-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, hGPqBRF14lQjdnlZWDI6S8T/p5zbEJPq7lw4yQCG/yrkR5kNLYz/7jWkBIxABQPq JF0Wxhvjpp6OVfAChHqTuQ== 0000201801-95-000005.txt : 19950531 0000201801-95-000005.hdr.sgml : 19950531 ACCESSION NUMBER: 0000201801-95-000005 CONFORMED SUBMISSION TYPE: 497 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19950530 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: LIBERTY MUNICIPAL SECURITIES FUND INC CENTRAL INDEX KEY: 0000201801 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 251304971 STATE OF INCORPORATION: PA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 497 SEC ACT: 1933 Act SEC FILE NUMBER: 002-57181 FILM NUMBER: 95543070 BUSINESS ADDRESS: STREET 1: FEDERATED INVESTORS TWR CITY: PITTSBURGH STATE: PA ZIP: 15222 BUSINESS PHONE: 4122886520 FORMER COMPANY: FORMER CONFORMED NAME: FEDERATED TAX FREE INCOME FUND INC DATE OF NAME CHANGE: 19920703 497 1 LIBERTY MUNICIPAL SECURITIES FUND, INC. CLASS A SHARES CLASS B SHARES CLASS C SHARES COMBINED PROSPECTUS The shares of Liberty Municipal Securities Fund, Inc. (the "Fund") represent interests in an open-end, diversified management investment company (a mutual fund) with an investment objective of providing its shareholders a high level of current income which is exempt from federal regular income tax by investing in a professionally managed, diversified portfolio primarily limited to municipal bonds. THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF ANY BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL. This prospectus contains the information you should read and know before you invest in the Fund. Keep this prospectus for future reference. The Fund has also filed a Combined Statement of Additional Information dated May 31, 1995, with the Securities and Exchange Commission. The information contained in the Combined Statement of Additional Information is incorporated by reference into this prospectus. You may request a copy of the Statement of Additional Information free of charge by calling 1-800-235-4669. To obtain other information or to make inquiries about the Fund, contact your financial institution. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Prospectus dated May 31, 1995 - ------------------------------------- --------------------------------------- TABLE OF CONTENTS Summary of Fund Expenses.......................................................1 Financial Highlights...........................................................4 Synopsis.......................................................................7 Liberty Family of Funds........................................................8 Investment Information.........................................................9 Investment Objective.........................................................9 Investment Policies..........................................................9 Investment Risks............................................................12 Investment Limitations......................................................12 Net Asset Value...............................................................13 Investing in the Fund.........................................................13 How To Purchase Shares........................................................14 Investing In Class A Shares.................................................14 Investing In Class B Shares.................................................17 Investing In Class C Shares.................................................17 Special Purchase Features...................................................18 Exchange Privilege............................................................19 Requirements For Exchange...................................................19 Tax Consequences............................................................19 Making An Exchange..........................................................19 How To Redeem Shares..........................................................20 Special Redemption Features.................................................21 Contingent Deferred Sales Charge............................................22 Elimination of Contingent Deferred Sales Charge.............................................................23 Account and Share Information.................................................24 Fund Information..............................................................25 Management of the Fund......................................................25 Distribution of Shares......................................................25 Administration of the Fund..................................................27 Shareholder Information.......................................................28 Voting Rights...............................................................28 Tax Information...............................................................28 Federal Income Tax..........................................................28 Pennsylvania Personal Property Taxes....................................................................28 Performance Information.......................................................29 - ------------------------------------- -------------------------------------- SUMMARY OF FUND EXPENSES LIBERTY MUNICIPAL SECURITIES FUND, INC. CLASS A SHARES SHAREHOLDER TRANSACTION EXPENSES Maximum Sales Load Imposed on Purchases (as a percentage of offering price)...................................... 4.50% Maximum Sales Load Imposed on Reinvested Dividends (as a percentage of offering price)........................... None Contingent Deferred Sales Charge (as a percentage of original purchase price or redemption proceeds, as applicable) (1)...................................................... 0.00% Redemption Fee (as a percentage of amount redeemed, if applicable)............................................... None Exchange Fee..................................................................................................... None ANNUAL CLASS A SHARES OPERATING EXPENSES (As a percentage of average net assets) Management Fee................................................................................................... 0.62% 12b-1 Fee........................................................................................................ None Total Other Expenses............................................................................................. 0.38% Shareholder Services Fee (after waiver) (2)....................................................... 0.12% Total Class A Shares Operating Expenses (3)............................................................. 1.00%
(1) Class A Shares purchased with the proceeds of a redemption of Shares of an unaffiliated investment company purchased or sold with a sales load and not distributed by Federated Securities Corp. may be charged a Contingent Deferred Sales Charge of .50 of 1.00% for redemptions made within one full year of purchase. See "Contingent Deferred Sales Charge." (2) The maximum shareholder services fee is 0.25%. (3) The total Class A Shares operating expenses in the table above are based on expenses expected during the fiscal year ending March 31, 1996. The total Class A Shares operating expenses were 0.92% for the fiscal year ended March 31, 1995. THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF CLASS A SHARES WILL BEAR, EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE VARIOUS COSTS AND EXPENSES, SEE "INVESTING IN THE FUND", "CLASS A SHARES" AND "FUND INFORMATION". Wire-transferred redemptions of less than $5,000 may be subject to additional fees.
EXAMPLE 1 year 3 years 5 years 10 years You would pay the following expenses on a $1,000 investment, assuming (1) 5% annual return and (2) redemption at the end of each time period.......................................................... $60 $75 $98 $162 You would pay the following expenses on the same investment, assuming no redemption................................................................... $55 $75 $98 $162
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. - ------------------------------------- -------------------------------------- SUMMARY OF FUND EXPENSES LIBERTY MUNICIPAL SECURITIES FUND, INC. CLASS B SHARES SHAREHOLDER TRANSACTION EXPENSES Maximum Sales Load Imposed on Purchases (as a percentage of offering price)...................................... None Maximum Sales Load Imposed on Reinvested Dividends (as a percentage of offering price)........................... None Contingent Deferred Sales Charge (as a percentage of original purchase price or redemption proceeds, as applicable) (1)...................................................... 5.50% Redemption Fee (as a percentage of amount redeemed, if applicable)............................................... None Exchange Fee..................................................................................................... None ANNUAL CLASS B SHARES OPERATING EXPENSES (As a percentage of average net assets) Management Fee................................................................................................... 0.62% 12b-1 Fee........................................................................................................ 0.75% Total Other Expenses............................................................................................. 0.51% Shareholder Services Fee.......................................................................... 0.25% Total Class B Shares Operating Expenses (2)(3).......................................................... 1.88%
(1) The contingent deferred sales charge is 5.50% in the first year, declining to 1.00% in the sixth year and 0.00% thereafter (see "Contingent Deferred Sales Charge"). (2) Class B Shares convert to Class A Shares (which pay lower ongoing expenses) approximately eight years after purchase. (3) The total Class B Shares operating expenses in the table above are based on expenses expected during the fiscal year ending March 31, 1996. The total Class B Shares operating expenses were 1.84% for the fiscal year ended March 31, 1995. THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF CLASS B SHARES WILL BEAR, EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE VARIOUS COSTS AND EXPENSES, SEE "INVESTING IN THE FUND", "CLASS B SHARES" AND "FUND INFORMATION". Wire-transferred redemptions of less than $5,000 may be subject to additional fees. Long-term shareholders may pay more than the economic equivalent of the maximum front-end sales charges permitted under the rules of the National Association of Securities Dealers, Inc.
EXAMPLE 1 year 3 years You would pay the following expenses on a $1,000 investment, assuming (1) 5% annual return and (2) redemption at the end of each time period.......................................................... $76 $103 You would pay the following expenses on the same investment, assuming no redemption................ $19 $59
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. - ------------------------------------- --------------------------------------- SUMMARY OF FUND EXPENSES LIBERTY MUNICIPAL SECURITIES FUND, INC. CLASS C SHARES SHAREHOLDER TRANSACTION EXPENSES Maximum Sales Load Imposed on Purchases (as a percentage of offering price)...................................... None Maximum Sales Load Imposed on Reinvested Dividends (as a percentage of offering price)........................... None Contingent Deferred Sales Charge (as a percentage of original purchase price or redemption proceeds, as applicable) (1)...................................................... 1.00% Redemption Fee (as a percentage of amount redeemed, if applicable)............................................... None Exchange Fee..................................................................................................... None ANNUAL CLASS C SHARES OPERATING EXPENSES (As a percentage of average net assets) Management Fee................................................................................................... 0.62% 12b-1 Fee........................................................................................................ 0.75% Total Other Expenses............................................................................................. 0.46% Shareholder Services Fee (after waiver) (2)....................................................... 0.20% Total Class C Shares Operating Expenses (3)............................................................. 1.83%
(1) The contingent deferred sales charge assessed is 1.00% of the lesser of the original purchase price or the net asset value of Shares redeemed within one year of their purchase date. For a more complete description, see "Contingent Deferred Sales Charge". (2) The maximum shareholder services fee is 0.25%. (3) The total Class C Shares operating expenses in the table above are based on expenses expected during the fiscal year ending March 31, 1996. The total Class C Shares operating expenses were 1.81% for the fiscal year ended March 31, 1995. THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF CLASS C SHARES WILL BEAR, EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE VARIOUS COSTS AND EXPENSES, SEE "INVESTING IN THE FUND", "CLASS C SHARES" AND "FUND INFORMATION". Wire-transferred redemptions of less than $5,000 may be subject to additional fees. Long-term shareholders may pay more than the economic equivalent of the maximum front-end sales charges permitted under the rules of the National Association of Securities Dealers, Inc.
EXAMPLE 1 year 3 years 5 years 10 years You would pay the following expenses on a $1,000 investment, assuming (1) 5% annual return and (2) redemption at the end of each time period.......................................................... $29 $58 $99 $215 You would pay the following expenses on the same investment, assuming no redemption................................................................... $19 $58 $99 $215
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. - ------------------------------------- -------------------------------------- FINANCIAL HIGHLIGHTS--CLASS A SHARES LIBERTY MUNICIPAL SECURITIES FUND, INC. - -------------------------------------------------------------------------------- (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD) The following table has been audited by Deloitte & Touche LLP, the Fund's independent auditors. Their report dated May 15, 1995 on the Fund's financial statements for the year ended March 31, 1995, and on the following table for each of the periods presented, is included in the Annual Report dated March 31, 1995, which is incorporated by reference. This table should be read in conjunction with the Fund's financial statements and notes thereto, whch may be obtained from the Fund.
YEAR ENDED MARCH 31, 1995 1994 1993 1992 1991 1990 1989 1988 1987 NET ASSET VALUE, BEGINNING OF PERIOD $ 11.20 $ 11.62 $ 10.98 $ 10.61 $ 10.47 $ 10.26 $ 10.03 $ 10.80 $ 10.51 - --------------------------- INCOME FROM INVESTMENT OPERATIONS - --------------------------- Net investment income 0.67 0.66 0.66 0.67 0.71 0.72 0.72 0.73 0.75 - --------------------------- Net realized and unrealized gain (loss) on investments (0.05) (0.40) 0.64 0.37 0.14 0.21 0.23 (0.77) 0.29 - --------------------------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Total from investment operations 0.62 0.26 1.30 1.04 0.85 0.93 0.95 (0.04) 1.04 - --------------------------- LESS DISTRIBUTIONS - --------------------------- Distributions from net investment income (0.67) (0.66) (0.66) (0.67) (0.71) (0.72) (0.72) (0.73) (0.75) - --------------------------- Distributions from net realized gain on investment transactions (0.23) (0.02) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 - --------------------------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Total distributions (0.90) (0.68) (0.66) (0.67) (0.71) (0.72) (0.72) (0.73) (0.75) - --------------------------- --------- --------- --------- --------- --------- --------- --------- --------- --------- NET ASSET VALUE, END OF PERIOD $ 10.92 $ 11.20 $ 11.62 $ 10.98 $ 10.61 $ 10.47 $ 10.26 $ 10.03 $ 10.80 - --------------------------- --------- --------- --------- --------- --------- --------- --------- --------- --------- TOTAL RETURN(A) 5.90% 2.10% 12.13% 10.05% 8.42% 9.20% 9.76% (0.17%) 10.28% - --------------------------- RATIOS TO AVERAGE NET ASSETS - --------------------------- Expenses 0.92% 0.84% 0.80% 0.84% 0.89% 0.90% 0.95% 0.95% 0.95% - --------------------------- Net investment income 6.17% 5.59% 5.81% 6.17% 6.77% 6.80% 7.07% 7.28% 7.07% - --------------------------- Expense waiver/ reimbursement(b) -- -- -- -- -- -- -- -- -- - --------------------------- SUPPLEMENTAL DATA - --------------------------- Net assets, end of period (000 omitted) $708,679 $714,384 $706,126 $590,118 $511,611 $474,797 $440,445 $388,916 $424,655 - --------------------------- Portfolio turnover 41% 27% 13% 8% 45% 25% 58% 55% 13% - --------------------------- 1986 NET ASSET VALUE, BEGINNING OF PERIOD $ 8.91 - --------------------------- INCOME FROM INVESTMENT OPERATIONS - --------------------------- Net investment income 0.80 - --------------------------- Net realized and unrealized gain (loss) on investments 1.60 - --------------------------- --------- Total from investment operations 2.40 - --------------------------- LESS DISTRIBUTIONS - --------------------------- Distributions from net investment income (0.80) - --------------------------- Distributions from net realized gain on investment transactions 0.00 - --------------------------- --------- Total distributions (0.80) - --------------------------- --------- NET ASSET VALUE, END OF PERIOD $ 10.51 - --------------------------- --------- TOTAL RETURN(A) 28.25% - --------------------------- RATIOS TO AVERAGE NET ASSETS - --------------------------- Expenses 0.93% - --------------------------- Net investment income 8.39% - --------------------------- Expense waiver/ reimbursement(b) 0.23% - --------------------------- SUPPLEMENTAL DATA - --------------------------- Net assets, end of period (000 omitted) $248,710 - --------------------------- Portfolio turnover 2% - ---------------------------
(a) Based on net asset value, which does not reflect the sales load or contingent deferred sales charge, if applicable. (b) This voluntary expense decrease is reflected in both the expense and net investment income ratios shown above. Further information about the Fund's performance is contained in the Fund's Annual Report for the fiscal year ended March 31, 1995, which can be obtained free of charge. - ------------------------------------- --------------------------------------- FINANCIAL HIGHLIGHTS--CLASS B SHARES LIBERTY MUNICIPAL SECURITIES FUND, INC. - -------------------------------------------------------------------------------- (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) The following table has been audited by Deloitte & Touche LLP, the Fund's independent auditors. Their report dated May 15, 1995 on the Fund's financial statements for the year ended March 31, 1995, and on the following table for the period presented, is included in the Annual Report dated March 31, 1995, which is incorporated by reference. This table should be read in conjunction with the Fund's financial statements and notes thereto, whch may be obtained from the Fund.
