-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EFRbZZCnWfOuYcyah0JGK8GVdW5k9sNfzXlYuN3DPLZ9sse/FBejf4K2tOCZeyGX ya6k2TTgv9UZlfIp5Zz17A== 0001318148-05-000063.txt : 20050308 0001318148-05-000063.hdr.sgml : 20050308 20050308113521 ACCESSION NUMBER: 0001318148-05-000063 CONFORMED SUBMISSION TYPE: 497 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 20050308 DATE AS OF CHANGE: 20050308 EFFECTIVENESS DATE: 20050308 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FEDERATED MUNICIPAL SECURITIES FUND INC CENTRAL INDEX KEY: 0000201801 IRS NUMBER: 251304971 STATE OF INCORPORATION: MD FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 497 SEC ACT: 1933 Act SEC FILE NUMBER: 333-122486 FILM NUMBER: 05665831 BUSINESS ADDRESS: STREET 1: 5800 CORPORATE DRIVE CITY: PITTSBURGH STATE: PA ZIP: 15237-7000 BUSINESS PHONE: 8003417400 MAIL ADDRESS: STREET 1: 5800 CORPORATE DRIVE CITY: PITTSBURGH STATE: PA ZIP: 15237-7000 FORMER COMPANY: FORMER CONFORMED NAME: LIBERTY MUNICIPAL SECURITIES FUND INC DATE OF NAME CHANGE: 19930517 FORMER COMPANY: FORMER CONFORMED NAME: FEDERATED TAX FREE INCOME FUND INC DATE OF NAME CHANGE: 19920703 497 1 fmsfform.txt NORTH TRACK FUNDS, INC. 250 East Wisconsin Avenue Suite 2000 Milwaukee, Wisconsin 53202 Dear Shareholder of the North Track Tax-Exempt Fund: A Special Meeting of the Shareholders of the North Track Tax-Exempt Fund (the "North Track Fund"), a mutual fund series of North Track Funds, Inc., will be held at 10:00 a.m., on Thursday April 28, 2005 at the offices of B.C. Ziegler and Company, 250 East Wisconsin Avenue, Suite 2000, Milwaukee, Wisconsin. At the Special Meeting, you will be asked to approve a proposed reorganization of the North Track Fund into Federated Municipal Securities Fund, Inc. (the "Federated Fund"), a mutual fund managed by Federated Investment Management Company ("FIMCO"). If the reorganization is approved, you will receive Class A shares of the Federated Fund in exchange for your Class A shares of the North Track Fund. The aggregate net asset value of the Federated Fund shares you receive in the reorganization will be equal to the value of the North Track Fund shares you exchange in the transaction. The enclosed Prospectus/Proxy Statement describes the proposed reorganization in detail. The Board of Directors of North Track Funds, Inc. unanimously believes that the proposed reorganization is in the best interests of the North Track Fund and its shareholders and unanimously recommends that you vote FOR the reorganization. The Federated Fund has similar investment objective and principal strategies as the North Track Fund, in that both funds invest primarily in municipal securities, the income on which is exempt from regular federal income tax. The Federated Fund has a significantly lower annual expense ratio (0.99% or 0.85% after voluntary fee waivers) for Class A shares than the North Track Fund (1.29%), and is considerably larger than the North Track Fund, with total assets of approximately $490 million compared to $32.3 million for the North Track Fund. The investment advisor and distributor to the Federated Fund are FIMCO and Federated Securities Corp., respectively, which are subsidiaries of Federated Investors, Inc., a New York Stock Exchange listed financial services company founded in 1955 which manages 133 mutual funds and has $179 billion of assets under management as of December 31, 2004. Remember, your vote is important. PLEASE TAKE A MOMENT TO SIGN, DATE AND RETURN YOUR PROXY CARD IN THE ENCLOSED POSTAGE-PAID RETURN ENVELOPE. IT IS VERY IMPORTANT THAT YOUR VOTING INSTRUCTIONS BE RECEIVED PROMPTLY. If you have any questions regarding the Special Meeting, please feel free to call us at 1-800-826-4600. Sincerely, David G. Stoeffel President March 10, 2005 TRANSFER OF ASSETS OF NORTH TRACK TAX-EXEMPT FUND TO AND IN EXCHANGE FOR CLASS A SHARES OF FEDERATED MUNICIPAL SECURITIES FUND, INC. QUESTION AND ANSWERS The enclosed materials include a Prospectus/Proxy Statement containing information you need to make an informed decision. However, we thought it also would be helpful to begin by answering some of the important questions you might have about the proposed reorganization. WHAT WILL HAPPEN TO MY NORTH TRACK TAX-EXEMPT FUND INVESTMENT IF THE PROPOSED REORGANIZATION IS APPROVED? If the proposed reorganization is approved, you will become a shareholder of Federated Municipal Securities Fund, Inc. (the "Federated Fund"), a mutual fund managed by Federated Investment Management Company, on or about April 29, 2005, and will no longer be a shareholder of the North Track Tax-Exempt Fund (the "North Track Fund"). The North Track Fund will cease operations at that time pursuant to the reorganization. You will automatically receive Class A shares of the Federated Fund having an aggregate value equal to the value of your North Track Fund shares at the time of the reorganization. No sales charge will be imposed at the time of the transaction either on the Federated Fund shares you receive or the North Track Fund shares you give up in the reorganization, and you will not be required to take any affirmative steps or incur any costs to receive the Federated Fund shares in the reorganization. WHAT ARE THE BENEFITS OF THE PROPOSED REORGANIZATION FOR ME? The benefits of the proposed reorganization to you as a shareholder of the North Track Fund are many. Class A shares of the Federated Fund have a considerably lower annual expense ratio (0.99% or 0.85% after voluntary fee waivers) than the North Track Fund (1.29%). The Federated Fund with total assets in excess of $490 million as of December 31, 2004, is significantly larger than the North Track Fund (which had total assets of $32.3 million as of December 31, 2004). Its size may enable the Federated Fund to enjoy economies of scale, such as lower total operating expenses and the possibility of more efficient execution for its portfolio purchases and sales, and to own a more diverse portfolio of securities and other investments. Neither the Board of Directors of North Track Funds, Inc. nor B.C. Ziegler and Company, the investment adviser and distributor for the North Track Fund, believes that the North Track Fund will be able to generate enough growth over the foreseeable future to achieve economies of scale by remaining a series of North Track. The reorganization will also enable you to become a holder of Class A shares of the Federated Fund on a tax-free, load-free basis, and thereafter you will be able to exchange your Class A shares of the Federated Fund for Class A shares of any other Federated mutual fund without a sales load. DO THE FUNDS HAVE SIMILAR INVESTMENT OBJECTIVES AND POLICIES? Although there are some differences in their investment objectives and principal strategies, both the Federated Fund and the North Track Fund seek current income that is exempt from federal income tax by investing primarily in investment grade municipal securities. Unlike the North Track Fund, the Federated Fund does not have a specific policy with regard to investments in securities subject to the federal alternative minimum tax (AMT) and uses derivatives such as futures contracts, options and swaps in furtherance of its investment objective and for hedging purposes. HOW DO THE EXPENSE RATIOS OF THE TWO FUNDS COMPARE? As a shareholder of the Federated Fund you will experience a significantly reduced expense ratio (i.e., the fund's annual operating expenses expressed as a percentage of its average daily net assets). The current expense ratio of the Federated Fund is 0.99% per year (and 0.85% after voluntary fee waivers), compared to 1.29% per year for the North Track Fund. HOW DO THE FUNDS COMPARE IN TERMS OF HISTORICAL PERFORMANCE? The historical performance of the Federated Fund and North Track Fund has been similar. The following table shows the average annual total returns (before deducting the applicable sales charge) for Class A shares of the two funds for the one-, three-, five- and 10-year periods ended December 31, 2004:
1 Year 3 Years 5 Years 10 Years ------ ------- ------- ------- Federated Municipal Securities Fund, Inc. 4.18% 6.17% 6.60% 5.42% North Track Tax-Exempt Fund 2.87% 5.83% 6.72% 5.94%
Past performance is no guarantee of future results. WHAT ARE THE TAX CONSEQUENCES OF THE PROPOSED REORGANIZATION? The proposed reorganization will not be a taxable event for federal income tax purposes. You will not recognize any capital gain or loss as a direct result of the reorganization. Your tax basis in your North Track Fund shares will carry over to the Class A shares of the Federated Fund you receive in the reorganization. However, following the Reorganization, it is anticipated that part of the income produced by the Federated Fund will be subject to the AMT because, unlike the North Track Fund, the Federated Fund does not have a policy restricting investments to securities which produce income exempt from the AMT. WHAT PRIVILEGES WILL I HAVE AS A SHAREHOLDER OF FEDERATED MUNICIPAL SECURITIES FUND? As a holder of Class A shares of the Federated Fund, you will have the right to exchange your Federated Fund shares into Class A shares of any other Federated mutual fund. There are currently 133 other Federated funds, including a full range of different types of equity, fixed-income and money market funds. If you would like to add to your Class A holdings of the Federated Fund after the reorganization, you will be credited with having purchased the Class A shares you receive in the reorganization for purposes of rights of accumulation and possible sales load reductions. Federated also offers systematic investment and withdrawal programs, as well as purchases and redemptions by wire and telephone redemption and exchange privileges. WHO ARE THE INVESTMENT ADVISER AND DISTRIBUTOR TO THE FEDERATED FUND? The investment adviser to the Federated Fund is Federated Investment Management Company ("FIMCO") and the distributor of its shares is Federated Securities Corp. ("FSC"). Both FIMCO and FSC are subsidiaries of Federated Investors, Inc., a New York Stock Exchange company founded in 1955 with approximately $179 billion of assets and 133 mutual funds under management as of December 31, 2004. Federated Investors, together with FIMCO, FSC, a number of other affiliated advisers and distributors, the Federated Fund and other Federated mutual funds have been named in several class action and other lawsuits regarding market timing and late trading allegations. Federated Investors is also in discussions with the SEC and the New York Attorney General to resolve related issues. Although Federated does not believe that these matters will have a material adverse effect on Federated mutual funds, there can be no assurance that the lawsuits, regulatory actions, ongoing adverse publicity and other related developments will not result in increased redemptions, reduced sales of fund shares or other adverse consequences. The North Track Board reviewed Federated's possible legal and regulatory exposure in considering the proposed Reorganization. WHO WILL PAY THE EXPENSES OF THE PROPOSED REORGANIZATION? Federated Investors, Inc. and B.C. Ziegler and Company, and not the North Track Fund or the Federated Fund, will pay the costs and expenses related to the proposed reorganization. HOW DOES THE BOARD OF DIRECTORS OF THE FUND RECOMMEND I VOTE? The Board of Directors of North Track Funds, Inc., including all of its independent directors, unanimously approved the proposed reorganization as being in the best interests of the North Track Fund shareholders, and unanimously recommends that shareholders approve it as well. HOW DO I VOTE MY SHARES? You can vote in any one of the following ways: o By mail: complete and sign the enclosed proxy card and mail it in the enclosed postage-paid envelope. o By telephone: call 1-800-690-6903, follow the simple recorded instructions and have your proxy card nearby. o By Internet: log onto www.proxyweb.com, follow the simple instructions and have your proxy card nearby. o In person at the meeting. HOW DO I SIGN THE PROXY CARD? Individual Accounts: Shareholders should sign exactly as their names appear on the account registration shown on the card. Joint Accounts: Both owners must sign exactly as their names appear in the registration. All Other Accounts: The person signing must indicate his or her capacity. For example, a trustee for a trust or other entity should sign, "Jane F. Doe, Trustee." NORTH TRACK FUNDS, INC. NORTH TRACK TAX-EXEMPT FUND NOTICE OF SPECIAL MEETING OF SHAREHOLDERS TO BE HELD APRIL 28, 2005 TO THE SHAREHOLDERS OF THE NORTH TRACK TAX-EXEMPT FUND, a mutual fund series of North Track Funds, Inc.: A Special Meeting of the Shareholders of the North Track Tax-Exempt Fund (the "North Track Fund") will be held at 10:00 a.m., on April 28, 2005 at the offices of B.C. Ziegler and Company, 250 East Wisconsin Avenue, Suite 2000, Milwaukee, Wisconsin, for the following purposes: 1. To approve a proposed Agreement and Plan of Reorganization pursuant to which Federated Municipal Securities Fund, Inc. (the "Federated Fund"), would acquire all of the assets of the North Track Fund (less amounts sufficient to satisfy liabilities) in exchange solely for the issuance of Class A Shares of the Federated Fund, to be distributed pro rata by the North Track Fund to holders of its shares, in complete liquidation and termination of the North Track Fund; 2. To transact such other business as may properly come before the meeting or any adjournment thereof. The Board of Directors has fixed March 1, 2005, as the record date for the determination of the shareholders entitled to vote at the Special Meeting. By Order of the Board of Directors, ----------------------------- S. Charles O'Meara Secretary March 10, 2005 - ------------------------------------------------------------------------------ You can help avoid the necessity and expense of sending follow-up letters to ensure a quorum by promptly signing and returning the enclosed proxy card. If you are unable to attend the meeting, please mark, sign, date and return the enclosed proxy card so that the necessary quorum may be represented at the special meeting. The enclosed envelope requires no postage if mailed in the United States. - ------------------------------------------------------------------------------ PROSPECTUS/PROXY STATEMENT March 10, 2005 Acquisition of the Assets of NORTH TRACK TAX-EXEMPT FUND a mutual fund series of North Track Funds, Inc. 250 East Wisconsin Avenue Suite 2000 Milwaukee, Wisconsin 53202 1-800-826-4600 By and in exchange for Class A Shares of FEDERATED MUNICIPAL SECURITIES FUND, INC. 5800 Corporate Drive Pittsburgh, PA 15237-7000 Telephone No: 1-800-341-7400 This Prospectus/Proxy Statement describes an Agreement and Plan of Reorganization (the "Plan") pursuant to which Federated Municipal Securities Fund, Inc. (the "Federated Fund") would acquire all of the assets (less amounts sufficient to satisfy liabilities) of the North Track Tax-Exempt Fund (the "North Track Fund"), in exchange solely for the issuance of Class A Shares of the Federated Fund (the "Reorganization"). The Federated Fund's Class A Shares will be distributed pro rata by the North Track Fund to its shareholders in complete liquidation and termination of the North Track Fund. As a result of the Reorganization, each owner of shares of the North Track Fund will become the owner of shares of the Federated Fund's Class A Shares, having a total net asset value equal to the total net asset value of his or her holdings in the North Track Fund on the date of the Reorganization (the "Closing Date"). A form of the Plan is attached as Exhibit A. The Board of Directors of North Track Funds, Inc. ("North Track") and B.C. Ziegler and Company ("Ziegler"), the fund's investment adviser, each believe that the proposed Reorganization is in the best interests of the North Track Fund and its shareholders. For a comparison of the investment objectives, policies and limitations, risks and fees of the North Track Fund and the Federated Fund, see "Summary - Comparison of Investment Objectives, Policies, and Limitations - Comparison of Risks" and "Comparative Fee Tables," respectively. This Prospectus/Proxy Statement should be retained for future reference. It sets forth concisely the information about the Federated Fund that a prospective investor should know before investing. This Prospectus/Proxy Statement is accompanied by the Prospectus of the Federated Fund, dated May 31, 2004, which is incorporated herein by reference. A Statement of Additional Information for the Federated Fund, dated May 31, 2004, a Prospectus and Statement of Additional Information for the North Track Fund, dated March 1, 2005, and a Statement of Additional Information relating to this Prospectus/Proxy Statement dated March 10, 2005, have been filed with the Securities and Exchange Commission (the "Commission") and are incorporated herein by reference. Further information about the Federated Fund's performance is contained in its Semi-Annual Report for the period ended September 30, 2004 and in its Annual Report for its fiscal year ended March 31, 2004, each of which also accompanies this Prospectus/Proxy Statement and is incorporated herein by reference. Further information about the North Track Fund's performance is contained in its Annual Report for its fiscal year ended October 31, 2004, which is incorporated herein by reference. Copies of the Prospectuses, Statements of Additional Information, Annual Reports and Semi-Annual Report and other information about the Federated Fund and the North Track Fund (each a "Fund" and together, the "Funds") may be obtained without charge by writing or by calling the Federated Fund or North Track at the addresses and telephone numbers shown above. THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS/PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS/PROXY STATEMENT AND IN THE MATERIALS EXPRESSLY INCORPORATED HEREIN BY REFERENCE AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUNDS. THE SHARES OFFERED BY THIS PROSPECTUS/PROXY STATEMENT ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY, GUARANTEED BY, OBLIGATIONS OF OR OTHERWISE SUPPORTED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL AGENCY. AN INVESTMENT IN THE FUNDS INVOLVES INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED. TABLE OF CONTENTS (continued) Page SUMMARY......................................................................4 The Proposed Reorganization............................................4 Comparison of Investment Objectives, Policies and Limitations..........5 Comparison of Risks....................................................6 Comparative Fee Tables.................................................6 Fees and Expenses......................................................7 Performance Information................................................8 Fund Management........................................................8 Distribution and Shareholder Servicing Arrangements....................9 Purchases, Redemptions and Exchange Procedures.........................9 Dividends and Other Distributions.....................................12 Financial