI) and the Lehman Brothers Municipal
Bond Index (LBMBI).3
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF
OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
This report must be preceded or accompanied by the Fund's prospectus dated
October 31, 1999, and, together with financial statements contained therein,
constitutes the Fund's annual report.
1 Total return quoted reflects all applicable sales charges and contingent
deferred sales charges.
2 Represents a hypothetical investment of $10,000 in the Fund. The ending value
of the Fund reflects a 5.50% contingent deferred sales charge on any redemption
less than one year from the purchase date. The Fund's performance assumes the
reinvestment of all dividends and distributions. The LBRBI and the LBMBI have
been adjusted to reflect reinvestment of dividends on securities in the indexes.
3 The LBRBI and the LBMBI are not adjusted to reflect sales charges, expenses or
other fees that the SEC requires to be reflected in the Fund's performance.
These indexes are unmanaged.
[Graphic]
Federated
Federated Pennsylvania Municipal Income Fund
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
1-800-341-7400
WWW.FEDERATEDINVESTORS.COM
Federated Securities Corp., Distributor
Cusip 625922505
Cusip 625922836
G00577-01 (10/99)
[Graphic]
PROSPECTUS
Federated Pennsylvania Municipal
Income Fund
A Portfolio of Federated Municipal Securities Income Trust
CLASS A SHARES
CLASS B SHARES
A mutual fund seeking to provide current income exempt from federal regular
income tax and the personal income taxes imposed by the Commonwealth of
Pennsylvania by investing primarily in a portfolio of long-term, investment
grade Pennsylvania tax exempt securities.
As with all mutual funds, the Securities and Exchange Commission (SEC) has not
approved or disapproved these securities or passed upon the adequacy of this
prospectus. Any representation to the contrary is a criminal offense.
OCTOBER 31, 1999
CONTENTS
Risk/Return Summary 1
What are the Fund's Fees and Expenses? 3
What are the Fund's Investment Strategies? 4
What are the Principal Securities in Which the
Fund Invests? 6
What are the Specific Risks of Investing in the Fund? 8
What Do Shares Cost? 10
How is the Fund Sold? 12
How to Purchase Shares 13
How to Redeem and Exchange Shares 14
Account and Share Information 17
Who Manages the Fund? 18
Financial Information 19
Independent Auditors' Report 38
Risk/Return Summary
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The Fund's investment objective is to provide current income exempt from federal
regular income tax and the personal income taxes imposed by the Commonwealth of
Pennsylvania. While there is no assurance that the Fund will achieve its
investment objective, it endeavors to do so by following the strategies and
policies described in this prospectus.
WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?
The Fund invests in a portfolio of tax exempt securities 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. Interest from the Fund's
investments may be subject to the federal alternative minimum tax for
individuals and corporations (AMT). The Fund's portfolio securities will be
primarily long- term, investment grade securities.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?
All mutual funds take investment risks. Therefore, it is possible to lose money
by investing in the Fund. The primary factors that may reduce the Fund's returns
include:
INTEREST RATE RISKS
Prices of tax exempt securities generally fall when interest rates rise.
Interest rate changes have a greater effect on the price of fixed income
securities with longer durations.
CREDIT RISKS
Issuers of tax exempt securities may default on the payment of interest or
principal when due.
CALL RISKS
Issuers of tax exempt securities may redeem the securities prior to maturity at
a price below their current market value.
SECTOR RISKS
Since the Fund invests primarily in issuers from Pennsylvania, the Fund may be
subject to additional risks compared to funds that invest in multiple states.
Pennsylvania's economy has diversified away from the concentration in heavy
industry and manufacturing which existed prior to the downsizing of the steel
industry and improved its mixture of service and technology based businesses.
Despite the improvements in its employment base, Pennsylvania is still subject
to the cyclical impact which an economic downturn has on the manufacturing
sector.
The Fund is non-diversified. Compared to diversified mutual funds, it may invest
a higher percentage of its assets among fewer issuers of portfolio securities.
This increases the Fund's risk by magnifying the impact (positively or
negatively) that any one issuer has on the Fund's Share price and performance.
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 or
guaranteed by the U.S. government, the Federal Deposit Insurance Corporation,
the Federal Reserve Board or any other government agency.
RISK/RETURN BAR CHART AND TABLE
[Graphic]
The bar chart shows the variability of the Fund's Class A Shares total returns
on a calendar year-end basis.
The total returns displayed for the Fund's Class A Shares do not reflect the
payment of any sales charges or recurring shareholder account fees. If these
charges or fees had been included, the returns shown would have been lower.
The Fund's Class A Shares total return for the nine-month period from January 1,
1999 to September 30, 1999 was (3.69%).
Within the period shown in the Chart, the Fund's Class A Shares highest
quarterly return was 7.43% (quarter ended March 31, 1995). Its lowest quarterly
return was (6.05%) (quarter ended March 31, 1994).
AVERAGE ANNUAL TOTAL RETURN TABLE
The following table represents the Fund's Class A Shares and Class B Shares
Average Annual Total Returns, reduced to reflect applicable sales charges, for
the calendar periods ended December 31, 1998. The table shows the Fund's Class A
Shares total returns averaged over a period of years relative to the Lehman
Brothers Revenue Bond Index (LBRBI) and the Lehman Brothers Municipal Bond Index
(LBMBI), both broad-based market indexes. The LBRBI is a total return
performance benchmark for the long-term, investment grade, revenue bond market.
The LBMBI is a broad market performance benchmark for the tax exempt bond
market. To be included in the LBMBI, bonds must have a minimum credit rating of
Baa. Total returns for the indexes shown do not reflect sales charges, expenses
or other fees that the SEC requires to be reflected in the Fund's performance.
Indexes are unmanaged, and it is not possible to invest directly in an index.
<TABLE>
<CAPTION>
CLASS A CLASS B
CALENDAR PERIOD SHARES SHARES LBRBI LBMBI
<S> <C> <C> <C> <C>
1 Year 0.99% (0.89%) 6.33% 6.22%
5 Years 5.21% NA 6.39% 6.49%
Start of Performance 1 7.59% 4.57% 8.19% NA
</TABLE>
1 The Fund's start of performance dates for Class A Shares and Class B Shares
were October 11, 1990, and March 4, 1997, respectively.
Past performance does not necessarily predict future performance. This
information provides you with historical performance information so that you can
analyze whether the Fund's investment risks are balanced by its potential
returns.
What are the Fund's Fees and Expenses?
FEDERATED PENNSYLVANIA MUNICIPAL INCOME FUND
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
Shares of the Fund.
<TABLE>
<CAPTION>
SHAREHOLDER FEES CLASS A CLASS B
<S> <C> <C>
Fees Paid Directly From
Your Investment
Maximum Sales Charge
(Load) Imposed on
Purchases (as a percentage
of offering price) 4.50% None
Maximum Deferred Sales
Charge (Load) (as a
percentage of original
purchase price or
redemption proceeds, as
applicable) None 5.50%
Maximum Sales Charge
(Load) Imposed on
Reinvested Dividends (and
other Distributions) (as a
percentage of offering
price) None None
Redemption Fee (as a
percentage of amount
redeemed, if applicable) None None
Exchange Fee None None
ANNUAL FUND OPERATING
EXPENSES (Before Waivers)
1
Expenses That are Deducted
From Fund Assets (as a
percentage of average net
assets)
Management Fee 2 0.40% 0.40%
Distribution (12b-1) Fee 3 0.40% 0.75%
Shareholder Services Fee 4 0.25% 0.25%
Other Expenses 0.20% 0.20%
Total Annual Fund
Operating Expenses 1.25% 1.60% 5
1 Although not contractually obligated to do so, the adviser, distributor and
shareholder services provider waived certain amounts. These are shown below
along with the net expenses the Fund actually paid for the fiscal year ended
August 31, 1999.
Total Waivers of Fund
Expenses 0.50% 0.08%
Total Actual Annual Fund
Operating Expenses (after
waivers) 0.75% 1.52%
2 The adviser voluntarily waived a portion of the management fee. The adviser
can terminate this voluntary waiver at any time. The management fee paid by the
Fund (after the voluntary waiver) was 0.32% for the fiscal year ended August 31,
1999. 3 The distributor voluntarily waived the distribution (12b-1) fee for the
Class A Shares. The distributor can terminate this voluntary waiver at any time.
The distribution (12b-1) fee paid by the Fund's Class A Shares (after the
voluntary waiver) was 0.00% for the fiscal year ended August 31, 1999. 4 The
shareholder services provider voluntarily waived a portion of the shareholder
services fee for Class A Shares. The shareholder services provider can terminate
this voluntary waiver at any time. The shareholder services fee paid by the
Fund's Class A Shares (after the voluntary waiver) was 0.23% for the fiscal year
ended August 31, 1999. 5 Class B Shares convert to Class A Shares (which pay
lower ongoing expenses) approximately eight years after purchase.
</TABLE>
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund's
Class A and Class B Shares with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund's Class A and Class B
Shares for the time periods indicated and then redeem all of your Shares at the
end of those periods. Expenses assuming no redemption are also shown. The
Example also assumes that your investment has a 5% return each year and that the
Fund's Class A and Class B Shares operating expenses are BEFORE WAIVERS as shown
in the table and remain the same. Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
SHARE CLASS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
CLASS A
Expenses
assuming
redemption $572 $829 $1,105 $1,893
Expenses
assuming
no redemption $572 $829 $1,105 $1,893
CLASS B
Expenses
assuming
redemption $713 $933 $1,100 $1,900
Expenses
assuming
no redemption $163 $505 $871 $1,900
</TABLE>
What are the Fund's Investment Strategies?
The Fund invests in a portfolio of tax exempt securities so that at least 80% of
its annual interest income is exempt from federal regular income tax and the
Commonwealth of Pennsylvania personal income tax. As a matter of operating
policy, the Fund ordinarily will invest so that 100% of its annual interest
income is exempt from such taxes. Interest income from the Fund's investments
may be subject to the AMT.
The Fund invests at least 65% of its assets in investment grade securities. The
Fund does not limit itself to securities of a particular maturity range, but
currently focuses on long-term securities with maturities greater than 10 years.
The Fund's investment adviser (Adviser) actively manages the Fund's portfolio,
seeking to manage the interest rate risk and credit risk assumed by the Fund and
to provide superior levels of after tax total return.
The Adviser manages the Fund's interest rate risk by adjusting the duration of
its portfolio. "Duration" measures the sensitivity of a security's price to
changes in interest rates. The greater a portfolio's duration, the greater the
change in the portfolio's value in response to a change in market interest
rates. The Adviser will increase or reduce the Fund's portfolio duration based
on its interest rate outlook. When the Adviser expects interest rates to fall,
it will maintain a longer portfolio duration. When the Adviser expects interest
rates to increase, it will shorten the portfolio duration. The Adviser considers
a variety of factors in formulating its interest rate outlook, including the
following:
* current and expected U.S. economic growth;
* current and expected interest rates and inflation;
* the Federal Reserve's monetary policy; and
* supply and demand factors related to the municipal market and the effect they
may have on the returns offered for various bond maturities.
The Adviser manages credit risk by performing a fundamental credit analysis on
tax exempt securities before the Fund purchases such securities. The Adviser
considers various factors, including the following:
* the economic feasibility of revenue bond financings and general purpose
financings;
* the financial condition of the issuer or guarantor; and
* political developments that may affect credit quality.
The Adviser monitors the credit risks of all portfolio securities on an ongoing
basis by reviewing periodic financial data and ratings of nationally recognized
ratings services.
The Adviser attempts to provide superior levels of after tax total return. After
tax total return consists of two components: (1) income received from the Fund's
portfolio securities; and (2) changes in the market value of the Fund's
portfolio securities and attendant increase or decrease in the market value of
Fund shares. The Adviser seeks total return on an after tax basis, so that it
will try to maximize tax exempt income distributions; make no ordinary income
distributions; and minimize or eliminate capital gains distributions.
HEDGING
Hedging transactions are intended to reduce specific risks. For example, to
protect the Fund against circumstances that would normally cause the Fund's
portfolio securities to decline in value, the Fund may buy or sell a futures
contract that would normally increase in value under the same circumstances. The
Fund may also attempt to hedge by using combinations of different futures
contracts, or futures contracts and securities. The Fund's ability to hedge may
be limited by the costs of the futures contracts. The Fund may attempt to lower
the cost of hedging by entering into transactions that provide only limited
protection, including transactions that (1) hedge only a portion of its
portfolio, (2) use futures contracts that cover a narrow range of circumstances
or (3) involve the sale of futures contracts with different terms. Consequently,
hedging transactions will not eliminate risk even if they work as intended. In
addition, hedging strategies are not always successful, and could result in
increased expenses and losses to the Fund.
TEMPORARY DEFENSIVE INVESTMENTS
The Fund may temporarily depart from its principal investment strategies by
investing its assets in securities subject to federal regular income tax and the
income tax imposed by the Commonwealth of Pennsylvania. It may do this to
minimize potential losses and maintain liquidity to meet shareholder redemptions
during adverse market conditions. This may cause the Fund to receive and
distribute taxable income to investors.
What are the Principal Securities in Which the Fund Invests?
TAX EXEMPT SECURITIES
Tax exempt securities are fixed income securities that pay interest that is not
subject to federal regular income taxes. Fixed income securities pay interest,
dividends or distributions at a specified rate. The rate may be a fixed
percentage of the principal or adjusted periodically.
Typically, states, counties, cities and other political subdivisions and
authorities issue tax exempt securities. The market categorizes tax exempt
securities by their source of repayment.
GENERAL OBLIGATION BONDS
General obligation bonds are supported by the issuer's power to exact property
or other taxes. The issuer must impose and collect taxes sufficient to pay
principal and interest on the bonds. However, the issuer's authority to impose
additional taxes may be limited by its charter or state law.
SPECIAL REVENUE BONDS
Special revenue bonds are payable solely from specific revenues received by the
issuer such as specific taxes, assessments, tolls or fees. Bondholders may not
collect from the municipality's general taxes or revenues. For example, a
municipality may issue bonds to build a toll road, and pledge the tolls to repay
the bonds. Therefore, a shortfall in the tolls normally would result in a
default on the bonds.
PRIVATE ACTIVITY BONDS
Private activity bonds are special revenue bonds used to finance private
entities. For example, a municipality may issue bonds to finance a new factory
to improve its local economy. The municipality would lend the proceeds from its
bonds to the company using the factory, and the company would agree to make loan
payments sufficient to repay the bonds. The bonds would be payable solely from
the company's loan payments, not from any other revenues of the municipality.
Therefore, any default on the loan normally would result in a default on the
bonds.
The interest on many types of private activity bonds is subject to AMT. The Fund
may invest in bonds subject to AMT.
TAX INCREMENT FINANCING BONDS
Tax increment financing (TIF) bonds are payable from increases in taxes or other
revenues attributable to projects financed by the bonds. For example, a
municipality may issue TIF bonds to redevelop a commercial area. The TIF bonds
would be payable solely from any increase in sales taxes collected from
merchants in the area. The bonds could default if merchants' sales, and related
tax collections, failed to increase as anticipated.
MUNICIPAL LEASES
Municipalities may enter into leases for equipment or facilities. In order to
comply with state public financing laws, these leases are typically subject to
annual appropriation. In other words, a municipality may end a lease, without
penalty, by not providing for the lease payments in its annual budget. After the
lease ends, the lessor can resell the equipment or facility but may lose money
on the sale.
The Fund may invest in securities supported by pools of municipal leases. The
most common type of lease backed securities are certificates of participation
(COPs). However, the Fund may also invest directly in individual leases.
ZERO COUPON SECURITIES
Zero coupon securities do not pay interest or principal until final maturity
unlike debt securities that provide periodic payments of interest (referred to
as a coupon payment). Investors buy zero coupon securities at a price below the
amount payable at maturity. The difference between the purchase price and the
amount paid at maturity represents interest on the zero coupon security.
Investors must wait until maturity to receive interest and principal, which
increases the interest rate and credit risks of a zero coupon security.
INVERSE FLOATERS
An inverse floater has a floating or variable interest rate that moves in the
opposite direction of market interest rates. When market interest rates go up,
the interest rate paid on the inverse floater goes down; when market interest
rates go down, the interest rate paid on the inverse floater goes up. Inverse
floaters generally respond more rapidly to market interest rate changes than
fixed rate tax exempt securities. Inverse floaters are subject to interest rate
risks and leverage risks.
CREDIT ENHANCEMENT
Credit enhancement consists of an arrangement in which a company agrees to pay
amounts due on a fixed income security if the issuer defaults. In some cases the
company providing credit enhancement makes all payments directly to the security
holders and receives reimbursement from the issuer. Normally, the credit
enhancer has greater financial resources and liquidity than the issuer. For this
reason, the Adviser usually evaluates the credit risk of a fixed income security
based solely upon its credit enhancement.
FUTURES CONTRACTS
Futures contracts, which are a type of derivative contract, provide for the
future sale by one party and purchase by another party of a specified amount of
an underlying asset at a specified price, date and time. Entering into a
contract to buy an underlying asset is commonly referred to as buying a contract
or holding a long position in the asset. Entering into a contract to sell an
underlying asset is commonly referred to as selling a contract or holding a
short position in the asset. Futures contracts are considered to be commodity
contracts.
The Fund may buy and sell interest rate and index financial futures contracts.
Depending upon how the Fund uses futures contracts and the relationships between
the market value of a futures contract and the underlying asset, futures
contracts may increase or decrease the Fund's exposure to interest rate risks,
and may also expose the Fund to liquidity risks and leverage risks.