PERIOD ENDED MARCH 31, 1995(A) NET ASSET VALUE, BEGINNING OF PERIOD $ 11.06 - ---------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS - ---------------------------------------------------------------------------------------------------- Net investment income 0.40 - ---------------------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments (0.03) - ---------------------------------------------------------------------------------------------------- ------- Total from investment operations 0.37 - ---------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS - ---------------------------------------------------------------------------------------------------- Distributions from net investment income (0.40) - ---------------------------------------------------------------------------------------------------- Distributions from net realized gain on investment transactions (0.11) - ---------------------------------------------------------------------------------------------------- ------- Total distributions (0.51) - ---------------------------------------------------------------------------------------------------- ------- NET ASSET VALUE, END OF PERIOD $ 10.92 - ---------------------------------------------------------------------------------------------------- ------- TOTAL RETURN (B) 3.49% - ---------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS - ---------------------------------------------------------------------------------------------------- Expenses 1.84%(c) - ---------------------------------------------------------------------------------------------------- Net investment income 5.94%(c) - ---------------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA - ---------------------------------------------------------------------------------------------------- Net assets, end of period (000 omitted) $18,201 - ---------------------------------------------------------------------------------------------------- Portfolio turnover 41% - ----------------------------------------------------------------------------------------------------
(a) Reflects operations for the period from July 26, 1994 (date of initial public investment) to March 31, 1995. (b) Based on net asset value, which does not reflect the sales load or contingent deferred sales charge, if applicable. (c) Computed on an annualized basis. Further information about the Fund's performance is contained in the Fund's Annual Report for the fiscal year ended March 31, 1995, which can be obtained free of charge. - ------------------------------------- --------------------------------------- FINANCIAL HIGHLIGHTS--CLASS C SHARES LIBERTY MUNICIPAL SECURITIES FUND, INC. - -------------------------------------------------------------------------------- (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD) The following table has been audited by Deloitte & Touche LLP, the Fund's independent auditors. Their report dated May 15, 1995 on the Fund's financial statements for the year ended March 31, 1995, and on the following table for each of the periods presented, is included in the Annual Report dated March 31, 1995, which is incorporated by reference. This table should be read in conjunction with the Fund's financial statements and notes thereto, whch may be obtained from the Fund.
YEAR ENDED MARCH 31, 1995 1994(A) NET ASSET VALUE, BEGINNING OF PERIOD $ 11.20 $ 11.70 - ----------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS - ----------------------------------------------------------------------------------------------- Net investment income 0.58 0.52 - ----------------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments (0.05) (0.48) - ----------------------------------------------------------------------------------------------- --------- ----------- Total from investment operations 0.53 0.04 - ----------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS - ----------------------------------------------------------------------------------------------- Distributions from net investment income (0.58) (0.52) - ----------------------------------------------------------------------------------------------- Distributions from net realized gain on investment transactions (0.23) (0.02) - ----------------------------------------------------------------------------------------------- --------- ----------- Total distributions (0.81) (0.54) - ----------------------------------------------------------------------------------------------- --------- ----------- NET ASSET VALUE, END OF PERIOD $ 10.92 $ 11.20 - ----------------------------------------------------------------------------------------------- --------- ----------- TOTAL RETURN (B) 4.96% 0.17% - ----------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS - ----------------------------------------------------------------------------------------------- Expenses 1.81% 1.80%(c) - ----------------------------------------------------------------------------------------------- Net investment income 5.28% 4.70%(c) - ----------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA - ----------------------------------------------------------------------------------------------- Net assets, end of period (000 omitted) $22,389 $22,066 - ----------------------------------------------------------------------------------------------- Portfolio turnover 41% 27% - -----------------------------------------------------------------------------------------------
(a) Reflects operations for the period from April 20, 1993 (date of initial public investment) to March 31, 1994.] (b) Based on net asset value, which does not reflect the sales load or contingent deferred sales charge, if applicable. (c) Computed on an annualized basis. Further information about the Fund's performance is contained in the Fund's Annual Report for the fiscal year ended March 31, 1995, which can be obtained free of charge. - -------------------------------------------------------------------------------- SYNOPSIS The Fund was incorporated under the laws of the State of Maryland on September 10, 1976. The Fund's address is Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779. The Articles of Incorporation permit the Fund to offer separate series representing interests in separate portfolios of securities. As of the date of this prospectus, the Board of Directors ("Directors") has established three classes of Shares for the Fund, known as Class A Shares, Class B Shares, and Class C Shares (individually and collectively as the context requires, "Shares"). Shares of the Fund are designed for individuals and institutions seeking a high level of current income which is exempt from federal regular income tax by investing in a professionally managed, diversified portfolio primarily limited to municipal bonds. For information on how to purchase Shares of the Fund, please refer to "How To Purchase Shares." The minimum initial investment for Class A Shares is $500. The minimum initial investment for Class B Shares and Class C Shares is $1500. Subsequent investments in any class must be in amounts of at least $100. Class A Shares are sold at net asset value plus an applicable sales load and are redeemed at net asset value. However, a contingent deferred sales charge is imposed under certain circumstances. For a more complete description, see "How To Redeem Shares." Class B Shares are sold at net asset value and are redeemed at net asset value. However, a contingent deferred sales charge is imposed on certain Shares which are redeemed within six full years of purchase. See "How To Redeem Shares." Class C Shares are sold at net asset value. A contingent deferred sales charge of 1.00% will be charged on assets redeemed within the first 12 months following purchase. See "How To Redeem Shares." In addition, the Fund also pays a Shareholder Services Fee at an annual rate not to exceed 0.25% of average daily net assets. Additionally, information regarding the exchange privilege offered with respect to the Fund and certain other funds for which affiliates of Federated Investors serve as principal underwriter ("Federated Funds") can be found under "Exchange Privilege." Federated Advisers is the investment adviser (the "Adviser") to the Fund and receives compensation for its services. The Adviser's address is Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779. Investors should be aware of the following general observations. The Fund may make certain investments and employ certain investment techniques that involve risks, including entering into repurchase agreements and investing in when-issued securities. These risks are described under "Investment Policies." - -------------------------------------------------------------------------------- LIBERTY FAMILY OF FUNDS This Fund is a member of a family of mutual funds, collectively known as the Liberty Family of Funds. The other funds in the Liberty Family of Funds are: .American Leaders Fund, Inc., providing growth of capital and income through high-quality stocks; .Capital Growth Fund, providing appreciation of capital primarily through equity securities; .Fund for U.S. Government Securities, Inc., providing current income through long-term U.S. government securities; .International Equity Fund, providing long-term capital growth and income through international securities; .International Income Fund, providing a high level of current income consistent with prudent investment risk through high-quality debt securities denominated primarily in foreign currencies; .Liberty Equity Income Fund, Inc., providing above-average income and capital appreciation through income producing equity securities; .Liberty High Income Bond Fund, Inc., providing high current income through high-yielding, lower-rated corporate bonds; .Liberty U.S. Government Money Market Trust, providing current income consistent with stability of principal through high-quality U.S. government securities; .Liberty Utility Fund, Inc., providing current income and long-term growth of income, primarily through electric, gas, and communications utilities; .Limited Term Fund, providing a high level of current income consistent with minimum fluctuation in principal value through investment grade securities; .Limited Term Municipal Fund, providing a high level of current income exempt from federal regular income tax consistent with the preservation of principal, primarily limited to municipal securities; .Michigan Intermediate Municipal Trust, providing current income exempt from federal regular income tax and the personal income taxes imposed by the state of Michigan and Michigan municipalities, primarily through Michigan municipal securities; .Pennsylvania Municipal Income Fund, providing current income exempt from federal regular income tax and the personal income taxes imposed by the Commonwealth of Pennsylvania, primarily through Pennsylvania municipal securities; .Strategic Income Fund, providing a high level of current income, primarily through domestic and foreign corporate debt obligations; .Tax-Free Instruments Trust, providing current income consistent with stability of principal and exempt from federal income tax, through high-quality, short-term municipal securities; and .World Utility Fund, providing total return primarily through securities issued by domestic and foreign companies in the utilities industries. Prospectuses for these funds are available by writing to Federated Securities Corp. Each of the funds may also invest in certain other types of securities as described in each fund's prospectus. The Liberty Family of Funds provides flexibility and diversification for an investor's long-term investment planning. It enables an investor to meet the challenges of changing market conditions by offering convenient exchange privileges which give access to various investment vehicles and by providing the investment services of proven, professional investment advisers. Shareholders of Class A Shares who have been designated as Liberty Life Members are exempt from sales loads on future purchases in and exchanges between the Class A Shares of any funds in the Liberty Family of Funds, as long as they maintain a $500 balance in one of the Liberty Funds. - -------------------------------------------------------------------------------- INVESTMENT INFORMATION INVESTMENT OBJECTIVE The investment objective of the Fund is to provide for its shareholders a high level of current income which is exempt from federal regular income tax. While there is no assurance that the Fund will achieve its investment objective, it endeavors to do so by following the investment policies described in this prospectus. The investment objective and the policies and limitations described below cannot be changed without approval of shareholders. INVESTMENT POLICIES ACCEPTABLE INVESTMENTS The Fund invests its assets so that at least 80% of its annual interest income is exempt from federal regular income tax. The Fund pursues its investment objective by investing at least 65% of its portfolio in municipal bonds. Municipal bonds are debt obligations issued by or on behalf of states, territories, and possessions of the United States, including the District of Columbia, and their political subdivisions, agencies, and instrumentalities, the interest from which is exempt from federal regular income tax. CHARACTERISTICS The municipal bonds which the Fund buys have the same characteristics assigned by Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's Ratings Group ("S & P") to bonds of investment grade quality or better. However, the Fund is not restricted to buying rated securities. Medium investment grade quality bonds are rated A and Baa by Moody's or A and BBB by S & P. In certain cases the Fund's adviser may choose bonds which are unrated if it judges the bonds to have the same characteristics as medium quality bonds (i.e., an adequate but not outstanding capacity to service their debt). Bonds rated "BBB" by S & P or "Baa" by Moody's have speculative characteristics. Changes in economic conditions or other circumstances are more likely to weaken capacity to make principal and interest payments than higher rated bonds. If a high-rated bond loses its rating or has its rating reduced after the Fund has purchased it, the Fund is not required to drop the bond from the portfolio, but will consider doing so. There is no limit to portfolio maturity. A description of the ratings categories is contained in the Appendix to the Statement of Additional Information. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS The Fund may purchase municipal bonds on a when-issued or delayed delivery basis. These transactions are arrangements in which the Fund purchases securities with payment and delivery scheduled for a future time. The seller's failure to complete these transactions may cause the Fund to miss a price or yield considered to be advantageous. Settlement dates may be a month or more after entering into these transactions, and the market value of the securities purchased may vary from the purchase prices. Accordingly, the Fund may pay more or less than the market value of the securities on the settlement date. The Fund may dispose of a commitment prior to settlement if the adviser deems it appropriate to do so. In addition, the Fund may enter in transactions to sell its purchase commitments to third parties at current market values and simultaneously acquire other commitments to purchase similar securities at later dates. The Fund may realize short-term profits or losses upon the sale of such commitments. TEMPORARY INVESTMENTS From time to time on a temporary basis, or when the investment adviser determines that market conditions call for a temporary defensive posture, the Fund may invest in short-term tax-exempt or taxable temporary investments. These temporary investments include: notes issued by or on behalf of municipal or corporate issuers; obligations issued or guaranteed by the U.S. government, its agencies, or instrumentalities; other debt securities; commercial paper; certificates of deposit of banks; and repurchase agreements (arrangements in which the organization selling the Fund a bond or temporary investment agrees at the time of sale to repurchase it at a mutually agreed upon time and price). There are no rating requirements applicable to temporary investments. However, the investment adviser will limit temporary investments to those it considers to be of good quality. The Fund intends to invest no more than 20% of its assets in temporary investments. Although the Fund is permitted to make taxable, temporary investments, there is no current intention of generating income subject to federal regular income tax. PORTFOLIO TURNOVER Securities in the Fund's portfolio will be sold whenever the Fund's investment adviser believes it is appropriate to do so in light of the Fund's investment objective, without regard to the length of time a particular security may have been held. The adviser to the Fund does not anticipate that portfolio turnover will result in adverse tax consequences. Any such trading will increase the Fund's portfolio turnover rate and transaction costs. MUNICIPAL BONDS Municipal bonds are generally issued to finance public works, such as airports, bridges, highways, housing, hospitals, mass transportation projects, schools, streets, and water and sewer works. They are also issued to repay outstanding obligations, to raise funds for general operating expenses, and to make loans to other public institutions and facilities. Municipal bonds