Highlights..................................................13 Legal and Regulatory Matters..........................................13 INFORMATION ABOUT THE REORGANIZATION........................................15 Description of the Proposed Reorganization............................15 Description of the Federated Fund Shares and Capitalization...........15 Federal Income Tax Consequences.......................................16 Reasons for the Reorganization........................................17 Comparative Information on Shareholder Rights and Obligations.........19 INFORMATION ABOUT FEDERATED FUND AND THE NORTH TRACK FUND...................22 Federated Fund........................................................22 North Track Fund......................................................23 INFORMATION ABOUT THE PROXY SOLICITATION AND THE SPECIAL MEETING............23 SHARE OWNERSHIP OF THE FUNDS AND CERTAIN INTERESTS.........................24 Federated Fund........................................................24 North Track Fund......................................................25 OTHER MATTERS AND DISCRETION OF ATTORNEYS NAMED IN THE PROXY................25 AGREEMENT AND PLAN OF REORGANIZATION.......................................A-1 SUMMARY This summary is qualified in its entirety by reference to the additional information contained elsewhere in this Prospectus/Proxy Statement, the Statement of Additional Information relating to this Prospectus/Proxy Statement, the Prospectuses and Statements of Additional Information of the Federated Fund and the North Track Fund and the Plan. The Proposed Reorganization The Board of Directors ("Board" or "Directors") of North Track Funds, Inc. ("North Track") has voted to recommend to holders of shares of the North Track Fund the approval of the Plan whereby the Federated Fund would acquire all of the assets of the North Track Fund (less amounts sufficient to satisfy liabilities) in exchange solely for the issuance of Class A Shares of the Federated Fund to be distributed pro rata by the North Track Fund to its shareholders in complete liquidation and termination of the North Track Fund. As a result of the Reorganization, each shareholder of the North Track Fund will become the owner of the Federated Fund's Class A Shares having a total net asset value equal to the total net asset value of his or her holdings in the North Track Fund on the Closing Date. The North Track Fund offers Class A Shares and the Federated Fund offers Class A, Class B and Class C Shares. Each North Track Fund shareholder would receive Class A Shares of the Federated Fund. The North Track Board has concluded that the Reorganization would be in the best interests of the North Track Fund shareholders, and that the economic interests of shareholders would not be diluted as a result of the transactions contemplated by the Reorganization. The Reorganization of the North Track Fund would give its shareholders the opportunity to participate in a significantly larger fund with similar investment objectives, policies and strategies. In addition, the North Track Fund shareholders are expected to experience a reduction of the annual operating expenses as a percentage of average daily net assets (otherwise known as an "expense ratio") paid in connection with their investment in the Federated Fund. The expense ratio for Class A shares of the Federated Fund is 0.99% (or 0.85% after voluntary waivers), compared to 1.29% for Class A shares of the North Track Fund. In considering the proposed Reorganization, the Board took into consideration a number of factors, including, among others: (1) the terms and conditions of the Reorganization, including the non-recognition of any gain or loss for federal income tax purposes by the North Track Fund or the Federated Fund and its shareholders as a result of the Reorganization; (2) the similarities and differences, but overall compatibility of the investment programs of the North Track Fund and the Federated Fund; (3) the historical expense ratios of each fund and projected pro forma estimated expense ratios; (4) the relative historical performance record of each fund; (5) the greater long-term viability of the combined Federated Fund that would result from the Reorganization as compared to the continued operation of the North Track Fund as a separate fund; (6) the relative disadvantages of alternatives to the reorganization, such as a liquidation of the North Track Fund or it continuation as a series of North Track; (7) the reputation, experience and resources of Federated Investors, Inc., the parent of the Federated Fund's adviser and distributor, as well as the legal and regulatory issues currently facing the organization and their possible consequences; and (8) the consideration paid to Ziegler in connection with the Reorganization and the prospective engagement of Ziegler as a shareholder service agent with respect to shares of the Federated Fund to be serviced by Ziegler. As a condition to the Reorganization, the Federated Fund and the North Track Fund will receive an opinion of counsel that the Reorganization will be considered a tax-free "Reorganization" under applicable provisions of the Internal Revenue Code, as amended, so that neither the Federated Fund nor the North Track Fund or its shareholders will recognize any gain or loss. See "Information about the Reorganizations - Federal Income Tax Consequences." THE BOARD OF DIRECTORS OF NORTH TRACK FUNDS, INC. UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE REORGANIZATION. Comparison of Investment Objectives, Policies and Limitations Investment Objectives and Policies of the Federated Fund and North Track Fund. The investment objectives of the Federated Fund and the North Track Fund are similar in that the Federated Fund seeks to provide a high level of current income which is exempt from federal regular income tax while the North Track Fund seeks to provide the highest total return, consistent with preserving principal, by investing in high quality municipal bonds. Both the Funds pursue their investment objective by investing primarily in a portfolio of securities that generate income that is exempt from federal regular income tax. Both the Funds invest primarily in investment grade securities. The Funds differ in that the North Track Fund pursues an investment strategy which seeks to, under normal market conditions, invest 90% of its assets in municipal securities that produce income that is exempt from both the regular federal income tax and the federal alternative minimum tax ("AMT"). This policy may not be changed without shareholder approval. The Funds also differ in that, in addition to hedging, the Federated Fund may purchase derivatives contracts rather than individual securities in order to gain exposure to the municipal bond market. Therefore, the Federated Fund may be subject to additional sector, call, liquidity and derivative risks as discussed below under the heading "Comparison of Risks" and in the Prospectus of the Federated Fund, which is incorporated herein by reference. Under normal market conditions, the North Track Fund invests at least 90% of its total assets in municipal securities the income of which is exempt from federal income tax (including AMT). This investment policy is fundamental. The North Track Fund may purchase municipal securities of any maturity, and is not required to maintain its portfolio within any range of average maturities or durations. The North Track Fund will invest primarily in municipal securities rated at the time of purchase in an "A" category or higher by Moody's Investors Services, Inc., Standard & Poor's Ratings Services or Fitch Ratings. Generally, the North Track Fund will invest at least 65% of its total assets in bonds rated in one of top two rating categories. The Federated Fund pursues its objective by investing its assets so that, normally, distributions of annual interest income are exempt from federal regular income tax. Interest from the Federated Fund's investments may be subject to AMT for individuals and corporations. The Federated Fund invests primarily in long-term, investment-grade, tax-exempt securities. The Federated Fund may invest in derivative contracts to implement its investment strategies. Because the Federated Fund refers to municipal investments in its name, it has an investment policy that it will normally invest its assets so that at least 80% of the income that it distributes will be exempt from federal regular income tax. This policy may not be changed without shareholder approval. Investment Limitations of the Funds. In addition to the objectives and policies described above, the Federated Fund and the North Track Fund are subject to certain investment policies and investment limitations, most of which are similar to one another. In addition, the North Track Fund has adopted the following fundamental investment limitations, which have not been adopted by the Federated Fund: The North Track Fund may not: (1) invest more than 5% of its total assets in securities of companies which, including any predecessors, have a record of less than three years of continuous operations; (2) invest in securities of other investment companies, except by purchases as a result of which not more than 10% of the Fund's total assets (taken at current value) would be invested in such securities, or except as they may be acquired as part of a merger, consolidation, reorganization or acquisition of assets; (3) borrow money or property except for temporary or emergency purposes; if the Fund ever should borrow money, it may only borrow from banks and in an amount not exceeding 10% of the market value of its total assets (not including the money borrowed), and in the event the Fund's borrowing exceeds 5% of the market value of its total assets, the Fund will not invest in any additional portfolio securities until its borrowings are reduced to below 5% of it total assets; (4) purchase securities with legal or contractual restrictions on resale; (5) issue senior securities; and (6) invest in illiquid securities. In addition to the investment limitations above, the North Track Fund also is subject to a fundamental investment limitation that it will invest at least 90% of its total assets in municipal securities that produce income that is exempt from both the regular federal income tax and the AMT, under normal circumstances. The Federated Fund may issue senior securities to the extent permitted by the Investment Company Act of 1940 ("1940 Act"). At the present time the 1940 Act limits the maximum amount of senior securities which may be issued to less than one-third of the value of the Federated Fund's assets. The Federated Fund has also adopted the following non-fundamental investment limitations: (1) the Federated Fund will not mortgage, pledge, or hypothecate any of its assets, provided that this shall not apply to the transfer of securities in connection with any permissible borrowing or to collateral arrangements in connection with permissible activities; and (2) the Federated Fund may invest in restricted securities. Restricted securities are any securities in which the Fund may invest pursuant to its investment objective and policies but which are subject to restrictions on resale under federal securities law. Under criteria established by the Board, certain restricted securities are determined to be liquid. To the extent that restricted securities are not determined to be liquid, the Fund will limit their purchase, together with other illiquid securities, to 15% of its net assets. The Funds' investment objectives, policies and limitations are further described in the Prospectus (which accompanies the Prospectus/Proxy Statement) and Statement of Additional Information of the Federated Fund dated May 31, 2004, and the Prospectus and Statement of Additional Information of the North Track Fund dated March 1, 2005, which set forth in full the investment objectives, policies and limitations of the Federated Fund and the North Track Fund, all of which are incorporated by reference herein. Comparison of Risks Risks of Investing in the Federated Fund and the North Track Fund. Investments in the Federated Fund and the North Track Fund are not guaranteed. As with any mutual fund, the value of either the Fund's shares will change and you could lose money by investing in either Fund. The risks associated with investment in the Federated Fund and the North Track Fund are similar in that both funds are subject to interest rate, credit and tax risks. Credit risk is the risk that the issuer of the bond will not pay or is perceived as less likely to pay the interest and principal payments when due. Interest-rate risk is the risk that interest rates will rise and the value of the bonds will fall. Interest rate risk is generally greater the longer the remaining maturity of the bonds. Prices will usually decrease more for a longer-term bond when interest rates rise. Tax risk is the risk that tax exempt securities may fail to meet certain legal requirements. For shareholders subject to the federal AMT, the tax risk of the Federated Fund may be greater due to the fact that, unlike the North Track Fund, the Federated Fund does not, under normal market conditions, invest 90% of its assets in securities which produce income exempt from the AMT. This difference may cause the interest received and distributed by the Fund to shareholders to be taxable. Also, changes or proposed changes in federal tax laws may cause the prices of tax exempt securities to fall. The Funds' risks differ in that the Federated Fund is also subject to sector, call, liquidity and leverage risks, as well as the risk of investing in derivative contracts. Sector risk is when a substantial part of a Fund's portfolio is comprised of securities issued or credit enhanced by companies in similar businesses, or with other similar characteristics. As a result, the Fund will be more susceptible to any economic, business, political, or other developments which generally affect these issuers. Call risk is the risk that the Fund's performance may be adversely affected by the possibility that an issuer of a security held by the Fund may redeem the security prior to maturity at a price below its current market value. Liquidity risk is the risk that certain securities in which a Fund invests may be less readily marketable and may be subject to greater fluctuation in price than other securities. Leverage risk is created when an investment exposes the Fund to a level of risk that exceeds the amount invested. Risks of investing in derivative contracts occur when changes in the value of the derivative contracts in which the Fund invests may not be correlated with changes in the value of the underlying asset or, if they are correlated, may move in the opposite direction than originally anticipated. A full description of the risks inherent in the investment in the Federated Fund and the North Track Fund is set forth in the Prospectus (which accompanies the Prospectus/Proxy Statement) and Statement of Additional Information of the Federated Fund dated May 31, 2004, and the Prospectus and Statement of Additional Information of the North Track Fund dated March 1, 2005, all of which are incorporated by reference herein. Comparative Fee Tables The Funds, like all mutual funds, incur certain expenses in their operations. These expenses include management fees, as well as the costs of maintaining accounts, providing shareholder liaison and distribution services and other activities. Set forth in the tables below is information regarding the fees and expenses currently incurred by the Federated Fund and the North Track Fund, respectively, and pro forma fees for the Federated Fund after giving effect to the Reorganization. Fees and Expenses This table describes the fees and expenses that you may pay if you buy and hold Class A Shares of the North Track Fund and the Federated Fund, and the pro forma fees and expenses of Class A Shares of the Federated Fund on a combined basis after giving effect to the Reorganization.
North Track Federated Tax Exempt Municipal Federated Municipal Fund - Class A Securities SecuritiesFund, Inc. - Shares Fund, Inc. - Class A Shares Shareholder Fees Class A Shares Pro Forma Combined Fees Paid Directly From Your Investment Maximum Sales Charge (Load) Imposed on 3.50% 4.50% 4.50% Purchases (as a percentage of offering price)1 Maximum Deferred Sales Charge (Load) (as a None None None percentage of original purchase price or redemption proceeds, as applicable) Maximum Sales Charge (Load) Imposed on None None None Reinvested Dividends (and other Distributions) (as a percentage of offering price) Redemption Fee (as a percentage of amount None None None redeemed, if applicable) Exchange Fee None None None Annual Fund Operating Expenses (Before Waiver and Reimbursement)2 Expenses That are Deducted From Fund Assets (as a percentage of average net assets) Management Fee 0.60%3 0.52%4 0.52%4 Distribution (12b-1) Fee 0.25% None None Shareholder Services Fee None 0.25%5 0.25%5 Other Expenses 0.44% 0.22% 0.22% ----- ----- ----- Total Annual Fund Operating Expenses 1.29% 0.99% 0.99% - -------------------------------- (1) Shareholders of the North Track Fund will not pay a front-end sales charge on the Class A Shares of the Federated Fund they receive in the Reorganization. Purchases of additional Class A Shares after the Reorganization may be subject to a front end sales charge as described below. (2) With respect to the Federated Fund's Class A Shares, the percentages shown are based on expenses for the entire fiscal year ending March 31, 2005. However, the rate at which expenses are accrued during the fiscal year may not be constant and, at any particular point, may be greater or less than the stated average percentage. Although not contractually obligated to do so, the shareholder services provider expects to waive certain amounts with respect to the Federated Fund's Class A Shares. These are shown below along with the net expenses the Federated Fund expects to pay in respect of its Class A Shares for the fiscal year ending March 31, 2005. Federated Federated Municipal Municipal Securities Fund, Securities Inc. - Fund, Inc. - Class A Shares Class A Shares Pro FormaCombined Total Waivers of Fund Expenses 0.14% 0.14% Total Actual Fund Operating Expenses (after 0.85% 0.85% waivers) (3) The annual management fee for the North Track Fund equals 0.60% of the first $50 million of the Fund's average daily net assets, plus 0.50% of the next $200 million of average daily net assets, plus 0.40% of average daily net assets in excess of $250 million. (4) The annual management fee for the the Federated Fund equals the sum of 0.30% of the Fund's average daily net assets plus 4.50% of the Fund's gross income. (5) The shareholder services provider to the Federated Fund expects to voluntarily waive a portion of the shareholder sevices fee. The shareholder services provider can terminate this anticipated voluntary waiver at any time. The shareholder services fee paid by the Federated Fund's Class A Shares (after the anticipated voluntary waiver) is expected to be 0.11% for the fiscal year ending March 31, 2005.