SPECIAL TRANSACTIONS
DELAYED DELIVERY TRANSACTIONS
Delayed delivery transactions, including when-issued transactions, are
arrangements in which the Fund buys securities for a set price, with payment and
delivery of the securities scheduled for a future time. During the period
between purchase and settlement, no payment is made by the Fund to the issuer
and no interest accrues to the Fund. The Fund records the transaction when it
agrees to buy the securities and reflects their value in determining the price
of its shares. Settlement dates may be a month or more after entering into these
transactions so that the market values of the securities bought may vary from
the purchase prices. Therefore, delayed delivery transactions create interest
rate risks for the Fund. Delayed delivery transactions also involve credit risks
in the event of a counterparty default.
ASSET COVERAGE
In order to secure its obligations in connection with futures contracts or
special transactions, the Fund will either own the underlying assets, enter into
an offsetting transaction or set aside readily marketable securities with a
value that equals or exceeds the Fund's obligations. Unless the Fund has other
readily marketable assets to set aside, it cannot trade assets used to secure
such obligations without entering into an offsetting futures contract or
terminating a special transaction. This may cause the Fund to miss favorable
trading opportunities or to realize losses on futures contracts or special
transactions.
INVESTMENT RATINGS FOR INVESTMENT GRADE SECURITIES
The Adviser will determine whether a security is investment grade based upon the
credit ratings given by one or more nationally recognized rating services. For
example, Standard and Poor's, a rating service, assigns ratings to investment
grade securities (AAA, AA, A and BBB) based on its assessment of the likelihood
of the issuer's inability to pay interest or principal (default) when due on
each security. Lower credit ratings correspond to higher credit risk. If a
security has not received a rating, the Fund must rely entirely upon the
Adviser's credit assessment that the security is comparable to investment grade.
If a security is downgraded below the minimum quality grade discussed above, the
Adviser will reevaluate the security, but will not be required to sell it.
What are the Specific Risks of Investing in the Fund?
INTEREST RATE RISKS
Prices of fixed income securities rise and fall in response to changes in the
interest rates paid by similar securities. Generally, when interest rates rise,
prices of fixed income securities fall. However, market factors, such as the
demand for particular fixed income securities, may cause the price of certain
fixed income securities to fall while the prices of other securities rise or
remain unchanged.
Interest rate changes have a greater effect on the price of fixed income
securities with longer durations. Duration measures the price sensitivity of a
fixed income security to changes in interest rates.
CREDIT RISKS
Credit risk is the possibility that an issuer will default on a security by
failing to pay interest or principal when due. If an issuer defaults, the Fund
will lose money.
Many fixed income securities receive credit ratings from services such as
Standard & Poor's and Moody's Investors Service. These services assign ratings
to securities by assessing the likelihood of issuer default. Lower credit
ratings correspond to higher credit risk. If a security has not received a
rating, the Fund must rely entirely upon the Adviser's credit assessment.
Credit risk includes the possibility that a party to a transaction involving the
Fund will fail to meet its obligations. This could cause the Fund to lose the
benefit of the transaction or prevent the Fund from selling or buying other
securities to implement its investment strategy.
CALL RISKS
Call risk is the possibility that an issuer may redeem a fixed income security
before maturity (a call) at a price below its current market price. An increase
in the likelihood of a call may reduce the security's price.
If a fixed income security is called, the Fund may have to reinvest the proceeds
in other fixed income securities with lower interest rates, higher credit risks
or other less favorable characteristics.
SECTOR RISKS
A substantial part of the Fund's portfolio may be comprised of securities issued
by Pennsylvania issuers or credit enhanced by insurance companies or companies
with similar characteristics. As a result, the Fund will be more susceptible to
any economic, business, political or other developments which generally affect
these entities. Pennsylvania's economy has diversified away from the
concentration in heavy industry and manufacturing which existed prior to the
downsizing of the steel industry and improved its mixture of service and
technology based businesses. Despite the improvements in its employment base,
Pennsylvania is still subject to the cyclical impact which an economic downturn
has on the manufacturing sector.
TAX RISKS
In order to be tax exempt, tax exempt securities must meet certain legal
requirements. Failure to meet such requirements may cause the interest received
and distributed by the Fund to shareholders to be taxable.
Changes or proposed changes in federal tax laws may cause the prices of tax
exempt securities to fall.
Income from the Fund may be subject to AMT.
LEVERAGE RISKS
Leverage risk is created when an investment exposes the Fund to a level of risk
that exceeds the amount invested. Changes in the value of such an investment
magnify the Fund's risk of loss and potential for gain.
Investments can have these same results if their returns are based on a multiple
of a specified index, security or other benchmark.
RISKS ASSOCIATED WITH NONINVESTMENT GRADE SECURITIES
Securities rated below investment grade, also known as junk bonds, generally
entail greater interest rate, credit and liquidity risks than investment grade
securities. For example, their prices are more volatile, economic and financial
setbacks may affect their prices more negatively, and their trading market may
be more limited. The Fund may invest up to 35% of its assets in noninvestment
grade securities.
LIQUIDITY RISKS
Trading opportunities are more limited for fixed income securities that have not
recorded any credit ratings, have recorded ratings below investment grade or are
not widely held.
Liquidity risk also refers to the possibility that the Fund may not be able to
sell a security or close out a futures contract when it wants to. If this
happens, the Fund will be required to continue to hold the security or keep the
position open, and the Fund could incur losses.
What Do Shares Cost?
You can purchase, redeem or exchange Shares any day the New York Stock Exchange
(NYSE) is open. When the Fund receives your transaction request in proper form
(as described in this prospectus), it is processed at the next calculated net
asset value (NAV) plus any applicable front-end sales charge (public offering
price). NAV is determined at the end of regular trading (normally 4:00 p.m.
Eastern time) each day the NYSE is open. The Fund generally values fixed income
securities at the last sale price on a national securities exchange, if
available, otherwise, as determined by an independent pricing service.
The Fund's current NAV and public offering price may be found in the mutual
funds section of certain local newspapers under "Federated" and the appropriate
class designation listing.
The following table summarizes the minimum required investment amount and the
maximum sales charge, if any, that you will pay on an investment in the Fund.
Keep in mind that investment professionals may charge you fees for their
services in connection with your Share transactions.
<TABLE>
<CAPTION>
MAXIMUM SALES CHARGE
MINIMUM CONTINGENT
INITIAL/ FRONT-END DEFERRED
INVESTMENT SALES SALES
SHARES OFFERED AMOUNTS 1 CHARGE 2 CHARGE 3
<S> <C> <C> <C>
Class A $1,500/$100 4.50% 0.00%
Class B $1,500/$100 None 5.50%
</TABLE>
1 The minimum subsequent investment amounts for Systematic Investment Programs
is $50. Investment professionals may impose higher or lower minimum investment
requirements on their customers than those imposed by the Fund. Orders for
$250,000 or more will be invested in Class A Shares instead of Class B Shares to
maximize your return and minimize the sales charges and marketing fees. Accounts
held in the name of an investment professional may be treated differently. Class
B Shares will automatically convert into Class A Shares after eight full years
from the purchase date. This conversion is a non-taxable event.
2 Front-End Sales Charge is expressed as a percentage of public offering
price. See "Sales Charge When You Purchase."
3 See "Sales Charge When You Redeem."
SALES CHARGE WHEN YOU PURCHASE
<TABLE>
<CAPTION>
CLASS A SHARES
Sales Charge
as a Percentage Sales Charge
of Public as a Percentage
Purchase Amount Offering Price of NAV
<S> <C> <C>
Less than $100,000 4.50% 4.71%
$100,000 but less than $250,000 3.75% 3.90%
$250,000 but less than $500,000 2.50% 2.56%
$500,000 but less than $1 million 2.00% 2.04%
$1 million or greater 1 0.00% 0.00%
</TABLE>
1 A contingent deferred sales charge of 0.75% of the redemption amount applies
to Class A Shares redeemed up to 24 months after purchase under certain
investment programs where an investment professional received an advance payment
on the transaction. To determine whether your Contingent Deferred Sales Charge
may be waived, see "Sales Charge When You Redeem."
THE SALES CHARGE AT PURCHASE MAY BE REDUCED OR ELIMINATED BY:
* purchasing Shares in greater quantities to reduce the applicable sales
charge;
* combining concurrent purchases of Shares:
- - by you, your spouse, and your children under age 21; or
- - of the same share class of two or more Federated Funds (other than money
market funds);
* accumulating purchases (in calculating the sales charge on an additional
purchase, include the current value of previous Share purchases still invested
in the Fund); or
* signing a letter of intent to purchase a specific dollar amount of Shares
within 13 months. (Call your investment professional or the Fund for more
information.)
THE SALES CHARGE WILL BE ELIMINATED WHEN YOU PURCHASE SHARES:
* within 120 days of redeeming Shares of an equal or lesser amount;
* by exchanging shares from the same share class of another Federated Fund
(other than a money market fund);
* through wrap accounts or other investment programs where you pay the
investment professional directly for services;
* through investment professionals that receive no portion of the sales
charge;
* as a Federated Life Member (Class A Shares only) and their immediate
family members; or
* as a Trustee, Director or employee of the Fund, the Adviser, the Distributor
and their affiliates, and the immediate family members of these individuals.
If your investment qualifies for a reduction or elimination of the sales charge,
you or your investment professional should notify the Fund's Distributor at the
time of purchase. If the Distributor is not notified, you will receive the
reduced sales charge only on additional purchases, and not retroactively on
previous purchases.
SALES CHARGE WHEN YOU REDEEM
Your redemption proceeds may be reduced by a sales charge, commonly referred to
as a contingent deferred sales charge (CDSC).
<TABLE>
<CAPTION>
CLASS A SHARES
<S> <C> A CDSC of 0.75% of the redemption amount applies to Class A Shares
redeemed up to 24 months after purchase under certain investment programs where
an investment professional received an advance payment on the transaction.
<CAPTION>
CLASS B SHARES
Shares Held Up To: CDSC
<S> <C>
1 year 5.50%
2 years 4.75%
3 years 4.00%
4 years 3.00%
5 years 2.00%
6 years 1.00%
7 years or more 0.00%
</TABLE>
YOU WILL NOT BE CHARGED A CDSC WHEN REDEEMING SHARES:
* purchased with reinvested dividends or capital gains;
* purchased within 120 days of redeeming Shares of an equal or lesser
amount;
* that you exchanged into the same share class of another Federated Fund if the
shares were held for the applicable CDSC holding period (other than a money
market fund);
* purchased through investment professionals who did not receive advanced
sales payments;
* if, after you purchase Shares, you become disabled as defined by the IRS;
* if the Fund redeems your Shares and closes your account for not meeting
the minimum balance requirement; or
* upon the death of the last surviving shareholder of the account.
If your redemption qualifies, you or your investment professional should notify
the Distributor at the time of redemption to eliminate the CDSC. If the
Distributor is not notified, the CDSC will apply.
TO KEEP THE SALES CHARGE AS LOW AS POSSIBLE, THE FUND REDEEMS YOUR SHARES IN
THIS ORDER:
* Shares that are not subject to a CDSC; and
* Shares held the longest (to determine the number of years your Shares have
been held, include the time you held shares of other Federated Funds that have
been exchanged for Shares of this Fund).
The CDSC is then calculated using the share price at the time of purchase or
redemption, whichever is lower.
How is the Fund Sold?
The Fund offers two share classes: Class A Shares and Class B Shares, each
representing interests in a single portfolio of securities.
The Fund's Distributor, Federated Securities Corp., markets the Shares described
in this prospectus to customers of financial institutions, such as
broker/dealers, banks, fiduciaries or investment advisers, or to individuals,
directly or through investment professionals. The Fund may not be a suitable
investment for retirement plans or for non-Pennsylvania taxpayers because it
invests in Pennsylvania municipal securities.
When the Distributor receives marketing fees and sales charges, it may pay some
or all of them to investment professionals. The Distributor and its affiliates
may pay out of their assets other amounts (including items of material value) to
investment professionals for marketing and servicing Shares. The Distributor is
a subsidiary of Federated Investors, Inc.
(Federated).
RULE 12B-1 PLAN
The Fund has adopted a Rule 12b-1 Plan, which allows it to pay marketing fees to
the Distributor and investment professionals for the sale, distribution and
customer servicing of the Fund's Class A and Class B Shares. Because these
Shares pay marketing fees on an ongoing basis, your investment cost may be
higher over time than other shares with different sales charges and marketing
fees.
How to Purchase Shares
You may purchase Shares through an investment professional, directly from the
Fund, or through an exchange from another Federated Fund. The Fund reserves the
right to reject any request to purchase or exchange Shares.
Where the Fund offers more than one share class and you do not specify the class
choice on your New Account Form or form of payment (e.g., Federal Reserve wire
or check) you automatically will receive Class A Shares.
THROUGH AN INVESTMENT PROFESSIONAL
* Establish an account with the investment professional; and
* Submit your purchase order to the investment professional before the end of
regular trading on the NYSE (normally 4:00 p.m. Eastern time). You will receive
the next calculated NAV if the investment professional forwards the order to the
Fund on the same day and the Fund receives payment within three business days.
You will become the owner of Shares and receive dividends when the Fund receives
your payment.
Investment professionals should send payments according to the instructions in
the sections "By Wire" or "By Check."
DIRECTLY FROM THE FUND
* Establish your account with the Fund by submitting a completed New
Account Form; and
* Send your payment to the Fund by Federal Reserve wire or check.
You will become the owner of Shares and your Shares will be priced at the next
calculated NAV after the Fund receives your wire or your check. If your check
does not clear, your purchase will be canceled and you could be liable for any
losses or fees incurred by the Fund or Federated Shareholder Services Company,
the Fund's transfer agent.
An institution may establish an account and place an order by calling the Fund
and the Shares will be priced at the next calculated NAV after the Fund receives
the order.
BY WIRE
Send your wire to:
State Street Bank and Trust Company
Boston, MA
Dollar Amount of Wire
ABA Number 011000028
Attention: EDGEWIRE
Wire Order Number, Dealer Number or Group Number
Nominee/Institution Name
Fund Name and Number and Account Number
You cannot purchase Shares by wire on holidays when wire transfers are
restricted.
BY CHECK
Make your check payable to THE FEDERATED FUNDS, note your account number on the
check, and mail it to:
Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600
If you send your check by a PRIVATE COURIER OR OVERNIGHT DELIVERY SERVICE that
requires a street address, mail it to:
Federated Shareholder Services Company
1099 Hingham Street
Rockland, MA 02370-3317
Payment should be made in U.S. dollars and drawn on a U.S. bank. The Fund
will not accept third-party checks (checks originally payable to someone
other than you or The Federated Funds).
THROUGH AN EXCHANGE
You may purchase Shares through an exchange from the same Share class of another
Federated Fund. You must meet the minimum initial investment requirement for
purchasing Shares and both accounts must have identical registrations.
BY SYSTEMATIC INVESTMENT PROGRAM
Once you have opened an account, you may automatically purchase additional
Shares on a regular basis by completing the Systematic Investment Program
section of the New Account Form or by contacting the Fund or your investment
professional.
BY AUTOMATED CLEARING HOUSE (ACH)
Once you have opened an account, you may purchase additional Shares through a
depository institution that is an ACH member. This purchase option can be
established by completing the appropriate sections of the New Account Form.
How to Redeem and Exchange Shares
You should redeem or exchange Shares:
* through an investment professional if you purchased Shares through an
investment professional; or
* directly from the Fund if you purchased Shares directly from the Fund.
THROUGH AN INVESTMENT PROFESSIONAL
Submit your redemption or exchange request to your investment professional by
the end of regular trading on the NYSE (normally 4:00 p.m. Eastern time). The
redemption amount you will receive is based upon the next calculated NAV after
the Fund receives the order from your investment professional.
DIRECTLY FROM THE FUND
BY TELEPHONE
You may redeem or exchange Shares by calling the Fund at 1-800-341-7400 once you
have completed the appropriate authorization form for telephone transactions. If
you call before the end of regular trading on the NYSE (normally 4:00 p.m.
Eastern time) you will receive a redemption amount based on that day's NAV.
BY MAIL
You may redeem or exchange Shares by mailing a written request to the Fund. You
will receive a redemption amount based on the next calculated NAV after the Fund
receives your written request in proper form.
Send requests by mail to:
Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600
Send requests by PRIVATE COURIER OR OVERNIGHT DELIVERY SERVICE to:
Federated Shareholder Services Company
1099 Hingham Street
Rockland, MA 02370-3317
All requests must include:
* Fund Name and Share Class, account number and account registration;
* amount to be redeemed or exchanged;
* signatures of all shareholders exactly as registered; and
* IF EXCHANGING, the Fund Name and Share Class, account number and account
registration into which you are exchanging.
Call your investment professional or the Fund if you need special instructions.
SIGNATURE GUARANTEES
Signatures must be guaranteed if:
* your redemption will be sent to an address other than the address of
record;
* your redemption will be sent to an address of record that was changed
within the last 30 days;
* a redemption is payable to someone other than the shareholder(s) of
record; or
* IF EXCHANGING (TRANSFERRING) into another fund with a different shareholder
registration.
A signature guarantee is designed to protect your account from fraud. Obtain a
signature guarantee from a bank or trust company, savings association, credit
union or broker, dealer, or securities exchange member. A NOTARY PUBLIC CANNOT
PROVIDE A SIGNATURE GUARANTEE.
PAYMENT METHODS FOR REDEMPTIONS
Your redemption proceeds will be mailed by check to your address of record. The
following payment options are available if you complete the appropriate section
of the New Account Form or an Account Service Options Form. These payment
options require a signature guarantee if they were not established when the
account was opened:
* an electronic transfer to your account at a financial institution that is
an ACH member; or
* wire payment to your account at a domestic commercial bank that is a Federal
Reserve System member.
REDEMPTION IN KIND
Although the Fund intends to pay Share redemptions in cash, it reserves the
right to pay the redemption price in whole or in part by a distribution of the
Fund's portfolio securities.