include industrial development bonds issued by or on behalf of public authorities to provide financing aid to acquire sites or construct and equip facilities for privately or publicly owned corporations. The availability of this financing encourages these corporations to locate within the sponsoring communities and thereby increases local employment. The two principal classifications of municipal bonds are "general obligation" and "revenue" bonds. General obligation bonds are secured by the issuer's pledge of its full faith and credit and taxing power for the payment of principal and interest. Interest on and principal of revenue bonds, however, are payable only from the revenue generated by the facility financed by the bond or other specified sources of revenue. Revenue bonds do not represent a pledge of credit or create any debt of or charge against the general revenues of a municipality or public authority. Industrial development bonds are typically classified as revenue bonds. Municipal bonds may carry fixed, floating or inverse floating rates of interest. Fixed rate bonds bear interest at the same rate from issuance until maturity. The interest rate on floating rate bonds is subject to adjustment based upon changes in market interest rates or indices, such as a bank's prime rate or a published market index. The interest rate may be adjusted at specified intervals or immediately upon any change in the applicable index rate. The interest rate for most floating rate bonds varies directly with changes in the index rate, so that the market value of the bond will approximate its stated value at the time of each adjustment. However, inverse floating rate bonds have interest rates that vary inversely with changes in the applicable index rate, such that the bond's interest rate rises when market interest rates fall and fall when market rates rise. The market value of floating rate bonds is less sensitive than fixed rate bonds to changes in market interest rates. In contrast, the market value of inverse floating rate bonds is more sensitive to market rate changes than fixed or floating rate bonds. The affect of market rate changes on bonds depends upon a variety of factors, including market expectations as to future changes in interest rates and, in the case of floating and inverse floating rate bonds, the frequency with which the interest rate is adjusted and the multiple of the index rate used in making the adjustment. Most municipal bonds pay interest in arrears on a semiannual or more frequent basis. However, certain bonds, variously known as capital appreciation bonds or zero coupon bonds, do not provide for any interest payments prior to maturity. Such bonds are normally sold at a discount from their stated value, or provide for periodic increases in their stated value to reflect a compounded interest rate. The market value of these bonds is also more sensitive to changes in market interest rates than bonds that provide for current interest payments. The Fund does not intend to purchase securities if, as a result of such purchase, more than 25% of the value of its total assets would be invested in the securities of governmental subdivisions located in any one state, territory, or possession of the United States. The Fund will not invest 25% or more of its total assets in any one industry. Governmental issuers of municipal securities are not considered part of any "industry." However, municipal securities backed only by the assets and revenues of nongovernmental users may, for this purpose, be deemed to be related to the industry in which such nongovernmental users engage, and the 25% limitation would apply to such obligations. It is nonetheless possible that the Fund may invest more than 25% of its assets in a broader segment of the municipal securities market, such as revenue obligations of hospitals and other health care facilities, housing agency revenue obligations or airport revenue obligations. This would be the case only if the Fund determines that the yields available from obligations in a particular segment of the market justified the additional risks associated with a large investment in such segment. Although such obligations could be supported by the credit of governmental users or by the credit of nongovernmental users engaged in a number of industries, economic, business, political and other developments generally affecting the revenues of such users (for example, proposed legislation or pending court decisions affecting the financing of such projects and market factors affecting the demand for their services or products) may have a general adverse effect on all municipal securities in such a market segment. The Fund reserves the right to invest more than 25% of its assets in industrial development bonds or private activity bonds or in securities of issuers located in the same state, however, it has no present intention to do so. INVESTMENT RISKS Yields on municipal bonds depend on a variety of factors, including: the general conditions of the money market and the taxable and municipal bond markets; the size of the particular offering; the maturity of the obligations; and the rating of the issue. The ability of the Fund to achieve its investment objective also depends on the continuing ability of the issuers of municipal bonds to meet their obligations for the payment of interest and principal when due. The prices of municipal bonds fluctuate inversely in relation to the direction of interest rates. The prices of longer term bonds fluctuate more widely in response to market interest rate changes. INVESTMENT LIMITATIONS The Fund will not: .borrow money or pledge securities except, under certain circumstances, the Fund may borrow up to one-third of the value of its total assets and pledge up to 10% of the value of those assets to secure such borrowings; .invest more than 5% of its total assets in securities of one issuer (except cash and cash items and U.S. government obligations); or .invest more than 10% of its total assets in municipal bonds subject to legal or contractual restrictions on resale, including repurchase agreements maturing in more than seven days. The above investment limitations cannot be changed without shareholder approval. The following limitations, however, can be changed by the Directors without shareholder approval. Shareholders will be notified before any material change in these limitations becomes effective. The Fund will not: .invest more than 5% of its total assets in securities of issuers that have records of less than three years of continuous operations; or .invest more than 10% of its net assets in illiquid securities, including restricted securities which the adviser believes cannot be sold within seven days and repurchase agreements maturing in more than seven days. ------------------------------------------------------------------------------- NET ASSET VALUE The Fund's net asset value per share fluctuates. The net asset value for Shares is determined by adding the interest of each class of Shares in the market value of all securities and other assets of the Fund, subtracting the interest of each class of Shares in the liabilities of the Fund and those attributable to each class of Shares, and dividing the remainder by the total number of each class of Shares outstanding. The net asset value for each class of Shares may differ due to the variance in daily net income realized by each class. Such variance will reflect only accrued net income to which the shareholders of a particular class are entitled. The net asset value of each class of Shares of the Fund is determined at 4:00 p.m. (Eastern time), Monday through Friday, except on: (i) days on which there are not sufficient changes in the value of the Fund's portfolio securities that it's net asset value might be materially affected; (ii) days during which no Shares are tendered for redemption and no orders to purchase Shares are received; or (iii) the following holidays: New Year's Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. - -------------------------------------------------------------------------------- INVESTING IN THE FUND The Fund offers investors three classes of Shares that carry sales loads and contingent deferred sales charges in different forms and amounts and which bear different levels of expenses. CLASS A SHARES An investor who purchases Class A Shares pays a maximum sales load of 4.50% at the time of purchase. As a result, Class A Shares are not subject to any charges when they are redeemed (except for special programs offered under "Purchases with Proceeds From Redemptions of Unaffiliated Investment Companies.") Certain purchases of Class A Shares qualify for reduced sales loads. See "Reducing or Eliminating the Sales Load." Class A Shares have no conversion feature. CLASS B SHARES Class B Shares are sold without an initial sales load, but are subject to a contingent deferred sales charge of up to 5.50% if redeemed within six full years following purchase. Class B Shares also bear a higher 12b-1 fee than Class A Shares. Class B Shares will automatically convert into Class A Shares, based on relative net asset value, on or around the fifteenth of the month eight full years after the purchase date. Class B Shares provide an investor the benefit of putting all of the investor's dollars to work from the time the investment is made, but (until conversion) will have a higher expense ratio and pay lower dividends than Class A Shares due to the higher 12b-1 fee. CLASS C SHARES Class C Shares are sold without an initial sales load, but are subject to a 1.00% contingent deferred sales charge on assets redeemed within the first 12 months following purchase. Class C Shares provide an investor the benefit of putting all of the investor's dollars to work from the time the investment is made, but will have a higher expense ratio and pay lower dividends than Class A Shares due to the higher 12b-1 fee. Class C Shares have no conversion feature. - -------------------------------------------------------------------------------- HOW TO PURCHASE SHARES Shares of the Fund are sold on days on which the New York Stock Exchange is open. Shares of the Fund may be purchased as described below, either through a financial institution (such as a bank or broker/dealer which has a sales agreement with the distributor) or by wire or by check directly to the Fund, with a minimum initial investment of $500 for Class A Shares and $1,500 for Class B Shares and Class C Shares. Additional investments can be made for as little as $100. (Financial institutions may impose different minimum investment requirements on their customers.) The Fund reserves the right to reject any purchase request. An account must be established at a financial institution or by completing, signing, and returning the new account form available from the Fund before Shares can be purchased. INVESTING IN CLASS A SHARES Class A Shares are sold at their net asset value next determined after an order is received, plus a sales load as follows:
DEALER SALES LOAD SALES LOAD CONCESSION AS A AS A AS A PERCENTAGE PERCENTAGE PERCENTAGE OF OF NET OF PUBLIC AMOUNT OF OFFERING AMOUNT OFFERING TRANSACTION PRICE INVESTED PRICE Less than $100,000 4.50% 4.71% 4.00% $100,000 but less than $250,000 3.75% 3.90% 3.25% $250,000 but less than $500,000 2.50% 2.56% 2.25% $500,000 but less than $1 million 2.00% 2.04% 1.80% $1 million or greater 0.00% 0.00% 0.25%*
*See sub-section entitled "DEALER CONCESSION." No sales load is imposed for Class A Shares purchased through bank trust departments, investment advisers registered under the Investment Advisers Act of 1940, as amended, or to shareholders designated as Liberty Life Members. However, investors who purchase Shares through a trust department or investment adviser may be charged an additional service fee by that institution. Additionally, no sales load is imposed for Class A Shares purchased through "wrap accounts" or similar programs, under which clients pay a fee or fees for services. DEALER CONCESSION For sales of Class A Shares, a dealer will normally receive up to 90% of the applicable sales load. Any portion of the sales load which is not paid to a dealer will be retained by the distributor. However, the distributor, may offer to pay dealers up to 100% of the sales load retained by it. Such payments may take the form of cash or promotional incentives, such as reimbursement of certain expenses of qualified employees and their spouses to attend informational meetings about the Fund or other special events at recreational-type facilities, or items of material value. In some instances, these incentives will be made available only to dealers whose employees have sold or may sell a significant amount of Shares. On purchases of $1 million or more, the investor pays no sales load; however, the distributor will make twelve monthly payments to the dealer totaling 0.25% of the public offering price over the first year following the purchase. Such payments are based on the original purchase price of Shares outstanding at each month end. The sales load for Shares sold other than through registered broker/dealers will be retained by Federated Securities Corp. Federated Securities Corp. may pay fees to banks out of the sales load in exchange for sales and/or administrative services performed on behalf of the bank's customers in connection with the initiation of customer accounts and purchases of Shares. REDUCING OR ELIMINATING THE SALES LOAD The sales load can be reduced or eliminated on the purchase of Class A Shares through: .quantity discounts and accumulated purchases; .concurrent purchases; .signing a 13-month letter of intent; .using the reinvestment privilege; or .purchases with proceeds from redemptions of unaffiliated investment company shares. QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES As shown in the table above, larger purchases reduce the sales load paid. The Fund will combine purchases of Class A Shares made on the same day by the investor, the investor's spouse, and the investor's children under age 21 when it calculates the sales load. In addition, the sales load, if applicable, is reduced for purchases made at one time by a trustee or fiduciary for a single trust estate or a single fiduciary account. If an additional purchase of Class A Shares is made, the Fund will consider the previous purchases still invested in the Fund. For example, if a shareholder already owns Class A Shares having a current value at the public offering price of $90,000 and he purchases $10,000 more at the current public offering price, the sales load on the additional purchase according to the schedule now in effect would be 3.75%, not 4.50%. To receive the sales load reduction, Federated Securities Corp. must be notified by the shareholder in writing or by his financial institution at the time the purchase is made that Class A Shares are already owned or that purchases are being combined. The Fund will reduce the sales load after it confirms the purchases. CONCURRENT PURCHASES For purposes of qualifying for a sales load reduction, a shareholder has the privilege of combining concurrent purchases of two or more funds in the Liberty Family of Funds, the purchase price of which includes a sales load. For example, if a shareholder concurrently invested $30,000 in one of the other funds in the Liberty Family of Funds with a sales load, and $70,000 in this Fund, the sales load would be reduced. To receive this sales load reduction, Federated Securities Corp. must be notified by the shareholder in writing or by his financial institution at the time the concurrent purchases are made. The Fund will reduce the sales load after it confirms the purchases. LETTER OF INTENT If a shareholder intends to purchase at least $100,000 of Shares of the funds in the Liberty Family of Funds (excluding money market funds) over the next 13 months, the sales load may be reduced by signing a letter of intent to that effect. This letter of intent includes a provision for a sales load adjustment depending on the amount actually purchased within the 13-month period and a provision for the custodian to hold up to 4.50% of the total amount intended to be purchased in escrow (in Shares) until such purchase is completed. The Shares held in escrow in the shareholder's account will be released upon fulfillment of the letter of intent or the end of the 13-month period, whichever comes first. If the amount specified in the letter of intent is not purchased, an appropriate number of escrowed Shares may be redeemed in order to realize the difference in the sales load. While this letter of intent will not obligate the shareholder to purchase Shares, each purchase during the period will be at the sales load applicable to the total amount intended to be purchased. At the time a letter of intent is established, current balances in accounts in any Class A Shares of any fund in the Liberty Family of Funds, excluding money market accounts, will be aggregated to provide a purchase credit towards fulfillment of the letter of intent. Prior trade prices will not be adjusted. REINVESTMENT PRIVILEGE If Class A Shares in the Fund have been redeemed, the shareholder has the privilege, within 120 days, to reinvest the redemption proceeds at the next-determined net asset value without any sales load. Federated Securities Corp. must be notified by the shareholder in writing or by his financial institution of the reinvestment in order to eliminate a sales load. If the shareholder redeems his