Example This example is intended to help you compare the cost of investing in the Funds with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in each respective Fund's Class A Shares for the time periods indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that each Fund's Class A Shares operating expenses remain the same. Although your actual costs and returns may be higher or lower, based on these assumptions your costs would be:
Federated Municipal North Track Tax Federated Municipal Securities Fund, Inc. Exempt Fund Securities Fund, Inc Pro Forma Combined 1 Year $477 $546 $546 3 Years $745 $751 $751 5 Years $1,033 $972 $972 10 Years $1,852 $1,608 $1,608
Performance Information Information about the performance of the Federated Fund is contained in its Semi-Annual Report for the period ended September 30, 2004 and its Annual Report for the fiscal year ended March 31, 2004, each of which accompanies this Prospectus/Proxy Statement and is incorporated herein by reference. The Annual Report contains management's discussion of the Fund's performance for the fiscal year ended March 31, 2004. Also, the Prospectus for the Federated Fund dated May 31, 2004, which accompanies this Prospectus/Proxy Statement and is incorporated herein by reference, contains a bar chart featuring the Fund's year-by-year total returns through calendar year 2003 and a table showing the Fund's average annual total returns for one-, five- and 10-year period ended December 31, 2003. Current performance information about the Federated Fund is available by calling 1-800-341-7400, or on Federated's website at www.federatedinvestors.com. Information about the performance of the North Track Fund is contained in its Prospectus dated March 1, 2005 and its Annual Report to Shareholders for the fiscal year ended October 31, 2004, which are incorporated herein by reference and available upon request by calling 1-800-826-4600, or on North Track's website at www.northtrackfunds.com. Fund Management Federated Fund. The Board of Directors ("Board") of the Federated Fund governs the Fund and selects and oversees Federated Investment Management Company ("FIMCO"), the Federated Fund's investment adviser. FIMCO is a subsidiary of Federated Investors, Inc. ("Federated"). FIMCO manages the Fund's assets, including buying and selling portfolio securities. Federated Advisory Services Company ("FASC"), an affiliate of FIMCO, provides certain support services to the Adviser. The fee for these services is paid by FIMCO and not by the Federated Fund. The address of the FIMCO and FASC is Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, PA 15222-3779. FIMCO and other subsidiaries of Federated advise approximately 133 equity, fixed-income and money market mutual funds as well as a variety of customized separately managed accounts, which totaled approximately $179 billion in assets as of December 31, 2004. Federated was established in 1955 and is one of the largest mutual fund investment managers in the United States with approximately 1,385 employees. Federated provides investment products to more than 5,700 investment professionals and institutions. The annual investment advisory fee payable to FIMCO for managing the Federated Fund is 0.30% of the Fund's average daily net assets plus 4.50% of the Fund's gross income. FIMCO may voluntarily waive a portion of its fee or reimburse the Fund for certain operating expenses. The following individuals serve as portfolio managers of the Federated Fund. J. Scott Albrecht J. Scott Albrecht has been the Fund's Portfolio Manager since May 1996. Mr. Albrecht joined Federated in 1989 and became a Vice President of the Fund's Adviser in 1994. He was a Portfolio Manager from 1994 to 1996 and has been a Senior Portfolio Manager since 1997. Mr. Albrecht is a Chartered Financial Analyst and received his M.S. in Public Management from Carnegie Mellon University. Mary Jo Ochson Mary Jo Ochson has been the Fund's Portfolio Manager since May 1996. Ms. Ochson was named Chief Investment Officer of tax-exempt, fixed-income products in 2004 and is Vice President of the Fund. She joined Federated in 1982 and has been a Senior Portfolio Manager and a Senior Vice President of the Fund's Adviser since 1996. Ms. Ochson is a Chartered Financial Analyst and received her M.B.A. in Finance from the University of Pittsburgh. North Track Fund. The Board of Directors of North Track, which currently consists of five directors, including four directors who are not "interested persons" of North Track, is responsible for management of North Track and provides broad supervision of its affairs and the operations of its various mutual fund series. The North Track Board selects and oversees B.C. Ziegler and Company ("Ziegler"), the North Track Fund's investment adviser. Ziegler also serves as distributor of the shares of the North Track mutual funds, including the North Track Fund. Ziegler is a wholly-owned subsidiary of The Ziegler Companies, Inc., a financial services holding company. As of December 31, 2004, Ziegler and its affiliates had approximately $2.8 billion of assets under management. Ziegler's address is 250 East Wisconsin Avenue, Suite 2000, Milwaukee, Wisconsin 53202. The annual advisory fee payable to Ziegler for managing the North Track Fund is 0.60% of the Fund's first $50 million of average daily net assets, plus 0.50% of the next $200 million of average daily net assets, plus 0.40% of average daily net assets in excess of $250 million. The North Track Fund is managed by a team of investment professionals, led by Derek J. Pawlak, and including Richard D. Scargill and Brian K. Andrew. Information about these portfolio managers is contained in the Prospectus of the North Track Fund, dated March 1, 2005, which is incorporated herein by reference. Distribution and Shareholder Servicing Arrangements Federated Securities Corp. ("FSC"), an affiliate of FIMCO, is the principal distributor for shares of the Federated Fund. The Class A shares of the Federated Fund do not have a Rule 12b-1 Distribution Plan and do not pay a Rule 12b-1 Distribution fee. The Class A shares of the Federated Fund have adopted a Shareholder Services Plan pursuant to which it may pay a fee to an affiliate of the distributor, Federated Shareholder Services Company, an amount computed at an annual rate of 0.25% of the average daily net assets of the Funds' Class A Shares to finance the maintenance of shareholder accounts and the provision of other shareholder services. B.C. Ziegler is the principal distributor for shares of the North Track Fund. The North Track Fund has adopted a plan pursuant to Rule 12b-1 under the 1940 Act that allows the North Track Fund to pay a fee of 0.25% of the average daily net assets of the Fund over the relevant year for the marketing and distribution of its shares as well as the maintenance of shareholder accounts and the provision of other shareholder services. Purchases, Redemptions and Exchange Procedures State Street Bank and Trust Company ("State Street Bank") is the transfer agent and dividend disbursing agent for the Federated Fund. Services provided by State Street Bank include the issuance, cancellation and transfer of the Fund's shares, and the maintenance of records regarding the ownership of such shares. Reference is made to the Prospectus of the Federated Fund for a complete description of the purchase, exchange, and redemption procedures applicable to purchases, exchanges, and redemptions of the Federated Fund. PFPC Inc. is the transfer agent and dividend disbursing agent for the North Track Fund. Reference is made to the Prospectus of the North Track Fund for a complete description of the purchase, exchange, and redemption procedures applicable to purchases, exchanges, and redemptions of the North Track Fund. The following charts show the minimum initial and subsequent investment amounts for each Fund:
Minimum Investments - Class A Shares Retirement Systematic Initial Subsequent Plan Retirement Plan Investment Plan Investment Investment Investment Subsequent Investment Minimum Fund Minimum Minimum Minimum Investment Minimum (Initial/Subsequent) - ---- ------- ------- ------- ------- -------------------- North Track Fund $1,000(1) $50(2) $25 $25 $50/$50 Federated Fund $1,500 $100 NA NA $1,500/$50 - ------------------------
(1) Except in the case of IRAs, self-directed retirement accounts and custodial accounts under the Uniform Gifts/Transfers to Minor Act, where the initial investment minimum is $500. (2) This minimum does not apply in the case of IRAs, self-directed retirement accounts and custodial accounts under the Uniform Gifts/Transfers to Minor Act. Set forth below is a brief description of the significant purchase, exchange, and redemption procedures applicable to the Federated Fund shares and the North Track Fund shares. Initial Investment Minimums of the Federated Fund will be waived for purposes of the Reorganization. Due to the high cost of maintaining accounts with low balances, the Federated Fund may redeem shares in a shareholder's account and pay the proceeds if the shareholder's account balance falls below the required minimum initial investment amount. Before shares are redeemed to close an account, the shareholder will be notified in writing and allowed 30 days to purchase additional shares to meet the minimum. The North Track Fund may presently redeem shares in a shareholder account if the shareholder account is less than $500 for three months or more, after giving the shareholder 60 days' written notice, unless additional investments are made which would increase the account balance to $1,000. Purchases of shares of the Federated Fund may be made through an investment professional, directly from the Fund, through an exchange from the same share class of another Federated mutual fund, or by systematic investments. The Federated Fund reserves the right to reject any request to purchase or exchange shares. Purchases of shares of the North Track Fund may be made through Ziegler, selected broker-dealers or other financial intermediaries authorized to receive orders, by mail, telephone, exchange with another North Track Fund, or systematic investments. The purchase price of the Federated Fund shares and the North Track Fund shares is based on net asset value, plus any applicable sales charges. However, shareholders of the North Track Fund will not be charged these sales charges in connection with the Reorganization. Class A Shares of the Federated Fund are sold at net asset value ("NAV"), plus a front end sales charge as listed below: Amount of Transaction Sales Charge as a % Sales Charge as a % of Offering Price of NAV Less than $100,000 4.50% 4.71% $100,000 but less than $250,000 3.75% 3.90% $250,000 but less than $500,000 2.50% 2.56% $500,000 but less than $1 million 2.00% 2.04% $1 million or greater 0.00% 0.00% No front-end sales charge will be imposed on the Class A Shares of the Federated Fund to be issued to the North Track Fund shareholders in this Reorganization. A contingent deferred sales charge ("CDSC") of 0.75% of the redemption amount applies to Class A Shares (purchase amount of $1 million or more) redeemed up to 24 months after purchase under certain investment programs where an investment professional received an advance payment on the transaction. Class A Shares of the North Track Fund are sold at NAV, plus a front end sales charge as listed below: Sales Charge as a Sales Charge as a Amount of Transaction % of Offering Price % of NAV Less than $25,000 3.50% 3.63% $25,000 but less than $50,000 3.00% 3.09% $50,000 but less than $100,000 2.50% 2.56% $100,000 but less than $250,000 2.00% 2.04% $250,000 but less than $500,000 1.50% 1.52% $500,000 but less than $1,000,000 1.00% 1.01% $1,000,000 or more None* None* - ------------------------------------- * If shares are redeemed within 24 months after they were purchased without a front-end sales charge as part of an investment of $1,000,000 or more, a contingent deferred sales charge will be imposed on the redemption. That charge will not exceed 0.75% of the NAV of the redeemed shares at the time of redemption or, if less, the net asset value of those shares at the time of purchase. Purchase orders for both Funds are effected at the offering price next calculated after receipt of the order. The net asset value per share for the Federated Fund and the North Track Fund is calculated as of the close of trading (normally 4:00 p.m. Eastern time) on the New York Stock Exchange, Inc. (the "NYSE") on each day on which the NYSE is open for business ("NYSE Closing Time"). The Funds also offer a Systematic Investment Program. Additionally, the Funds can be purchased through a retirement account. The Federated Fund offers the ability to exchange into the same class of another Federated mutual fund without paying a sales charge. The new fund shares will be the same class as the current shares. The North Track Fund offers the ability to exchange into the same class of another North Track mutual fund, subject to applicable sales charges. Any contingent deferred sales charges will continue to be calculated from the date of the shareholder's initial investment. Following the Reorganization, shareholders of the North Track Fund will not be permitted to exercise exchange privileges between shares of the Federated Fund and other mutual fund series of North Track. Redemptions of the Federated Fund may be made through an investment professional or directly from the Fund. Submit your redemption request to your investment professional by the end of regular trading on the NYSE. To redeem directly from the Fund, call the Fund at 1-800-341-7400. To redeem by mail, send a written request to Federated Shareholder Services Company, P. O. Box 8600, Boston, MA 02266-8600. Redemptions of shares of the North Track Fund may be made through Ziegler, selected broker-dealers or other financial intermediaries authorized to receive orders, by mail, telephone, exchange into another North Track mutual fund, or systematic withdrawal. Dividends and Other Distributions The Federated Fund declares any dividends daily and pays them monthly to shareholders. In addition, the Fund pays any capital gains at least annually. Unless a shareholder otherwise instructs, dividends and/or capital gain distributions will be reinvested automatically in additional shares of the Federated Fund at net asset value. The North Track Fund declares any dividends daily and pays them monthly to shareholders. Capital gains distributions are declared annually and paid within 60 days after the Fund's fiscal year end. Unless a shareholder elects in writing to PFPC to receive dividends and capital gains distributions in cash, they will automatically be reinvested in additional shares of the North Track Fund. It is anticipated that the Federated Fund distributions will be primarily dividends that are exempt from federal regular income tax, although a portion of the Fund's dividends may not be so exempt. Dividends may be subject to the federal AMT and state and local taxes. Capital gains and non-exempt dividends are taxable whether paid in cash or reinvested in the Fund. Redemptions and exchanges are taxable sales. Investors should consult their tax adviser regarding federal, state and local tax liability. The North Track Fund annually reports the federal income tax status of all distributions. Other than the Fund's exempt-interest dividends, distributions will be taxed when they are paid, whether a shareholder elects to take them in cash or to reinvest them in additional shares, except that distributions declared in December and paid in January each year will be taxable to a shareholder as if the shareholder received them on December 31 of the earlier year. Distributions will be taxable as ordinary income, qualifying dividends or capital gains. The exemption of exempt-interest dividends for federal income tax purposes does not necessarily result in exemption under the tax laws of any state or local taxing authority which vary with respect to the taxation of such dividend income. Financial Highlights Financial highlights of the Federated Fund for the past five fiscal years ended March 31, 2004 and for the six months ended September 30, 2004 are contained in its Semi-Annual Report for the period ended September 30, 2004, which accompanies this Prospectus/Proxy Statement and is incorporated by reference herein. Financial highlights of the North Track Fund for the past five fiscal years ended October 31, 2004 are contained in the Prospectus of the North Track Fund, which is incorporated by reference herein. Legal and Regulatory Matters Like many other mutual fund companies, in September 2003, Federated Investors, Inc., the parent company of the Federated funds' advisers and distributor (collectively, "Federated"), received detailed requests for information on shareholder trading activities in the Federated funds ("Funds") from the SEC, the New York State Attorney General, and the National Association of Securities Dealers. Since that time, Federated has received additional inquiries from regulatory authorities on these and related matters, and more such inquiries may be received in the future. As a result of these inquiries, Federated and the Funds have conducted an internal investigation of the matters raised, which revealed instances in which a few investors were granted exceptions to Federated's internal procedures for limiting frequent transactions and that one of these investors made an additional investment in another Federated fund. The investigation has also identified inadequate procedures which permitted a limited number of investors (including several employees) to engage in undetected frequent trading activities and/or the placement and acceptance of orders to purchase shares of fluctuating net asset value funds after the funds' closing times. Federated has issued a series of press releases describing these matters in greater detail and emphasizing that it is committed to compensating the Funds for any detrimental impact these transactions may have had on them. In that regard, on February 3, 2004, Federated and the independent directors of the Funds announced the establishment by Federated of a restoration fund that is intended to cover any such detrimental impact. The press releases and related communications are available in the "About Us" section of Federated's website at www.federatedinvestors.com, and any future press releases on this subject will also be posted there. Shortly after Federated's first public announcement concerning the foregoing matters, and notwithstanding Federated's commitment to taking remedial actions, Federated and various Funds were named as defendants in several class action lawsuits now pending in the United States District Court for the District of Maryland seeking damages of unspecified amounts. The lawsuits were purportedly filed on behalf of people who purchased, owned and/or redeemed shares of Federated-sponsored mutual funds during specified periods beginning November 1, 1998. The suits are generally similar in alleging that Federated engaged in illegal and improper trading practices including market timing and late trading in concert with certain institutional traders, which allegedly caused financial injury to the mutual fund shareholders. Federated and various Funds have also been named as defendants in several additional lawsuits, the majority of which are now pending in the United States District Court for the Western District of Pennsylvania, alleging, among other things, excessive advisory and rule 12b-1 fees, and seeking damages of unspecified amounts. The board of the Funds has retained the law firm of Dickstein, Shapiro Morin & Oshinsky LLP to represent the Funds in these lawsuits. Federated and the Funds, and their respective counsel, are reviewing the allegations and will respond appropriately. Additional