LIMITATIONS ON REDEMPTION PROCEEDS
Redemption proceeds normally are wired or mailed within one business day after
receiving a request in proper form. Payment may be delayed up to seven days:
* to allow your purchase to clear;
* during periods of market volatility; or
* when a shareholder's trade activity or amount adversely impacts the Fund's
ability to manage its assets.
You will not accrue interest or dividends on uncashed checks from the Fund if
those checks are undeliverable and returned to the Fund.
EXCHANGE PRIVILEGE
You may exchange Shares of the Fund into Shares of the same class of another
Federated Fund. To do this, you must:
* ensure that the account registrations are identical;
* meet any minimum initial investment requirements; and
* receive a prospectus for the fund into which you wish to exchange.
An exchange is treated as a redemption and a subsequent purchase, and is a
taxable transaction.
The Fund may modify or terminate the exchange privilege at any time. The Fund's
management or investment adviser may determine from the amount, frequency and
pattern of exchanges that a shareholder is engaged in excessive trading that is
detrimental to the Fund and other shareholders. If this occurs, the Fund may
terminate the availability of exchanges to that shareholder and may bar that
shareholder from purchasing other Federated funds.
SYSTEMATIC WITHDRAWAL/ EXCHANGE PROGRAM
You may automatically redeem or exchange Shares in a minimum amount of $100 on a
regular basis. Complete the appropriate section of the New Account Form or an
Account Service Options Form or contact your investment professional or the
Fund. Your account value must meet the minimum initial investment amount at the
time the program is established. This program may reduce, and eventually
deplete, your account. Payments should not be considered yield or income.
Generally, it is not advisable to continue to purchase Class A Shares subject to
a sales charge while redeeming Shares using this program.
SYSTEMATIC WITHDRAWAL PROGRAM (SWP) ON CLASS B SHARES
You will not be charged a CDSC on SWP redemptions if:
* you redeem 12% or less of your account value in a single year;
* you reinvest all dividends and capital gains distributions; and
* your account has at least a $10,000 balance when you establish the SWP. (You
cannot aggregate multiple Class B Share accounts to meet this minimum balance.)
You will be subject to a CDSC on redemption amounts that exceed the 12% annual
limit. In measuring the redemption percentage, your account is valued when you
establish the SWP and then annually at calendar year-end. You can redeem
monthly, quarterly or semi-annually.
For SWP accounts established prior to April 1, 1999, your account must be at
least one year old in order to be eligible for the waiver of the CDSC.
ADDITIONAL CONDITIONS
TELEPHONE TRANSACTIONS
The Fund will record your telephone instructions. If the Fund does not follow
reasonable procedures, it may be liable for losses due to unauthorized or
fraudulent telephone instructions.
SHARE CERTIFICATES
The Fund no longer issues share certificates. If you are redeeming or exchanging
Shares represented by certificates previously issued by the Fund, you must
return the certificates with your written redemption or exchange request. For
your protection, send your certificates by registered or certified mail, but do
not endorse them.
Account and Share Information
CONFIRMATIONS AND ACCOUNT STATEMENTS
You will receive confirmation of purchases, redemptions and exchanges (except
for systematic transactions). In addition, you will receive periodic statements
reporting all account activity, including systematic transactions, dividends and
capital gains paid.
DIVIDENDS AND CAPITAL GAINS
The Fund declares and pays any dividends monthly to shareholders. Dividends are
paid to all shareholders invested in the Fund on the record date. The record
date is the date on which a shareholder must officially own Shares in order to
earn a dividend.
In addition, the Fund pays any capital gains at least annually. Your dividends
and capital gains distributions will be automatically reinvested in additional
Shares without a sales charge, unless you elect cash payments.
If you purchase Shares just before a Fund declares a capital gain distribution,
you will pay the full price for the Shares and then receive a portion of the
price back in the form of a taxable distribution, whether or not you reinvest
the distribution in Shares. Therefore, you should consider the tax implications
of purchasing Shares shortly before the Fund declares a capital gain. Contact
your investment professional or the Fund for information concerning when
dividends and capital gains will be paid.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, accounts may be
closed if redemptions or exchanges cause the account balance to fall below the
minimum initial investment amount. Before an account is closed, you will be
notified and allowed 30 days to purchase additional Shares to meet the minimum.
TAX INFORMATION
The Fund sends an annual statement of your account activity to assist you in
completing your federal, state and local tax returns. It is anticipated that
Fund distributions will be primarily dividends that are exempt from federal
income tax, although a portion of the Fund's dividends may not be exempt.
Dividends may be subject to state and local taxes, although the Federated
Pennsylvania Municipal Income Fund's dividends will be exempt from the
Pennsylvania taxes discussed above to the extent they are derived from interest
on obligations exempt from such taxes. Capital gains and non-exempt dividends
are taxable whether paid in cash or reinvested in the Fund. Redemptions and
exchanges are taxable sales. Please consult your tax adviser regarding your
federal, state and local tax liability.
Who Manages the Fund?
The Board of Trustees governs the Fund. The Board selects and oversees the
Adviser, Federated Investment Management Company. The Adviser manages the Fund's
assets, including buying and selling portfolio securities. The Adviser's address
is Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, PA 15222-3779.
The Adviser and other subsidiaries of Federated advise approximately 175 mutual
funds and separate accounts, which totaled approximately $111 billion in assets
as of December 31, 1998. Federated was established in 1955 and is one of the
largest mutual fund investment managers in the United States with approximately
1,900 employees. More than 4,000 investment professionals make Federated Funds
available to their customers.
THE FUND'S PORTFOLIO MANAGERS ARE:
J. SCOTT ALBRECHT
J. Scott Albrecht has been the Fund's portfolio manager since March 1995. He is
Vice President of the Fund. Mr. Albrecht joined Federated in 1989. He has been a
Senior Portfolio Manager since 1997 and a Vice President of the Fund's Adviser
since 1994. He was a Portfolio Manager from 1994 to 1996. Mr. Albrecht is a
Chartered Financial Analyst and received his M.S. in Public Management from
Carnegie Mellon University.
MARY JO OCHSON
Mary Jo Ochson has been the Fund's portfolio manager since April 1997.
Ms. Ochson joined Federated in 1982 and has been a Senior Portfolio Manager
and a Senior Vice President of the Fund's Adviser since 1996. From 1988
through 1995, Ms. Ochson served as a Portfolio Manager and a Vice President
of the Fund's Adviser. Ms. Ochson is a Chartered Financial Analyst and
received her M.B.A. in Finance from the University of Pittsburgh.
ADVISORY FEES
The Adviser receives an annual investment advisory fee of 0.40% of the Fund's
average daily net assets. The Adviser may voluntarily waive a portion of its fee
or reimburse the Fund for certain operating expenses.
YEAR 2000 READINESS (UNAUDITED)
The "Year 2000" problem is the potential for computer errors or failures because
certain computer systems may be unable to interpret dates after December 31,
1999 or may experience other date-related problems. The Year 2000 problem may
cause systems to process information incorrectly and could disrupt businesses,
such as the Fund, that rely on computers.
While it is impossible to determine in advance all of the risks to the Fund, the
Fund could experience interruptions in basic financial and operational
functions. Fund shareholders could experience errors or disruptions in Fund
share transactions or Fund communications.
The Fund's service providers are making changes to their computer systems to fix
any Year 2000 problems. In addition, they are working to gather information from
third-party providers to determine their Year 2000 readiness.
Year 2000 problems would also increase the risks of the Fund's investments. To
assess the potential effect of the Year 2000 problem, the Adviser is reviewing
information regarding the Year 2000 readiness of issuers of securities the Fund
may purchase. The financial impact of these issues for the Fund is still being
determined. There can be no assurance that potential Year 2000 problems would
not have a material adverse effect on the Fund.
Financial Information
FINANCIAL HIGHLIGHTS
The following Financial Highlights will help you understand the Fund's financial
performance for its past five fiscal years or since inception, if the life of
the Fund is shorter. Some of the information is presented on a per share basis.
Total returns represent the rate an investor would have earned (or lost) on an
investment in the Fund, assuming reinvestment of any dividends and capital
gains.
This information has been audited by Deloitte & Touche LLP, whose report, along
with the Fund's audited financial statements, is included in this prospectus.
Financial Highlights-Class A Shares
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 38.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $12.08 $11.71 $11.35 $11.23 $10.94
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.56 0.62 0.62 0.65 0.65
Net realized and unrealized gain (loss)
on investments (0.79) 0.43 0.39 0.12 0.27
TOTAL FROM INVESTMENT OPERATIONS (0.23) 1.05 1.01 0.77 0.92
LESS DISTRIBUTIONS:
Distributions from net investment income (0.56) (0.64) (0.65) (0.65) (0.63)
Distributions from net realized gain on investments (0.09) (0.04) - - -
Distributions in excess of net realized gain
on investments (0.01) - - - -
TOTAL DISTRIBUTIONS (0.66) (0.68) (0.65) (0.65) (0.63)
NET ASSET VALUE, END OF PERIOD $11.19 $12.08 $11.71 $11.35 $11.23
TOTAL RETURN 1 (2.05%) 8.72% 9.12% 6.99% 8.76%
RATIOS TO AVERAGE NET ASSETS:
Expenses 2 0.85% 0.85% 0.97% 1.00% 1.03%
Net investment income 2 4.64% 4.74% 5.12% 5.48% 5.64%
Expense (after waivers and reimbursements) 0.75% 0.75% 0.75% 0.75% 0.75%
Net investment income (after waivers
and reimbursements) 4.74% 4.84% 5.34% 5.73% 5.92%
SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $221,599 $237,705 $212,792 $84,116 $83,722
Portfolio turnover 28% 24% 30% 23% 59%
</TABLE>
1 Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
2 During the period, certain fees were voluntarily waived and reimbursed. If
such voluntary waivers and reimbursements had not occurred, the ratios would
have been as indicated.
See Notes which are an integral part of the Financial Statements
Financial Highlights-Class B Shares
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 38.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31 1999 1998 1997 1
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $12.08 $11.71 $11.52
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income 0.47 0.54 0.30
Net realized and
unrealized gain (loss) on
investments (0.78) 0.42 0.20
TOTAL FROM INVESTMENT
OPERATIONS (0.31) 0.96 0.50
LESS DISTRIBUTIONS:
Distributions from net
investment income (0.47) (0.55) (0.31)
Distributions from net
realized gain on
investments (0.09) (0.04) -
Distributions in excess of
net realized gain on
investments (0.01) - -
TOTAL DISTRIBUTIONS (0.57) (0.59) (0.31)
NET ASSET VALUE, END OF
PERIOD $11.20 $12.08 $11.71
TOTAL RETURN 2 (2.70%) 7.92% 4.41%
RATIOS TO AVERAGE NET
ASSETS:
Expenses 3 1.60% 1.61% 1.72% 4
Net investment income 3 3.90% 3.98% 4.15% 4
Expense (after waivers and
reimbursements) 1.52% 1.53% 1.25% 4
Net investment income
(after waivers and
reimbursements) 3.98% 4.06% 4.62% 4
SUPPLEMENTAL DATA:
Net assets, end of period
(000 omitted) $46,828 $30,629 $7,906
Portfolio turnover 28% 24% 30%
</TABLE>
1 Reflects operations for the period from March 4, 1997 (date of initial public
investment) to August 31, 1997.
2 Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
3 During the period, certain fees were voluntarily waived and reimbursed. If
such voluntary waivers and reimbursements had not occurred, the ratios would
have been as indicated.
4 Computed on an annualized basis.
See Notes which are an integral part of the Financial Statements
Portfolio of Investments
AUGUST 31, 1999
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING 1 VALUE
<S> <C> <C> <C>
LONG-TERM MUNICIPALS-90.3%
PENNSYLVANIA-89.5%
$ 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%), 6/1/2022
(@102) NR $ 2,171,600
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 Baa1 1,411,035
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 1,756,140
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 1,297,695
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 3,689,000
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 309,255
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 310,875
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 1,390,575
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 1,394,895
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 3,971,960
2,635,000 Allegheny County, PA,
Hospital Development
Authority, Refunding
Revenue Bonds, 6.625%
(Allegheny General
Hospital), 7/1/2009 AAA 2,822,744
3,185,000 Allegheny County, PA, IDA,
Environmental Improvement
Refunding Revenue Bonds
(Series 1998), 5.50% (USX
Corp.), 12/1/2029 BBB- 2,846,084
1,250,000 Allegheny County, PA, IDA,
Environmental Improvement
Refunding Revenue Bonds
(Series 1998), 5.60% (USX
Corp.), 9/1/2030 BBB- 1,132,988
1,500,000 Allegheny County, PA IDA,
Health Care Facilities
Revenue Refunding Bonds
(Series 1998), 5.75%
(Presbyterian SeniorCare-
Westminister Place
Project), 1/1/2023 NR 1,396,245
500,000 Allegheny County, PA
Institution District, GO
UT Bonds, 7.30%
(MBIA INS)/(Original Issue
Yield: 7.375%), 4/1/2009 AAA 509,835
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING 1 VALUE
<S> <C> <C> <C>
LONG-TERM MUNICIPALS-
continued
PENNSYLVANIA-CONTINUED
$ 345,000 Allegheny County, PA,
Residential Finance
Agency, SFM Revenue Bonds
(Series K), 7.75% (GNMA
COL), 12/1/2022 Aaa $ 352,266
570,000 Allegheny County, PA,
Residential Finance
Agency, SFM Revenue Bonds
(Series Q), 7.40% (GNMA
COL), 12/1/2022 Aaa 592,116
2,060,000 Allentown, PA, Area
Hospital Authority,
Revenue Bonds (Series B),
6.75% (Sacred Heart
Hospital of Allentown),
11/15/2015 BBB 2,159,457
1,000,000 Berks County, PA,
Municipal Authority,
Health Care Revenue Bonds
(Series 1998), 5.00%
(Reading Hospital &
Medical Center and the
Highlands at
Wyomissing)/(Original
Issue Yield: 5.23%),
3/1/2028 AA- 873,440
3,325,000 Bethlehem, PA, Area
Vocational-Technical
School Authority,
Guaranteed Lease Revenue
Bonds (Series 1999), 5.50%
(Bethlehem Area
Vocational-Technical
School)/(Original Issue
Yield: 5.55%), 9/1/2020 Aaa 3,278,184
4,250,000 Bradford County, PA, IDA,
Solid Waste Disposal
Revenue Bonds
(Series A), 6.60%
(International Paper Co.),
3/1/2019 BBB+ 4,436,065
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 NR 984,860
2,010,000 Bucks County, PA, Water &