Class A Shares in the Fund, there may be tax consequences. PURCHASES WITH PROCEEDS FROM REDEMPTIONS OF UNAFFILIATED INVESTMENT COMPANIES Investors may purchase Class A Shares at net asset value, without a sales load, with the proceeds from the redemption of shares of an unaffiliated investment company that were purchased or sold with a sales load or commission and were not distributed by Federated Securities Corp. The purchase must be made within 60 days of the redemption, and Federated Securities Corp. must be notified by the investor in writing, or by his financial institution, at the time the purchase is made. From time to time, the Fund may offer dealers a payment of .50 of 1.00% for Shares purchased under this program. If Shares are purchased in this manner, fund purchases will be subject to a contingent deferred sales charge for one year from the date of purchase. Shareholders will be notified prior to the implementation of any special offering as described above. INVESTING IN CLASS B SHARES Class B Shares are sold at their net asset value next determined after an order is received. While Class B Shares are sold without an initial sales load, under certain circumstances described under "Contingent Deferred Sales Charge--Class B Shares," a contingent deferred sales charge may be applied by the distributor at the time Class B Shares are redeemed. CONVERSION OF CLASS B SHARES Class B Shares will automatically convert into Class A Shares on or around the fifteenth of the month eight full years after the purchase date, except as noted below, and will no longer be subject to a distribution services fee (see "Distribution of Shares"). Such conversion will be on the basis of the relative net asset values per share, without the imposition of any sales load, fee or other charge. Class B Shares acquired by exchange from Class B Shares of another fund in the Liberty Family of Funds will convert into Class A Shares based on the time of the initial purchase. For purposes of conversion to Class A Shares, Shares purchased through the reinvestment of dividends and distributions paid on Class B Shares will be considered to be held in a separate sub-account. Each time any Class B Shares in the shareholder's account (other than those in the sub-account) convert to Class A Shares, an equal pro rata portion of the Class B Shares in the sub-account will also convert to Class A Shares. The conversion of Class B Shares to Class A Shares is subject to the continuing availability of a ruling from the Internal Revenue Service or an opinion of counsel that such conversions will not constitute taxable events for federal tax purposes. There can be no assurance that such ruling or opinion will be available, and the conversion of Class B Shares to Class A Shares will not occur if such ruling or opinion is not available. In such event, Class B Shares would continue to be subject to higher expenses than Class A Shares for an indefinite period. Orders for $250,000 or more of Class B Shares will automatically be invested in Class A Shares. INVESTING IN CLASS C SHARES Class C Shares are sold at net asset value next determined after an order is received. A contingent deferred sales charge of 1.00% will be charged on assets redeemed within the first full 12 months following purchase. For a complete description of this charge see "Contingent Deferred Sales Charge--Class C Shares." PURCHASING SHARES THROUGH A FINANCIAL INSTITUTION An investor may call his financial institution (such as a bank or an investment dealer) to place an order to purchase Shares. Orders placed through a financial institution are considered received when the Fund is notified of the purchase order or when payment is converted into federal funds. Purchase orders through a registered broker/dealer must be received by the broker before 4:00 p.m. (Eastern time) and must be transmitted by the broker to the Fund before 5:00 p.m. (Eastern time) in order for Shares to be purchased at that day's price. Purchase orders through other financial institutions must be received by the financial institution and transmitted to the Fund before 4:00 p.m. (Eastern time) in order for Shares to be purchased at that day's price. It is the financial institution's responsibility to transmit orders promptly. Financial institutions may charge additional fees for their services. The financial institution which maintains investor accounts in Class B Shares or Class C Shares with the Fund must do so on a fully disclosed basis unless it accounts for share ownership periods used in calculating the contingent deferred sales charge (see "Contingent Deferred Sales Charge"). In addition, advance payments made to financial institutions may be subject to reclaim by the distributor for accounts transferred to financial institutions which do not maintain investor accounts on a fully disclosed basis and do not account for share ownership periods. PURCHASING SHARES BY WIRE Once an account has been established, Shares may be purchased by wire by calling the Fund. All information needed will be taken over the telephone, and the order is considered received when State Street Bank receives payment by wire. Federal funds should be wired as follows: State Street Bank and Trust Company, Boston, MA; Atten; EDGEWIRE; For Credit to: (Fund Name) (Fund Class); (Fund Number); Account Number; Trade Date and Order Number; Group Number or Dealer Number; Nominee or Institution Name; and ABA Number 011000028. Shares cannot be purchased by wire on holidays when wire transfers are restricted. PURCHASING SHARES BY CHECK Once an account has been established, Shares may be purchased by sending a check made payable to the name of the Fund (designate class of Shares and account number) to: Federated Services Company, P.O. Box 8600, Boston, MA 02266-8600. Orders by mail are considered received when payment by check is converted into federal funds (normally the business day after the check is received). SPECIAL PURCHASE FEATURES SYSTEMATIC INVESTMENT PROGRAM Once a Fund account has been opened, shareholders may add to their investment on a regular basis in a minimum amount of $100. Under this program, funds may be automatically withdrawn periodically from the shareholder's checking account at an Automated Clearing House ("ACH") member and invested in the Fund at the net asset value next determined after an order is received by the Fund, plus the sales load, if applicable. Shareholders should contact their financial institution or the Fund to participate in this program. - -------------------------------------------------------------------------------- EXCHANGE PRIVILEGE CLASS A SHARES Class A shareholders may exchange all or some of their Shares for Class A Shares of other funds in the Liberty Family of Funds at net asset value. Neither the Fund nor any of the funds in the Liberty Family of Funds imposes any additional fees on exchanges. CLASS B SHARES Class B shareholders may exchange all or some of their Shares for Class B Shares of other funds in the Liberty Family of Funds. (Not all funds in the Liberty Family of Funds currently offer Class B Shares. Contact your financial institution regarding the availability of other Class B Shares in the Liberty Family of Funds). Exchanges are made at net asset value without being assessed a contingent deferred sales charge on the exchanged Shares. To the extent that a shareholder exchanges Shares for Class B Shares in other funds in the Liberty Family of Funds, the time for which the exchanged-for Shares are to be held will be added to the time for which exchanged-from Shares were held for purposes of satisfying the applicable holding period. CLASS C SHARES Class C shareholders may exchange all or some of their Shares for Class C Shares in other funds in the Liberty Family of Funds at net asset value without a contingent deferred sales charge. (Not all funds in the Liberty Family of Funds currently offer Class C Shares. Contact your financial institution regarding the availability of other Class C Shares in the Liberty Family of Funds.) To the extent that a shareholder exchanges Shares for Class C Shares in other funds in the Liberty Family of Funds, the time for which the exchanged-for Shares are to be held will be added to the time for which exchanged-from Shares were held for purposes of satisfying the applicable holding period. For more information, see "Contingent Deferred Sales Charge." REQUIREMENTS FOR EXCHANGE Shareholders using this privilege must exchange Shares having a net asset value equal to the minimum investment requirements of the fund into which the exchange is being made. Before the exchange, the shareholder must receive a prospectus of the fund for which the exchange is being made. This privilege is available to shareholders resident in any state in which the Shares being acquired may be sold. Upon receipt of proper instructions and required supporting documents, Shares submitted for exchange are redeemed and proceeds invested in the same class of Shares of the other fund. The exchange privilege may be modified or terminated at any time. Shareholders will be notified of the modification or termination of the exchange privilege. Further information on the exchange privilege and prospectuses for the Liberty Family of Funds are available by contacting the Fund. TAX CONSEQUENCES An exercise of the exchange privilege is treated as a sale for federal income tax purposes. Depending upon the circumstances, a capital gain or loss may be realized. MAKING AN EXCHANGE Instructions for exchanges for the Liberty Family of Funds may be given in writing or by telephone. Written instructions may require a signature guarantee. Shareholders of the Fund may have difficulty in making exchanges by telephone through brokers and other financial institutions during times of drastic economic or market changes. If a shareholder cannot contact his broker or financial institution by telephone, it is recommended that an exchange request be made in writing and sent by overnight mail to Federated Services Company, 500 Victory Road--2nd Floor, Quincy, Massachusetts 02171. TELEPHONE INSTRUCTIONS Telephone instructions made by the investor may be carried out only if a telephone authorization form completed by the investor is on file with the Fund. If the instructions are given by a broker, a telephone authorization form completed by the broker must be on file with the Fund. If reasonable procedures are not followed by the Fund, it may be liable for losses due to unauthorized or fraudulent telephone instructions. Shares may be exchanged between two funds by telephone only if the two funds have identical shareholder registrations. Any Shares held in certificate form cannot be exchanged by telephone but must be forwarded to Federated Services Company, P.O. Box 8600, Boston, Massachusetts 02266-8600 and deposited to the shareholder's account before being exchanged. Telephone exchange instructions are recorded and will be binding upon the shareholder. Such instructions will be processed as of 4:00 p.m. (Eastern time) and must be received by the Fund before that time for Shares to be exchanged the same day. Shareholders exchanging into a Fund will begin receiving dividends the following business day. This privilege may be modified or terminated at any time. - -------------------------------------------------------------------------------- HOW TO REDEEM SHARES Shares are redeemed at their net asset value, less any applicable contingent deferred sales charge, next determined after the Fund receives the redemption request. Redemptions will be made on days on which the Fund computes its net asset value. Redemption requests must be received in proper form and can be made as described below. REDEEMING SHARES THROUGH A FINANCIAL INSTITUTION Shares of the Fund may be redeemed by calling your financial institution to request the redemption. Shares will be redeemed at the net asset value, less any applicable contingent deferred sales charge next determined after the Fund receives the redemption request from the financial institution. Redemption requests through a registered broker/dealer must be received by the broker before 4:00 p.m. (Eastern time) and must be transmitted by the broker to the Fund before 5:00 p.m. (Eastern time) in order for Shares to be redeemed at that day's net asset value. Redemption requests through other financial institutions (such as banks) must be received by the financial institution and transmitted to the Fund before 4:00 p.m. (Eastern time) in order for Shares to be redeemed at that day's net asset value. The financial institution is responsible for promptly submitting redemption requests and providing proper written redemption instructions. Customary fees and commissions may be charged by the financial institution for this service. REDEEMING SHARES BY TELEPHONE Shares may be redeemed in any amount by calling the Fund provided the Fund has a properly completed authorization form. These forms can be obtained from Federated Securities Corp. Proceeds will be mailed in the form of a check, to the shareholder's address of record or by wire transfer to the shareholder's account at a domestic commercial bank that is a member of the Federal Reserve System. The minimum amount for a wire transfer is $1,000. Proceeds from redeemed Shares purchased by check or through ACH will not be wired until that method of payment has cleared. Telephone instructions will be recorded. If reasonable procedures are not followed by the Fund, it may be liable for losses due to unauthorized or fraudulent telephone instructions. In the event of drastic economic or market changes, a shareholder may experience difficulty in redeeming by telephone. If this occurs, "Redeeming Shares By Mail" should be considered. If at any time the Fund shall determine it necessary to terminate or modify the telephone redemption privilege, shareholders would be promptly notified. REDEEMING SHARES BY MAIL Shares may be redeemed in any amount by mailing a written request to: Federated Services Company, Fund Name, Fund Class, P.O. Box 8600, Boston, MA 02266-8600. The written request should state: Fund Name and the Class designation; the account name as registered with the Fund; the account number; and the number of Shares to be redeemed or the dollar amount requested. All owners of the account must sign the request exactly as the Shares are registered. It is recommended that any share certificates be sent by registered or certified mail with the written request. If you are requesting a redemption of any amount to be sent to an address other than that on record with the Fund, or a redemption payable to a third party, then all signatures appearing on the written request must be guaranteed by a bank which is a member of the Federal Deposit Insurance Corporation, a trust company, a member firm of a domestic stock exchange, or any other "eligible guarantor institution," as defined by the Securities and Exchange Act of 1934. The Fund does not accept signatures guaranteed by a notary public. The Fund and its transfer agent have adopted standards for accepting signature guarantees from the above institutions. The Fund may elect in the future to limit eligible signature guarantors to institutions that are members of a signature guarantee program. The Fund and its transfer agent reserve the right to amend these standards at any time without notice. Normally, a check for the proceeds is mailed within one business day, but in no event more than seven days, after receipt of a proper written redemption request. SPECIAL REDEMPTION FEATURES SYSTEMATIC WITHDRAWAL PROGRAM Shareholders who desire to receive payments of a predetermined amount not less than $100 may take advantage of the Systematic Withdrawal Program. Under this program, Shares are redeemed to provide for periodic withdrawal payments in an amount directed by the shareholder. Depending upon the amount of the withdrawal payments, the amount of dividends paid and capital gains distributions with respect to Shares, and the fluctuation of the net asset value of Shares redeemed under this program, redemptions may reduce, and eventually deplete, the shareholder's investment in the Fund. For this reason, payments under this program should not be considered as yield or income on the shareholder's investment in the Fund. To be eligible to participate in this program, a shareholder must have an account value of at least $10,000. A shareholder may apply for participation in this program through his financial institution. Due to the fact that Class A Shares are sold with a sales load, it is not advisable for shareholders to continue to purchase Class A Shares while participating in this program. A contingent deferred sales charge may be imposed on Class B Shares and Class C Shares. CONTINGENT DEFERRED SALES CHARGE Shareholders may be subject to a contingent deferred sales charge upon redemption of their Shares under the following circumstances: CLASS A SHARES Class A Shares purchased under a periodic special offering with the proceeds of a redemption of Shares of an unaffiliated investment company purchased or sold with a sales load and not distributed by Federated Securities Corp. may be charged a contingent deferred sales charge of .50 of 1.00% for redemptions made within one full year of purchase. Any applicable contingent deferred sales charge will be imposed on the lesser of the net asset value of the redeemed Shares at the time of purchase or the net asset value of the redeemed Shares at the time of redemption. CLASS B SHARES Shareholders redeeming Class B Shares from their Fund accounts within six full years of the purchase date of those Shares will be charged a contingent deferred sales charge by the Fund's distributor. Any applicable contingent deferred sales charge will be imposed on the lesser of the net asset value of the redeemed Shares at the time of purchase or the net asset value of the redeemed Shares at the time of redemption in accordance with the following schedule:
CONTINGENT YEAR OF REDEMPTION DEFERRED AFTER PURCHASE SALES CHARGE First 5.50% Second 4.75% Third 4.00% Fourth 3.00% Fifth 2.00% Sixth 1.00% Seventh and thereafter 0.00%
CLASS C SHARES Shareholders redeeming Class C Shares from their Fund accounts within one full year of the purchase date of those Shares will be charged a contingent deferred sales charge by the Fund's distributor of 1.00%. Any applicable contingent deferred sales charge will be imposed on the lesser of the net asset value of the redeemed Shares at the time of purchase or the net asset value of the redeemed Shares at the time of redemption. CLASS A SHARES, CLASS B SHARES, AND CLASS C SHARES The contingent deferred sales charge will be deducted from the redemption proceeds otherwise payable to the shareholder and will be retained by the distributor. The contingent deferred sales charge will not be imposed with respect to: (1) Shares acquired through the reinvestment of dividends or distributions of long-term capital gains; and (2) Shares held for more than six full years from the date of purchase with respect to Class B Shares and one full year from the date of purchase with respect to Class C Shares and applicable Class A Shares. Redemptions will be processed in a manner intended to maximize the amount of redemption which will not be subject to a contingent deferred sales charge. In computing the amount of the applicable contingent deferred sales charge, redemptions are deemed to have occurred in the following order: (1) Shares acquired through the reinvestment of dividends and long-term capital gains; (2) Shares held for more than six full years from the date of purchase with respect to Class B Shares and one full year from the date of purchase with respect to Class C Shares and applicable Class A Shares; (3) Shares held for fewer than six years with respect to Class B Shares and one full year from the date of purchase with respect to Class C Shares and applicable Class A Shares on a first-in, first-out basis. A contingent deferred sales charge is not assessed in connection with an exchange of Fund Shares for Shares of other funds in the Liberty Family of Funds in the same class (see "Exchange Privilege"). Any contingent deferred sales charge imposed at the time the exchanged for Shares are redeemed is calculated as if the shareholder had held the Shares from the date on which he became a shareholder of the exchanged-from Shares. Moreover, the contingent deferred sales charge will be eliminated with respect to certain redemptions (see "Elimination of Contingent Deferred Sales Charge"). ELIMINATION OF CONTINGENT DEFERRED SALES CHARGE A contingent deferred sales charge will not be charged in connection with exchanges of Shares for Class A Shares in other Liberty Family Funds. The contingent deferred sales charge will be eliminated with respect to the following redemptions: (1) redemptions following the death or disability, as defined in Section 72(m)(7) of the Internal Revenue Code of 1986, of a shareholder; (2) redemptions representing minimum required distributions from an Individual Retirement Account or other retirement plan to a shareholder who has attained the age of 70-1/2; and (3) involuntary redemptions by the Fund of Shares in shareholder accounts that do not comply with the minimum balance requirements. No contingent deferred sales charge will be imposed on redemptions of Shares held by Directors, employees and sales representatives of the Fund, the distributor, or affiliates of the Fund or distributor; employees of any financial institution that sells Shares of the Fund pursuant to a sales agreement with the distributor; and spouses and children under the age of 21 of the aforementioned persons. Finally, no contingent deferred sales charge will be imposed on the redemption of Shares originally purchased through a bank trust department, an investment adviser registered under the Investment Advisers Act of 1940, as amended, or any other financial institution, to the extent that no payments were advanced for purchases made through such entities. The Directors reserve the right to discontinue elimination of the contingent deferred sales charge. Shareholders will be notified of such elimination. Any Shares purchased prior to the termination of such waiver would have the contingent deferred sales charge eliminated as provided in the Fund's prospectus at the time of the purchase of the Shares. If a shareholder making a redemption qualifies for an elimination of the contingent deferred sales charge, the shareholder must notify Federated Securities Corp. or the transfer agent in writing that he is entitled to such elimination. - -------------------------------------------------------------------------------- ACCOUNT AND SHARE INFORMATION CERTIFICATES AND CONFIRMATIONS As transfer agent for the Fund, Federated Services Company maintains a share account for each shareholder. Share certificates are not issued unless requested in writing to Federated Services Company. Detailed confirmations of each purchase and redemption are sent to each shareholder. Monthly confirmations are sent to report dividends paid during that month. DIVIDENDS Dividends are declared daily and paid monthly to all shareholders invested in the Fund on the record date. Dividends and distributions are automatically reinvested in additional Shares of the Fund on payment dates at the ex-dividend date net asset value without a sales load, unless shareholders request cash payments on the new account form or by contacting the transfer agent. All shareholders on the record date are entitled to the dividend. If Shares are redeemed or exchanged prior to the record date or purchased after the record date, those Shares are not entitled to that month's dividend. CAPITAL GAINS Net long-term capital gains realized by the Fund, if any, will be distributed at least once every twelve months. ACCOUNTS WITH LOW BALANCES Due to the high cost of maintaining accounts with low balances, the Fund may redeem Shares in any account and pay the proceeds to the shareholder if the account balance falls below the Class A Share required minimum value of $500 or the required minimum value of $1,500 for Class B Shares and Class C Shares. This requirement does not apply, however, if the balance falls below the required minimum value because of changes in the net asset value of the respective Share Class. Before Shares are redeemed to close an account, the shareholder is notified in writing and allowed 30 days to purchase additional Shares to meet the minimum requirement. - -------------------------------------------------------------------------------- FUND INFORMATION MANAGEMENT OF THE FUND BOARD OF DIRECTORS The Fund is managed by a Board of Directors. The Directors are responsible for managing the Fund's business affairs and for exercising all the Fund's powers except those reserved for the shareholders. An Executive Committee of the Board of Directors handles the Board's responsibilities between meetings of the Board. INVESTMENT ADVISER Investment decisions for the Fund are made by Federated Advisers, the Fund's investment adviser, subject to direction by the Directors. The Adviser continually conducts investment research and supervision for the Fund and is responsible for the purchase or sale of portfolio instruments, for which it receives an annual fee from the Fund. ADVISORY FEES The Adviser receives an annual investment advisory fee equal to .30 of 1% of the Fund's average daily net assets, plus 4.5% of the Fund's gross income (excluding any capital gains or losses). The Adviser may voluntarily waive a portion of its fee or reimburse the Fund for certain operating expenses. The Adviser can terminate this voluntary waiver at any time at its sole discretion. The Adviser has also undertaken to reimburse the Fund for operating expenses in excess of limitations established by certain states. ADVISER'S BACKGROUND Federated Advisers, a Delaware business trust organized on April 11, 1989, is a registered investment adviser under the Investment Advisers Act of 1940. It is a subsidiary of Federated Investors. All of the Class A (voting) Shares of Federated Investors are owned by a trust, the trustees of which are John F. Donahue, Chairman and Trustee of Federated Investors, Mr. Donahue's wife, and Mr. Donahue's son, J. Christopher Donahue, who is President and Trustee of Federated Investors. Federated Advisers and other subsidiaries of Federated Investors serve as investment advisers to a number of investment companies and private accounts. Certain other subsidiaries also provide administrative services to a number of investment companies. With over $72 billion invested across more than 260 funds under management and/or administration by its subsidiaries, as of December 31, 1994, Federated Investors is one of the largest mutual fund investment managers in the United States. With more than 1,750 employees, Federated continues to be led by the management who founded the company in 1955. Federated funds are presently at work in and through 4,000 financial institutions nationwide. More than 100,000 investment professionals have selected Federated funds for their clients. Jonathan C. Conley has been the Fund's portfolio manager since October 1984. Mr. Conley joined Federated Investors in 1979 and has been a Vice President of the Fund's investment adviser since 1982. Mr. Conley is a Chartered Financial Analyst and received his M.B.A. in Finance from the University of Virginia. DISTRIBUTION OF SHARES Federated Securities Corp. is the principal distributor for Shares of the Fund. Federated Securities Corp. is located at Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779. It is a Pennsylvania corporation organized on November 14, 1969, and is the principal distributor for a number of investment companies. Federated Securities Corp. is a subsidiary of Federated Investors. The distributor may offer to pay financial institutions an amount equal to 1% of the net asset value of Class C Shares purchased by their clients or customers at the time of purchase. These payments will be made directly by the distributor from its assets, and will not be made from assets of the Fund. Financial institutions may elect to waive the initial payment described above; such waiver will result in the waiver by the Fund of the otherwise applicable contingent deferred sales charge. The distributor will pay dealers an amount equal to 5.5% of the net asset value of Class B Shares purchased by their clients or customers. These payments will be made directly by the distributor from its assets, and will not be made from the assets of the Fund. Dealers may voluntarily waive receipt of all or any portion of these payments. The distributor may pay a portion of the distribution fee discussed below to financial institutions that waive all or any portion of the advance payments. DISTRIBUTION PLAN (CLASS B SHARES AND CLASS C SHARES ONLY) AND SHAREHOLDER SERVICES PLANS Under a distribution plan adopted in accordance with Investment Company Act Rule 12b-1 (the "Distribution Plan"), Class B Shares and Class C Shares will pay a fee to the distributor in an amount computed at an annual rate of .75% of the average daily net assets of each class of Shares to finance any activity which is principally intended to result in the sale of Shares subject to the Distribution Plan. For Class C Shares, the distributor may select financial institutions such as banks, fiduciaries, custodians for public funds, investment advisers, and broker/dealers to provide sales support services as agents for their clients or customers. With respect to Class B Shares, because distribution fees to be paid by the Fund to the distributor may not exceed an annual rate of .75% of each class of Shares' average daily net assets, it will take the distributor a number of years to recoup the expenses it has incurred for its distribution and distribution-related services pursuant to the Plan. The Distribution Plan is a compensation type Plan. As such, the Fund makes no payments to the distributor except as described above. Therefore, the Fund does not pay for unreimbursed expenses of the distributor, including amounts expended by the distributor in excess of amounts received by it from the Fund, interest, carrying or other financing charges in connection with excess amounts expended, or the distributor's overhead expenses. However, the distributor may be able to recover such amounts or may earn a profit from future payments made by Shares under the Plan. In addition, the Fund has adopted a Shareholder Services Plan (the "Services Plan") under which it may make payments up to 0.25 of 1% of the average daily net asset value of Class A Shares, Class B Shares, and Class C Shares to obtain certain personal services for shareholders and for the maintenance of shareholder accounts ("Shareholder Services"). The Fund has entered into a Shareholder Services Agreement with Federated Shareholder Services, a subsidiary of Federated Investors, under which Federated Shareholder Services will either perform shareholder services directly or will select financial institutions to perform shareholder services. Financial institutions will receive fees based upon Shares owned by their clients or customers. The schedules of such fees and the basis upon which such fees will be paid will be determined from time to time by the Fund and Federated Shareholder Services. The Glass-Steagall Act prohibits a depository institution (such as a commercial bank or savings and loan association) from being an underwriter or distributor of most securities. In the event the Glass-Steagall Act is deemed to prohibit depository institutions from acting in the capacities described above or should Congress relax current restrictions on depository institutions, the Directors will consider appropriate changes in the services. State securities laws governing the ability of depository institutions to act as underwriters or distributors of securities may differ from interpretations given to the Glass-Steagall Act and, therefore, banks and financial institutions may be required to register as dealers pursuant to state laws. OTHER PAYMENTS TO FINANCIAL INSTITUTIONS With respect to Class A Shares, Class B Shares, and Class C Shares, the distributor may offer to pay a fee from its own assets to financial institutions as financial assistance for providing substantial marketing and sales support. The support may include sponsoring sales, educational and training seminars for their employees, providing sales literature, and engineering computer software programs that emphasize the attributes of the Fund. Such assistance will be predicated upon the amount of Shares the financial institution sells or may sell, and/or upon the type and nature of sales or marketing support furnished by the financial institution. Any payments made by the distributor may be reimbursed by the Fund's investment adviser or its affiliates. ADMINISTRATION OF THE FUND ADMINISTRATIVE SERVICES Federated Administrative Services, a subsidiary of Federated Investors, provides administrative personnel and services (including certain legal and financial reporting services) necessary to operate the Fund. Federated Administrative Services provides these at an annual rate which relates to the average aggregate daily net assets of all Federated Funds as specified below:
MAXIMUM AVERAGE AGGREGATE ADMINISTRATIVE DAILY NET ASSETS FEE OF THE FEDERATED FUNDS 0.15 of 1% on the first $250 million 0.125 of 1% on the next $250 million 0.10 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 Administrative Services may choose voluntarily to waive a portion of its fee. CUSTODIAN State Street Bank and Trust Company, P.O. Box 8600, Boston, Massachusetts 02266-8600, is custodian for the securities and cash of the Fund. TRANSFER AGENT AND DIVIDEND DISBURSING AGENT Federated Services Company, P.O. Box 8600, Boston, Massachusetts 02266-8600, is transfer agent for the Shares of the Fund, and dividend disbursing agent for the Fund. INDEPENDENT AUDITORS The independent auditors for the Fund are Deloitte & Touche LLP, 2500 One PPG Place, Pittsburgh, Pennsylvania 15222. - -------------------------------------------------------------------------------- SHAREHOLDER INFORMATION VOTING RIGHTS Each share of the Fund gives the shareholder one vote in Director elections and other matters submitted to shareholders for vote. All Shares of each portfolio or class in the Fund have equal voting rights, except that in matters affecting only a particular portfolio or class, only Shares of that portfolio or class are entitled to vote. As a Maryland corporation, the Fund is not required to hold annual shareholder meetings. Shareholder approval will be sought only for certain changes in the Fund's operation and for the election of Directors under certain circumstances. Directors may be removed by a two-thirds vote of the number of Directors prior to such removal or by a two-thirds vote of the shareholders at a special meeting. A special meeting of shareholders shall be called by the Directors upon the written request of shareholders owning at least 10% of the Fund's outstanding Shares of all series entitled to vote. - -------------------------------------------------------------------------------- TAX INFORMATION FEDERAL INCOME TAX The Fund will pay no federal income tax because it expects to meet requirements of the Internal Revenue Code applicable to regulated investment companies and to receive the special tax treatment afforded to such companies. Unless otherwise exempt, shareholders are required to pay federal income tax on any dividends and other distributions, including capital gains distributions, received. This applies whether dividends and distributions are received in cash or as additional Shares. Distributions representing long-term capital gains, if any, will be taxable to shareholders as long-term capital gains no matter how long the shareholders have held the Shares. No federal income tax is due on any dividends earned in an IRA or qualified retirement plan until distributed. PENNSYLVANIA PERSONAL PROPERTY TAXES Shares are exempt from personal property taxes imposed by counties, municipalities, and school districts in Pennsylvania. Shareholders are urged to consult their own tax advisers regarding the status of their accounts under state and local tax laws. - -------------------------------------------------------------------------------- PERFORMANCE INFORMATION From time to time the Fund advertises its total return and yield for each class of Shares. Total return represents the change, over a specific period of time, in the value of an investment in each class of Shares after reinvesting all income and capital gains distributions. It is calculated by dividing that change by the initial investment and is expressed as a percentage. The yield of each class of Shares is calculated by dividing the net investment income per share (as defined by the Securities and Exchange Commission) earned by each class of Shares over a thirty-day period by the maximum offering price per share of each class on the last day of the period. This number is then annualized using semi-annual compounding. The yield does not necessarily reflect income actually earned by each class of Shares and, therefore, may not correlate to the dividends or other distributions paid to shareholders. The performance information reflects the effect of non-recurring charges, such as the maximum sales load or contingent deferred sales charges, which, if excluded, would increase the total return and yield. Total return and yield will be calculated separately for Class A Shares, Class B Shares and Class C Shares. Because Class B Shares and Class C Shares are subject to Rule 12b-1 fees, and higher Shareholder Services fees, the yield for Class A Shares, for the same period, may exceed that of Class B Shares and Class C Shares. Because Class A Shares are subject to a sales load, the total return for Class B Shares and Class C Shares for the same period will exceed that of Class A Shares. Depending on the dollar amount invested, and the time period for which any particular class of Shares is held, the total return for any particular class may exceed that of another. From time to time, advertisements for Class A Shares, Class B Shares, and Class C Shares of the Fund may refer to ratings rankings, and other information in certain financial publications and/or compare the performance of Class A Shares, Class B Shares, and Class C Shares to certain indices. LIBERTY MUNICIPAL SECURITIES FUND, INC. CLASS A SHARES CLASS B SHARES CLASS C SHARES COMBINED PROSPECTUS An Open-End, Diversified Management Investment Company May 31, 1995 [LOGO] FEDERATED SECURITIES CORP. --------------------------------------------- Distributor A subsidiary of FEDERATED INVESTORS FEDERATED INVESTORS TOWER PITTSBURGH, PENNSYLVANIA 15222-3779 530900109 530900406 530900208 G00322-01 (5/95) LIBERTY MUNICIPAL SECURITIES FUND, INC. CLASS A SHARES CLASS B SHARES CLASS C SHARES Combined Statement of Additional Information This Combined Statement of Additional Information should be read with the combined prospectus for Liberty Municipal Securities Fund, Inc. (the "Fund") dated May 31, 1995. This Statement is not a prospectus itself. To receive a copy of the prospectus, write or call the Fund. FEDERATED INVESTORS TOWER PITTSBURGH, PENNSYLVANIA 15222-3779 Statement dated May 31, 1995 FEDERATED SECURITIES CORP. Distributor A subsidiary of FEDERATED INVESTORS GENERAL INFORMATION ABOUT THE FUND 1 INVESTMENT OBJECTIVE AND POLICIES 1 Acceptable Investments 1 When-Issued and Delayed Delivery Transactions 1 Temporary Investments 1 Portfolio Turnover 2 Investment Limitations 2 LIBERTY MUNICIPAL SECURITIES FUND, INC. MANAGEMENT 4 Fund Ownership 8 Directors Compensation 9 INVESTMENT ADVISORY SERVICES 9 Adviser to the Fund 9 Advisory Fees 10 ADMINISTRATIVE SERVICES 10 TRANSFER AGENT AND DIVIDEND DISBURSING AGENT 10 BROKERAGE TRANSACTIONS 10 PURCHASING SHARES 11 Distribution Plan (Class B Shares and Class C Shares Only) and Shareholder Services Plan 11 Conversion to Federal Funds 11 Purchases by Sales Representatives, Fund Directors, and Employees 11 Valuing Municipal Bonds 12 REDEEMING SHARES 12 TAX STATUS 12 The Fund's Tax Status 12 TOTAL RETURN 12 YIELD 13 TAX-EQUIVALENT YIELD 13 Tax-Equivalency Table 13 PERFORMANCE COMPARISONS 14 ABOUT FEDERATED INVESTORS 15 FINANCIAL STATEMENTS 16 APPENDIX 17 GENERAL INFORMATION ABOUT THE FUND The Fund was incorporated under the laws of the State of Maryland on September 10, 1976. On December 23, 1992, the shareholders of the Fund voted to permit the Fund to offer separate series and classes of shares. On January 6, 1993, the Board of Directors ("Directors") approved changing the name of the Fund, effective January 6, 1993, from Federated Tax-Free Income Fund, Inc. to Liberty Municipal Securities Fund, Inc. Shares of the Fund are offered in three classes, known as Class A Shares, Class B Shares, and Class C Shares (individually and collectively referred to as "Shares" as the context may require.) This Combined Statement of Additional Information relates to all three classes of the above-mentioned Shares. INVESTMENT OBJECTIVE AND POLICIES The Fund's investment objective is to provide for its shareholders a high level of current income which is exempt from federal regular income tax. The objective cannot be changed without approval of shareholders. ACCEPTABLE INVESTMENTS The Fund invests primarily in municipal bonds. Characteristics and Risks The municipal bonds in which the Fund invests have the characteristics and risks set forth in the prospectus. If ratings made by Moody's or Standard & Poor's change because of changes in those organizations or in their rating systems, the Fund will try to use comparable ratings as standards in accordance with the investment policies described in the Fund's prospectus. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS These transactions are made to secure what is considered to be an advantageous price and yield for the Fund. No fees or other expenses, other than normal transaction costs, are incurred. However, liquid assets of the Fund sufficient to make payment for the securities to be purchased are segregated at the trade date. These assets are marked to market daily and are maintained until the transaction has been settled. The Fund does not intend to engage in when-issued and delayed delivery transactions to an extent that would cause the segregation of more than 20% of the total value of its assets. TEMPORARY INVESTMENTS The Fund may also invest in temporary investments from time to time for defensive purposes. During the last fiscal year, the Fund did not invest in temporary investments and does not presently intend to do so in the current fiscal year. The Fund might invest in temporary investments: o as a reaction to market conditions; o while waiting to invest proceeds of sales of shares or portfolio securities, although generally proceeds from sales of shares will be invested in municipal bonds as quickly as possible; or o in anticipation of redemption requests. The Fund will not purchase temporary investments (other than securities of the U.S. government, its agencies, or instrumentalities) if, as a result of the purchase, 25% or more of the value of its total assets would be invested in any one industry. However, the Fund may, for temporary defensive purposes, invest more than 25% of the value of its assets in cash or cash items, U.S. Treasury bills, or securities issued or guaranteed by the U.S. government, its agencies, or instrumentalities, or instruments secured by these money market instruments, such as repurchase agreements. Repurchase Agreements Repurchase agreements are arrangements in which banks, broker/dealers, and other recognized financial institutions sell U.S. government securities or certificates of deposit to the Fund and agree at the time of sale to repurchase them at a mutually agreed upon time and price. The Fund or its custodian will take possession of the securities subject to repurchase agreements and these securities will be marked to market daily. To the extent that the original seller does not repurchase the securities from the Fund, the Fund could receive less than the repurchase price on any sale of such securities. In the event that such a defaulting seller filed for bankruptcy or became insolvent, disposition of such securities by the Fund might be delayed pending court action. The Fund believes that under the regular procedures normally in effect for custody of the Fund's portfolio securities subject to repurchase agreements, a court of competent jurisdiction would rule in favor of the Fund and allow retention or disposition of such securities. The Fund may only enter into repurchase agreements with banks and other recognized financial institutions, such as broker/dealers, which are found by the Fund's adviser to be creditworthy pursuant to guidelines established by the Directors. From time to time, such as when suitable municipal bonds are not available, the Fund may invest a portion of its assets in cash. Any portion of the Fund's assets maintained in cash will reduce the amount of assets in municipal bonds and thereby reduce the Fund's yield. PORTFOLIO TURNOVER Portfolio trading will be undertaken principally to accomplish the Fund's objective in relation to anticipated movements in the general level of interest rates. The Fund is free to dispose of portfolio securities at any time when changes in circumstances or conditions make such a move desirable in light of the investment objective. The Fund will not attempt to achieve or be limited to a predetermined rate of portfolio turnover, such turnover always being incidental to transactions undertaken with a view to achieving the Fund's investment objective. During the fiscal years ended March 31, 1995 and 1994, the portfolio turnover rates were 41% and 27% , respectively. INVESTMENT LIMITATIONS Selling Short and Buying on Margin The Fund will not make short sales of securities or purchase any securities on margin, except for such credits as are necessary for the clearance of transactions. Borrowing Money The Fund will not borrow money except as a temporary measure for extraordinary or emergency purposes and then only in amounts not in excess of 5% of the value of its total assets or in an amount up to one-third of the value of its total assets, including the amount borrowed, in order to meet redemption requests without immediately selling any portfolio securities. This borrowing provision is not for investment leverage but solely to facilitate management of the portfolio by enabling the Fund to meet redemption requests where the liquidation of portfolio securities is deemed to be inconvenient or disadvantageous. While any such borrowings are outstanding, no net purchases of investment securities will be made by the Fund. Pledging Assets The Fund will not pledge, mortgage or hypothecate its assets, except to secure permitted borrowings. In those cases, it may pledge securities having a market value at the time of pledge not exceeding 10% of the value of the Fund's total assets. Investing in Commodities or Minerals The Fund will not purchase or sell commodities, commodity contracts, oil, gas, or other mineral exploration or development programs. Investing in Real Estate The Fund will not purchase or sell real estate, but this shall not prevent the Fund from investing in Municipal Bonds secured by real estate or interest therein. Underwriting The Fund will not underwrite any issue of securities except as it may be deemed to be an underwriter under the Securities Act of 1933, in connection with the sale of securities in accordance with its investment objective, policies and limitations. Making Loans The Fund will not make loans except that the Fund may, in accordance with its investment objective, policies and limitations, acquire publicly or non-publicly issued Municipal Bonds or temporary investments or enter into repurchase agreements. Acquiring Securities Issued by Other Investment Companies The Fund will not invest in securities issued by any other investment company or investment trust. Diversification of Investments The Fund will not purchase the securities of any one issuer, except in cash and cash instruments and securities issued by the United States government, its agencies, and instrumentalities, if as a result more than 5% of its total assets would be invested in the securities of such issuer. For purposes of this limitation, each governmental subdivision, i.e. state, territory, possession of the United States or any political subdivision of the foregoing including agencies, authorities, instrumentalities, or similar entities, or of the District of Columbia shall be considered a separate issuer if its assets and revenues are separate from those of the governmental body creating it and revenues are separate from those of the governmental body creating it and the security is backed by its own assets and revenues. In the case of an industrial development bond, if the security is backed only by the assets and revenues of a non-governmental user, then such non-governmental user will be deemed to be the sole issuer. If, however, in the case of an industrial development bond or governmental issued security, a governmental or some other entity guarantees the security, such guarantee would be considered a separate security issued by the guarantor as well as the other issuer (as above defined), subject to limited exclusions allowed by the Investment Company Act of 1940, as amended. For purposes of this limitation, cash instruments do not include securities issued by banks. Dealing in Puts and Calls The Fund will not purchase or sell puts, calls, straddles, spreads, or any combination thereof. Investing in Issuers Whose Securities are Owned by Officers of the Fund The Fund will not purchase or retain the securities of any issuer other than the securities of the Fund, if, to the Fund's knowledge, those officers and directors of the Fund, or of the Adviser, who individually own beneficially more than 1/2 of 1% of the outstanding securities of such issuer, together own benefically more than 5% of such outstanding securities. Concentration of Investments The Fund will not purchase securities if, as a result of such purchase more than 25% of the value of its assets would be invested in the securities of governmental subdivisions located in any one state, territory, or possession of the United States. The Fund may invest more than 25% of the value of its assets in industrial development bonds. As to industrial development bonds, the Fund may purchase securities of an issuer resulting in the ownership of more than 25% of the Fund's assets in any one industry. Investing in Restricted Securities The Fund will not invest more than 10% of the value of its total assets in Municipal Bonds which are subject to legal or contractual restrictions on resale, including repurchase agreements maturing in more than seven days. The above investment limitations cannot be changed without shareholder approval. The following limitations, however, may be changed by the Directors without shareholder approval. Shareholders will be notified before any material change in these limitations becomes effective. Investing in Illiquid Securities The Fund will not invest more than 10% of its net assets in illiquid securities, including restricted securities which the adviser believes cannot be sold within seven days and repurchase agreements maturing in more than seven days. Investing in New or Foreign Issuers or in Securities Not Readily Marketable In order to qualify Shares of the Fund for sale in certain states, the Fund has agreed with certain state securities administrators not to invest more than 5% of the value of its total assets in securities of issuers with records of less than three years of continuous operations, including the operation of any predecessor. The Fund has also agreed not to purchase equity securities of any issuer that are not readily marketable or to invest in securities of any foreign issuer. In addition, in order to comply with certain state restrictions, the Fund will not invest in real estate limited partnerships, oil, gas or other mineral leases. Except with respect to borrowing money, if a percentage limitation is adhered to at the time of investment, a later increase or decrease in percentage resulting from any change in value or net assets will not result in a violation of such restriction. The Fund did not borrow money, pledge