lawsuits based upon similar allegations may be filed in the future. The potential impact of these recent lawsuits and future potential similar suits is uncertain. Although we do not believe that these lawsuits will have a material adverse effect on the Funds, there can be no assurance that these suits, the ongoing adverse publicity and/or other developments resulting from the regulatory investigations will not result in increased Fund redemptions, reduced sales of Fund shares, or other adverse consequences for the Funds. INFORMATION ABOUT THE REORGANIZATION Description of the Proposed Reorganization This summary is qualified in its entirety by reference to the additional information contained elsewhere in this Prospectus/Proxy Statement, the Statement of Additional Information relating to this Prospectus/Proxy Statement, the Prospectuses and Statements of Additional Information of the Federated Fund and the North Track Fund and the Plan (attached hereto as Exhibit A). The Plan provides for the Reorganization to occur on or about April 29, 2005 (the "Closing Date"). The Plan provides that all of the assets of the North Track Fund (less any cash needed to cover ordinary liabilities to be paid by the North Track Fund) will be transferred to the Class A Shares of the Federated Fund at the close of business or at such other time as to which the Funds may agree (the "Effective Time") on the Closing Date of the Reorganization. In exchange for the transfer of these assets, the Federated Fund will simultaneously issue at the Effective Time of the Reorganization a number of full and fractional shares of the Class A Shares of the Federated Fund to the North Track Fund equal in value to the aggregate net asset value of the North Track Fund calculated before the Effective Time of the Reorganization. Following the transfer of assets in exchange for shares of the Federated Fund, the North Track Fund will distribute all the shares of the Federated Fund pro rata to its shareholders of record in complete liquidation and termination of the North Track Fund. Shareholders of the North Track Fund owning shares at the Effective Time of the Reorganization will receive a number of Class A Shares of the Federated Fund with the same aggregate value as the shareholder had in the North Track Fund immediately before the Reorganization. Such distribution will be accomplished by the establishment of accounts in the names of the North Track Fund's shareholders on the share records of the Federated Fund's transfer agent. Each account will receive the respective pro rata number of full and fractional shares of the Federated Fund due to the shareholders of the North Track Fund. The North Track Fund will then be liquidated and terminated. The Federated Fund does not issue share certificates to shareholders. Class A Shares of the Federated Fund to be issued will have no preemptive or conversion rights. No sales charges will be imposed in connection with the receipt of such shares by the North Track Fund's shareholders. The Plan contains customary representations, warranties and conditions. The Plan provides that the consummation of the Reorganization with respect to the North Track Fund and the Federated Fund is conditioned upon, among other things: (i) approval of the Reorganization by the North Track Fund's shareholders; and (ii) the receipt by the North Track Fund and the Federated Fund of a tax opinion to the effect that the Reorganization will be tax-free to the North Track Fund, its shareholders and the Federated Fund. The Plan may be terminated with respect to the Reorganization if, before the Closing Date, any of the required conditions have not been met, the representations and warranties are not true or the Board of the North Track Fund or the Federated Fund, as the case may be, determines that the Reorganization is not in the best interests of the shareholders of the North Track Fund or the Federated Fund, respectively. All expenses of the Reorganization will be paid by FIMCO or its affiliates, and certain expenses will be evenly split between FIMCO and Ziegler if they exceed $150,000. In connection with the Reorganization (and the simultaneous reorganization of the North Track Government Fund), Ziegler, the investment adviser of the North Track Fund, will receive consideration of up to $200,000. Ziegler has also contracted with FSC to serve as a Shareholder Service Agent with respect to shares of the Federated Fund serviced by Ziegler following the Reorganization. Pursuant to the Shareholder Services Agreement entered into between Ziegler and FSC, Ziegler will receive a shareholder services fee of 0.25% per annum with respect to the Class A shares of the Federated Fund serviced by Ziegler. Description of the Federated Fund Shares and Capitalization Class A Shares of the Federated Fund to be issued to shareholders of the North Track Fund under the Plan will be fully paid and non-assessable when issued, transferable without restrictions and will have no preemptive or conversion rights. Reference is hereby made to the Prospectus of the Federated Fund provided herewith for additional information about the Class A Shares of the Federated Fund. The following table sets forth the unaudited capitalization of the North Track Fund into the Federated Fund as of January 21, 2005:
Federated Municipal Federated Securities Municipal Fund, Adjustments Securities Fund, North Track Inc.-Class A Inc.-Class A Shares Tax-Exempt Fund Shares Pro Forma Combined Net Assets $32,247,489 $432,298,694 -- $464,546,183 Net Asset Value Per $9.46 $10.82 -- $10.82 Share Shares Outstanding 3,410,179 39,957,127 (429,820) 42,937,486 Federal Income Tax Consequences
As a condition to each Reorganization, the Funds will receive an opinion of counsel, each substantially to the effect that, on the basis of the existing provisions of the Code and the regulations thereunder, current administrative rules and court decisions, for federal income tax purposes: o the Reorganization will qualify as a tax-free reorganization under Section 368(a)(1)(C) of the Code, and the North Track Fund and the Federated Fund each will be a "party to a reorganization" within the meaning of Section 368(b) of the Code; o the Federated Fund will recognize no gain or loss upon its receipt of the North Track Fund's assets in exchange solely for the Federated Fund's Class A Shares; o the North Track Fund will recognize no gain or loss upon the transfer of its assets to the Federated Fund in exchange solely for the Federated Fund's Class A Shares or the distribution of the Federated Fund's shares, pro rata, to the North Track Fund's shareholders in constructive exchange for their North Track Fund's shares; o the shareholders of the North Track Fund will recognize no gain or loss upon the exchange of their North Track Fund shares for the Federated Fund's Class A Shares; o the Federated Fund's tax basis in each North Track Fund asset it receives in the Reorganization will be the same as the North Track Fund's tax basis in that asset immediately prior to the Reorganization; o the Federated Fund's holding period for each such asset will include the period during which the asset was held by the North Track Fund; o each North Track Fund's shareholder's aggregate tax basis in the shares of the Federated Fund received by each shareholder of the North Track Fund pursuant to the Reorganization will be the same as the aggregate tax basis of the shares of the North Track Fund held by such shareholder immediately prior to the Reorganization; and o each North Track Fund's shareholder's holding period for the Federated Fund's Class A Shares it receives pursuant to the Reorganization will include the period during which the shareholder held the North Track Fund shares exchanged therefor, provided the North Track Fund shares were held as capital assets at the Effective Time. Each foregoing opinion may state that no opinion is expressed as to the effect of either Reorganization on the Federated Fund, the North Track Fund or the North Track Fund's shareholders with respect to any asset as to which unrealized gain or loss is required to be recognized for federal income tax purposes at the end of a taxable year (or on the termination or transfer thereof) under a mark-to-market system of accounting. As of October 31, 2004, the North Track Fund had a net capital loss carryover of $2,961,679. The final amount of the net capital loss carryover for the North Track Fund is subject to change and will not be determined until the time of the Reorganization. As of October 31, 2004, the North Track Fund had a net unrealized appreciation on the portfolio securities it held of $2,582,204. After reviewing several factors relating to the Reorganization, including (1) the continuance of employment of FIMCO as investment adviser to the Fund; (2) the continuance of the Federated Fund's existing investment objectives, policies and restrictions; (3) the continuance of the Federated Fund's existing expense structure and expense ratio; (4) the larger asset size of the Federated Fund; and (5) the combined portfolio composition of the Federated Fund and the North Track Fund, FIMCO and Ziegler have determined that the Federated Fund will be the accounting survivor following the Reorganization. After and as a result of the Reorganization, it is anticipated that the ability of the accounting survivor to use the North Track Fund's net capital loss carryover and to deduct losses recognized on the sale of assets of the North Track Fund to the extent that the losses were "built-in losses" as of the time of the Reorganization, will be significantly limited under Section 382 of the Code. It is not anticipated that there will be material sales of portfolio securities by the North Track Fund or the Federated Fund in connection with the Reorganization. Shareholders of the North Track Fund should consult their tax advisors regarding the effect of the Reorganization in light of their individual circumstances. Because the foregoing discussion only relates to the federal income tax consequences of the Reorganization, those shareholders also should consult their tax advisors about state and local tax consequences of the Reorganization. Reasons for the Reorganization The North Track Fund has experienced difficulties growing its assets to an acceptable level through its current distribution network, and Ziegler believes these difficulties will continue through the foreseeable future. The North Track Fund has steadily declined in size over the past five years, due to net redemption activity. At its current asset level (approximately $32.3 million at December 31, 2004), the North Track Fund cannot operate efficiently. Its annual operating expenses as a percentage of average daily net assets (i.e., its "expense ratio") are currently running at the rate of 1.29%, which is higher than many other funds in its category. Increasing operating costs, due in part to the need to implement new SEC compliance and related requirements, will put added pressure on the Fund. The North Track Fund's small size also creates challenges in making effective trading decisions and leaves it vulnerable to the risk that significant redemptions could disrupt normal investment operations. Moreover, the North Track Fund is outside North Track's primary marketing and investment focus, which is offering "index funds with advice." Ziegler is recommending the Reorganization because the North Track Fund could potentially benefit from economies of scale that could be realized by transferring its assets to the Federated Fund, thereby allowing the North Track Fund shareholders to realize a significant expense ratio reduction when they become shareholders of the Federated Fund. With total net assets of $491 million (as of December 31, 2004), the Federated Fund has a current annualized expense ratio of 0.99% for its Class A shares (or 0.85% after voluntary fee waivers) compared to 1.29% for the North Track Fund. The Federated Fund's larger size offers investors the potential for greater stability than the North Track Fund. The average annual total returns over the relevant 1, 3, 5 and 10 year periods for the Federated Fund have also been comparable to those of the North Track Fund. The Federated Fund is also part of a family of 133 funds associated with Federated Investors, Inc., a NYSE-listed financial services company with approximately $179 billion of assets under management as of December 31, 2004. Ziegler considered alternatives to the Reorganization, including a liquidation of the North Track Fund, a possible transaction with another mutual fund complex or continuation as a separate series of North Track, but determined that the Reorganization was preferable. A liquidation would be a taxable event and involve transaction costs to be borne by the North Track Fund, and it would require the shareholders to incur costs in making alternative investments of their liquidation proceeds. Ziegler also did not believe that other mutual fund complexes that expressed an interest in acquiring the North Track Fund offered the level of experience, reputation, depth of resources, range of funds and other benefits that Federated can bring to the North Track Fund shareholders. The status quo would likely result in a further decline in the North Track Fund's asset levels and an escalating expense ratio. Ziegler informed the North Track Board that FIMCO (or its affiliates) and Ziegler would collectively bear the costs of the Reorganization. Ziegler also disclosed to the Board that, in connection with the Reorganization and the proposed reorganization of the North Track Government Fund, Ziegler, the investment adviser of the North Track Fund, will receive consideration of up to $200,000 from Federated. Ziegler has also contracted with FSC to serve as a Shareholder Service Agent with respect to shares of the Federated Fund serviced by Ziegler following the Reorganization. Pursuant to the Shareholder Services Agreement entered into between Ziegler and FSC, Ziegler will receive a shareholder services fee of 0.25% per annum with respect to the Class A shares of the Federated Fund serviced by Ziegler. The Board of Directors of North Track considered the transaction at meetings held on December 12, 2004 and on January 28, 2005. The Board received, reviewed and discussed a significant amount of information concerning Federated, the Federated Fund and the proposed Reorganization; met with representatives of Ziegler and Federated; and considered the terms of the Reorganization and its benefits to shareholders of the North Track Fund. After consultation with legal counsel, the Board, including those members who are not "interested persons" (within the meaning of the 1940 Act), unanimously approved the Plan with respect to the Fund and recommended its approval by the shareholders of the North Track Fund. In approving the Reorganization, the Board determined that participation in the Reorganization is in the best interests of the North Track Fund and its shareholders and that the economic interests of the shareholders of the Fund would not be diluted as a result of the Reorganization. In approving the Reorganization, the Board took into consideration a number of factors, including (1) the terms and conditions of the Reorganization, including the non-recognition of any gain or loss for federal income tax purposes to the North Track Fund or its shareholders as a result of the Reorganization; (2) the similarities and differences, but overall compatibility of the investment programs of the North Track Fund and the Federated Fund; (3) the historical expense ratios of each Fund on a comparative basis; (4) the comparable relative historical performance record of the Funds; (5) the greater long-term viability of the combined Federated Fund that will result from the Reorganization as compared to the continued operation of the North Track Fund as a separate series of North Track; (6) the reputation, experience and resources of Federated in terms of its mutual fund management, administration and distribution capabilities; (7) the availability of many different Federated mutual funds to the shareholders of the North Track Fund following the Reorganization; (8) the legal and regulatory issues and challenges currently faced by Federated and their possible consequences; (9) the relative disadvantages to alternatives to the Reorganization, such as a liquidation of the North Track Fund or its continuation as a series of North Track; and (10) the interest of Ziegler in consummating the Reorganization, including the consideration to be paid to Ziegler in connection with the Reorganization and the engagement of Ziegler as a shareholder service agent with respect to shares of the Federated Fund to be serviced by Ziegler. The North Track Board in particular noted that the Federated Fund's expense ratio was 30 basis points less than the North Track Fund's expense ratio (0.99% versus 1.29%); the Federated Fund's Class A average annual total returns at NAV for the one-, three-, five- and 10-year periods ended December 31, 2004 were 4.18%, 6.17%, 6.60% and 5.42%, compared to 2.87%, 5.83%, 6.72% and 5.94% for the North Track Fund; the Federated Fund had total net assets of $491 million compared to $32.3 million for the North Track Fund as of December 31, 2004, which should promote improved economies of scale, trading efficiencies and more stable operations; the ability of holders of Class A shares of the Federated Fund investors to effect exchanges into Class A shares of more than 100 other Federated mutual funds without a sales load; and the belief that current litigation and regulatory matters in which Federated and Federated mutual funds are involved, including market timing and late trading lawsuits and lawsuits regarding the reasonableness of advisory and 12b-1 fees, are not likely to impair the continued ability of FIMCO to effectively manage the Federated Fund, although the Federated Fund may experience significant net redemptions as a result of adverse developments and publicity. The Board of Directors of the Federated Fund met on August 20, 2004 to receive information concerning the North Track Fund, to review this information and to consider the terms of the proposed Reorganization. After consultation with legal counsel, the Board, including those members who are not "interested persons" (within the meaning of the 1940 Act), unanimously approved the Plan with respect to the Federated Fund. In approving the Reorganization, the Board determined that participation in the Reorganization is in the best interests of the Fund and that the interests of the shareholders of the Federated Fund would not be diluted as a result of the Reorganization. BASED ON THIS INFORMATION, THE NORTH TRACK BOARD UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS OF THE NORTH TRACK FUND APPROVE THE REORGANIZATION. Comparative Information on Shareholder Rights and Obligations General. The Federated Fund is an open-end management investment company registered under the 1940 Act, which continuously offers to sell shares at their current net asset value. The North Track Fund is a series of an open-end management investment company, North Track Funds, Inc., registered under the 1940 Act, which continuously offers to sell shares at their current net asset value. North Track Funds, Inc. and the Federated Fund are both organized as Maryland corporations. North Track Funds, Inc. and the Federated Fund are governed by their respective Articles of Incorporation, Bylaws and Boards of Directors, in addition to applicable state and federal law. The rights of shareholders of the Federated Fund and the North Track Fund are set forth in the applicable Articles of Incorporation and Bylaws. The chart set forth below describes the significant rights of shareholders of the Federated Fund and shareholders of the North Track Fund.