Sewer Authority, Revenue
Bonds, 5.45% (Neshaminy
Interceptor Sewer
System)/(AMBAC
INS)/(Original Issue
Yield: 5.50%), 6/1/2015 Aaa 2,008,332
1,500,000 Bucks County, PA, Water &
Sewer Authority, Revenue
Bonds, 5.50% (Neshaminy
Interceptor Sewer
System)/(AMBAC
INS)/(Original Issue
Yield: 5.60%), 6/1/2017 Aaa 1,493,970
2,100,000 Chartiers Valley, PA,
Refunding Revenue Bonds,
6.15%, 3/1/2007 AAA 2,239,104
1,100,000 Chester County, PA, HEFA,
Mortgage Refunding Revenue
Bonds, 5.50% (Tel Hai
Obligated Group
Project)/(Original Issue
Yield: 5.60%), 6/1/2025 BBB 976,998
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- 1,407,645
1,575,000 Commonwealth of
Pennsylvania, GO UT Bonds,
6.00% (Original Issue
Yield: 6.15%), 7/1/2007 AA 1,700,811
4,000,000 Commonwealth of
Pennsylvania, UT GO Bonds,
5.00% (Original Issue
Yield: 5.25%), 6/1/2018 AAA 3,729,840
150,000 Dauphin County, PA,
Revenue Bonds, 6.00% (MBIA
INS), 6/1/2002 AAA 150,890
150,000 Dauphin County, PA,
Revenue Bonds, 6.10% (MBIA
INS), 6/1/2003 AAA 150,926
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- 2,664,665
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING 1 VALUE
<S> <C> <C> <C>
LONG-TERM MUNICIPALS-
continued
PENNSYLVANIA-CONTINUED
$ 300,000 Delaware County, PA,
Authority, Hospital
Revenue Bonds, 5.90%
(Riddle Memorial
Hospital)/(Original Issue
Yield: 6.10%), 1/1/2002 A- $ 310,293
1,000,000 Delaware County, PA,
Authority, Revenue Bonds (Series 1996), 5.50% (Elwyn,
Inc.)/(AMBAC INS)/ (Original Issue Yield:
5.69%), 6/1/2020 AAA 961,060
10,000,000 Delaware Valley, PA,
Regional Finance
Authority, Local
Government Revenue Bonds
(Series 1997D), 5.60%,
7/1/2017 AAA 10,117,600
500,000 Erie County, PA, Prison
Authority, Lease Revenue
Bonds, 6.45%
(MBIA LOC)/(Original Issue
Yield: 6.50%), 11/1/2001 AAA 524,035
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 1,004,940
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 2,010,080
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 2,772,193
500,000 Indiana County, PA,
Hospital Authority,
Revenue Refunding Bonds
(Series B), 6.20% (Indiana
Hospital, PA)/(AMBAC
INS)/(Original Issue
Yield: 6.30%), 7/1/2006 AAA 526,320
800,000 Jeannette Health Services
Authority, PA, Hospital
Revenue Bonds (Series A of
1996), 6.00% (Jeannette
District Memorial
Hospital)/(Original Issue
Yield: 6.15%), 11/1/2018 BBB+ 800,480
2,915,000 Jim Thorpe Area School
District, PA, UT GO Bonds
(Series A), 5.75%, (MBIA
INS) 3/15/2017 AAA 2,943,859
1,000,000 Lackawanna Trail School
District, PA, UT GO
Refunding Bonds, 6.90%
(AMBAC INS), 3/15/2010 AAA 1,046,630
3,000,000 Lancaster, PA, School
District, GO Bonds (Series
1997), 5.40%
(FGIC INS)/(Original Issue
Yield: 5.50%), 2/15/2014 AAA 3,000,090
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 AAA 1,533,870
1,500,000 Lebanon County, PA,
Hospital Authority,
Hospital Revenue Bonds,
6.00% (Good Samaritan
Hospital)/(Original Issue
Yield: 6.10%), 11/15/2018 BBB+ 1,500,660
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 1,054,500
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 2,238,751
325,000 Lower Dauphin, PA, School
District, UT GO Bonds,
5.75% (United States
Treasury PRF), 9/15/2002
(@100) AAA 328,689
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING 1 VALUE
<S> <C> <C> <C>
LONG-TERM MUNICIPALS-
continued
PENNSYLVANIA-CONTINUED
$ 1,000,000 Luzerne Co., PA, UT GO
Bonds, 5.625% (FGIC
INS)/(Original Issue
Yield: 5.78%), 12/15/2021 AAA $ 993,620
2,500,000 Luzerne County, PA, IDA,
Revenue Refunding Bonds
(Series A), 7.00%
(Pennsylvania Gas & Water
Co.), 12/1/2017 AAA 2,753,875
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- 4,138,280
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 947,880
2,360,000 Monroe County, PA,
Hospital Authority,
Hospital Revenue Bonds,
(Series A), 5.125% (Pocono
Medical Center)/(AMBAC
INS)/(Original Issue
Yield: 5.40%), 7/1/2015 AAA 2,232,466
3,250,000 Montgomery County, PA,
IDA, Retirement Community
Revenue Bonds (Series
1996B), 5.75% (Adult
CommunitiesTotal Services,
Inc.)/(Original Issue
Yield: 5.98%), 11/15/2017 A- 3,110,153
1,000,000 Montgomery County, PA,
IDA, Retirement Community
Revenue Refunding Bonds
(Series 1996A), 5.875%
(Adult CommunitiesTotal
Services, Inc.)/(Original
Issue Yield: 6.125%),
11/15/2022 A- 964,350
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 470,365
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 1,200,901
1,225,000 North Penn, PA, School
District, Refunding
Revenue Bonds, 6.20%,
3/1/2007 Aaa 1,249,843
110,000 North Penn, PA, Water
Authority, Revenue Bonds,
6.10% (FGIC INS),
11/1/2003 AAA 117,192
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 524,425
500,000 Northern Cambria, PA,
School District, GO UT
Bonds, 7.10% (AMBAC INS),
1/15/2007 (@100) AAA 506,465
500,000 Pennsylvania Convention
Center Authority,
Refunding Revenue Bonds
(Series A), 6.25%,
9/1/2004 BBB 518,450
1,000,000 Pennsylvania Convention
Center Authority, Revenue
Bonds, (Series A), 6.70%
(FGIC INS)/(Original Issue
Yield: 6.843%), 9/1/2016 AAA 1,137,630
5,000,000 Pennsylvania EDFA, Exempt
Facilities Revenue Bonds
(Series 1997B), 6.125%
(National Gypsum Co.),
11/1/2027 NR 4,833,700
4,000,000 Pennsylvania EDFA,
Resource Recovery Revenue
Bonds (Series A), 6.40%
(Northampton Generating),
1/1/2009 BBB- 4,083,920
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING 1 VALUE
<S> <C> <C> <C>
LONG-TERM MUNICIPALS-
continued
PENNSYLVANIA-CONTINUED
$ 4,230,000 Pennsylvania EDFA, Revenue
Bonds (Series 1998A),
5.25% (Northwestern Human
Services, Inc.)/(Original
Issue Yield: 5.668%),
6/1/2028 BBB $ 3,613,351
755,000 Pennsylvania Housing
Finance Authority,
Refunding Revenue Bonds,
(Series 54A), 5.375% (FHA
INS), 10/1/2028 AA+ 765,578
915,000 Pennsylvania Housing
Finance Authority, Revenue
Bonds, (Series 48),
5.375%, 10/1/2016 AA+ 915,952
1,000,000 Pennsylvania Housing
Finance Authority, Revenue
Bonds,
(Series 96/53A), 5.40%,
10/1/2027 AA+ 991,240
575,000 Pennsylvania Housing
Finance Authority, Revenue
Bonds,
(Series 96/52B), 5.55%
(FHA/VA mtgs. GTD),
10/1/2012 AA+ 576,173
915,000 Pennsylvania Housing
Finance Authority, Revenue
Bonds, 5.65%, 4/1/2020 AA+ 908,348
495,000 Pennsylvania Housing
Finance Authority, SFM
Revenue Bonds
(Series 33), 6.90%,
4/1/2017 AA+ 515,196
100,000 Pennsylvania Housing
Finance Authority, SFM
Revenue Bonds
(Series 41-B), 5.90%,
10/1/2005 AA+ 103,300
100,000 Pennsylvania Housing
Finance Authority, SFM
Revenue Bonds
(Series 42), 5.90%,
10/1/2004 AA+ 104,333
345,000 Pennsylvania Housing
Finance Authority, SFM
Revenue Bonds
(Series 43), 6.35%,
4/1/2001 AA+ 350,451
1,425,000 Pennsylvania Housing
Finance Authority, SFM
Revenue Bonds,
(Series 62A), 5.50%,
10/1/2022 AA+ 1,355,275
3,000,000 Pennsylvania Housing
Finance Authority, Single
Family Mortgage Revenue
Bonds (Series 67A), 5.85%,
10/1/2018 AA+ 2,982,780
2,000,000 Pennsylvania
Intergovernmental Coop
Authority, Special Tax
Revenue Bonds, 5.625%
(MBIA INS)/(Original Issue
Yield: 97.245%), 6/15/2023 AAA 2,086,980
3,085,000 Pennsylvania
Intergovernmental Coop Authority, Special Tax Revenue Refunding
Bonds (Series 1999), 5.00% (Original Issue Yield:
5.13%), 6/15/2021 AAA 2,804,697
5,500,000 Pennsylvania State Higher
Education Facilities
Authority, Health Services
Revenue Bonds (Series A of
1996), 5.75% (University
of Pennsylvania Health
Services)/(Original Issue
Yield: 6.035%), 1/1/2022 AA 5,173,905
2,000,000 Pennsylvania State Higher
Education Facilities
Authority, Revenue Bonds
(Series 1996), 7.20%
(Thiel College), 5/15/2026 NR 2,283,860
3,000,000 Pennsylvania State Higher
Education Facilities Authority, Revenue Bonds (Series 1999A),
4.875% (UPMC Health System)/(FSA INS)(Original Issue Yield:
5.12%), 8/1/2019 AAA 2,634,390
2,000,000 Pennsylvania State Higher Education Facilities Authority,
Revenue Bonds (Series N), 5.875% (Original Issue Yield:
5.913%), 6/15/2021 AAA 2,012,020
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING 1 VALUE
<S> <C> <C> <C>
LONG-TERM MUNICIPALS-
continued
PENNSYLVANIA-CONTINUED
$ 2,000,000 Pennsylvania State Higher
Education Facilities
Authority, Revenue Bonds,
5.00% (Thomas Jefferson
University)/(AMBAC
INS)/(Original Issue
Yield: 5.22%), 7/1/2019 AAA $ 1,849,320
4,515,000 Pennsylvania State Higher
Education Facilities
Authority, Revenue Bonds,
5.20% (University of the
Arts)/(Asset Guaranty
INS)/(Original Issue
Yield: 5.30%), 3/15/2025 AA 4,090,048
2,000,000 Pennsylvania State Higher
Education Facilities
Authority, Revenue Bonds,
6.375% (Drexel
University)/(Original
Issue Yield: 6.415%),
5/1/2017 A- 2,084,520
750,000 Pennsylvania State Higher Education Facilities Authority,
Revenue Bonds, 6.80% (MBIA LOC)/ (Original Issue Yield:
6.85%), 6/15/2001 AAA 768,030
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 1,438,035
500,000 Pennsylvania State IDA,
Economic Development
Revenue Bonds (Series A),
6.80% (Original Issue
Yield: 6.85%), 1/1/2001 AAA 517,140
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 1,040,700
500,000 Philadelphia, PA, Gas
Works, Revenue Bonds,
7.40%, 6/15/2000 BBB 512,960
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 BBB+ 2,368,008
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+ 1,646,262
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+ 1,623,092
325,000 Philadelphia, PA,
Hospitals & Higher
Education Facilities
Authority, Refunding
Revenue Bonds, 6.15%
(Pennsylvania
Hospital)/(Original Issue
Yield: 6.25%), 7/1/2005 NR 347,835
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 259,278
5,195,000 Philadelphia, PA, Parking
Authority, Airport Parking
Revenue Bonds (Series
1999), 5.625%, 9/1/2016 AAA 5,226,534
1,240,000 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 Baa3 1,197,034
4,000,000 Philadelphia, PA, (Series
1995A) Airport Revenue
Bonds, 6.10%
(Philadelphia, PA Airport
System)/(Series A), (AMBAC
INS)/(Original Issue
Yield: 6.40%), 6/15/2025 AAA 4,047,720
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING 1 VALUE
<S> <C> <C> <C>
LONG-TERM MUNICIPALS-
continued
PENNSYLVANIA-CONTINUED
$ 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 $ 9,252,240
3,500,000 Philadelphia, PA,
Refunding UT GO Bonds,
5.125% (FGIC INS),
5/15/2014 AAA 3,363,395
855,000 Philadelphia, PA, Revenue
Bonds, 10.875% (United
States Treasury PRF),
7/1/2008 (@100) Aaa 1,019,322
4,000,000 Pittsburgh, PA, Auditorium
Authority, Regional Asset
District Sales Tax Revenue
Bonds (Series 1999), 5.00%
(AMBAC INS)/(Original
Issue Yield: 5.23%),
2/1/2019 AAA 3,684,560
765,000 Pittsburgh, PA, Urban
Redevelopment Authority,
Mortgage Revenue Bonds
(Series 1997A), 6.15%,
10/1/2016 AAA 786,122
420,000 Pittsburgh, PA, Urban
Redevelopment Authority,
Mortgage Revenue Bonds
(Series 1997C), 5.35%,
10/1/2009 AAA 417,430
1,260,000 Pittsburgh, PA, Urban
Redevelopment Authority,
Mortgage Revenue Bonds
(Series 1997C), 5.90%,
10/1/2022 AAA 1,269,450
1,430,000 Pittsburgh, PA, Urban
Redevelopment Authority,
Revenue Bonds, 5.45% (FGIC
INS)/(PNC Bank, N.A. LOC),
6/1/2028 AAA 1,357,370
2,000,000 Pittsburgh, PA, Water &
Sewer Authority, Water &
Sewer System Revenue Bonds
(Series C), 5.25% (FSA
INS), 9/1/2022 AAA 1,881,800
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 4,435,992
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 2,680,474
1,000,000 Seneca Valley, PA, School District, Refunding UT GO Bonds
(Series 1998AA), 5.15% (Original Issue Yield:
5.20%), 2/15/2020 AAA 934,610
1,920,000 Shaler, PA, School
District Authority, GO UT
Bonds, 6.25%, 4/15/2008 AAA 2,029,957
2,650,000 Sharon, PA, General
Hospital Authority,
Hospital Revenue Bonds,
6.875% (Sharon Regional
Health System), 12/1/2022 AAA 2,902,280
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 1,899,960
2,000,000 Southeastern, PA,
Transportation Authority,
Special Revenue Bonds,
5.375% (FGIC INS)/
(Original Issue Yield:
5.70%), 3/1/2017 AAA 1,957,840
8,000,000 Southeastern, PA Transportation Authority, Special Revenue
Bonds, 5.375% (FGIC INS)/ (Original Issue Yield:
5.75%), 3/1/2022 AAA 7,706,960
100,000 Spring Ford, PA School
District, UT GO Refunding
Bonds (Series AA), 5.80%,
8/1/2005 AAA 101,632
500,000 State Public School
Building Authority, PA,
College Revenue Bonds,
6.50% (Harrisburg Area
Community College-D)/(MBIA
LOC), 4/1/2002 AAA 526,540
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING 1 VALUE
<S> <C> <C> <C>
LONG-TERM MUNICIPALS-
continued
PENNSYLVANIA-CONTINUED
$ 1,000,000 Susquehanna, PA, Area
Regional Airport
Authority, Airport
Facilities Revenue Bonds
(Series 1999), 5.50% (Aero
Harrisburg)/(Original
Issue Yield: 5.85%),
1/1/2024 NR $ 930,920
40,000 Swarthmore Boro Authority
PA, Refunded Revenue
Bonds, 6.00% (Original
Issue Yield: 6.10%),
9/15/2006 AA+ 42,691
7,000,000 University of Pittsburgh,
University Refunding
Revenue Bonds
(Series 1997B), 5.00%
(Original Issue Yield:
5.287%), 6/1/2017 AAA 6,549,480
3,000,000 Upper Darby School District, PA, UT GO Bonds, 5.00% (AMBAC
INS)/ (Original Issue Yield:
5.10%), 5/1/2019 Aaa 2,775,030
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 1,059,280
680,000 Washington County, PA,
Authority, Lease Revenue
Bonds, 7.00% (AMBAC INS),
6/15/2000 (@103) AAA 706,805
400,000 Washington County, PA,
Authority, Lease Revenue
Bonds, 7.875%, 12/15/2018 AAA 513,431
1,000,000 West View, PA, Municipal
Authority, Special
Obligation Bonds, 9.50%,
11/15/2014 AAA 1,328,520
695,000 Westmoreland County, PA,
Municipal Authority,
Special Obligation Bonds,
9.125%, 7/1/2010 AAA 805,330
TOTAL 240,181,826
PUERTO RICO-0.8%
1,000,000 Puerto Rico Highway and
Transportation Authority,
Residual Interest Tax-
Exempt Securites (Series
PA 331A), 7.20% (AMBAC
INS), 7/1/2013 NR 1,057,520
1,000,000 Puerto Rico Highway and
Transportation Authority,
Residual Interest Tax-
Exempt Securities (Series
PA 331B), 7.20% (AMBAC
INS), 7/1/2014 NR 1,049,900
TOTAL 2,107,420
VIRGIN ISLANDS-0.0%
70,000 Virgin Islands HFA, SFM Revenue Refunding Bonds (Series A),
5.80% (GNMA
COL), 3/1/2005 AAA 72,330
TOTAL LONG-TERM MUNICIPALS
(IDENTIFIED COST
$243,664,658) 242,361,576
SHORT-TERM INVESTMENTS-
10.8%
PENNSYLVANIA-9.8%
12,880,000 Erie County, PA, Hospital
Authority, (Series 1998B),
Daily VRDNs (Hamot Health
Foundation)/(AMBAC
INS)/(PNC Bank, N.A. LIQ),
2.95%, 5/15/2020 AAA 12,880,000
13,500,000 South Fork Municipal
Authority, PA, (Series A)
Daily VRDNs (Conemaugh
Health System)/(MBIA
INS)/(Credit Suisse First
Boston LIQ), 3.10%,
7/1/2008 AAA 13,500,000
TOTAL 26,380,000
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING 1 VALUE
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS-
continued
PUERTO RICO-1.0%
$ 2,600,000 Puerto Rico Commonwealth
Infrastructure Financing
Authority, Floater
Certificates (Series 1998-
139) Weekly VRDNs (AMBAC
INS)/(Morgan Stanley, Dean
Witter Municipal Funding,
Inc. LIQ), 2.99%, 7/1/2028 AAA $ 2,600,000
TOTAL SHORT-TERM
INVESTMENTS (AT AMORTIZED
COST) $ 28,980,000
TOTAL INVESTMENTS
(IDENTIFIED COST
$272,644,658) 2 $ 271,341,576
</TABLE>
Securities that are subject to alternative minimum tax represent 12.2% of the
portfolio as calculated based upon total portfolio market valve.
1 Please refer to the Appendix of the Statement of Additional Information for an
explanation of the credit ratings. Current credit ratings are unaudited.
2 The cost of investments for federal tax purposes amounts to $272,644,658. The
net unrealized depreciation of investments on a federal tax basis amounts to
$(1,303,082) which is comprised of $4,837,262 appreciation and $6,140,344
depreciation at August 31, 1999.
Note: The categories of investments are shown as a percentage of net assets
($268,426,689) at August 31, 1999.