securities, invest in municipal bonds subject to legal or contractual restrictions, invest in issuers whose securities are owned by officers of the Fund, or invest in securities of issuers with a record of less than three years of continuous operation in excess of 5% of the value of its net assets during the last fiscal year and has no present intent to do so in the coming fiscal year. For purposes of its policies and limitations, the Fund considers certificates of deposits and demand and time deposits issued by a U.S. branch of a domestic bank or savings and loan having capital, surplus and undivided profits in excess of $100,000,000 at the time of investment to be "cash items." LIBERTY MUNICIPAL SECURITIES FUND, INC. MANAGEMENT Officers and Directors are listed with their addresses, present positions with Liberty Municipal Securities Fund, Inc., and principal occupations. John F. Donahue@* Federated Investors Tower Pittsburgh, PA Birthdate: July 28, 1924 Chairman and Director Chairman and Trustee, Federated Investors, Federated Advisers, Federated Management, and Federated Research; Chairman and Director, Federated Research Corp.; Chairman, Passport Research, Ltd.; Director, AEtna Life and Casualty Company; Chief Executive Officer and Director, Trustee, or Managing General Partner of the Funds. Mr. Donahue is the father of J. Christopher Donahue, President and Director of the Company. Thomas G. Bigley 28th Floor, One Oxford Centre Pittsburgh, PA Birthdate: February 3, 1934 Director Director, Oberg Manufacturing Co.; Chairman of the Board, Children's Hospital of Pittsburgh; Director, Trustee, or Managing General Partner of the Funds; formerly, Senior Partner, Ernst & Young LLP. John T. Conroy, Jr. Wood/IPC Commercial Department John R. Wood and Associates, Inc., Realtors 3255 Tamiami Trail North Naples, FL Birthdate: June 23, 1937 Director President, Investment Properties Corporation; Senior Vice-President, John R. Wood and Associates, Inc., Realtors; President, Northgate Village Development Corporation; Partner or Trustee in private real estate ventures in Southwest Florida; Director, Trustee, or Managing General Partner of the Funds; formerly, President, Naples Property Management, Inc. William J. Copeland One PNC Plaza - 23rd Floor Pittsburgh, PA Birthdate: July 4, 1918 Director Director and Member of the Executive Committee, Michael Baker, Inc.; Director, Trustee, or Managing General Partner of the Funds; formerly, Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp. and Director, Ryan Homes, Inc. J. Christopher Donahue * Federated Investors Tower Pittsburgh, PA Birthdate: April 11, 1949 President and Director President and Trustee, Federated Investors, Federated Advisers, Federated Management, and Federated Research; President and Director, Federated Research Corp.; President, Passport Research, Ltd.; Trustee, Federated Administrative Services, Federated Services Company, and Federated Shareholder Services; President or Vice President of the Funds; Director, Trustee, or Managing General Partner of some of the Funds. Mr. Donahue is the son of John F. Donahue, Chairman and Director of the Company. James E. Dowd 571 Hayward Mill Road Concord, MA Birthdate: May 18, 1922 Director Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director, Trustee, or Managing General Partner of the Funds; formerly, Director, Blue Cross of Massachusetts, Inc. Lawrence D. Ellis, M.D.* 3471 Fifth Avenue, Suite 1111 Pittsburgh, PA Birthdate: October 11, 1932 Director Professor of Medicine and Member, Board of Trustees, University of Pittsburgh; Medical Director, University of Pittsburgh Medical Center - Downtown; Member, Board of Directors, University of Pittsburgh Medical Center; formerly, Hematologist, Oncologist, and Internist, Presbyterian and Montefiore Hospitals; Director, Trustee, or Managing General Partner of the Funds. Edward L. Flaherty, Jr.@ Henny, Kochuba, Meyer and Flaherty Two Gateway Center - Suite 674 Pittsburgh, PA Birthdate: June 18, 1924 Director Attorney-at-law; Partner, Henny, Kochuba, Meyer and Flaherty; Director, Eat'N Park Restaurants, Inc., and Statewide Settlement Agency, Inc.; Director, Trustee, or Managing General Partner of the Funds; formerly, Counsel, Horizon Financial, F.A., Western Region. Peter E. Madden 225 Franklin Street Boston, MA Birthdate: April 16, 1942 Director Consultant; State Representative, Commonwealth of Massachusetts; Director, Trustee, or Managing General Partner of the Funds; formerly, President, State Street Bank and Trust Company and State Street Boston Corporation and Trustee, Lahey Clinic Foundation, Inc. Gregor F. Meyer Henny, Kochuba, Meyer and Flaherty Two Gateway Center - Suite 674 Pittsburgh, PA Birthdate: October 6, 1926 Director Attorney-at-law; Partner, Henny, Kochuba, Meyer and Flaherty; Chairman, Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.; Director, Trustee, or Managing General Partner of the Funds; formerly, Vice Chairman, Horizon Financial, F.A. John E. Murray, Jr., J.D., S.J.D. President, Duquesne University Pittsburgh, PA Birthdate: December 20, 1932 Director President, Law Professor, Duquesne University; Consulting Partner, Mollica, Murray and Hogue; Director, Trustee or Managing General Partner of the Funds. Wesley W. Posvar 1202 Cathedral of Learning University of Pittsburgh Pittsburgh, PA Birthdate: September 14, 1925 Director Professor, Foreign Policy and Management Consultant; Trustee, Carnegie Endowment for International Peace, RAND Corporation, Online Computer Library Center, Inc., and U.S. Space Foundation; Chairman, Czecho Slovak Management Center; Director, Trustee, or Managing General Partner of the Funds; President Emeritus, University of Pittsburgh; formerly, Chairman, National Advisory Council for Environmental Policy and Technology. Marjorie P. Smuts 4905 Bayard Street Pittsburgh, PA Birthdate: July 21, 1935 Director Public relations/marketing consultant; Director, Trustee, or Managing General Partner of the Funds. Richard B. Fisher Federated Investors Tower Pittsburgh, PA Birthdate: May 17, 1923 Vice President Executive Vice President and Trustee, Federated Investors; Director, Federated Research Corp.; Chairman and Director, Federated Securities Corp.; President or Vice President of some of the Funds; Director or Trustee of some of the Funds. Edward C. Gonzales Federated Investors Tower Pittsburgh, PA Birthdate: October 22, 1930 Vice President and Treasurer Vice President, Treasurer, and Trustee, Federated Investors; Vice President and Treasurer, Federated Advisers, Federated Management, Federated Research, Federated Research Corp., and Passport Research, Ltd.; Executive Vice President, Treasurer, and Director, Federated Securities Corp.; Trustee, Federated Services Company and Federated Shareholder Services; Chairman, Treasurer, and Trustee, Federated Administrative Services; Trustee or Director of some of the Funds; Vice President and Treasurer of the Funds. John W. McGonigle Federated Investors Tower Pittsburgh, PA Birthdate: October 26, 1938 Vice President and Secretary Secretar Secretary, Federated Research Corp. and Passport Research, Ltd.; Trustee, Federated Services Company; Executive Vice President, Secretary, and Trustee, Federated Administrative Services; Secretary and Trustee, Federated Shareholder Services; Executive Vice President and Director, Federated Securities Corp.; Vice President and Secretary of the Funds. * This Director is deemed to be an "interested person" as defined in the Investment Company Act of 1940, as amended. @ Member of the Executive Committee. The Executive Committee of the Board of Directors handles the responsibilities of the Board of Directors between meetings of the Board. As used in the table above, "The Funds" and "Funds" mean the following investment companies: American Leaders Fund, Inc.; Annuity Management Series; Automated Cash Management Trust; Automated Government Money Trust; California Municipal Cash Trust; Cash Trust Series II; Cash Trust Series, Inc.; DG Investor Series; Edward D. Jones & Co. Daily Passport Cash Trust; Federated ARMs Fund; Federated Exchange Fund, Ltd.; Federated GNMA Trust; Federated Government Trust; Federated Growth Trust; Federated High Yield Trust; Federated Income Securities Trust; Federated Income Trust; Federated Index Trust; Federated Intermediate Government Trust; Federated Master Trust; Federated Municipal Trust; Federated Short-Intermediate Government Trust; Federated Short-Term U.S. Government Trust; Federated Stock Trust; Federated Tax-Free Trust; Federated U.S. Government Bond Fund; First Priority Funds; Fixed Income Securities, Inc.; Fortress Adjustable Rate U.S. Government Fund, Inc.; Fortress Municipal Income Fund, Inc.; Fortress Utility Fund, Inc.; Fund for U.S. Government Securities, Inc.; Government Income Securities, Inc.; High Yield Cash Trust; Insight Institutional Series, Inc.; Insurance Management Series; Intermediate Municipal Trust; International Series Inc.; Investment Series Funds, Inc.; Investment Series Trust; Liberty Equity Income Fund, Inc.; Liberty High Income Bond Fund, Inc.; Liberty Municipal Securities Fund, Inc.; Liberty Term Trust, Inc.-1999; Liberty U.S. Government Money Market Trust; Liberty Utility Fund, Inc.; Liquid Cash Trust; Mark Twain Funds; Money Market Management, Inc.; Money Market Obligations Trust; Money Market Trust; Municipal Securities Income Trust; New York Municipal Cash Trust; 111 Corcoran Funds; Peachtree Funds; The Planters Funds; Portage Funds; RIMCO Monument Funds; The Shawmut Funds; Short-Term Municipal Trust; Signet Select Funds; Star Funds; The Starburst Funds; The Starburst Funds II; Stock and Bond Fund, Inc.; Sunburst Funds; Targeted Duration Trust; Tax-Free Instruments Trust; Trademark Funds; Trust for Financial Institutions; Trust For Government Cash Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S. Treasury Obligations; The Virtus Funds; and World Investment Series, Inc. FUND OWNERSHIP Officers and Directors own less than 1% of the Fund's outstanding Shares. As of May 5, 1995, there were no shareholders of record who owned 5% or more of the outstanding Class A Shares of the Fund. As of May 5, 1995, there were no shareholders of record who owned 5% or more of the outstanding Class B Shares of the Fund. Merrill Lynch Pierce Fenner & Smith (as record owner holding Class C Shares for its clients) Jacksonville, Florida, owned approximately 625,806 Shares (30.31%) of the Fund as of May 5, 1995. DIRECTORS COMPENSATION NAME , AGGREGATE TOTAL COMPENSATION PAID POSITION WITH COMPENSATION FROM TO DIRECTORS FROM CORPORATION CORPORATION* CORPORATION AND FUND COMPLEX + John F. Donahue, $ -0- $ -0- for the Corporation and Chairman and Director 68 other investment companies in the Fund Complex Thomas G. Bigley, $ 857.00 $ 20,688 for the Corporation and Director 49 other investment companies in the Fund Complex John T. Conroy, Jr., $ 1,908.00 $ 117,202 for the Corporation and Director 64 other investment companies in the Fund Complex William J. Copeland, $ 1,908.00 $ 117,202 for the Corporation and Director 64 other investment companies in the Fund Complex J. Christopher Donahue, $ -0- $ -0- for the Corporation and President and Director 14 other investment companies in the Fund Complex James E. Dowd, $ 1,908.00 $ 117,202 for the Corporation and Director 64 other investment companies in the Fund Complex Lawrence D. Ellis, M.D., $ 1,731.00 $ 106,460 for the Corporation and Director 64 other investment companies in the Fund Complex Edward L. Flaherty, Jr., $ 1,908.00 $ 117,202 for the Corporation and Director 64 other investment companies in the Fund Complex Peter E. Madden, $ 1,472.00 $ 90,563 for the Corporation and Director 64 other investment companies in the Fund Complex Gregor F. Meyer, $ 1,731.00 $ 106,460 for the Corporation and Director 64 other investment companies in the Fund Complex John E. Murray, Jr., $ -0- $ -0- for the Corporation and Director 64 other investment companies in the Fund Complex Wesley W. Posvar, $ 1,731.00 $ 106,460 for the Corporation and Director 64 other investment companies in the Fund Complex Marjorie P. Smuts, $ 1,731.00 $ 106,460 for the Corporation and Director 64 other investment companies in the Fund Complex *Information is furnished for the fiscal year ended March 31, 1995. +The information is provided for the last calendar year. INVESTMENT ADVISORY SERVICES ADVISER TO THE FUND The Fund's investment adviser is Federated Advisers. It is a subsidiary of Federated Investors. All the Class A (voting) shares of Federated Investors are owned by a trust, the trustees of which are John F. Donahue, his wife, and his son, J. Christopher Donahue. John F. Donahue is Chairman and Trustee of Federated Advisers, Chairman and Trustee, Federated Investors, and Chairman and Director of the Fund. J. Christopher Donahue is President and Trustee, Federated Advisers, President and Trustee, Federated Investors, Trustee, Federated Administrative Services, Trustee, Federated Services Company, and President and Director of the Fund. John W. McGonigle is Vice President, Secretary and Trustee of Federated Advisers, Trustee, Vice President, Secretary and General Counsel, Federated Investors, Executive Vice President, Secretary and Trustee, Federated Administrative Services, Executive Vice President and Director, Federated Securities Corp., Trustee, Federated Services Company, and Vice President and Secretary of the Fund. The adviser shall not be liable to the Fund or any 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. ADVISORY FEES For its advisory services, Federated Advisers receives an annual investment advisory fee as described in the prospectus. During the fiscal years ended March 31, 1995, 1994, and 1993, the Fund's adviser earned $4,498,635, $4,570,573, and $4,015,243, respectively. State Expense Limitations The adviser has undertaken to comply with the expense limitation established by certain states for investment companies whose shares are registered for sale in those states. If the Fund's normal operating expenses (including the investment advisory fee, but not including brokerage commissions, interest, taxes, and extraordinary expenses) exceed 2-1/2% per year of the first $30 million of average net assets, 2% per year of the next $70 million of average net assets, and 1-1/2% per year of the remaining average net assets, the adviser will reimburse the Fund for its expenses over the limitation. If the Fund's monthly projected operating expenses exceed this limitation, the investment advisory fee paid will be reduced by the amount of the excess, subject to an annual adjustment. If the expense limitation is exceeded, the amount to be reimbursed by the adviser will be limited, in any single fiscal year, by the amount of the investment advisory fee. This arrangement is not part of the advisory contract and may be amended or rescinded in the future. ADMINISTRATIVE SERVICES Federated Administrative Services, a subsidiary of Federated Investors, provides administrative personnel and services to the Fund for a fee as described in the prospectus. Prior to March 1, 1994, Federated Administrative Services, Inc., also a subsidiary of Federated Investors, served as the Fund's administrator. For the fiscal year ended March 31, 1995, Federated Administrative Services earned $550,028. For the fiscal year ended March 31, 1994, Federated Administrative Services and Federated Administrative Services, Inc., the Fund's former administrator, collectively earned $541,113. For the fiscal year ended March 31, 1993, Federated Administrative Services, Inc. earned $398,773. Dr. Henry J. Gailliot, an officer of Federated Advisers, the adviser to the Fund, holds approximately 20% of the outstanding common stock and serves as a director of Commercial Data Services, Inc., a company which provides computer processing services to Federated Administrative Services. TRANSFER AGENT AND DIVIDEND DISBURSING AGENT Federated Services Company serves as transfer agent and dividend disbursing agent for the Fund. The fee paid to the transfer agent is based upon the size, type and number of accounts and transactions made by shareholders. Federated Services Company also maintains the Corporation's accounting records. The fee paid for this service is based upon the level of the Fund's average net assets for the period plus out-of-pocket expenses. BROKERAGE TRANSACTIONS When selecting brokers and dealers to handle the purchase and sale of portfolio instruments, the adviser looks for prompt execution of the order at a favorable price. In working with dealers, the adviser will generally utilize 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 Federated Securities Corp. The adviser makes decisions on portfolio transactions and selects brokers and dealers subject to review by the Directors. The adviser may select brokers and dealers who offer brokerage and research services. These services may be furnished directly to the Fund or to the adviser and may include: o advice as to the advisability of investing in securities; o security analysis and reports; o economic studies; o industry studies; o receipt of quotations for portfolio evaluations; and o similar services. The adviser and its affiliates exercise reasonable business judgment in selecting brokers who offer brokerage and research services to execute securities transactions. They determine in good faith that commissions charged by such persons are reasonable in relation to the value of the brokerage and research services provided. Research services provided by brokers may