CATEGORY FEDERATED FUND NORTH TRACK FUND - -------- -------------- ---------------- Preemptive Rights None None Preferences None All consideration received by the North Track Fund for the issue or sale of Shares to a particular class, together with all assets in which such consideration is invested or reinvested, all income, earnings, profits, and proceeds thereof, including any proceeds derived from the sale, exchange, or liquidation of such assets, and any funds or payments derived from any reinvestment of such proceeds in whatever form the same may be, shall irrevocably belong to that Class for all purposes, subject only to the rights of creditors, and shall be so recorded upon the books and accounts of the North Track Fund. Minimum Account Size The Board of Directors If an investor's account in has discretion to have a Fund drops below $500 for the Federated Fund three months or more, the redeem the shares of any Fund has the right to redeem shareholder whose shares the account after giving 60 have an aggregate net days' written notice, unless asset value of less than the investor makes $1,000. additional investments to bring the account value to $1,000 or more. Annual Meetings An Annual Meeting of As permitted by the Shareholders is not Investment Company Act of required in any year in 1940, as amended from time which the election of to time, and the rules and Directors is not regulations prescribed by required to be acted the Securities and Exchange upon under the Commission thereunder, the Investment Company Act North Track Fund shall not of 1940. If the be required to hold annual Federated Fund is meetings of stockholders. required to hold a meeting of Shareholders to elect Directors, the meeting shall be designated the annual meeting of Shareholders for that year. Right to Call May be called at the Special meetings of the Shareholder Meetings request in writing of stockholders shall be called the holders of at least by the Secretary upon the 10% of the Shares of the written request of Federated Fund. stockholders entitled to vote not less than 25% of all the votes entitled to be cast at such meeting, provided that (1) such request shall state the purposes of such meeting and the matters proposed to be acted on, and (2) the stockholders requesting such meeting shall have paid to the North Track Fund the reasonably estimated cost of preparing and mailing the notice thereof, which the Secretary shall determine and specify to such stockholders. Notice of Meetings Not less than ten days The Secretary shall cause nor more than 90 days notice of the place, date before the date of every and hour, and, in the case Annual or Special of a special meeting, the Meeting of Shareholders purpose or purposes for the Secretary or an which the meeting is called, Assistant Secretary to be served, either shall give to each personally or by mail, not Shareholder of record of less than 10 nor more than the Federated Fund or of 90 days before the date of the relevant Series or the meeting, to each Class written notice of stockholder entitled to vote such meeting, mailed to at such meeting. the Shareholder's address of record. Record Date for Meetings stock transfer books for fix in advance a date as a a period not exceeding record date for the 10 days prior to the determination of the date of any shareholder stockholders entitled to meeting or may fix in notice of or to vote at advance a date not stockholders' meeting or any exceeding 10 days, as a adjournment thereof, or to record date. express consent to corporate action in writing without a meeting, or to receive payment of any dividend or other distribution or allotment of any rights, or to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, provided that (1) such record date shall be within 60 days prior to the date on which the particular action requiring such determination will be taken, (2) the transfer books shall not be closed for a period longer than 20 days, and (3) in the case of a meeting of stockholders, the record date or any closing of the transfer books shall be at least 10 days before the date of the meeting. Quorum for Meeting The presence in person The presence at any or by proxy of holders stockholders' meeting, in of one-third of the person or by proxy, of shares of stock of the stockholders entitled to Federated Fund entitled cast one third of the votes to vote without regard shall be necessary and to Class shall sufficient to constitute a constitute a quorum at quorum for the transaction any meeting of the of business, except as shareholders. otherwise provided by statute, by the Articles of Incorporation or by the By-Laws. Election of Directors The Members of the Board At any meeting of of Directors shall be stockholders called and held elected by the for the purpose of electing Shareholders at the Directors pursuant to the Annual Meeting of requirements of the Shareholders. Investment Company Act, the North Track Fund's Articles of Incorporation or the By-Laws, Directors shall be elected by vote of the holders of a majority of the shares present in person or by proxy and entitled to vote thereon. Adjournment of Meetings In the absence of a In the absence of a quorum, quorum, a majority of the holders of a majority of those Shareholders shares entitled to vote at present in person or by the meeting and present in proxy may adjourn the person or by proxy, or, if meeting to be held at no stockholder entitled to the same place without vote is present in person or further notice than by by proxy, any officer announcement to be given present entitled to preside at the meeting until a or act as Secretary of such quorum is present. meeting may adjourn the meeting sine die or from time to time without further notice to a date not more than 120 days after the original record date. Any business that might have been transacted at the meeting originally called may be transacted at any such adjourned meeting at which a quorum is present. Removal of Directors by May be removed by the At any meeting duly called Shareholders vote of a majority of and at which a quorum is all of the Shares present, the stockholders entitled to vote. may, by the affirmative votes of the holders of a majority of the votes entitled to be cast thereon, remove any Director or Directors from office, with or without cause, and may elect a successor or successors to fill any resulting vacancies for the unexpired terms of the removed Directors. Personal Liability of The Maryland General The North Track Fund shall Directors Corporation Law makes indemnify each person who directors immune from was or is a party or is liability to the extent threatened to be made a that they perform their party to any threatened, duties as directors: pending or completed action, suit or proceeding, whether (1) In good faith; civil, criminal, administrative or (2) In a manner the investigative director reasonably ("Proceeding"), by reason of believes to be in the the fact that he is or was a best interests of the Director, officer, employee Fund; and or agent of the North Track Fund, or is or was serving (3) With the care that at the request of the North an ordinarily prudent Track Fund as a Director, person in a like officer, employee or agent position would use under of another corporation, similar circumstances. partnership, joint venture, trust or other enterprise, against all expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such Proceeding to the fullest extent permitted by law. Personal Liability of None None Shareholders Number of Authorized The Federated Fund is The Board of Directors has Shares; Par Value authorized to issue one established and designated billion (1,000,000,000) 50,000,000 shares for the shares of common stock, North Track Fund of its par value $0.01 per previously authorized but share. The aggregate unissued common stock, par value of all shares $0.001 par value per share. which the Federated Fund is authorized to issue is $10,000,000. The authorized shares are classified as 375,000,000 shares of the Class A Shares and Class C Shares, and 250,000,000 unclassified shares.
INFORMATION ABOUT THE FEDERATED FUND AND THE NORTH TRACK FUND Federated Fund The Federated Fund is subject to the informational requirements of the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, and the 1940 Act, and in accordance therewith files reports and other information with the Securities and Exchange Commission. Reports, the proxy and information statements, and other information filed by the Federated Fund, can be obtained by calling or writing the Federated Fund and can also be inspected and copied by the public at the public reference facilities maintained by the Securities and Exchange Commission in Washington, DC located at Room 1024, 450 Fifth Street, N.W., Washington, DC 20549 and at certain of its regional offices located at 175 West Jackson Boulevard, Suite 900, Chicago, Illinois 60604 and 233 Broadway, New York, NY 10279. Copies of such material can be obtained at prescribed rates from the Public Reference Branch, Office of Consumer Affairs and Information Services, Securities and Exchange Commission, Washington, DC 20549, or obtained electronically from the Securities and Exchange Commission's Internet website (http://www.sec.gov). This Prospectus/Proxy Statement, which constitutes part of a separate Registration Statement filed by the Federated Fund, with the Securities and Exchange Commission under the Securities Act of 1933, as amended, omits certain of the information contained in such Registration Statement. Reference is hereby made to the Registration Statement and to the exhibits thereto for further information with respect to the Federated Fund and the shares offered hereby. Statements contained herein concerning the provisions of documents are necessarily summaries of such documents, and each such statement is qualified in its entirety by reference to the copy of the applicable documents filed with the Securities and Exchange Commission. North Track Fund The North Track Fund is subject to the information requirements of the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, and the 1940 Act, and in accordance therewith files reports and other information with the Securities and Exchange Commission. Reports, proxy and information statements, and other information filed by the North Track Fund can be obtained by calling or writing the North Track Fund and can also be inspected at the public reference facilities maintained by the Securities and Exchange Commission at the addresses listed in the previous Section or obtained electronically from the Securities and Exchange Commission's Internet website (http://www.sec.gov). INFORMATION ABOUT THE PROXY SOLICITATION AND THE SPECIAL MEETING Proxies are being solicited by the Board of North Track, on behalf of the North Track Fund. The proxies will be voted at the special meeting of shareholders of the North Track Fund to be held at 10:00 a.m., on April 28, 2005 at the offices of B.C. Ziegler and Company, 250 East Wisconsin Avenue, Suite 2000, Milwaukee, Wisconsin (such special meeting and any adjournment or postponement thereof are referred to as the "Special Meeting"). The cost of the solicitation, including the printing and mailing of proxy materials, will be borne by FIMCO or its affiliates and Ziegler, and not by the Funds. In addition to solicitations through the mails, proxies may be solicited by officers, employees, and agents of each Fund, or, if necessary, a communications firm retained for this purpose. Such solicitations may be by telephone or otherwise. Any telephonic solicitations will follow procedures designed to ensure accuracy and prevent fraud, including requiring identifying shareholder information, recording the shareholder's instructions, and confirming to the shareholder after the fact. Shareholders who communicate proxies by telephone or by other electronic means have the same power and authority to issue, revoke, or otherwise change their voting instructions as shareholders submitting proxies in written form. FIMCO or its affiliates and Ziegler may reimburse custodians, nominees, and fiduciaries for the reasonable costs incurred by them in connection with forwarding solicitation materials to the beneficial owners of shares held of record by such persons. The purpose of the Special Meeting is set forth in the accompanying Notice. The Board of Directors of North Track knows of no business other than that mentioned in the Notice that will be presented for consideration at the Special Meeting. Should other business properly be brought before the Special Meeting, proxies will be voted in accordance with the best judgment of the persons named as proxies. This Prospectus/Proxy Statement and the enclosed proxy card are expected to be mailed on or about March 11, 2005, to shareholders of record at the close of business on March 1, 2005 (the "Record Date"). The Prospectus for the Federated Fund, dated May 31, 2004, and the Annual and Semi-Annual Reports for the Federated Fund, which contain audited financial statements for the fiscal year ended March 31, 2004 and unaudited financial statements for the six-month period ended September 30, 2004, respectively, accompany this Prospectus/Proxy Statement. The Prospectus for the North Track Fund, dated March 1, 2005, and the Annual Report for the North Track Fund, which contains audited financial statements for the fiscal year ended October 31, 2004, were previously mailed to shareholders of the North Track Fund. The Funds will promptly provide, without charge and upon request, to each person to whom this Prospectus/Proxy Statement is delivered, additional copies of the Prospectus, Annual Report and/or the Semi-Annual Report for the Federated Fund and the Prospectus and Annual Report for the North Track Fund. Requests may be made in writing to the Federated Fund's and the North Track Fund's principal executive offices or by calling the Federated Fund or the North Track Fund. The principal executive offices for the Federated Fund and North Track are located at 5800 Corporate Drive, Pittsburgh, Pennsylvania and 250 East Wisconsin Avenue, Suite 2000, Milwaukee, Wisconsin 53202, respectively. The Federated Fund's toll-free telephone number is 1-800-341-7400 and North Track's toll-free telephone number is 1-800-826-4600. Only shareholders of record on the Record Date will be entitled to vote at the Special Meeting. Each share of the North Track Fund is entitled to one vote. Fractional shares are entitled to proportionate shares of one vote. On the Record Date, there were 3,367,975 shares of the North Track Fund outstanding. Any person giving a proxy has the power to revoke it any time prior to its exercise by executing a superseding proxy or by submitting a written notice of revocation to the Secretary of the Trust. In addition, although mere attendance at the Special Meeting will not revoke a proxy, a shareholder present at the Special Meeting may withdraw his or her proxy and vote in person. All properly executed and unrevoked proxies received in time for the Special Meeting will be voted in accordance with the instructions contained in the proxies. If no instruction is given on the proxy, the persons named as proxies will vote the shares represented thereby in favor of the matter set forth in the attached Notice. The North Track Fund shareholders will vote on the approval of the Plan. In order to hold the Special Meeting, a "quorum" of shareholders of the North Track Fund must be present. Holders of at least one-third of the total number of shares of the North Track Fund outstanding as of the Record Date, present in person or by proxy, shall be required to constitute a quorum for the purpose of voting on the proposal. Approval of the Reorganization with respect to the North Track Fund requires the vote of a majority of the outstanding shares of the North Track Fund entitled to vote on the proposal. For purposes of determining a quorum for transacting business at the Special Meeting, abstentions and broker "non-votes" (that is, proxies from brokers or nominees indicating that such persons have not received instructions from the beneficial owner or other persons entitled to vote shares on a particular matter with respect to which the brokers or nominees do not have discretionary power) will be treated as shares that are present but which have not been voted. For this reason, abstentions and broker non-votes will have the effect of a "no" vote for purposes of obtaining the requisite approval of each proposal. If a quorum for the Special Meeting of the North Track Fund is not present, the persons named as proxies may vote those proxies that have been received to adjourn the Special Meeting to a later date. In the event that a quorum is present but sufficient votes in favor of the proposal have not been received, the persons named as proxies may propose one or more adjournments of the Special Meeting to permit further solicitations of proxies with respect to the proposal. All such adjournments will require the affirmative vote of a majority of the shares present in person or by proxy at the session of the Special Meeting to be adjourned. The persons named as proxies will vote AGAINST an adjournment those proxies that they are required to vote against the proposal, and will vote in FAVOR of such an adjournment all other proxies that they are authorized to vote. A shareholder vote may be taken on the proposal in this Prospectus/Proxy Statement prior to any such adjournment if sufficient votes have been received for approval. SHARE OWNERSHIP OF THE FUNDS AND CERTAIN INTERESTS Federated Fund As of the Record Date, the Officers and Directors of the Federated Fund owned less than 1% of the Federated Fund's outstanding Class A Shares, Class B Shares and Class C Shares. At the close of business on the Record Date, the following persons owned beneficially or of record as indicated, to the knowledge of management, more than 5% of the outstanding shares of each Class of the Federated Fund: Class A Shares - Edward Jones & Co., Maryland Heights, MO (8.80%). Class B Shares - Edward Jones & Co., Maryland Heights, MO (10.11%); and Citigroup Global Markets Inc., New York, NY (9.41%). Class C Shares - MLPF&S, Jacksonville, FL (22.07%); Edward Jones & Co., Maryland Heights, MO (12.83%); and TRUCOJO Gold Trust Company, St. Joseph, MO (5.35%). Upon consummation of the Reorganization, such persons would own shares as follows based upon information as of the Record Date: Class A Shares - Edward Jones & Co., Maryland Heights, MO (8.21%). Class B Shares - Edward Jones & Co., Maryland Heights, MO (10.11%); and Citigroup Global Markets Inc., New York, NY (9.41%).. Class C Shares - MLPF&S, Jacksonville, FL (22.07%); Edward Jones & Co., Maryland Heights, MO (12.83%); and TRUCOJO Gold Trust Company, St. Joseph, MO (5.35%). North Track Fund As of the Record Date, the officers and directors of the North Track Fund, as a group, owned less than 1% of the outstanding shares of the Fund. At the close of business on the Record Date, no person was known to own of record or beneficially 5% or more of the outstanding shares of the North Track Fund. OTHER MATTERS AND DISCRETION OF PERSONS NAMED IN THE PROXY The North Track Fund is not required, and does not intend, to hold regular annual meetings of shareholders. Shareholders wishing to submit proposals for consideration for inclusion in a Proxy Statement for the next meeting of shareholders should send their written proposals to the North Track Fund, 250 East Wisconsin Avenue, Suite 2000, Milwaukee, Wisconsin 53202, so that they are received within a reasonable time before any such meeting. No business other than the matters described above is expected to come before the Special Meeting, but should any other matter requiring a vote of shareholders arise, including any question as to an adjournment or postponement of the Special Meeting, the persons named on the enclosed proxy card will vote on such matters according to their best judgment in the interests of the North Track Fund. - ------------------------------------------------------------------------------ SHAREHOLDERS ARE REQUESTED TO COMPLETE, DATE AND SIGN THE ENCLOSED PROXY CARD AND RETURN IT IN THE ENCLOSED ENVELOPE, WHICH NEEDS NO POSTAGE IF MAILED IN THE UNITED STATES. - ------------------------------------------------------------------------------ EXHIBIT A NORTH TRACK TAX-EXEMPT FUND AGREEMENT AND PLAN OF REORGANIZATION THIS AGREEMENT AND PLAN OF REORGANIZATION ("Agreement") is made as of February 2, 2005, between NORTH TRACK FUNDS, INC., a Maryland corporation ("North Track"), on behalf of NORTH TRACK TAX-EXEMPT FUND ("Acquired Fund"), and FEDERATED MUNICIPAL SECURITIES FUND, INC. a Maryland corporation ("Federated" or "Acquiring Fund"). (Acquired Fund and Acquiring Fund are sometimes referred to herein individually as a "Fund" and collectively as the "Funds," and North Track and Federated are sometimes referred to herein individually as an "Investment Company" and collectively as the "Investment Companies.") The Investment Companies wish to effect a reorganization described in Section 368(a)(1)(C) of the Internal Revenue Code of 1986, as amended ("Code"), and intend this Agreement to be, and adopt it as, a "plan of reorganization" within the meaning of the regulations under the Code ("Regulations"). The reorganization will consist of (1) the transfer of the assets (net of cash sufficient to satisfy those liabilities described in Section 1.2 hereof) of the Acquired Fund to the Acquiring Fund in exchange solely for the Acquiring Fund's issuance to the Acquired Fund of "Class A" shares of common stock of the Acquiring Fund, (2) the distribution of those shares to the Acquired Fund's shareholders in liquidation of the Acquired Fund, and (3) the termination of the Acquired Fund, all on the terms and conditions hereinafter set forth in this Agreement. (All such transactions are referred to herein as the "Reorganization.") All agreements, representations, actions, obligations, and covenants described herein made or to be taken or undertaken by the Funds are made and shall be taken or undertaken by North Track on Acquired Fund's behalf and by Federated on Acquiring Fund's behalf. Acquired Fund's shares have only one Class of shares, designated "Class A" shares ("Acquired Fund Shares"). Acquiring Fund's shares are divided into three classes, designated "Class A," "Class B" and "Class C" shares. Under the terms of this Reorganization the Acquired Fund Shares will be exchanged for Class A shares of the Acquiring Fund ("Acquiring Fund Shares"). In consideration of the mutual promises contained herein, the parties agree as follows: 1. PLAN OF REORGANIZATION AND TERMINATION 1.1. Acquired Fund agrees to assign, sell, convey, transfer, and deliver all of its assets described in paragraph 1.2 ("Assets") to Acquiring Fund. Acquiring Fund agrees in exchange therefor, to issue and deliver to Acquired Fund the number of full and fractional (rounded to the third decimal place) Acquiring Fund Shares determined by dividing Acquired Fund's net value (computed as set forth in paragraph 2.1) ("Acquired Fund Value") by the net asset value ("NAV") of an Acquiring Fund Share (computed as set forth in paragraph 2.2). Such transactions shall take place at the Closing (as defined in paragraph 3.1). 1.2. The Assets shall include all cash, cash equivalents, securities, receivables (including interest and dividends receivable), claims and rights of action, rights to register shares under applicable securities laws, books and records, deferred and prepaid expenses shown as assets on Acquired Fund's books, and other property Acquired Fund owns at the Effective Time (as defined in paragraph 3.1), less any cash sufficient to satisfy any Liabilities (as defined in Section 1.3 hereof) that have not been paid by the Effective Time as shown on a balance sheet as of the Effective Time. 1.3. Acquired Fund agrees to use all reasonable efforts to discharge all its Liabilities before the Effective Time and shall, in any event, discharge them promptly following the Effective Time. The "Liabilities" shall include all of Acquired Fund's liabilities, debts, obligations, and duties of whatever kind or nature, whether absolute, accrued, contingent, or otherwise, whether or not arising in the ordinary course of business, whether or not determinable at the Effective Time, and whether or not specifically referred to in this Agreement. Acquiring Fund shall not assume any of the Liabilities. 1.4. At or immediately before the Effective Time, Acquired Fund shall declare and pay to its shareholders a dividend and/or other distribution in an amount large enough so that it will have distributed substantially all (and in any event not less than 90%) of its investment company taxable income (as defined in Section 852(b)(2) of the Code, computed without regard to any deduction for dividends paid) and substantially all of its realized net capital gain (as defined in Section 1222(11)), if any, for the current taxable year through the Effective Time. 1.5. At the Effective Time (or as soon thereafter as is reasonably practicable), Acquired Fund shall distribute the Acquiring Fund Shares it receives pursuant to paragraph 1.1 to its shareholders of record, determined as of the Effective Time (each a "Shareholder" and collectively "Shareholders"), in constructive exchange for their Acquired Fund Shares. Such distribution shall be accomplished by Federated's transfer agent's opening accounts on Acquiring Fund's share transfer books in the Shareholders' names and transferring such Acquiring Fund Shares thereto. Each Shareholder's account shall be credited with the respective pro rata number of full and fractional (rounded to the third decimal place) Acquiring Fund Shares due that Shareholder, based on the value of the Acquired Fund Shares owned by that Shareholder immediately prior to the Effective Time. All outstanding Acquired Fund Shares, including any represented by certificates, shall simultaneously be canceled on Acquired Fund's share transfer books. Acquiring Fund shall not issue certificates representing the Acquiring Fund Shares issued in connection with the Reorganization. 1.6. As soon as reasonably practicable after distribution of the Acquiring Fund Shares pursuant to paragraph 1.5, but in all events within six months after the Effective Time, Acquired Fund shall be terminated as a series of North Track and any further actions shall be taken in connection therewith as required by applicable law. 1.7. Any reporting responsibility of Acquired Fund to a public authority is and shall remain its responsibility up to and including the date on which it is terminated. 1.8. Any transfer taxes payable on issuance of Acquiring Fund Shares in a name other than that of the registered holder on Acquired Fund's share transfer books of the Acquired Fund Shares constructively exchanged therefor shall be paid by the person to whom such Acquiring Fund Shares are to be issued, as a condition of such transfer. 2. VALUATION 2.1. For purposes of paragraph 1.1, Acquired Fund's net value shall be the value of the Assets computed as of the close of regular trading on the New York Stock Exchange ("NYSE") on the date of the Closing ("Valuation Time"), using the valuation procedures set forth in its then-current prospectus and statement of additional information ("SAI"). 2.2. For purposes of paragraph 1.1, the NAV per share of the Acquiring Fund Shares shall be computed as of the Valuation Time, using the valuation procedures set forth in Acquiring Fund's then-current prospectus and SAI. 2.3. All computations pursuant to paragraphs 2.1 and 2.2 shall be made by or under the direction of the custodians and transfer agents of the Funds. 3. CLOSING AND EFFECTIVE TIME 3.1. The Reorganization, together with related acts necessary to consummate it ("Closing"), shall occur at the Investment Companies' principal offices on or about April 29, 2005, or at such other place and/or on such other date as to which they may agree. All acts taking place at the Closing shall be deemed to take place simultaneously as of the close of business on the date thereof or at such other time as to which the Investment Companies may agree ("Effective Time"). If, immediately before the Valuation Time, (a) the NYSE is closed to trading or trading thereon is restricted or (b) trading or the reporting of trading on the NYSE or elsewhere is disrupted, so that accurate appraisal of Acquired Fund's net value and/or the NAV of the Acquiring Fund Share of any Class is impracticable, the Effective Time shall be postponed until the first business day after the day when such trading has been fully resumed and such reporting has been restored. 3.2. North Track shall deliver at the Closing a certificate of its Chief Financial Officer verifying that the information (including adjusted basis and holding period, by lot) concerning the Assets, including all portfolio securities, transferred by Acquired Fund to Acquiring Fund, as reflected on Acquiring Fund's books immediately after the Closing, does or will conform to such information on Acquired Fund's books immediately before the Closing. North Track's custodian shall deliver at the Closing a certificate of an authorized officer stating that (a) the Assets it holds will be transferred to Acquiring Fund at the Effective Time and (b) all necessary taxes in conjunction with the delivery of the Assets, including all applicable federal and state stock transfer stamps, if any, have been paid or provision for payment has been made. 3.3. North Track shall deliver to Federated at the Closing a list of the names and addresses of the Shareholders and the number of outstanding Acquired Fund Shares owned by each Shareholder, all as of the Effective Time, certified by North Track's Secretary. Federated's transfer agent shall deliver at the Closing a certificate as to the opening of accounts in the Shareholders' names on Acquiring Fund's share transfer books. Federated shall issue and deliver a confirmation to North Track evidencing the Acquiring Fund Shares to be credited to Acquired Fund and subsequently to the Shareholders at the Effective Time or provide evidence satisfactory to North Track that such Acquiring Fund Shares have been credited to Acquired Fund's account and subsequently to the Shareholders' accounts on Acquiring Fund's share transfer books. At the Closing, each party shall deliver to the other bills of sale, checks, assignments, stock certificates, receipts, or other documents the other party or its counsel reasonably requests. 3.4. Each Investment Company shall deliver to the other at the Closing a certificate executed in its name by its President or a Vice President in form and substance satisfactory to the recipient and dated the Effective Time, to the effect that the representations and warranties it made in this Agreement are true and correct at the Effective Time except as they may be affected by the transactions contemplated by this Agreement. 4. REPRESENTATIONS AND WARRANTIES 4.1. North Track, on behalf of the Acquired Fund, represents and warrants to Federated as follows: 4.1.1. North Track is a corporation that is duly organized, validly existing, and in good standing under the laws of the State of Maryland; and its Articles of Incorporation, as amended and supplemented ("Articles"), are on file with that state's Department of Assessments and Taxation; 4.1.2. North Track is duly registered as an open-end management investment company under the Investment Company Act of 1940, as amended ("1940 Act"), and such registration is in full force and effect; 4.1.3. Acquired Fund is a duly established and designated series of North Track; 4.1.4. At the Closing, Acquired Fund will have good and marketable title to the Assets and full right, power, and authority to sell, assign, transfer, and deliver the Assets free of any liens or other encumbrances (except securities that are subject to "securities loans" as referred to in Section 851(b)(2) of the Code and except securities with contractual or legal restrictions on transfer); and on delivery and payment for the Assets, Acquiring Fund will acquire good and marketable title thereto; 4.1.5. Acquired Fund's current prospectus and SAI conform in all material respects to the applicable requirements of the Securities Act of 1933, as amended ("1933 Act"), and the 1940 Act and the rules and regulations thereunder and do not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; 4.1.6. Acquired Fund is not in violation of, and the execution and delivery of this Agreement and consummation of the transactions contemplated hereby will not conflict with or violate, Maryland law or any provision of its Articles or North Track's By-Laws or of any agreement, instrument, lease, or other undertaking to which North Track (with respect to Acquired Fund) is a party or by which it (with respect to Acquired Fund) is bound or result in the acceleration of any obligation, or the imposition of any penalty, under any agreement, judgment, or decree to which North Track (with respect to Acquired Fund) is a party or by which it (with respect to Acquired Fund) is bound, except as otherwise disclosed in writing to and accepted by Federated; 4.1.7. Except as otherwise disclosed in writing to and accepted by Federated, all material contracts and other commitments of or applicable to Acquired Fund (other than this Agreement and investment contracts, including options, futures, and forward contracts included on the Acquired Fund's books) will be terminated in accordance with the provisions of Section 1.3 at or before the Effective Time, without either Fund's incurring any liability or penalty with respect thereto; 4.1.8. Except as otherwise disclosed in writing to and accepted by Federated, (a) no litigation, administrative proceeding, or investigation of or before any court or governmental body is presently pending or (to North Track's knowledge) threatened against North Track (with respect to Acquired Fund) or any of its properties or assets attributable or allocable to Acquired Fund that, if adversely determined, would materially and adversely affect Acquired Fund's financial condition or the conduct of its business and (b) North Track knows of no facts that might form a reasonable basis for the institution of any such litigation, proceeding, or investigation and is not a party to or subject to the provisions of any order, decree, or judgment of any court or governmental body that materially or adversely affects its business or its ability to consummate the transactions contemplated hereby; 4.1.9. The execution, delivery, and performance of this Agreement have been duly authorized as of the date hereof by all necessary action on the part of North Track's board of directors. Subject to the approval of the shareholders of Acquired Fund, and assuming the due authorization, execution and delivery of this Agreement by Federated, this Agreement will constitute the valid and legally binding obligation of North Track (with respect to Acquired Fund), enforceable in accordance with its terms, except as the same may be limited by bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium, and similar laws relating to or affecting creditors' rights and by general principles of equity and the discretion of the court (regardless of whether the enforceability is considered in a proceeding in equity or at law); 4.1.10. No governmental consents, approvals, authorizations, or filings are required under the 1933 Act, the Securities Exchange Act of 1934, as amended, or the 1940 Act (collectively, "Federal Securities Laws") for North Track's execution or performance of this Agreement, except for (a) the filing with the Securities and Exchange Commission ("SEC") of a registration statement by Federated on Form N-14 relating to the Acquiring Fund Shares issuable hereunder, and any supplement or amendment thereto ("Registration Statement"), including therein a prospectus and proxy statement and any supplements or amendments thereto ("Prospectus/Statement"), (b) the filing of one or more supplements to the then-current prospectus or SAI of Acquired Fund, and (c) such consents, approvals, authorizations, and filings as have been made or received or as may be required subsequent to the Effective Time; 4.1.11. On the effective date of the Registration Statement, the date of the special meeting of Acquired Fund shareholders to approve this Agreement and the Reorganization, and at the Effective Time, the Registration Statement, including the Prospectus/Statement, only insofar as it related to North Track or Acquired Fund, will (a) comply in all material respects with the applicable provisions of the Federal Securities Laws and the regulations thereunder and (b) not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which such statements were made, not misleading; provided that the foregoing shall not apply to statements in or omissions from the Registration Statement or the Prospectus/Statement made in reliance on and in conformity with information furnished by Federated for use therein; 4.1.12. Acquired Fund incurred the Liabilities in the ordinary course of its business; and there are no Liabilities other than Liabilities disclosed or provided for in the Acquired Fund's financial statements referred to in paragraph 4.1.18 and Liabilities incurred by Acquired Fund in the ordinary course of business subsequent to October 31, 2004, or otherwise disclosed to Federated, none of which has been materially adverse to the business, assets or results of Acquired Fund's operations; 4.1.13. Acquired Fund is a "fund" as defined in Section 851(g)(2) of the Code; it qualified for treatment as a regulated investment company under Subchapter M of the Code ("RIC") for each past taxable year since it commenced operations and will continue to meet all the requirements for such qualification for its current taxable year; the Assets will be invested at all times through the Effective Time in a manner that ensures compliance with the foregoing; and Acquired Fund has no earnings and profits accumulated in any taxable year in which the provisions of Subchapter M did not apply to it; 4.1.14. Acquired Fund is not under the jurisdiction of a court in a "title 11 or similar case" (as defined in Section 368(a)(3)(A) of the Code); 4.1.15. Not more than 25% of the value of Acquired Fund's total assets (excluding cash, cash items, and U.S. government securities) is invested in the stock and securities of any one issuer, and not more than 50% of the value of such assets is invested in the stock and securities of five or fewer issuers; 4.1.16. During the five-year period ending at the Effective Time, (a) neither Acquired Fund nor any person "related" (as defined in Section 1.368-1(e)(3) of the Regulations) to it will have acquired Acquired Fund Shares, either directly or through any transaction, agreement, or arrangement with any other person, with consideration other than the Acquiring Fund Shares or Acquired Fund Shares, except for shares redeemed in the ordinary course of Acquired Fund's business as a series of an open-end investment company as required by Section 22(e) of the 1940 Act, and (b) no distributions will have been made with respect to Acquired Fund Shares, other than normal, regular dividend distributions made pursuant to Acquired Fund's historic dividend-paying practice and other distributions that qualify for the deduction for dividends paid (within the meaning of Section 561 of the Code) referred to in sections 852(a)(1) and 4982(c)(1)(A) of the Code; 4.1.17. Acquired Fund's federal income tax returns, and all applicable state and local tax returns, for all taxable years through and including the taxable year ended October 31, 2003, have been timely filed and all taxes payable pursuant to those returns have been timely paid, and Acquired Fund has been granted an extension until September 15, 2005 with respect to the filing of its federal and state income tax returns for the taxable year ended October 31, 2004; and 4.1.18. North Track's audited financial statements for the year ended October 31, 2004 fairly represent Acquired Fund's financial position as of such date and the results of its operations and changes in its net assets for the period then ended. 