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
See Notes which are an integral part of the Financial Statements
Statement of Assets and Liabilities
AUGUST 31, 1999
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS:
Total investments in
securities, at value
(identified and tax cost
$272,644,658) $ 271,341,576
Cash 236,798
Income receivable 3,922,025
Receivable for investments
sold 20,000
Receivable for shares sold 280,667
Receivable for daily
variation margin 6,560
TOTAL ASSETS 275,807,626
LIABILITIES:
Payable for investments
purchased $ 6,332,505
Payable for shares
redeemed 508,222
Income distribution
payable 478,681
Accrued expenses 61,529
TOTAL LIABILITIES 7,380,937
Net assets for 23,977,587
shares outstanding $ 268,426,689
NET ASSETS CONSIST OF:
Paid in capital $ 270,987,711
Net unrealized
depreciation of
investments and futures
transactions (1,321,944)
Accumulated net realized
loss on investments (602,998)
Distributions in excess of
net investment income (636,080)
TOTAL NET ASSETS $ 268,426,689
NET ASSET VALUE, OFFERING
PRICE AND REDEMPTION
PROCEEDS PER SHARE
CLASS A SHARES:
Net Asset Value Per Share
($221,598,985 / 19,794,704
shares outstanding) $11.19
Offering Price Per Share
(100/95.50 of $11.19) 1 $11.72
Redemption Proceeds Per
Share (100.00/100 of
$11.19) 2 $11.19
CLASS B SHARES:
Net Asset Value Per Share
($46,827,704 / 4,182,883
shares outstanding) $11.20
Offering Price Per Share
(100/100.00 of $11.20) 1 $11.20
Redemption Proceeds Per
Share (94.50/100 of
$11.20) 2 $10.58
</TABLE>
1 See "What Do Shares Cost?" in the Prospectus.
2 See "Sales Charge When You Redeem" in the Prospectus.
See Notes which are an integral part of the Financial Statements
Statement of Operations
YEAR ENDED AUGUST 31, 1999
<TABLE>
<CAPTION>
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest $ 15,077,894
EXPENSES:
Investment advisory fee $ 1,097,037
Administrative personnel
and services fee 206,792
Custodian fees 28,824
Transfer and dividend
disbursing agent fees and
expenses 117,498
Directors'/Trustees' fees 5,009
Auditing fees 13,927
Legal fees 4,231
Portfolio accounting fees 97,977
Distribution services fee-
Class B Shares 299,784
Shareholder services fee-
Class A Shares 585,720
Shareholder services fee-
Class B Shares 99,928
Share registration costs 21,180
Printing and postage 60,105
Insurance premiums 2,117
Miscellaneous 5,571
TOTAL EXPENSES 2,645,700
WAIVERS:
Waiver of investment
advisory fee $ (223,304)
Waiver of shareholder
services fee-Class A
Shares (46,858)
TOTAL WAIVERS (270,162)
Net expenses 2,375,538
Net investment income 12,702,356
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
AND FUTURES TRANSACTIONS:
Net realized gain (loss) on
investments and futures
transactions (459,349)
Net change in unrealized
appreciation
(depreciation)
of investments and futures
transactions (17,976,493)
Net realized and
unrealized gain (loss) on
investments and
futures transactions (18,435,842)
Change in net assets
resulting from operations $ (5,733,486)
</TABLE>
See Notes which are an integral part of the Financial Statements
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31 1999 1998
<S> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS
OPERATIONS:
Net investment income $ 12,702,356 $ 11,625,708
Net realized gain (loss) on
investments ($(143,649)
and $2,643,156,
respectively, as computed
for federal tax purposes) (459,349) 2,643,156
Net change in unrealized
appreciation
(depreciation) (17,976,493) 6,503,027
CHANGE IN NET ASSETS
RESULTING FROM OPERATIONS (5,733,486) 20,771,891
DISTRIBUTIONS TO
SHAREHOLDERS:
Distributions from net
investment income
Class A Shares (11,168,636) (11,176,550)
Class B Shares (1,629,212) (807,283)
Distributions from net
realized gains
Class A Shares (1,810,336) (692,628)
Class B Shares (255,129) (44,936)
Distributions in excess of
net realized gains
Class A Shares (100,040) -
Class B Shares (21,220) -
CHANGE IN NET ASSETS
RESULTING FROM
DISTRIBUTIONS
TO SHAREHOLDERS (14,984,573) (12,721,397)
SHARE TRANSACTIONS:
Proceeds from sale of
shares 59,110,607 53,698,762
Net asset value of shares
issued to shareholders in
payment of
distributions declared 8,605,947 7,262,803
Net asset value of shares
issued in connection with
the acquisition of
Federated Pennsylvania
Intermediate Municipal
Trust - 20,752,947
Cost of shares redeemed (46,905,826) (42,128,847)
CHANGE IN NET ASSETS
RESULTING FROM SHARE
TRANSACTIONS 20,810,728 39,585,665
Change in net assets 92,669 47,636,159
NET ASSETS:
Beginning of period 268,334,020 220,697,861
End of period $ 268,426,689 $ 268,334,020
</TABLE>
See Notes which are an integral part of the Financial Statements
Notes to Financial Statements
AUGUST 31, 1999
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 six 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.
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 60
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.
Distributions are determined in accordance with income tax regulations which may
differ from the generally accepted accounting principles. These distributions do
not represent a return of capital for federal income tax purposes.
The following reclassifications have been made to the financial statements:
<TABLE>
<CAPTION>
INCREASE (DECREASE)
UNDISTRIBUTED
ACCUMULATED NET INVESTMENT
PAID-IN CAPITAL GAIN/LOSS INCOME
<S> <C> <C>
$137,977 $44,486 $(182,463)
</TABLE>
Net investment income, net realized gains/losses and net assets are 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.
Additionally, net capital losses of $621,861 attributable to security
transactions incurred after October 31, 1998, are treated as arising on
September 1, 1999, the first day of the fund's next taxable year.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may engage in when-issued or delayed delivery transactions. The Fund
records when-issued securities on the trade date and maintains security
positions such that sufficient liquid assets will be available to make payment
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.
FUTURES CONTRACTS
The Fund purchases stock index futures contracts to manage cashflows, enhance
yield, and to potentially reduce transaction costs. Upon entering into a stock
index futures contract with a broker, the Fund is required to deposit in a
segregated account a specified amount of cash or U.S. government securities.
Futures contracts are valued daily and unrealized gains or losses are recorded
in a "variation margin" account. Daily, the Fund receives from or pays to the
broker a specified amount of cash based upon changes in the variation margin
account. When a contract is closed, the Fund recognizes a realized gain or loss.
Futures contracts have market risks, including the risk that the change in the
value of the contract may not correlate with changes in the value of the
underlying securities. For the year ended August 31, 1999, the Fund had realized
gains of $63,994 on future contracts.
At August 31, 1999, the Fund had outstanding futures contracts as set forth
below:
<TABLE>
<CAPTION>
EXPIRATION CONTRACTS UNREALIZED
DATE TO RECEIVE POSITION DEPRECIATION
<S> <C> <C> <C>
December 1999 15 Municipal Bond Short ($18,862)
</TABLE>
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 1999 1998
CLASS A SHARES: SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 3,020,879 $ 35,437,670 2,592,539 $ 30,277,416
Shares issued to
shareholders in payment of
distributions declared 627,660 7,389,056 566,650 6,739,691
Shares issued in
connection with the
acquisition of William
Penn Interest Income PA Tax
Free Fund - - 1,735,196 20,752,947
Shares redeemed (3,535,185) (41,544,942) (3,391,170) (40,368,961)
NET CHANGE RESULTING FROM
CLASS A
SHARE TRANSACTIONS 113,354 $1,281,784 1,503,215 $17,401,093
<CAPTION>
YEAR ENDED AUGUST 31 1999 1998
CLASS B SHARES: SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 2,003,003 $ 23,672,937 1,964,044 $ 23,421,346
Shares issued to
shareholders in payment of
distributions declared 103,408 1,216,891 43,929 523,112
Shares redeemed (459,373) (5,360,884) (147,500) (1,759,886)
NET CHANGE RESULTING FROM
CLASS B
SHARE TRANSACTIONS 1,647,038 $ 19,528,944 1,860,473 $ 22,184,572
NET CHANGE RESULTING FROM
SHARE TRANSACTIONS 1,760,392 $ 20,810,728 3,363,688 $ 39,585,665
</TABLE>
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE
Federated Investment Management Company, 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
Shares and Class B Shares. The Plan provides that the Fund may incur
distribution expenses according to the following schedule annually, to
compensate FSC.
<TABLE>
<CAPTION>
PERCENTAGE OF
AVERAGE DAILY
NET ASSETS
SHARE CLASS NAME OF CLASS
<S> <C>
Class A 0.40%
Class B 0.75%
</TABLE>
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. Class A
Shares did not incur a distribution services fee for the period ended August 31,
1999, and has no present intention of paying or accruing a distribution services
fee.
SHAREHOLDER SERVICES FEE
Under the terms of a Shareholder Services Agreement with Federated Shareholder
Services Company ("FSSC"), the Fund will pay FSSC 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 FSSC is used to finance certain services for shareholders and to maintain
shareholder accounts. FSSC may voluntarily choose to waive any portion of its
fee. FSSC 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 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.
INTERFUND TRANSACTIONS
During the period ended August 31, 1999, the Fund engaged in purchase and sale
transactions with funds that have a common investment adviser (or affiliated
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 $97,845,000 and $75,300,000 respectively.
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.
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, 1999, were as follows:
<TABLE>
<CAPTION>
<S> <C>
Purchases $ 72,871,593
Sales $ 83,986,044
</TABLE>
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, 1999, 26.6% of the securities in the portfolio of investments are
backed by letters of credit or bond insurance of various financial institutions
and financial guaranty assurance agencies. The percentage of investments insured
by or supported (backed) by a letter of credit from any one institution or
agency did not exceed 13.8% 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
FEDERATED 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, 1999, the related statement of operations for the year then ended,
the statement of changes in net assets for the years ended August 31, 1999 and
1998, 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, 1999, 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, 1999, 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
Boston, Massachusetts
October 15, 1999
[Graphic]
Federated
World-Class Investment Manager
PROSPECTUS
Federated Pennsylvania Municipal
Income Fund
A Portfolio of Federated Municipal Securities Income Trust
CLASS A SHARES
CLASS B SHARES
OCTOBER 31, 1999
A Statement of Additional Information (SAI) dated October 31, 1999, is
incorporated by reference into this prospectus. Additional information about the
Fund's investments is contained in the Fund's Annual and SemiAnnual Reports to
shareholders as they become available. The Annual Report's Management Discussion
& Analysis discusses market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year. To
obtain the SAI, Annual Report, Semi-Annual Report and other information without
charge, and make inquiries, call your investment professional or the Fund at
1-800-341-7400.
You can obtain information about the Fund (including the SAI) by writing to or
visiting the Public Reference Room in Washington, D.C. You may also access fund
information from the EDGAR Database on the SEC's Internet site at
http://www.sec.gov. You can purchase copies of this information by contacting
the SEC by email at [email protected] or by writing to the SEC's Public
Reference Section, Washington, D.C. 20549-0102. Call 1-202- 942-8090 for
information on the Public Reference Room's operations and copying fees.
[Graphic]
Federated
Federated Pennsylvania Municipal
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
1-800-341-7400
WWW.FEDERATEDINVESTORS.COM
Federated Securities Corp., Distributor
Investment Company Act File No. 811-6165
Cusip 625922505
Cusip 625922836
G00577-02 (10/99)
[Graphic]
STATEMENT OF ADDITIONAL INFORMATION
Federated Pennsylvania Municipal Income
Fund
A Portfolio of Federated Municipal Securities Income Trust
CLASS A SHARES
CLASS B SHARES
This Statement of Additional Information (SAI) is not a prospectus. Read this
SAI in conjunction with the prospectus for Federated Pennsylvania Municipal
Income Fund (Fund), dated October 31, 1999. Obtain the prospectus and the Annual
Report's Management Discussion & Analysis without charge by calling
1-800-341-7400.
OCTOBER 31, 1999
[Graphic]
Federated
World-Class Investment Manager
Federated Pennsylvania Municipal Income
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
1-800-341-7400
WWW.FEDERATEDINVESTORS.COM
Federated Securities Corp., Distributor
0090701B (10/99)
[Graphic]
CONTENTS
How is the Fund Organized? 1
Securities in Which the Fund Invests 1
What Do Shares Cost? 4
How is the Fund Sold? 5
Subaccounting Services 6
Redemption in Kind 7
Massachusetts Partnership Law 7
Account and Share Information 7
Tax Information 7
Who Manages and Provides Services to the Fund? 8
How Does the Fund Measure Performance? 11
Who is Federated Investors, Inc.? 13
Investment Ratings 14
Addresses 16
How is the Fund Organized?
The Fund is a non-diversified portfolio of Federated Municipal Securities Income
Trust (Trust). The Trust is an open-end, management investment company that was
established under the laws of the Commonwealth of Massachusetts on August 6,
1990. The Trust may offer separate series of shares representing interests in
separate portfolios of securities. The Fund changed its name from Pennsylvania
Municipal Income Fund to Federated Pennsylvania Municipal Income Fund on
February 26, 1996. Effective October 1, 1999, the Trust changed its name from
Municipal Securities Income Trust to Federated Municipal Securities Income
Trust.
The Board of Trustees (the Board) has established two classes of shares of the
Fund, known as Class A Shares and Class B Shares (Shares). This SAI relates to
both classes of Shares. The Fund's investment adviser is Federated Investment
Management Company (Adviser). The Adviser, formerly known as Federated Advisers,
changed its name effective March 31, 1999.
Securities in Which the Fund Invests
The Fund's principal securities are described in its prospectus. Additional
securities, and further information regarding the principal securities, are
outlined below. In pursuing its investment strategy, the Fund may invest in the
following securities for any purpose that is consistent with its investment
objective.
SECURITIES DESCRIPTIONS AND TECHNIQUES
FIXED INCOME SECURITIES
Fixed income securities pay interest, dividends or distributions at a specified
rate. The rate may be a fixed percentage of the principal or adjusted
periodically. In addition, the issuer of a fixed income security must repay the
principal amount of the security, normally within a specified time. Fixed income
securities provide more regular income than equity securities. However, the
returns on fixed income securities are limited and normally do not increase with
the issuer's earnings. This limits the potential appreciation of fixed income
securities as compared to equity securities.
A security's yield measures the annual income earned on a security as a
percentage of its price. A security's yield will increase or decrease depending
upon whether it costs less (a discount) or more (a premium) than the principal
amount. If the issuer may redeem the security before its scheduled maturity, the
price and yield on a discount or premium security may change based upon the
probability of an early redemption. Securities with higher risks generally have
higher yields.
TAX EXEMPT SECURITIES
Tax exempt securities are fixed income securities that pay interest that is not
subject to federal regular income taxes. Typically, states, counties, cities and
other political subdivisions and authorities issue tax exempt securities. The
market categorizes tax exempt securities by their source of repayment.
MUNICIPAL NOTES
Municipal notes are short-term tax exempt securities. Many municipalities issue
such notes to fund their current operations before collecting taxes or other
municipal revenues. Municipalities may also issue notes to fund capital projects
prior to issuing long-term bonds. The issuers typically repay the notes at the
end of their fiscal year, either with taxes, other revenues or proceeds from
newly issued notes or bonds.
VARIABLE RATE DEMAND INSTRUMENTS
Variable rate demand instruments are tax exempt securities that require the
issuer or a third party, such as a dealer or bank, to repurchase the security
for its face value upon demand. The securities also pay interest at a variable
rate intended to cause the securities to trade at their face value. The Fund
treats demand instruments as short-term securities, because their variable
interest rate adjusts in response to changes in market rates, even though their
stated maturity may extend beyond 13 months.
CREDIT ENHANCEMENT
Common types of credit enhancement include guarantees, letters of credit, bond
insurance and surety bonds. Credit enhancement also includes arrangements where
securities or other liquid assets secure payment of a fixed income security. If
a default occurs, these assets may be sold and the proceeds paid to the
security's holders. Either form of credit enhancement reduces credit risks by
providing another source of payment for a fixed income security.
DERIVATIVE CONTRACTS
Derivative contracts are financial instruments that require payments based upon
changes in the values of designated (or underlying) securities, currencies,
commodities, financial indices or other assets. Some derivative contracts (such
as futures, forwards and options) require payments relating to a future trade
involving the underlying asset. The other party to a derivative contract is
referred to as a counterparty.
Many derivative contracts are traded on securities or commodities exchanges. In
this case, the exchange sets all the terms of the contract except for the price.
Investors make payments due under their contracts through the exchange. Most
exchanges require investors to maintain margin accounts through their brokers to
cover their potential obligations to the exchange. Parties to the contract make
(or collect) daily payments to the margin accounts to reflect losses (or gains)
in the value of their contracts. This protects investors against potential
defaults by the counterparty. Trading contracts on an exchange also allows
investors to close out their contracts by entering into offsetting contracts.
For example, the Fund could close out an open contract to buy an asset at a
future date by entering into an offsetting contract to sell the same asset on
the same date. If the offsetting sale price is more than the original purchase
price, the Fund realizes a gain; if it is less, the Fund realizes a loss.
Exchanges may limit the amount of open contracts permitted at any one time. Such
limits may prevent the Fund from closing out a position. If this happens, the
Fund will be required to keep the contract open (even if it is losing money on
the contract), and to make any payments required under the contract (even if it
has to sell portfolio securities at unfavorable prices to do so). Inability to
close out a contract could also harm the Fund by preventing it from disposing of
or trading any assets it has been using to secure its obligations under the
contract.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest its assets in securities of other investment companies,
including the securities of affiliated money market funds, as an efficient means
of carrying out its investment policies and managing its uninvested cash.
TEMPORARY DEFENSIVE INVESTMENTS
The Fund may make temporary defensive investments in the following taxable
securities:
REPURCHASE AGREEMENTS
Repurchase agreements are transactions in which the Fund buys a security from a
dealer or bank and agrees to sell the security back at a mutually agreed upon
time and price. The repurchase price exceeds the sale price, reflecting the
Fund's return on the transaction. This return is unrelated to the interest rate
on the underlying security. The Fund will enter into repurchase agreements only
with banks and other recognized financial institutions, such as securities
dealers, deemed creditworthy by the Adviser.
The Fund's custodian or subcustodian will take possession of the securities
subject to repurchase agreements. The Adviser or subcustodian will monitor the
value of the underlying security each day to ensure that the value of the
security always equals or exceeds the repurchase price.
Repurchase agreements are subject to credit risks.
REVERSE REPURCHASE AGREEMENTS
Reverse repurchase agreements are repurchase agreements in which the Fund is the
seller (rather than the buyer) of the securities, and agrees to repurchase them
at an agreed upon time and price. A reverse repurchase agreement may be viewed
as a type of borrowing by the Fund. Reverse repurchase agreements are subject to
credit risks. In addition, reverse repurchase agreements create leverage risks
because the Fund must repurchase the underlying security at a higher price,
regardless of the market value of the security at the time of repurchase.