be used by the adviser or by affiliates of Federated Investors in advising Federated Funds and other accounts. To the extent that receipt of these services may supplant services for which the adviser or its affiliates might otherwise have paid, it would tend to reduce their expenses. PURCHASING SHARES Except under certain circumstances described in the prospectus, Shares are sold at their net asset value (plus a sales charge on Class A Shares only) on days the New York Stock Exchange is open for business. The procedure for purchasing Shares is explained in the combined prospectus under "How To Purchase Shares." DISTRIBUTION PLAN (CLASS B SHARES AND CLASS C SHARES ONLY) AND SHAREHOLDER SERVICES PLAN These arrangements permit the payment of fees to financial institutions, the distributor, and Federated Shareholder Services, to stimulate distribution activities and to cause services to be provided to shareholders by a representative who has knowledge of the shareholder's particular circumstances and goals. These activities and services may include, but are not limited to, marketing efforts; providing office space, equipment, telephone facilities, and various clerical, supervisory, computer, and other personnel as necessary or beneficial to establish and maintain shareholder accounts and records; processing purchase and redemption transactions and automatic investments of client account cash balances; answering routine client inquiries; and assisting clients in changing dividend options, account designations, and addresses. With respect to the Class B and C Shares of the Fund, by adopting the Distribution Plan, the Board of Directors expects that the Fund will be able to achieve a more predictable flow of cash for investment purposes and to meet redemptions. This will facilitate more efficient portfolio management and assist the Fund in pursuing its investment objectives. By identifying potential investors whose needs are served by the Fund's objectives, and properly servicing these accounts, it may be possible to curb sharp fluctuations in rates of redemptions and sales. Other benefits, which may be realized under either arrangement, may include: (1) providing personal services to shareholders; (2) investing shareholder assets with a minimum of delay and administrative detail; and (3) enhancing shareholder recordkeeping systems; and (4) responding promptly to shareholders' requests and inquiries concerning their accounts. For the fiscal period ending March 31, 1995, payments in the amount of $206,000 were made pursuant to the Distribution Plan, all of which was paid to the financial institutions. In addition, for this period, payments in the amount of $728,702 were made pursuant to the Shareholder Services Plan. CONVERSION TO FEDERAL FUNDS It is the Fund's policy to be as fully invested as possible so that maximum interest may be earned. To this end, all payments from shareholders must be in federal funds or be converted into federal funds before shareholders begin to earn dividends. Federated Services Company acts as the shareholder's agent in depositing checks and converting them to federal funds. PURCHASES BY SALES REPRESENTATIVES, FUND DIRECTORS, AND EMPLOYEES Directors, employees, and sales representatives of the Fund, Federated Advisers, and Federated Securities Corp. or their affiliates, or any investment dealer who has a sales agreement with Federated Securities Corp. and their spouses and children under 21, may buy Class A Shares at net asset value without a sales charge. Shares may also be sold without a sales charge to trusts or pension or profit-sharing plans for these people. These sales are made with the purchaser's written assurance that the purchase is for investment purposes and that the securities will not be resold except through redemption by the Fund. DETERMINING NET ASSET VALUE Net asset value generally changes each day. The days on which net asset value is calculated by the Fund are described in the prospectus. VALUING MUNICIPAL BONDS The Board of Directors uses an independent pricing service to value municipal bonds. The independent pricing service takes into consideration yield, stability, risk, quality, coupon rate, maturity, type of issue, trading characteristics, special circumstances of a security or trading market, and any other factors or market data it considers relevant in determining valuations for normal institutional size trading units of debt securities, and does not rely exclusively on quoted prices. REDEEMING SHARES The Fund redeems Shares at the next computed net asset value, less any applicable contingent deferred sales charge, after the Fund receives the redemption request. Redemption procedures are explained in the combined prospectus under "How To Redeem Shares." Although State Street Bank does not charge for telephone redemptions, it reserves the right to charge a fee for the cost of wire-transferred redemptions of less than $5,000. TAX STATUS THE FUND'S TAX STATUS The Fund will pay no federal income tax because it expects to meet requirements of Subchapter M of the Internal Revenue Code applicable to regulated investment companies and to receive the special tax treatment afforded to such companies. To qualify for this treatment, the Fund must, among other requirements: o derive at least 90% of its gross income from dividends, interest, and gains from the sale of securities; o derive less than 30% of its gross income from the sale of securities held less than three months; o invest in securities within certain statutory limits; and o distribute to its shareholders at least 90% of its net income earned during the year. TOTAL RETURN The Fund's average annual total return based on offering price for Class A Shares for the one-year, five-year, and ten-year periods ended March 31, 1995, was 1.11%, 6.68%, and 8.86%, respectively. The Fund's cumulative total return based on offering price for Class B Shares for the period from July 26, 1994 (date of initial public offering for Class B Shares) to March 31, 1995, was (2.17%). The Fund's one-year average annual total return based on offering price for Class C Shares for the period ended March 31, 1995 and for the period from April 20, 1993 (date of initial public offering for Class C Shares) to March 31, 1995, was 3.91% and 2.61%, respectively. The average annual total return for each class of Shares of the Fund is the average compounded rate of return for a given period that would equate a $1,000 initial investment to the ending redeemable value of that investment. The ending redeemable value is computed by multiplying the number of shares owned at the end of the period by the net asset value 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 load adjusted over the period by any additional Shares, assuming the monthly reinvestment of all dividends and distributions. Any applicable contingent deferred sales charge is deducted from the ending value of the investment based on the lesser of the original purchase price or the net asset value of Shares redeemed. Cumulative total return reflects the Class B Shares' total performance over a specific period of time. This total return assumes and is reduced by the payment of the maximum sales load and contingent deferred sales charge, if applicable. The Class B Shares' total return is representative of only eight months of investment activity since the start of performance. YIELD The Fund's yields for the thirty-day period ended March 31, 1995 for Class A Shares, Class B Shares, and Class C Shares were 5.10%, 4.44%, and 4.45%, respectively. The yield for each class of Shares of the Fund is determined by dividing the net investment income per share (as defined by the Securities and Exchange Commission) earned by any class of Shares over a thirty-day period by the maximum offering price per share of the respective class on the last day of the period. This value is then annualized using semi- annual compounding. This means that the amount of income generated during the thirty-day period is assumed to be generated each month over a 12-month period and is reinvested every six months. The yield does not necessarily reflect income actually earned by the Fund because of certain adjustments required by the Securities and Exchange Commission and therefore, may not correlate to the dividends or other distributions paid to shareholders. To the extent that financial institutions and broker/dealers charge fees in connection with services provided in conjunction with an investment in any class of Shares, the performance will be reduced for those shareholders paying those fees. TAX-EQUIVALENT YIELD The Fund's tax-equivalent yields for the thirty-day period ended March 31, 1995 for Class A Shares, Class B Shares, and Class C Shares were 7.08%, 6.17%, and 6.18%, respectively. The tax-equivalent yield of the Fund is calculated similarly to the yield, but is adjusted to reflect the taxable yield that the Fund would have had to earn to equal its actual yield, assuming a 28% tax rate and assuming that income is 100% tax-exempt. TAX-EQUIVALENCY TABLE A tax-equivalency table may be used in advertising and sales literature. The interest earned by the municipal securities in the Fund's portfolio generally remains free from federal regular income tax*, and is often free from state and local taxes as well. As the table on the next page indicates, a "tax-free" investment can be an attractive choice for investors, particularly in times of narrow spreads between tax-free and taxable yields. TAXABLE YIELD EQUIVALENT FOR 1995 MULTISTATE MUNICIPAL FUND FEDERAL INCOME TAX BRACKET: 15.00% 28.00% 31.00% 36.00% 39.60% Joint $1- $39,001 - $94,251 - $143,601 - OVER Return 39,000 94,250 143,600 256,500 256,500 Single Return $1- $23,351 - $56,551 - $117,951 - OVER 23,350 56,550 117,950 256,500 $256,500 Tax-Exempt Yield Taxable Yield Equivalent 1.00% 1.18% 1.39% 1.45% 1.56% 1.66% 1.50% 1.76% 2.08% 2.17% 2.34% 2.48% 2.00% 2.35% 2.78% 2.90% 3.13% 3.31% 2.50% 2.94% 3.47% 3.62% 2.91% 4.14% 3.00% 3.53% 4.17% 4.35% 4.69% 4.97% 3.50% 4.12% 4.86% 5.07% 5.47% 5.79% 4.00% 4.71% 5.56% 5.80% 6.25% 6.62% 4.50% 5.29% 6.25% 6.52% 7.03% 7.45% 5.00% 5.88% 6.94% 7.25% 7.81% 8.28% 5.50% 6.47% 7.64% 7.97% 8.59% 9.11% 6.00% 7.06% 8.33% 8.70% 9.38% 9.93% 6.50% 7.65% 9.03% 9.42% 10.16% 10.76% 7.00% 8.24% 9.72% 10.14% 10.94% 11.59% 7.50% 8.82% 10.42% 10.87% 11.72% 12.42% 8.00% 9.41% 11.11% 11.59% 12.50% 13.25% NOTE: THE MAXIMUM MARGINAL TAX RATE FOR EACH BRACKET WAS USED IN CALCULATING THE TAXABLE YIELD EQUIVALENT. The chart above is for illustrative purposes only. It is not an indicator of past or future performance of the Fund. *Some portion of the Fund's income may be subject to the federal alternative minimum tax and state and local taxes. PERFORMANCE COMPARISONS The performance of each of the classes of Shares depends upon such variables as: o portfolio quality; o average portfolio maturity; o type of instruments in which the portfolio is invested; o changes in interest rates and market value of portfolio securities; o changes in the Fund's or any class of Shares' expenses; and o various other factors. The Fund's performance fluctuates on a daily basis largely because net earnings and offering price per share fluctuate daily. Both net earnings and offering price per share are factors in the computation of yield and total return. Investors may use financial publications and/or indices to obtain a more complete view of the Fund's performance. When comparing performance, investors should consider all relevant factors such as the composition of any index used, prevailing market conditions, portfolio compositions of other funds, and methods used to value portfolio securities and compute offering price. The financial publications and/or indices which the Fund uses in advertising may include: o LIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund categories by making comparative calculations using total return. Total return assumes the reinvestment of all capital gains distributions and income dividends and takes into account any change in net asset value over a specific period of time. From time to time, the Fund will quote its Lipper ranking in the general municipal bond funds category in advertising and sales literature. o LEHMAN BROTHERS REVENUE BOND INDEX is a total return performance benchmark for the long-term, investment grade, revenue bond market. Returns and attribute for the index are calculated semi- monthly. o LEHMAN SEVEN YEAR STATE GENERAL OBLIGATIONS INDEX is an index of general obligation bonds rated A or better with 6-8 years to maturity. o MORNINGSTAR, INC., an independent rating service, is the publisher of the bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000 NASDAQ-listed mutual funds of all types, according to their risk-adjusted returns. The maximum rating is five stars, and ratings are effective for two weeks. Advertisements and other sales literature for any class of Shares may quote total returns which are calculated on non-standardized base periods. These total returns represent the historic change in the value of an investment in any of the classes of Shares based on monthly reinvestment of dividends over a specified period of time. From time to time as it deems appropriate, the Fund may advertise the performance of any of the classes of Shares using charts, graphs, and descriptions, compared to federally insured bank products including certificates of deposit and time deposits and to money market funds using the Lipper Analytical Services money market instruments average. Advertisements may quote performance which does not reflect the effect of the sales charge for Class A Shares. ABOUT FEDERATED INVESTORS Federated is dedicated to meeting investor needs which is reflected in its investment decision making structured, straightforward, and consistent. This has resulted in a history of competitive performance with a range of competitive investment products that have gained the confidence of thousands of clients and their customers. The company's disciplined security selection process is firmly rooted in sound methodologies backed by fundamental and technical research. Investment decisions are made and executed by teams of portfolio managers, analysts, and traders dedicated to specific market sectors. In the municipal sector, as of December 31, 1994, Federated managed 18 bond funds with approximately $1.9 billion in assets and 18 money market funds with approximately $6.6 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. J. Thomas Madden, Executive Vice President, oversees Federated's equity and high yield corporate bond management while William D. Dawson, Executive Vice President, oversees Federated's domestic fixed income management. Henry A. Frantzen, Executive Vice President, oversees the management of Federated's international portfolios. MUTUAL FUND MARKET Twenty-seven percent of American households are pursuing their financial goals through mutual funds. These investors, as well as businesses and institutions, have entrusted over $2 trillion to the more than 5,500 funds available.* Federated Investors, through its subsidiaries, distributes mutual funds for a variety of investment applications. Specific markets include: INSTITUTIONAL Federated meets the needs of more than 4,000 institutional clients nationwide by managing and servicing separate accounts and mutual funds for a variety of applications, including defined benefit and defined contribution programs, cash management, and asset/liability management. Institutional clients include corporations, pension funds, tax-exempt entities, foundations/endowments, insurance companies, and investment and financial advisors. The marketing effort to these institutional clients is headed by John B. Fisher, President, Institutional Sales Division. TRUST ORGANIZATIONS Other institutional clients include close relationships with more than 1,500 banks and trust organizations. Virtually all of the trust divisions of the top 100 bank holding companies use Federated funds in their clients' portfolios. The marketing effort to trust clients is headed by Mark R. Gensheimer, Executive Vice President, Bank Marketing & Sales. BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES Federated mutual funds are available to consumers through major brokerage firms nationwide--including 200 New York Stock Exchange firms--supported by more wholesalers than any other mutual fund distributor. The marketing effort to these firms is headed by James F. Getz, President, Broker/Dealer Division. *source: Investment Company Institute FINANCIAL STATEMENTS The Financial Statements for the fiscal year ended March 31, 1995, are incorporated herein by reference to the Annual Report of the Fund dated March 31, 1995 (File Nos. 2-57181 and 811-2677). A copy of this report may be obtained without charge by contacting the Fund. APPENDIX STANDARD AND POOR'S RATINGS GROUP MUNICIPAL BOND RATING DEFINITIONS AAA--Debt rated "AAA" has the highest rating assigned by Standard & Poor's Ratings Group. 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 effect 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. MOODY'S INVESTORS SERVICE, INC. MUNICIPAL 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 rated BA are judged to have speculative elements; their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate, and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B--Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. 530900109 530900406 530900208 8051601B (5/95) -----END PRIVACY-ENHANCED MESSAGE-----