4.2. Federated, on behalf of Acquiring Fund, represents and warrants to North Track as follows: 4.2.1. Federated is a corporation that is duly organized, validly existing, and in good standing under the laws of the State of Maryland; and its Articles are on file with that state's Department of Assessments and Taxation; 4.2.2. Federated is duly registered as an open-end management investment company under the 1940 Act, and such registration is in full force and effect; 4.2.3. Acquiring Fund is a duly established and designated series of Federated, and Federated currently has no other series; 4.2.4. No consideration other than the Acquiring Fund Shares will be issued to Acquired Fund shareholders in exchange for the Assets in the Reorganization; 4.2.5. The Acquiring Fund Shares to be issued and delivered to Acquired Fund hereunder will, at the Effective Time, have been duly authorized and, when issued and delivered as provided herein (including the receipt of consideration in exchange therefor exceeding their par value), will be duly and validly issued and outstanding shares of Acquiring Fund, fully paid and non-assessable by Federated; 4.2.6. Acquiring Fund's current prospectus and SAI conform in all material respects to the applicable requirements of the 1933 Act and the 1940 Act and the rules and regulations thereunder and do not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; 4.2.7. Acquiring Fund is not in violation of, and the execution and delivery of this Agreement and consummation of the transactions contemplated hereby will not conflict with or violate, Maryland law or any provision of any provision of its Articles or Federated's By-Laws or of any agreement, instrument, lease, or other undertaking to which Federated (with respect to Acquiring Fund) is a party or by which it (with respect to Acquiring Fund) is bound or result in the acceleration of any obligation, or the imposition of any penalty, under any agreement, judgment, or decree to which Federated (with respect to Acquiring Fund) is a party or by which it (with respect to Acquiring Fund) is bound, except as otherwise disclosed in writing to and accepted by North Track; 4.2.8. Except as otherwise disclosed in writing to and accepted by North Track, (a) no litigation, administrative proceeding, or investigation of or before any court or governmental body is presently pending or (to Federated's knowledge) threatened against Federated (with respect to Acquiring Fund) or any of its properties or assets North Track (with respect to Acquired Fund) or any of its properties or assets attributable or allocable to Acquired Fund that, if adversely determined, would materially and adversely affect Acquiring Fund's financial condition or the conduct of its business and (b) Federated knows of no facts that might form a reasonable basis for the institution of any such litigation, proceeding, or investigation and is not a party to or subject to the provisions of any order, decree, or judgment of any court or governmental body that materially or adversely affects its business or its ability to consummate the transactions contemplated hereby; 4.2.9. The execution, delivery, and performance of this Agreement have been duly authorized as of the date hereof by all necessary action on the part of Federated's board of directors (together with North Track's board of directors, "Boards"). Subject to approval of the shareholders of Acquired Fund, and assuming the due authorization, execution and delivery of this Agreement by North Track, this Agreement constitutes the valid and legally binding obligation of Federated (with respect to Acquiring Fund), enforceable in accordance with its terms, except as the same may be limited by bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium, and similar laws relating to or affecting creditors' rights and by general principles of equity and the discretion of the court (regardless of whether the enforceability is considered in a proceeding in equity or at law); 4.2.10. No governmental consents, approvals, authorizations, or filings are required under the Federal Securities Laws for Federated's execution or performance of this Agreement, except for (a) the filing with the SEC of the Registration Statement, (b) the filing of one or more supplements to the then-current prospectus or SAI of Acquiring Fund as may be required, and (c) such consents, approvals, authorizations, and filings as have been made or received or as may be required subsequent to the Effective Time; 4.2.11. On the effective date of the Registration Statement, the date of the special meeting of Acquired Fund shareholders to approve this Agreement and the Reorganization, and at the Effective Time, the Registration Statement, including the Prospectus/Statement, only insofar as it relates to Federated or Acquiring Fund, will (a) comply in all material respects with the applicable provisions of the Federal Securities Laws and the regulations thereunder and (b) not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which such statements were made, not misleading; provided that the foregoing shall not apply to statements in or omissions from the Registration Statement or the Prospectus/Statement made in reliance on and in conformity with information furnished by North Track for use therein; 4.2.12. Acquiring Fund is a "fund" as defined in Section 851(g)(2) of the Code; it qualified for treatment as a RIC for each past taxable year since it commenced operations and will continue to meet all the requirements for such qualification for its current taxable year; it intends to continue to meet all such requirements for the next taxable year; and it has no earnings and profits accumulated in any taxable year in which the provisions of Subchapter M of the Code did not apply to it; 4.2.13. Following the Reorganization, Acquiring Fund (a) will continue Acquired Fund's "historic business" (within the meaning of Section 1.368-1(d)(2) of the Regulations) and (b) will use a significant portion of Acquired Fund's "historic business assets" (within the meaning of Section 1.368-1(d)(3) of the Regulations) in a business; moreover, Acquiring Fund (c) has no plan or intention to sell or otherwise dispose of any of the Assets, except for dispositions made in the ordinary course of that business and dispositions necessary to maintain its status as a RIC, and (d) expects to retain substantially all the Assets in the same form as it receives them in the Reorganization, unless and until subsequent investment circumstances suggest the desirability of change or it becomes necessary to make dispositions thereof to maintain such status; 4.2.14. There is no plan or intention for Acquiring Fund to be dissolved or merged into another business or statutory trust or North Track or any "fund" thereof (as defined in Section 851(g)(2) of the Code) following the Reorganization, and Acquiring Fund is not under the jurisdiction of a court in a "title 11 or similar case" (as defined in Section 368(a)(3)(A) of the Code); 4.2.15. Immediately after the Reorganization, (a) not more than 25% of the value of Acquiring Fund's total assets (excluding cash, cash items, and U.S. government securities) will be invested in the stock and securities of any one issuer and (b) not more than 50% of the value of such assets will be invested in the stock and securities of five or fewer issuers; 4.2.16. Acquiring Fund does not directly or indirectly own, nor at the Effective Time will it directly or indirectly own, nor has it directly or indirectly owned at any time during the past five years, any Acquired Fund Shares; 4.2.17. Acquiring Fund has no plan or intention to issue additional Acquiring Fund Shares following the Reorganization except for shares issued in the ordinary course of its business as a series of an open-end investment company; nor does Acquiring Fund, or any person "related" (within the meaning of Section 1.368-1(e)(3) of the Regulations) to it, have any plan or intention to acquire -- during the five-year period beginning at the Effective Time, either directly or through any transaction, agreement, or arrangement with any other person -- with consideration other than the Acquiring Fund Shares, any Acquiring Fund Shares issued to the Shareholders pursuant to the Reorganization, except for redemptions in the ordinary course of such business as required by Section 22(e) of the 1940 Act; 4.2.18. During the five-year period ending at the Effective Time, neither Acquiring Fund nor any person "related" (as defined in Section 1.368-1(e)(3) of the Regulations) to it will have acquired any Acquired Fund Shares with consideration other than the Acquiring Fund Shares; 4.2.19. Acquiring Fund's federal income tax returns, and all applicable state and local tax returns, for all taxable years through and including the most recent taxable year ended March 31, 2004, have been timely filed and all taxes payable pursuant to such returns have been timely paid; 4.2.20. Federated's audited financial statements for the year ended March 31, 2004, and unaudited financial statements for the six months ended September 30, 2004, fairly represent Acquiring Fund's financial position as of each such date and the results of its operations and changes in its net assets for the periods then ended; and 4.2.21. If the Reorganization is consummated, Acquiring Fund will treat each Shareholder that receives Acquiring Fund Shares in connection with the Reorganization as having made a minimum initial purchase of such shares for the purpose of making additional investments therein, regardless of the value of the shares so received and as having paid the maximum sales charge applicable to purchases of Class A shares of Acquiring Fund. 4.3. Each Investment Company represents and warrants to the other Investment Company (and (1)to Reed Smith LLP for purposes of the opinion described in Section 6.4 and to (2)Quarles & Brady LLP for purposes of the opinion described in Section 6.6 hereof) as follows: 4.3.1. The fair market value of the Acquiring Fund Shares each Shareholder receives will be approximately equal to the fair market value of its Acquired Fund Shares it constructively surrenders in exchange therefor; 4.3.2. Its management (a) is unaware of any plan or intention of Shareholders to redeem, sell, or otherwise dispose of (1) any portion of their Acquired Fund Shares before the Reorganization to any person "related" (within the meaning of Section 1.368-1(e)(3) of the Regulations) to either Fund or (2) any portion of the Acquiring Fund Shares they receive in the Reorganization to any person "related" (within such meaning) to Acquiring Fund, (b) does not anticipate dispositions of those Acquiring Fund Shares at the time of or soon after the Reorganization to exceed the usual rate and frequency of dispositions of shares of Acquired Fund as a series of an open-end investment company, (c) expects that the percentage of Shareholder interests, if any, that will be disposed of as a result of or at the time of the Reorganization will be de minimis, and (d) does not anticipate that there will be extraordinary redemptions of Acquiring Fund Shares immediately following the Reorganization; 4.3.3. The Shareholders will pay their own expenses, if any, incurred in connection with the Reorganization; 4.3.4. There is no intercompany indebtedness between the Funds that was issued or acquired, or will be settled, at a discount; 4.3.5. Pursuant to the Reorganization, Acquired Fund will transfer to Acquiring Fund, and Acquiring Fund will acquire, at least 90% of the fair market value of the net assets, and at least 70% of the fair market value of the gross assets, Acquired Fund held immediately before the Reorganization. For the purposes of this representation, any amounts Acquired Fund uses to pay its Reorganization expenses and to make redemptions and distributions immediately before the Reorganization (except (a) redemptions in the ordinary course of its business required by Section 22(e) of the 1940 Act and (b) regular, normal dividend distributions made to conform to its policy of distributing all or substantially all of its income and gains to avoid the obligation to pay federal income tax and/or the excise tax under Section 4982 of the Code) will be included as assets it held immediately before the Reorganization; 4.3.6. None of the compensation received by any Shareholder who is an employee of or service provider to Acquired Fund will be separate consideration for, or allocable to, any of the Acquired Fund Shares such Shareholder held; none of the Acquiring Fund Shares any such Shareholder receives will be separate consideration for, or allocable to, any employment agreement, investment advisory agreement, or other service agreement; and the compensation paid to any such Shareholder will be for services actually rendered and will be commensurate with amounts paid to third parties bargaining at arm's-length for similar services; 4.3.7. Immediately after the Reorganization, the Shareholders will not own shares constituting "control" (as defined in Section 304(c) of the Code) of Acquiring Fund; 4.3.8. Neither Fund will be reimbursed for any expenses incurred by it or on its behalf in connection with the Reorganization unless those expenses are solely and directly related to the Reorganization (determined in accordance with the guidelines set forth in Rev. Rul. 73-54, 1973-1 C.B. 187) ("Reorganization Expenses"); and 4.3.9. The aggregate value of the acquisitions, redemptions, and distributions limited by paragraphs 4.1.16, 4.2.17, and 4.2.18 will not exceed 50% of the value (without giving effect to such acquisitions, redemptions, and distributions) of the proprietary interest in Acquired Fund at the Effective Time. 5. COVENANTS 5.1. Each Investment Company covenants to operate its respective Fund's business in the ordinary course between the date hereof and the Closing, it being understood that: (a) such ordinary course will include declaring and paying customary dividends and other distributions and such changes in operations as are contemplated by each Fund's normal business activities and (b) each Fund will retain exclusive control of the composition of its portfolio until the Closing; provided that Acquired Fund shall not dispose of more than an insignificant portion of its historic business assets (as defined above) during such period, other than dispositions in the ordinary course of business, without Acquiring Fund's prior consent; and, subject to their fiduciary duties to their respective shareholders and the Funds' respective investment objectives, strategies, policies and limitations, the Investment Companies shall coordinate the Funds' respective portfolios so that the transfer of the Assets to Acquiring Fund will not cause it to fail to be in compliance with all of its investment policies and restrictions immediately after the Closing. 5.2. North Track covenants that the Acquiring Fund Shares to be delivered hereunder are not being acquired for the purpose of making any distribution thereof, other than in accordance with the terms hereof. 5.3. North Track covenants that it will assist Federated in seeking to obtain information Federated reasonably requests concerning the beneficial ownership of Acquired Fund Shares. 5.4. North Track covenants that its books and records (including all books and records required to be maintained under the 1940 Act and the rules and regulations thereunder) regarding Acquired Fund will be turned over to Federated at the Closing. 5.5. Each Investment Company covenants to cooperate in preparing the Registration Statement and the Prospectus/Statement in compliance with applicable Federal Securities Laws. 5.6. Each Investment Company covenants that it will, from time to time, as and when requested by the other Investment Company, execute and deliver or cause to be executed and delivered all assignments and other instruments, and will take or cause to be taken all further action, the other Investment Company may deem necessary or desirable in order to vest in, and confirm to, (a) Federated, on Acquiring Fund's behalf, title to and possession of all the Assets, and (b) North Track, on Acquired Fund's behalf, title to and possession of the Acquiring Fund Shares to be delivered hereunder, and otherwise to carry out the intent and purpose hereof. 