TREASURY SECURITIES
Treasury securities are direct obligations of the federal government of the
United States.
BANK INSTRUMENTS
Bank instruments are unsecured interest bearing deposits with banks. Bank
instruments include bank accounts, time deposits, certificates of deposit and
banker's acceptances.
AGENCY SECURITIES
Agency securities are issued or guaranteed by a federal agency or other
government sponsored entity acting under federal authority (a "GSE"). The United
States supports some GSEs with its full faith and credit. Other GSEs receive
support through federal subsidies, loans or other benefits. A few GSEs have no
explicit financial support, but are regarded as having implied support because
the federal government sponsors their activities.
CORPORATE DEBT SECURITIES
Corporate debt securities are fixed income securities issued by businesses.
Notes, bonds, debentures and commercial paper are the most prevalent types of
corporate debt securities.
COMMERCIAL PAPER
Commercial paper is an issuer's obligation with a maturity of less than nine
months. Companies typically issue commercial paper to pay for current
expenditures. Most issuers constantly reissue their commercial paper and use the
proceeds (or bank loans) to repay maturing paper. If the issuer cannot continue
to obtain liquidity in this fashion, its commercial paper may default. The short
maturity of commercial paper reduces both the market and credit risks as
compared to other debt securities of the same issuer.
INVESTMENT RISKS
There are many factors which may affect an investment in the Fund. The Fund's
principal risks are described in its prospectus. Additional risk factors are
outlined below.
CREDIT RISKS
Fixed income securities generally compensate for greater credit risk by paying
interest at a higher rate. The difference between the yield of a security and
the yield of a U.S. Treasury security with a comparable maturity (the spread)
measures the additional interest paid for risk. Spreads may increase generally
in response to adverse economic or market conditions. A security's spread may
also increase if the security's rating is lowered, or the security is perceived
to have an increased credit risk. An increase in the spread will cause the price
of the security to decline.
LIQUIDITY RISKS
Limited trading opportunities may make it more difficult to sell or buy a
security at a favorable price or time. Consequently, the Fund may have to accept
a lower price to sell a security, sell other securities to raise cash or give up
an investment opportunity, any of which could have a negative effect on the
Fund's performance. Infrequent trading of securities may also lead to an
increase in their price volatility.
FUNDAMENTAL INVESTMENT OBJECTIVE
The Fund's investment objective is to provide current income exempt from federal
regular income tax and the personal income taxes imposed by the Commonwealth of
Pennsylvania. The investment objective may not be changed by the Fund's Trustees
without shareholder approval.
INVESTMENT LIMITATIONS
BORROWING MONEY AND ISSUING SENIOR SECURITIES
The Fund may borrow money, directly or indirectly, and issue senior securities
to the maximum extent permitted under the 1940 Act.
INVESTING IN REAL ESTATE
The Fund may not purchase or sell real estate, provided that this restriction
does not prevent the Fund from investing in issuers which invest, deal, or
otherwise engage in transactions in real estate or interests therein, or
investing in securities that are secured by real estate or interests therein.
The Fund may exercise its rights under agreements relating to such securities,
including the right to enforce security interests and to hold real estate
acquired by reason of such enforcement until that real estate can be liquidated
in an orderly manner.
INVESTING IN COMMODITIES
The Fund may not purchase or sell physical commodities, provided that the Fund
may purchase securities of companies that deal in commodities.
UNDERWRITING
The Fund may not underwrite the securities of other issuers, except that the
Fund may engage in transactions involving the acquisition, disposition or resale
of its portfolio securities, under circumstances where it may be considered to
be an underwriter under the Securities Act of 1933.
LENDING CASH OR SECURITIES
The Fund may not make loans, provided that this restriction does not prevent the
Fund from purchasing debt obligations, entering into repurchase agreements,
lending its assets to broker/dealers or institutional investors and investing in
loans, including assignments and participation interests.
CONCENTRATION OF INVESTMENTS
The Fund will not make investments that will result in the concentration of its
investments in the securities of issuers primarily engaged in the same industry.
Government securities, municipal securities and bank instruments will not be
deemed to constitute an industry.
THE ABOVE LIMITATIONS CANNOT BE CHANGED BY THE BOARD UNLESS AUTHORIZED BY THE
"VOTE OF A MAJORITY OF ITS OUTSTANDING VOTING SECURITIES," AS DEFINED BY THE
INVESTMENT COMPANY ACT OF 1940. THE FOLLOWING LIMITATIONS, HOWEVER, MAY BE
CHANGED BY THE BOARD WITHOUT SHAREHOLDER APPROVAL. SHAREHOLDERS WILL BE NOTIFIED
BEFORE ANY MATERIAL CHANGE IN THESE LIMITATIONS BECOMES EFFECTIVE.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any of its assets, provided
that this shall not apply to the transfer of securities in connection with any
permissible borrowing or to collateral arrangements in connection with
permissible activities.
BUYING ON MARGIN
The Fund will not purchase securities on margin, provided that the Fund may
obtain short-term credits necessary for the clearance of purchases and sales of
securities, and further provided that the Fund may make margin deposits in
connection with its use of financial options and futures, forward and spot
currency contracts, swap transactions and other financial contracts or
derivative instruments.
ILLIQUID SECURITIES
The Fund will not purchase securities for which there is no readily available
market, or enter into repurchase agreements or purchase time deposits maturing
in more than seven days, if immediately after and as a result, the value of such
securities would exceed, in the aggregate, 15% of the Fund's net assets.
RESTRICTED SECURITIES
The Fund may invest its securities subject to restrictions on resale under the
Securities Act of 1933.
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.
In applying the Fund's commodities limitation, investments in transactions
involving futures contracts and options, forward currency contracts, swap
transactions and other financial contracts that settle by payment of cash are
not deemed to be investments in commodities.
In applying the Fund's concentration limitation: (a) utility companies will be
divided according to their services, for example, gas, gas transmission,
electric and telephone will each be considered a separate industry; (b)
financial service companies will be classified according to the end users of
their services, for example, automobile finance, bank finance and diversified
finance will each be considered a separate industry; and (c) asset-backed
securities will be classified according to the underlying assets securing such
securities. To conform to the current view of the Securities and Exchange
Commission (SEC) staff that only domestic bank instruments may be excluded from
industry concentration limitations, the Fund will not exclude foreign bank
instruments from industry concentration limits as long as the policy of the SEC
remains in effect. The Fund will consider concentration to be the investment of
more than 25% of the value of its total assets in any one industry.
DETERMINING MARKET VALUE OF SECURITIES
Market values of the Fund's portfolio securities are determined as follows:
* for fixed income securities, at the last sale price on a national securities
exchange, if available, otherwise, as determined by an independent pricing
service;
* futures contracts and options are generally valued at market values
established by the exchanges on which they are traded at the close of trading on
such exchanges. Options traded in the over-the-counter market are generally
valued according to the mean between the last bid and the last asked price for
the option as provided by an investment dealer or other financial institution
that deals in the option. The Board may determine in good faith that another
method of valuing such investments is necessary to appraise their fair market
value;
* for short-term obligations, according to the mean between bid and asked prices
as furnished by an independent pricing service, except that short-term
obligations with remaining maturities of less than 60 days at the time of
purchase may be valued at amortized cost or at fair market value as determined
in good faith by the Board; and
* for all other securities at fair value as determined in good faith by the
Board.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may consider institutional trading in
similar groups of securities, yield, quality, stability, risk, coupon rate,
maturity, type of issue, trading characteristics, and other market data or
factors. From time to time, when prices cannot be obtained from an independent
pricing service, securities may be valued based on quotes from broker/dealers or
other financial institutions that trade the securities.
What Do Shares Cost?
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.
REDUCING OR ELIMINATING THE FRONT-END SALES CHARGE
You can reduce or eliminate the applicable front-end sales charge, as follows:
QUANTITY DISCOUNTS
Larger purchases of the same Share class reduce the sales charge you pay. You
can combine purchases of Shares made on the same day by you, your spouse and
your children under age 21. In addition, purchases made at one time by a trustee
or fiduciary for a single trust estate or a single fiduciary account can be
combined.
ACCUMULATED PURCHASES
If you make an additional purchase of Shares, you can count previous Share
purchases still invested in the Fund in calculating the applicable sales charge
on the additional purchase.
CONCURRENT PURCHASES
You can combine concurrent purchases of the same share class of two or more
Federated Funds in calculating the applicable sales charge.
LETTER OF INTENT (CLASS A SHARES)
You can sign a Letter of Intent committing to purchase a certain amount of the
same class of Shares within a 13-month period to combine such purchases in
calculating the sales charge. The Fund's custodian will hold Shares in escrow
equal to the maximum applicable sales charge. If you complete the Letter of
Intent, the Custodian will release the Shares in escrow to your account. If you
do not fulfill the Letter of Intent, the Custodian will redeem the appropriate
amount from the Shares held in escrow to pay the sales charges that were not
applied to your purchases.
REINVESTMENT PRIVILEGE
You may reinvest, within 120 days, your Share redemption proceeds at the next
determined NAV without any sales charge.
PURCHASES BY AFFILIATES OF THE FUND
The following individuals and their immediate family members may buy Shares at
NAV without any sales charge because there are nominal sales efforts associated
with their purchases:
* the Trustees, Directors, employees and sales representatives of the Fund,
the Adviser, the Distributor and their affiliates;
* any associated person of an investment dealer who has a sales agreement
with the Distributor; and
* trusts, pension or profit-sharing plans for these individuals.
FEDERATED LIFE MEMBERS
Shareholders of the Fund known as "Federated Life Members" are exempt from
paying any front-end sales charge. These shareholders joined the Fund
originally:
* through the "Liberty Account," an account for Liberty Family of Funds
shareholders on February 28, 1987 (the Liberty Account and Liberty Family of
Funds are no longer marketed); or
* as Liberty Account shareholders by investing through an affinity group prior
to August 1, 1987.
REDUCING OR ELIMINATING THE CONTINGENT DEFERRED SALES CHARGE
These reductions or eliminations are offered because: no sales commissions have
been advanced to the investment professional selling Shares; the shareholder has
already paid a Contingent Deferred Sales Charge (CDSC); or nominal sales efforts
are associated with the original purchase of Shares.
Upon notification to the Distributor or the Fund's transfer agent, no CDSC will
be imposed on redemptions:
* following the death or post-purchase disability, as defined in Section
72(m)(7) of the Internal Revenue Code of 1986, of the last surviving
shareholder;
* of Shares that represent a reinvestment within 120 days of a
previous redemption;
* of Shares held by the Trustees, Directors, employees, and sales
representatives of the Fund, the Adviser, the Distributor and their affiliates;
employees of any investment professional that sells Shares according to a sales
agreement with the Distributor; and the immediate family members of the above
persons;
* of Shares originally purchased through a bank trust department, a registered
investment adviser or retirement plans where the third party administrator has
entered into certain arrangements with the Distributor or its affiliates, or any
other investment professional, to the extent that no payments were advanced for
purchases made through these entities;
* which are involuntary redemptions processed by the Fund because the
accounts do not meet the minimum balance requirements; and
CLASS B SHARES ONLY
* which are qualifying redemptions of Class B Shares under a Systematic
Withdrawal Program.
How is the Fund Sold?
Under the Distributor's Contract with the Fund, the Distributor (Federated
Securities Corp.) offers Shares on a continuous, best-efforts basis.
FRONT-END SALES CHARGE REALLOWANCES
The Distributor receives a front-end sales charge on certain Share sales. The
Distributor generally pays up to 90% (and as much as 100%) of this charge to
investment professionals for sales and/or administrative services. Any payments
to investment professionals in excess of 90% of the front-end sales charge are
considered supplemental payments. The Distributor retains any portion not paid
to an investment professional.
RULE 12B-1 PLAN (CLASS A SHARES AND CLASS B SHARES)
As a compensation-type plan, the Rule 12b-1 Plan is designed to pay the
Distributor (who may then pay investment professionals such as banks,
broker/dealers, trust departments of banks, and registered investment advisers)
for marketing activities (such as advertising, printing and distributing
prospectuses, and providing incentives to investment professionals) to promote
sales of Shares so that overall Fund assets are maintained or increased. This
helps the Fund achieve economies of scale, reduce per share expenses, and
provide cash for orderly portfolio management and Share redemptions. In
addition, the Fund's service providers that receive asset-based fees also
benefit from stable or increasing Fund assets.
The Fund may compensate the Distributor more or less than its actual marketing
expenses. In no event will the Fund pay for any expenses of the Distributor that
exceed the maximum Rule 12b-1 Plan fee.
For some classes of Shares, the maximum Rule 12b-1 Plan fee that can be paid in
any one year may not be sufficient to cover the marketing-related expenses the
Distributor has incurred. Therefore, it may take the Distributor a number of
years to recoup these expenses. Federated and its subsidiaries may benefit from
arrangements where the Rule 12b-1 Plan fees related to Class B Shares may be
paid to third parties who have advanced commissions to investment professionals.
SHAREHOLDER SERVICES
The Fund may pay Federated Shareholder Services Company, a subsidiary of
Federated Investors, Inc. (Federated), for providing shareholder services and
maintaining shareholder accounts. Federated Shareholder Services Company may
select others to perform these services for their customers and may pay them
fees.
SUPPLEMENTAL PAYMENTS
Investment professionals may be paid fees out of the assets of the Distributor
and/or Federated Shareholder Services Company (but not out of Fund assets). The
Distributor and/or Federated Shareholder Services Company may be reimbursed by
the Adviser or its affiliates.
Investment professionals receive such fees for providing distribution-related or
shareholder services such as sponsoring sales, providing sales literature,
conducting training seminars for employees, and engineering sales-related
computer software programs and systems. Also, investment professionals may be
paid cash or promotional incentives, such as reimbursement of certain expenses
relating to attendance at informational meetings about the Fund or other special
events at recreational-type facilities, or items of material value. These
payments will be based upon the amount of Shares the investment professional
sells or may sell and/or upon the type and nature of sales or marketing support
furnished by the investment professional.
When an investment professional's customer purchases shares, the investment
professional may receive an amount up to 5.50% of the NAV of Class B Shares.
In addition, the Distributor may pay investment professionals 0.25% of the
purchase price of $1 million or more of Class A Shares that its customer has not
redeemed over the first year.
CLASS A SHARES
Investment professionals purchasing Class A Shares for their customers are
eligible to receive an advance payment from the Distributor based on the
following breakpoints:
<TABLE>
<CAPTION>
ADVANCE PAYMENTS
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 advance payments reset
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 advance payments will be paid only on
those purchases that were not previously subject to a front-end sales charge and
dealer advance payments. Certain retirement accounts may not be eligible for
this program.
A contingent deferred sales charge of 0.75% of the redemption amount applies to
Class A Shares redeemed up to 24 months after purchase. The CDSC does not apply
under certain investment programs where the investment professional does not
receive an advance payment on the transaction including, but not limited to,
trust accounts and wrap programs where the investor pays an account level fee
for investment management.
Subaccounting Services
Certain investment professionals may wish to use the transfer agent's
subaccounting system to minimize their internal recordkeeping requirements. The
transfer agent may charge a fee based on the level of subaccounting services
rendered. Investment professionals holding Shares in a fiduciary, agency,
custodial or similar capacity may charge or pass through subaccounting fees as
part of or in addition to normal trust or agency account fees. They may also
charge fees for other services that may be related to the ownership of Shares.
This information should, therefore, be read together with any agreement between
the customer and the investment professional about the services provided, the
fees charged for those services, and any restrictions and limitations imposed.
Redemption in Kind
Although the Fund intends to pay Share redemptions in cash, it reserves the
right, as described below, to pay the redemption price in whole or in part by a
distribution of the Fund's portfolio securities.
Because the Fund has elected to be governed by Rule 18f-1 under the Investment
Company Act of 1940, the Fund is obligated to pay Share redemptions to any one
shareholder in cash only up to the lesser of $250,000 or 1% of the net assets
represented by such Share class during any 90-day period.
Any Share redemption payment greater than this amount will also be in cash
unless the Fund's Board determines that payment should be in kind. In such a
case, the Fund will pay all or a portion of the remainder of the redemption in
portfolio securities, valued in the same way as the Fund determines its NAV. The
portfolio securities will be selected in a manner that the Fund's Board deems
fair and equitable and, to the extent available, such securities will be readily
marketable.
Redemption in kind is not as liquid as a cash redemption. If redemption is made
in kind, shareholders receiving the portfolio securities and selling them before
their maturity could receive less than the redemption value of the 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 obligations of the Trust. To protect its
shareholders, the Trust has filed legal documents with Massachusetts that
expressly disclaim the liability of its shareholders for acts or obligations of
the Trust.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required by the Declaration of Trust to use its
property to protect or compensate the shareholder. On request, the Trust will
defend any claim made and pay any judgment against a shareholder for any act or
obligation of the Trust. Therefore, financial loss resulting from liability as a
shareholder will occur only if the Trust itself cannot meet its obligations to
indemnify shareholders and pay judgments against them.
Account and Share 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 the Trust have equal voting rights, except that in matters
affecting only a particular Fund or class, only Shares of that Fund or class are
entitled to vote.
Trustees may be removed by the Board or by shareholders at a special meeting. A
special meeting of shareholders will be called by the Board upon the written
request of shareholders who own at least 10% of the Trust's outstanding shares
of all series entitled to vote.
As of October 7, 1999, the following shareholders owned of record, beneficially,
or both, 5% or more of outstanding Shares: Merrill Lynch Pierce Fenner & Smith
(as record owner holding Class A Shares for its clients), Jacksonville, Florida,
owned approximately 1,330,331 Class A Shares (5.54%).
Tax Information
FEDERAL INCOME TAX
The Fund intends to meet requirements of Subchapter M of the Internal Revenue
Code applicable to regulated investment companies. If these requirements are not
met, it will not receive special tax treatment and will pay federal income tax.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income earned and capital gains and losses realized by the
Trust's other portfolios will be separate from those realized by the Fund.
The Fund is entitled to a loss carry-forward, which may reduce the taxable
income or gain that the Fund would realize, and to which the shareholder would
be subject, in the future.
Who Manages and Provides Services to the Fund?
BOARD OF TRUSTEES
The Board is responsible for managing the Trust's business affairs and for
exercising all the Trust's powers except those reserved for the shareholders.
Information about each Board member is provided below and includes each
person's: name, address, birth date, present position(s) held with the Trust,
principal occupations for the past five years and positions held prior to the
past five years, total compensation received as a Trustee from the Trust for its
most recent fiscal year, and the total compensation received from the Federated
Fund Complex for the most recent calendar year. The Trust is comprised of six
funds and the Federated Fund Complex is comprised of 54 investment companies,
whose investment advisers are affiliated with the Fund's Adviser.
As of October 7, 1999, the Fund's Board and Officers as a group owned less than
1% of the Fund's outstanding Class A and Class B Shares.
<TABLE>
<CAPTION>
NAME TOTAL
BIRTH DATE AGGREGATE COMPENSATION
ADDRESS PRINCIPAL OCCUPATIONS COMPENSATION FROM TRUST AND
POSITION WITH TRUST FOR PAST FIVE YEARS FROM TRUST FUND COMPLEX
<S> <C> <C> <C>
JOHN F. DONAHUE*+# Chief Executive Officer $0 $0 for the Trust and
Birth Date: July 28, 1924 and Director or Trustee of 54 other investment
Federated Investors Tower the Federated Fund companies in the
1001 Liberty Avenue Complex; Chairman and Fund Complex
Pittsburgh, PA Director, Federated
CHAIRMAN and TRUSTEE Investors, Inc.; Chairman
and Trustee, Federated Investment
Management Company; Chairman and
Director, Federated Investment
Counseling and Federated Global
Investment Management Corp.; Chairman,
Passport Research, Ltd.
THOMAS G. BIGLEY Director or Trustee of $1,305.35 $113,860.22 for the Trust
Birth Date: February 3, 1934 the Federated Fund and 54 other investment
15 Old Timber Trail Complex; Director, Member companies in the
Pittsburgh, PA of Executive Committee, Fund Complex
TRUSTEE Children's Hospital of
Pittsburgh; Director,
Robroy Industries, Inc.
(coated steel conduits/
computer storage
equipment); formerly:
Senior Partner, Ernst &
Young LLP; Director, MED
3000 Group, Inc.
(physician practice
management); Director,
Member of Executive
Committee, University of
Pittsburgh.
JOHN T. CONROY, JR. Director or Trustee of the $1,436.05 $125,264.48 for the Trust
Birth Date: June 23, 1937 Federated Fund Complex; and 54 other investment
Wood/Commercial Dept. President, Investment companies in the
John R. Wood Associates, Inc. Realtors Properties Corporation; Fund Complex
3255 Tamiami Trail North Senior Vice President,
Naples, FL John R. Wood and
TRUSTEE 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 CONSTANTAKIS Director or Trustee of some $1,305.35 $47,958.02 for the Trust
Birth Date: September 3, 1939 of the Federated Fund and 29 other investment
175 Woodshire Drive Complex; formerly: companies in the
Pittsburgh, PA Partner, Andersen Fund Complex
TRUSTEE Worldwide SC.
JOHN F. CUNNINGHAM++ Director or Trustee of some $331.87 $0 for the Trust
Birth Date: March 5, 1943 of the Federated Fund and 46 other investment
353 El Brillo Way Complex; Chairman, companies in the
Palm Beach, FL President and Chief Fund Complex
TRUSTEE Executive Officer,
Cunningham & Co., Inc.
(strategic business
consulting); Trustee
Associate, Boston College;
Director, Iperia Corp.
(communications/software);
formerly: Director,
Redgate Communications and
EMC Corporation (computer
storage systems).
Previous Positions:
Chairman of the Board and
Chief Executive Officer,
Computer Consoles, Inc.;
President and Chief
Operating Officer, Wang
Laboratories; Director,
First National Bank of
Boston; Director, Apollo
Computer, Inc.
LAWRENCE D. ELLIS, M.D.* Director or Trustee of the $1,305.35 $113,860.22 for the Trust
Birth Date: October 11, 1932 Federated Fund Complex; and 54 other investment
3471 Fifth Avenue Professor of Medicine, companies in the
Suite 1111 University of Pittsburgh; Fund Complex
Pittsburgh, PA Medical Director,
TRUSTEE University of Pittsburgh
Medical Center - Downtown;
Hematologist, Oncologist and Internist,
University of Pittsburgh Medical
Center; Member, National Board of
Trustees, Leukemia Society of America.
PETER E. MADDEN Director or Trustee of the $1,189.91 $113,860.22 for the Trust
Birth Date: March 16, 1942 Federated Funds Complex; and 54 other investment
One Royal Palm Way formerly: Representative, companies in the
100 Royal Palm Way Commonwealth of Fund Complex
Palm Beach, FL Massachusetts General
TRUSTEE Court; President, State
Street Bank and Trust
Company and State Street
Corporation.
Previous Positions:
Director, VISA USA and
VISA International;
Chairman and Director,
Massachusetts Bankers
Association; Director,
Depository Trust
Corporation; Director, The
Boston Stock Exchange.
<CAPTION>
NAME TOTAL
BIRTH DATE AGGREGATE COMPENSATION
ADDRESS PRINCIPAL OCCUPATIONS COMPENSATION FROM TRUST AND
POSITION WITH TRUST FOR PAST FIVE YEARS FROM TRUST FUND COMPLEX
<S> <C> <C> <C>
CHARLES F. MANSFIELD, JR.++ Director or Trustee of some $1,016.39 $0 for the Trust
Birth Date: April 10, 1945 of the Federated Fund and 50 other investment
80 South Road Complex; Management companies in the
Westhampton Beach, NY Consultant. Fund Complex
TRUSTEE Previous Positions: Chief
Executive Officer, PBTC International
Bank; Partner, Arthur Young & Company
(now Ernst & Young LLP); Chief
Financial Officer of Retail Banking
Sector, Chase Manhattan Bank; Senior
Vice President, Marine Midland Bank;
Vice President, Citibank; Assistant
Professor of Banking and Finance, Frank
G. Zarb School of Business, Hofstra
University.
JOHN E. MURRAY, JR., J.D., S.J.D.# Director or Trustee of $1,403.80 $113,860.22 for the Trust
Birth Date: December 20, 1932 the Federated Fund and 54 other investment
President, Duquesne University Complex; President, Law companies in the
Pittsburgh, PA Professor, Duquesne Fund Complex
TRUSTEE University; Consulting
Partner, Mollica & Murray;
Director, Michael Baker
Corp. (engineering,
construction, operations
and technical services).
Previous Positions: Dean
and Professor of Law,
University of Pittsburgh
School of Law; Dean and
Professor of Law,
Villanova University
School of Law.
MARJORIE P. SMUTS Director or Trustee of the $1,305.35 $113,860.22 for the Trust
Birth Date: June 21, 1935 Federated Fund Complex; and 54 other investment
4905 Bayard Street Public Relations/ companies in the
Pittsburgh, PA Marketing/Conference Fund Complex
TRUSTEE Planning.
Previous Positions:
National Spokesperson,
Aluminum Company of
America; television
producer; business owner.
JOHN S. WALSH++ Director or Trustee of some $331.87 $0 for the Trust
Birth Date: November 28, 1957 of the Federated Fund and 48 other investment
2007 Sherwood Drive Complex; President and companies in the
Valparaiso, IN Director, Heat Wagon, Inc. Fund Complex
TRUSTEE (manufacturer of
construction temporary
heaters); President and
Director, Manufacturers
Products, Inc.
(distributor of portable
construction heaters);
President, Portable Heater
Parts, a division of
Manufacturers Products,
Inc.; Director, Walsh &
Kelly, Inc. (heavy highway
contractor); formerly:
Vice President, Walsh &
Kelly, Inc.
J. CHRISTOPHER DONAHUE*+ President or Executive $0 $0 for the Trust
Birth Date: April 11, 1949 Vice President of the and 16 other investment
Federated Investors Tower Federated Fund Complex; companies in the
1001 Liberty Avenue Director or Trustee of some Fund Complex
Pittsburgh, PA of the Funds in the
EXECUTIVE VICE PRESIDENT Federated Fund Complex;
and TRUSTEE President, Chief Executive
Officer and Director, Federated
Investors, Inc.; President and Trustee,
Federated Investment Management Company
and Federated Investment Counseling;
President and Director, Federated
Global Investment Management Corp.;
President, Passport Research, Ltd.;
Trustee, Federated Shareholder Services
Company; Director, Federated Services
Company.
EDWARD C. GONZALES Trustee or Director of some $0 $0 for the Trust
Birth Date: October 22, 1930 of the Funds in the and 1 other investment
Federated Investors Tower Federated Fund Complex; company in the
1001 Liberty Avenue President, Executive Vice Fund Complex
Pittsburgh, PA President and Treasurer of
EXECUTIVE VICE PRESIDENT some of the Funds in the
Federated Fund Complex; Vice Chairman,
Federated Investors, Inc.; Vice
President, Federated Investment
Management Company, Federated
Investment Counseling, Federated Global
Investment Management Corp. and
Passport Research, Ltd.; Executive Vice
President and Director, Federated
Securities Corp.; Trustee, Federated
Shareholder Services Company.
JOHN W. MCGONIGLE Executive Vice President $0 $0 for the Trust
Birth Date: October 26, 1938 and Secretary of the and 54 other investment
Federated Investors Tower Federated Fund Complex; companies in the
1001 Liberty Avenue Executive Vice President, Fund Complex
Pittsburgh, PA Secretary and Director,
EXECUTIVE VICE PRESIDENT Federated Investors, Inc.;
Trustee, Federated Investment
Management Company and Federated
Investment Counseling; Director,
Federated Global Investment Management
Corp, Federated Services Company and
Federated Securities Corp.
RICHARD J. THOMAS Treasurer of the Federated $0 $0 for the Trust
Birth Date: June 17, 1954 Fund Complex; Vice and 54 other investment
Federated Investors Tower President - Funds companies in the
1001 Liberty Avenue Financial Services Fund Complex
Pittsburgh, PA Division, Federated
TREASURER Investors, Inc.; formerly:
various management
positions within Funds
Financial Services
Division of Federated
Investors, Inc.
RICHARD B. FISHER President or Vice $0 $0 for the Trust
Birth Date: May 17, 1923 President of some of the and 6 other investment
Federated Investors Tower Funds in the Federated Fund companies in the
1001 Liberty Avenue Complex; Director or Fund Complex
Pittsburgh, PA Trustee of some of the
PRESIDENT Funds in the Federated Fund
Complex; Executive Vice
President, Federated
Investors, Inc.; Chairman
and Director, Federated
Securities Corp.
<CAPTION>
NAME TOTAL
BIRTH DATE AGGREGATE COMPENSATION
ADDRESS PRINCIPAL OCCUPATIONS COMPENSATION FROM TRUST AND
POSITION WITH TRUST FOR PAST FIVE YEARS FROM TRUST FUND COMPLEX
<S> <C> <C> <C>
WILLIAM D. DAWSON, III Chief Investment Officer $0 $0 for the Trust
Birth Date: March 3, 1949 of this Fund and various and 41 other investment
Federated Investors Tower other Funds in the companies in the
1001 Liberty Avenue Federated Fund Complex; Fund Complex
Pittsburgh, PA Executive Vice President,
CHIEF INVESTMENT OFFICER Federated Investment
Counseling, Federated Global Investment
Management Corp., Federated Investment
Management Company and Passport
Research, Ltd.; Registered
Representative, Federated Securities
Corp.; Portfolio Manager, Federated
Administrative Services; Vice
President, Federated Investors, Inc.;
formerly: Executive Vice President and
Senior Vice President, Federated
Investment Counseling Institutional
Portfolio Management Services Division;
Senior Vice President, Federated
Investment Management Company and
Passport Research, Ltd.
J. SCOTT ALBRECHT J. Scott Albrecht has been $0 $0 for the Trust
Birth Date: June 1, 1960 the Fund's portfolio and 1 other investment
Federated Investors Tower manager since March 1995. company in the
1001 Liberty Avenue He is Vice President of the Fund Complex
Pittsburgh, PA Trust. Mr. Albrecht joined
VICE PRESIDENT Federated in 1989. He has
been a Senior Portfolio
Manager since 1997 and a
Vice President of the
Fund's investment adviser
since 1994. He was a
Portfolio Manager from
1994 to 1996. Mr. Albrecht
is a Chartered Financial
Analyst and received his
M.S. in Public Management
from Carnegie Mellon
University.
</TABLE>
* An asterisk denotes a Trustee who is deemed to be an interested person as
defined in the Investment Company Act of 1940.
# A pound sign denotes a Member of the Board's Executive Committee, which
handles the Board's responsibilities between its meetings.
+ Mr. Donahue is the father of J. Christopher Donahue, Executive Vice
President and Trustee of the Trust.
++ Mr. Mansfield became a member of the Board of Trustees on January 1,
1999. Messrs. Cunningham and Walsh became members of the Board of
Trustees on July 1, 1999. They did not earn any fees for serving the Fund
Complex since these fees are reported as of the end of the last calendar
year.
INVESTMENT ADVISER
The Adviser conducts investment research and makes investment decisions for the
Fund.
The Adviser is a wholly owned subsidiary of Federated.
The Adviser shall not be liable to the Trust or any Fund shareholder 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 Fund.
OTHER RELATED SERVICES
Affiliates of the Adviser may, from time to time, provide certain electronic
equipment and software to institutional customers in order to facilitate the
purchase of Fund Shares offered by the Distributor.
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. 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. In selecting among firms believed to meet these
criteria, the Adviser may give consideration to those firms which have sold or
are selling Shares of the Fund and other funds distributed by the Distributor
and its affiliates. The Adviser makes decisions on portfolio transactions and
selects brokers and dealers subject to review by the Fund's Board.
Investment decisions for the Fund are made independently from those of other
accounts managed by the Adviser. When the Fund and one or more of those accounts
invests in, or disposes of, the same security, available investments or
opportunities for sales will be allocated among the Fund and the account(s) in a
manner believed by the Adviser to be equitable. While the coordination and
ability to participate in volume transactions may benefit the Fund, it is
possible that this procedure could adversely impact the price paid or received
and/or the position obtained or disposed of by the Fund.
ADMINISTRATOR
Federated Services Company, a subsidiary of Federated, provides administrative
personnel and services (including certain legal and financial reporting
services) necessary to operate the Fund. Federated Services Company provides
these at the following annual rate of the average aggregate daily net assets of
all Federated Funds as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY
ADMINISTRATIVE FEE NET ASSETS OF THE FEDERATED FUNDS
<S> <C>
0.150 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.100 of 1% on the next $250 million
0.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of Shares.
Federated Services Company may voluntarily waive a portion of its fee and may
reimburse the Fund for expenses.
Federated Services Company also provides certain accounting and recordkeeping
services with respect to the Fund's portfolio investments for a fee based on
Fund assets plus out-of-pocket expenses.
CUSTODIAN
State Street Bank and Trust Company, Boston, Massachusetts, is custodian for the
securities and cash of the Fund. Foreign instruments purchased by the Fund are
held by foreign banks participating in a network coordinated by State Street
Bank.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Federated Services Company, through its registered transfer agent subsidiary,
Federated Shareholder Services Company, maintains all necessary shareholder
records. The Fund pays the transfer agent a fee based on the size, type and
number of accounts and transactions made by
shareholders.
INDEPENDENT AUDITORS
The independent auditor for the Fund, Deloitte & Touche LLP, plans and performs
its audit so that it may provide an opinion as to whether the Fund's financial
statements and financial highlights are free of material misstatement.
FEES PAID BY THE FUND FOR SERVICES
<TABLE>
<CAPTION>
FOR THE YEAR ENDED AUGUST 31 1999 1998 1997
<S> <C> <C> <C>
Advisory Fee Earned $1,097,307 $972,754 $470,040
Advisory Fee Reduction 223,304 194,282 239,900
Administrative Fee 206,792 183,420 141,863
12B-1 FEE
Class A Shares 0 - -
Class B Shares 299,784 - -
SHAREHOLDER SERVICES FEE
Class A Shares 538,862 - -
Class B Shares 99,928 - -
</TABLE>
Fees are allocated among classes based on their pro rata share of Fund assets,
except for marketing (Rule 12b-1) fees and shareholder services fees, which are
borne only by the applicable class of Shares.
How Does the Fund Measure Performance?
The Fund may advertise Share performance by using the SEC's standard method for
calculating performance applicable to all mutual funds. The SEC also permits
this standard performance information to be accompanied by non-standard
performance information.
Share performance reflects the effect of non-recurring charges, such as maximum
sales charges, which, if excluded, would increase the total return and yield.
The performance of Shares depends upon such variables as: portfolio quality;
average portfolio maturity; type and value of portfolio securities; changes in
interest rates; changes or differences in the Fund's or any class of Shares'
expenses; and various other factors.
Share performance fluctuates on a daily basis largely because net earnings
fluctuate daily. Both net earnings and offering price per Share are factors in
the computation of yield and total return.
AVERAGE ANNUAL TOTAL RETURNS AND YIELD
Total returns are given for the one-year, five-year and Start of Performance
periods ended August 31, 1999.
Yield and Tax-Equivalent Yield are given for the 30-day period ended August 31,
1999.
<TABLE>
<CAPTION>
START OF
30-DAY PERFORMANCE ON
PERIOD 1 YEAR 5 YEARS OCTOBER 11, 1990
<S> <C> <C> <C> <C>
CLASS A SHARES
Total Return NA (6.46%) 5.24% 6.60%
Yield 4.64% NA NA NA
Tax-Equivalent Yield 7.68% NA NA NA
<CAPTION>
START OF
30-DAY PERFORMANCE ON
PERIOD 1 YEAR 5 YEARS MARCH 4, 1997
<S> <C> <C> <C> <C>
CLASS B SHARES
Total Return NA (7.80%) NA 2.26%
Yield 3.86% NA NA NA
Tax-Equivalent Yield 6.39% NA NA NA
</TABLE>
TOTAL RETURN
Total return represents the change (expressed as a percentage) in the value of
Shares over a specific period of time, and includes the investment of income and
capital gains distributions.
The average annual total return for Shares is the average compounded rate of
return for a given period that would equate a $1,000 initial investment to the
ending redeemable value of that investment. The ending redeemable value is
computed by multiplying the number of Shares owned at the end of the period by
the NAV 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 annual reinvestment of all
dividends and distributions.
YIELD AND TAX-EQUIVALENT YIELD
The yield of Shares is calculated by dividing: (i) the net investment income per
Share earned by the Shares over a 30-day period; by (ii) the maximum offering
price per Share on the last day of the period. This number is then annualized
using semi-annual compounding. This means that the amount of income generated
during the 30-day period is assumed to be generated each month over a 12-month
period and is reinvested every six months. 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 the actual yield, assuming a
specific tax rate. The yield and tax-equivalent yield do not necessarily reflect
income actually earned by Shares because of certain adjustments required by the
SEC and, therefore, may not correlate to the dividends or other distributions
paid to shareholders.
To the extent investment professionals and broker/dealers charge fees in
connection with services provided in conjunction with an investment in Shares,
the Share performance is lower for shareholders paying those fees.
TAX EQUIVALENCY TABLE
Set forth below is a sample of a tax-equivalency table that may be used in
advertising and sales literature. This table is for illustrative purposes only
and is not representative of past or future performance of the Fund. The
interest earned by the municipal securities owned by the Fund generally remains
free from federal regular income tax and is often free from state and local
taxes as well. However, some of the Fund's income may be subject to the federal
alternative minimum tax and state and/or local taxes.
TAX EQUIVALENCY TABLE
<TABLE>
<CAPTION>
TAXABLE YIELD EQUIVALENT FOR 1999-COMMONWEALTH
OF PENNSYLVANIA
<S> <C> <C> <C> <C> <C>
FEDERAL TAX BRACKET: 15.00% 28.00% 31.00% 36.00% 39.60%
<CAPTION>
COMBINED FEDERAL AND STATE TAX BRACKET: 17.800% 30.800% 33.800% 38.800% 42.400%
<S> <C> <C> <C> <C> <C>
Joint Return $1-43,050 $43,051-104,050 $104,051-158,550 $158,551-283,150 Over $283,150
Single Return $1-25,750 $25,751-62,450 $62,451-130,250 $130,251-283,150 Over $283,150
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%
</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.
PERFORMANCE COMPARISONS
Advertising and sales literature may include:
* references to ratings, rankings, and financial publications and/or
performance comparisons of Shares to certain indices;
* charts, graphs and illustrations using the Fund's returns, or returns in
general, that demonstrate investment concepts such as tax-deferred compounding,
dollar-cost averaging and systematic investment;
* discussions of economic, financial and political developments and their impact
on the securities market, including the portfolio manager's views on how such
developments could impact the Fund; and
* information about the mutual fund industry from sources such as the Investment
Company Institute.
The Fund may compare its performance, or performance for the types of securities
in which it invests, to a variety of other investments, including federally
insured bank products such as bank savings accounts, certificates of deposit,
and Treasury bills.
The Fund may quote information from reliable sources regarding individual
countries and regions, world stock exchanges, and economic and demographic
statistics.
You may use financial publications and/or indices to obtain a more complete view
of Share performance. When comparing performance, you should consider all
relevant factors such as the composition of the 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
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.
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.
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.
Who is Federated Investors, Inc.?
Federated is dedicated to meeting investor needs by making structured,
straightforward and consistent investment decisions. Federated investment
products have a history of competitive performance and have gained the
confidence of thousands of financial institutions and individual investors.
Federated's disciplined investment selection process is rooted in sound
methodologies backed by fundamental and technical research. At Federated,
success in investment management does not depend solely on the skill of a single
portfolio manager. It is a fusion of individual talents and state- of-the-art
industry tools and resources. Federated's investment process involves teams of
portfolio managers and analysts, and investment decisions are executed by
traders who are dedicated to specific market sectors and who handle trillions of
dollars in annual trading volume.
FEDERATED FUNDS OVERVIEW
MUNICIPAL FUNDS
In the municipal sector, as of December 31, 1998, Federated managed 10 bond
funds with approximately $2.2 billion in assets and 23 money market funds with
approximately $12.5 billion in total assets. In 1976, Federated introduced one
of the first municipal bond mutual funds in the industry and is now one of the
largest institutional buyers of municipal securities. The Funds may quote
statistics from organizations including The Tax Foundation and the National
Taxpayers Union regarding the tax obligations of Americans.
EQUITY FUNDS
In the equity sector, Federated has more than 28 years' experience. As of
December 31, 1998, Federated managed 27 equity funds totaling approximately
$14.9 billion in assets across growth, value, equity income, international,
index and sector (i.e. utility) styles. Federated's value- oriented management
style combines quantitative and qualitative analysis and features a structured,
computer-assisted composite modeling system that was developed in the 1970s.
CORPORATE BOND FUNDS
In the corporate bond sector, as of December 31, 1998, Federated managed 9 money
market funds and 15 bond funds with assets approximating $22.8 billion and $7.1
billion, respectively. Federated's corporate bond decision making-based on
intensive, diligent credit analysis-is backed by over 26 years of experience in
the corporate bond sector. In 1972, Federated introduced one of the first
high-yield bond funds in the industry. In 1983, Federated was one of the first
fund managers to participate in the asset backed securities market, a market
totaling more than $209 billion.
GOVERNMENT FUNDS
In the government sector, as of December 31, 1998, Federated managed 9 mortgage
backed, 5 government/agency and 19 government money market mutual funds, with
assets approximating $5.3 billion, $1.8 billion and $41.6 billion, respectively.
Federated trades approximately $425 million in U.S. government and mortgage
backed securities daily and places approximately $25 billion in repurchase
agreements each day. Federated introduced the first U.S. government fund to
invest in U.S. government bond securities in 1969. Federated has been a major
force in the short- and intermediate-term government markets since 1982 and
currently manages approximately $43.2 billion in government funds within these
maturity ranges.
MONEY MARKET FUNDS
In the money market sector, Federated gained prominence in the mutual fund
industry in 1974 with the creation of the first institutional money market fund.
Simultaneously, the company pioneered the use of the amortized cost method of
accounting for valuing shares of money market funds, a principal means used by
money managers today to value money market fund shares. Other innovations
include the first institutional tax-free money market fund. As of December 31,
1998, Federated managed more than $76.7 billion in assets across 52 money market
funds, including 19 government, 9 prime and 23 municipal with assets
approximating $41.6 billion, $22.8 billion and $12.5 billion, respectively.
The Chief Investment Officers responsible for oversight of the various
investment sectors within Federated 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 $5 trillion to the more than 7,300 funds available,
according to the Investment Company Institute.
FEDERATED CLIENTS OVERVIEW
Federated distributes mutual funds through its subsidiaries for a variety of
investment purposes. Specific markets include:
INSTITUTIONAL CLIENTS
Federated meets the needs of approximately 900 institutional clients nationwide
by managing and servicing separate accounts and mutual funds for a variety of
purposes, 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 advisers. The marketing effort
to these institutional clients is headed by John B. Fisher, President,
Institutional Sales Division, Federated Securities Corp.
BANK MARKETING
Other institutional clients include 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,
Broker/Dealer Sales Division, Federated Securities Corp.
Investment Ratings
STANDARD AND POOR'S LONG-TERM DEBT RATING DEFINITIONS
AAA-Debt rated AAA has the highest rating assigned by Standard & Poor's.
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 or 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 BB 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.
MOODY'S INVESTORS SERVICE LONG-TERM BOND RATING DEFINITIONS
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 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.
FITCH IBCA, INC. LONG-TERM DEBT RATING DEFINITIONS
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 credit 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 obligor's 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 imminent default in payment of interest or principal.
MOODY'S INVESTORS SERVICE COMMERCIAL PAPER RATINGS
PRIME-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 structure 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.
PRIME-2-Issuers rated Prime-1 (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.
STANDARD AND POOR'S COMMERCIAL PAPER RATINGS
A-1-This designation 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.
FITCH IBCA, INC. COMMERCIAL PAPER RATING DEFINITIONS
FITCH-1-(Highest Grade) Commercial paper assigned this rating is regarded as
having the strongest degree of assurance for timely payment.
FITCH-2-(Very Good Grade) Issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than the strongest issues.
Addresses
FEDERATED PENNSYLVANIA MUNCIPAL 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 Investment Management Company
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
200 Berkeley Street
Boston, MA 02116
APPENDIX
A. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed in the upper left
quadrant. The Class A Shares of Federated Pennsylvania Municipal Income Fund are
represented by a solid line, whereas Lehman Brothers Revenue Bond Index (LBRBI)
is represented by a dotted line and the Lehman Brothers Municipal Bond Index
(LBMBI) is represented by a broken line. The line graph is a visual
representation of a comparison of change in value of a hypothetical investment
in the Class A Shares of the Federated Pennsylvania Municipal Income Fund and
LBRBI and LBMBI for the period from October 11, 1990 (Start of Performance) to
August 31, 1999. The "y" axis reflect the cost of the investment. The "x" axis
reflects computation periods from the ending value of the hypothetical
investment in the Class A Shares of Federated Pennsylvania Municipal Income Fund
as compared to LBRBI and LBMBI; the ending values are $17,931, $19,643, and
$19,263, respectively. Beneath the list of components that correspond to the
line graph are the following total return data for the Class A Shares of
Federated Pennsylvania Municipal Income Fund: total return figures for the one
year, five year, and start of performance-to-date average annualized total
return. The corresponding total return figures are as follows: (6.46%), 5.24%,
and 6.60%, respectively.
B. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed in the upper left
quadrant. The Class B Shares of Federated Pennsylvania Municipal Income Fund are
represented by a solid line, whereas Lehman Brothers Revenue Bond Index
(LBRBI)is represented by a dotted line and the Lehman Brothers Municipal Bond
Index(LBMBI) is represented by a broken line. The line graph is a visual
representation of a comparison of change in value of a hypothetical investment
in the Class B Shares of the Federated Pennsylvania Municipal Income Fund and
LBRBI and LBMBI for the period from March 4, 1997 (Start of Performance) to
August 31, 1999. The "y" axis reflect the cost of the investment. The "x" axis
reflects computation periods from the ending value of the hypothetical
investment in the Class B Shares of Federated Pennsylvania Municipal Income Fund
as compared to LBRBI and LBMBI; the ending values are $10,389, $11,523, and
$11,459, respectively. Beneath the list of components that correspond to the
line graph are the following total return data for the Class B Shares of
Federated Pennsylvania Municipal Income Fund: total return figures for the one
year and start of performance-to-date average annualized total return. The
corresponding total return figures are as follows: (7.80%) and 2.26%,
respectively.
C. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed in the upper left
quadrant. Federated Michigan Intermediate Municipal Trust is represented by a
solid line, whereas Lehman Brothers Seven Year State General Obligation Bond
Index (LB7YRSGOBI) is represented by a dotted line and the Lehman Brothers
Municipal Bond Index (LBMBI) is represented by a broken line. The line graph isa
visual representation of a comparison of change in value of a hypothetical
investment in Federated Michigan Intermediate Municipal Trust and LB7YRSGOBI and
LBMBI for the period from September 18, 1991 (Start of Performance) to August
31, 1999. The "y" axis reflect the cost of the investment. The "x" axis reflects
computation periods from the ending value of the hypothetical investment in
Federated Michigan Intermediate Municipal Trust as compared to LB7YRSGOBI and
LBMBI; the ending values are $15,392, $16,099, and $17,241, respectively.
Beneath the list of components that correspond to the line graph are the
following total return data for Federated Michigan Intermediate Municipal Trust:
total return figures for the one year, five year, and start of
performance-to-date average annualized total return. The corresponding total
return figures are as follows: (2.51%), 4.49%, and 5.57%, respectively.
D. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed in the upper left
quadrant. The Class A Shares of Federated California Municipal Income Fund are
represented by a solid line, whereas Lehman Brothers Revenue Bond Index (LBRBI)
is represented by a dotted line and the Lehman Brothers Municipal Bond Index
(LBMBI) is represented by a broken line. The line graph is a visual
representation of a comparison of change in value of a hypothetical investment
in the Class A Shares of the Federated California Municipal Income Fund and
LBRBI and LBMBI for the period from December 2, 1992 (Start of Performance) to
August 31, 1999. The "y" axis reflects the cost of the investment. The "x" axis
reflects computation periods from the ending value of the hypothetical
investment in the Class A Shares of Federated California Municipal Income Fund
as compared to LBRBI and LBMBI; the ending values are $14,913, $15,368, and
$15,289, respectively. Beneath the list of components that correspond to the
line graph is the following total return information for the Class A Shares of
Federated California Municipal Income Fund: total return figures for the one
year, five year, and start of performance-to-date average annual total returns.
The corresponding total return figures are as follows: (6.51%), 5.44%, and
5.54%, respectively.
E. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed in the upper left
quadrant. The Class B Shares of Federated California Municipal Income Fund are
represented by a solid line, whereas Lehman Brothers Revenue Bond Index (LBRBI)
is represented by a dotted line and the Lehman Brothers Municipal Bond Index
(LBMBI) is represented by a broken line. The line graph is a visual
representation of a comparison of change in value of a hypothetical investment
in the Class B Shares of the Federated California Municipal Income Fund and
LBRBI and LBMBI for the period from December 2, 1992 (Start of Performance) to
August 31, 1999. The "y" axis reflect the cost of the investment. The "x" axis
reflects computation periods from the ending value of the hypothetical
investment in the Class B Shares of Federated California Municipal Income Fund
as compared to LBRBI and LBMBI; the ending values are $9,277, $10,648, and
$10,782, respectively. Beneath the list of components that correspond to the
line graph is the following total return information for the Class B Shares of
Federated California Municipal Income Fund: total return information for the one
year and start of performance-to-date average annual total returns. The
corresponding total return figures are as follows: (7.10%) and (0.61%).
F. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. The Class A
Shares of Federated North Carolina Municipal Income Fund are represented by a
solid line. The LBSGOBI is represented by a dotted line, the LNCMDF is
represented by a broken line, and the LBMBI is represented by a dashed line. The
line graph is a visual representation of a comparison of change in value of a
$10,000 hypothetical investment in the Class A Shares of the Fund, the LBSGOBI,
LNCMDF and the LBMBI. The "x" axis reflects computation periods from 7/22/92 to
8/31/99. The "y" axis reflects the cost of the investment. The right margin
reflects the ending value of the hypothetical investment in the Fund's Class A
Shares as compared to the LBSGOBI, LNCMDF and the LBMBI. The ending values were
$13,870, $14,815, $13,683 and $15,023, respectively. The legend in the bottom
quadrant of the graphic presentation indicates the Fund's Class A Shares Average
Annual Total Return for the one and five year period ended 8/31/99 and from the
start of performance of Class A Shares (7/22/92) to 8/31/99. The total returns
were (4.58%), 4.52% and 4.71%, respectively.
G. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. The Class F
Shares of Federated Ohio Municipal Income Fund are represented by a solid line.
TheLBRBI is represented by a dotted and the LBMBI is represented by a broken
line. The line graph is a visual representation of a comparison of change in
value of a $10,000 hypothetical investment in the Class F Shares of the Fund,
the LBRBI and the LBMBI. The "x" axis reflects computation periods from 10/12/90
to 8/31/99. The "y" axis reflects the cost of the investment. The right margin
reflects the ending value of the hypothetical investment in the Fund's Class F
Shares as compared to the LBRBI and the LBMBI. The ending values were $17,819,
$19,643, and $19,263, respectively. The legend in the bottom quadrant of the
graphic presentation indicates the Fund's Class F Shares Average Annual Total
Return for the one and five year period ended 8/31/99 and from the start of
performance of Class F Shares (10/12/90) to 8/31/99. The total returns were
(3.05%), 5.48% and 6.72%, respectively.
H. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. The Class A
Shares of Federated New York Municipal Income Fund are represented by a solid
line. TheLBMBI is represented by a broken line and the LBRBI is represented by a
dotted line. The line graph is a visual representation of a comparison of change
in value of a $10,000 hypothetical investment in the Class A Shares of the Fund,
the LBMBI and the LBRBI. The "x" axis reflects computation periods from 12/2/92
to 8/31/99. The "y" axis reflects the cost of the investment. The right margin
reflects the ending value of the hypothetical investment in the Fund's Class A
Shares as compared to the LBMBI and the LBRBI. The ending values were $14,223,
$15,368, and $15,289, respectively. The legend in the bottom quadrant of the
graphic presentation indicates the Fund's Class A Shares Average Annual Total
Return for the one and five year period ended 8/31/99 and from the start of
performance of Class A Shares (12/2/92) to 8/31/99. The total returns were
(6.47%), 5.04% and 5.36%, respectively.