5.7. Federated covenants to use all reasonable efforts to obtain the approvals and authorizations required by the 1933 Act, the 1940 Act, and such state securities laws it may deem appropriate in order to continue Acquiring Fund's operations after the Effective Time. 5.8. Subject to this Agreement, each Investment Company covenants to take or cause to be taken all actions, and to do or cause to be done all things, reasonably necessary, proper, or advisable to consummate and effectuate the transactions contemplated hereby. 6. CONDITIONS PRECEDENT Each Investment Company's obligations hereunder shall be subject to (a) performance by the other Investment Company of all its obligations to be performed hereunder at or before the Effective Time, (b) all representations and warranties of the other Investment Company contained herein being true and correct in all material respects as of the date hereof and, except as they may be affected by the transactions contemplated hereby, as of the Effective Time, with the same force and effect as if made at and as of the Effective Time, and (c) the following further conditions that, at or before the Effective Time: 6.1. This Agreement and the transactions contemplated hereby shall have been duly adopted and approved by both Boards, and by the shareholders of Acquired Fund. 6.2. All necessary filings shall have been made with the SEC and state securities authorities, and no order or directive shall have been received that any other or further action is required to permit the parties to carry out the transactions contemplated hereby. The Registration Statement shall have become effective under the 1933 Act, no stop orders suspending the effectiveness thereof shall have been issued, and the SEC shall not have issued an unfavorable report with respect to the Reorganization under Section 25(b) of the 1940 Act nor instituted any proceedings seeking to enjoin consummation of the transactions contemplated hereby under Section 25(c) of the 1940 Act. All consents, orders, and permits of federal, state, and local regulatory authorities (including the SEC and state securities authorities) either Investment Company deems necessary to permit consummation, in all material respects, of the transactions contemplated hereby shall have been obtained, except where failure to obtain same would not involve a risk of a material adverse effect on the assets or properties of either Fund, provided that either Investment Company may for itself waive any of such conditions. 6.3. At the Effective Time, no action, suit, or other proceeding shall be pending before any court or governmental agency in which it is sought to restrain or prohibit, or to obtain damages or other relief in connection with, the transactions contemplated hereby. 6.4. North Track shall have received an opinion of Reed Smith LLP substantially to the effect that: 6.4.1. Acquiring Fund is a duly established series of Federated, a Maryland corporation duly organized and validly existing under the laws of the State of Maryland with power under its Articles and Bylaws to own all its properties and assets and to carry on its business as presently conducted; 6.4.2. This Agreement (a) has been duly authorized, executed, and delivered by Federated on Acquiring Fund's behalf and (b) assuming due authorization, execution, and delivery of this Agreement by North Track on Acquired Fund's behalf, is a valid and legally binding obligation of Federated with respect to Acquiring Fund, enforceable in accordance with its terms, except as the same may be limited by bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium, and similar laws relating to or affecting creditors' rights and by general principles of equity and the discretion of the court (regardless of whether the enforceability is considered in a proceeding in equity or at law); 6.4.3. The Acquiring Fund Shares to be issued and distributed to the Shareholders under this Agreement, assuming their due delivery as contemplated by this Agreement and the receipt of consideration in exchange therefor exceeding their par value, will be duly authorized and validly issued and outstanding and fully paid and non-assessable by Federated; 6.4.4. The execution and delivery of this Agreement did not, and the consummation of the transactions contemplated hereby will not, materially violate any provision of Federated's Articles or By-Laws or of any agreement (known to Reed Smith LLP, without any independent inquiry or investigation) to which Federated (with respect to Acquiring Fund) is a party or by which it (with respect to Acquiring Fund) is bound or (to Reed Smith LLP knowledge, without any independent inquiry or investigation) result in the acceleration of any obligation, or the imposition of any penalty, under any agreement, judgment, or decree to which Federated (with respect to Acquiring Fund) is a party or by which it (with respect to Acquiring Fund) is bound, except as set forth in such opinion or as otherwise disclosed in writing to and accepted by North Track; 6.4.5. To Reed Smith LLP's knowledge (without any independent inquiry or investigation), no consent, approval, authorization, or order of any court or governmental authority is required for the consummation by Federated on Acquiring Fund's behalf of the transactions contemplated herein, except such as have been obtained under the Federal Securities Laws and such as may be required under state securities laws; 6.4.6. Federated is registered with the SEC as an investment company, and to Reed Smith LLP's knowledge no order has been issued or proceeding instituted to suspend such registration; and 6.4.7. To Reed Smith LLP's knowledge (without any independent inquiry or investigation), (a) no litigation, administrative proceeding, or investigation of or before any court or governmental body is pending or threatened as to Federated (with respect to Acquiring Fund) or any of its properties or assets attributable or allocable to Acquiring Fund and (b) Federated (with respect to Acquiring Fund) is not a party to or subject to the provisions of any order, decree, or judgment of any court or governmental body that materially and adversely affects or is reasonably likely to materially and adversely affect Acquiring Fund's business, except as set forth in such opinion or as otherwise disclosed in writing to and accepted by North Track. In rendering such opinion, Reed Smith LLP may (1) rely, as to matters governed by the laws of the State of Maryland, on an opinion of competent Maryland counsel, and assume for purposes of the enforceability opinion that the laws of Maryland are identical to the laws of Pennsylvania, (1) make assumptions regarding the authenticity, genuineness, and/or conformity of documents and copies thereof without independent verification thereof, (2) limit such opinion to applicable federal and state law, and (3) define the word "knowledge" and related terms to mean the knowledge of attorneys then with Reed Smith LLP who have devoted substantive attention to matters directly related to this Agreement and the Reorganization. 6.5. Federated shall have received an opinion of Quarles & Brady LLP substantially to the effect that: 6.5.1. Acquired Fund is a duly established series of North Track, a corporation that is duly organized, validly existing, and in good standing under the laws of the State of Maryland with power under the Articles to own all its properties and assets and, to Quarles & Brady LLP's knowledge, to carry on its business as presently conducted; 6.5.2. This Agreement (a) has been duly authorized, executed, and delivered by North Track on Acquired Fund's behalf and (b) assuming due authorization, execution, and delivery of this Agreement by Federated on Acquiring Fund's behalf, is a valid and legally binding obligation of North Track with respect to Acquired Fund, enforceable in accordance with its terms, except as the same may be limited by bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium, and similar laws relating to or affecting creditors' rights and by general principles of equity and the discretion of the court (regardless of whether the enforceability is considered in a proceeding in equity or at law); 6.5.3. The execution and delivery of this Agreement did not, and the consummation of the transactions contemplated hereby will not, materially violate any provision of North Track's Articles or By-Laws or of any agreement (known to Quarles & Brady LLP, without any independent inquiry or investigation) to which North Track (with respect to Acquired Fund) is a party or by which it (with respect to Acquired Fund) is bound or (to Quarles & Brady LLP's knowledge, without any independent inquiry or investigation) result in the acceleration of any obligation, or the imposition of any penalty, under any agreement, judgment, or decree to which North Track (with respect to Acquired Fund) is a party or by which it (with respect to Acquired Fund) is bound, except as set forth in such opinion or as otherwise disclosed in writing to and accepted by Federated; 6.5.4. To Quarles & Brady LLP's knowledge (without any independent inquiry or investigation), no consent, approval, authorization, or order of any court or governmental authority is required for the consummation by North Track on Acquired Fund's behalf of the transactions contemplated herein, except such as have been obtained under the Federal Securities Laws and such as may be required under state securities laws; 6.5.5. North Track is registered with the SEC as an investment company, and to Quarles & Brady LLP's knowledge no order has been issued or proceeding instituted to suspend such registration; and 6.5.6. To Quarles & Brady LLP's knowledge (without any independent inquiry or investigation), (a) no litigation, administrative proceeding, or investigation of or before any court or governmental body is pending or threatened as to North Track (with respect to Acquired Fund) or any of its properties or assets attributable or allocable to Acquired Fund and (b) North Track (with respect to Acquired Fund) is not a party to or subject to the provisions of any order, decree, or judgment of any court or governmental body that materially and adversely affects or is reasonably likely to materially and adversely affect Acquired Fund's business, except as set forth in such opinion or as otherwise disclosed in writing to and accepted by Federated. In rendering such opinion, Quarles & Brady LLP may (1) rely, as to matters governed by the laws of the State of Maryland, on an opinion of competent Maryland counsel, and assume for purposes of the enforceability opinion that the laws of Maryland are identical to the laws of Wisconsin, (2) make assumptions regarding the authenticity, genuineness, and/or conformity of documents and copies thereof without independent verification thereof, (3) limit such opinion to applicable federal and state law, and (4) define the word "knowledge" and related terms to mean the knowledge of attorneys then with Quarles & Brady LLP who have devoted substantive attention to matters directly related to this Agreement and the Reorganization. 6.6. Each Investment Company shall have received an opinion of Quarles & Brady LLP, addressed to and in form and substance reasonably satisfactory to it, as to the federal income tax consequences mentioned below ("Tax Opinion"). In rendering the Tax Opinion, Quarles & Brady LLP may rely as to factual matters, exclusively and without independent verification, on the representations and warranties made in this Agreement, which Quarles & Brady LLP may treat as representations and warranties made to it, and in separate letters addressed to Quarles & Brady LLP and the certificates delivered pursuant to paragraph 3.4. The Tax Opinion shall be substantially to the effect that, based on the facts and assumptions stated therein and conditioned on consummation of the Reorganization in accordance with this Agreement, for federal income tax purposes: 6.6.1. Acquiring Fund's acquisition of the Assets in exchange solely for Acquiring Fund Shares, followed by Acquired Fund's distribution of those shares pro rata to the Shareholders constructively in exchange for their Acquired Fund Shares, will qualify as a "reorganization" (as defined in Section 368(a)(1)(C) of the Code), and each Fund will be "a party to a reorganization" within the meaning of Section 368(b) of the Code; 6.6.2. Acquired Fund will recognize no gain or loss on the transfer of the Assets to Acquiring Fund in exchange solely for Acquiring Fund Shares or on the subsequent distribution of those shares to the Shareholders in constructive exchange for their Acquired Fund Shares in liquidation of Acquired Fund pursuant to the Reorganization; 6.6.3. Acquiring Fund will recognize no gain or loss on its receipt of the Assets in exchange solely for Acquiring Fund Shares pursuant to the Reorganization; 6.6.4. The tax basis of each Asset acquired by Acquiring Fund pursuant to the Reorganization's basis in each Asset will be the same as the tax basis of such Assets to Acquired Fund immediately prior to the Reorganization, and the holding period of each Asset in the hands of Acquiring Fund will include the period during which such Asset was held by Acquired Fund; 6.6.5. The Shareholders will recognize no gain or loss on the constructive exchange of their Acquired Fund Shares for Acquiring Fund Shares pursuant to the Reorganization; and 6.6.6. The aggregate tax basis of the Acquiring Fund Shares received by each Shareholder in the Reorganization will be the same as the aggregate tax basis of the Acquired Fund Shares held by such Shareholder immediately prior to the Reorganization, and the holding period of the Acquiring Fund Shares to be received by each such Shareholder will include the period during which the Acquired Fund Shares exchanged therefore were held by such Shareholder (provided the Acquired Fund Shares were held as capital assets at the Effective Time). Notwithstanding subparagraphs 6.6.2 and 6.6.4, the Tax Opinion may state that no opinion is expressed as to the effect of the Reorganization on the Funds or any Shareholder with respect to any Asset as to which any unrealized gain or loss is required to be recognized for federal income tax purposes at the end of a taxable year (or on the termination or transfer thereof) under a mark-to-market system of accounting. At any time before the Closing, either Investment Company may waive any of the foregoing conditions (except that set forth in paragraph 6.1) if, in the judgment of its Board, such waiver will not have a material adverse effect on its Fund's shareholders' interests. 7. BROKERAGE FEES AND EXPENSES 7.1. Each Investment Company represents and warrants to the other that there are no brokers or finders entitled to receive any payments in connection with the transactions provided for herein. 7.2. Federated Investors, Inc., the parent of the investment adviser to Acquiring Fund, and B.C. Ziegler and Company, the investment adviser to Acquired Fund, or their respective affiliates will bear the total Reorganization Expenses in accordance with a separate Agreement among B.C. Ziegler and Company, The Ziegler Companies, Inc. and Federated Investors, Inc. dated as of February 2, 2005. 8. ENTIRE AGREEMENT; NO SURVIVAL Neither Investment Company has made any representation, warranty, or covenant not set forth herein, and this Agreement constitutes the entire agreement between the parties. The representations, warranties, and covenants contained herein or in any document delivered pursuant hereto or in connection herewith shall not survive the Closing. 9. TERMINATION OF AGREEMENT This Agreement may be terminated at any time at or before the Effective Time: 9.1. By either Investment Company (a) in the event of the other Investment Company's material breach of any representation, warranty, or covenant contained herein to be performed at or prior to the Effective Time, (b) if a condition to its obligations has not been met and it reasonably appears that such condition will not or cannot be met, or (c) if the Closing has not occurred on or before May 30, 2005; or 9.2. By the Investment Companies' mutual agreement. In the event of termination under paragraphs 9.1(c) or 9.2, there shall be no liability for damages on the part of either Investment Company, or the directors or officers thereof, to the other Investment Company. 10. AMENDMENT This Agreement may be amended, modified, or supplemented at any time in any manner mutually agreed on in writing by the Investment Companies; provided that no such amendment, modification, or supplement shall have a material adverse effect on the Shareholders' interests. 11. MISCELLANEOUS 11.1. This Agreement shall be governed by and construed in accordance with the internal laws of the State of Maryland; provided that, in the case of any conflict between such laws and the federal securities laws, the latter shall govern. 11.2. Nothing expressed or implied herein is intended or shall be construed to confer on or give any person, firm, trust, or North Track other than the parties and their respective successors and assigns any rights or remedies under or by reason of this Agreement. 11.3 The parties acknowledge that each Investment Company is a Maryland corporation. Notice is hereby given that this instrument is executed by each Investment Company's officer's and directors solely in their capacities as officers and directors, and not individually, and solely on behalf of its respective Fund, and that neither Investment Company's obligations under this instrument is binding on or enforceable against any of its respective officers, directors or shareholders or any series of such Investment Company other than Acquiring Fund in the case of Federated and Acquired Fund in the case of North Track but are only binding on and enforceable against the property of its respective Fund. Each Investment Company agrees that, in asserting any rights or claims under this Agreement, it shall look only to the property of the respective Fund of the other Investment Company in settlement of such rights or claims and not to the other Investment Company's directors, officers, or shareholders. 11.4. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement, and shall become effective when one or more counterparts have been executed by each Investment Company and delivered to the other Investment Company. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. IN WITNESS WHEREOF, each party has caused this Agreement to be executed and delivered by its duly authorized officers as of the date first written above. NORTH TRACK FUNDS, INC. By:/s/ David G. Stoeffel Name: David G. Stoeffel Title: President FEDERATED MUNICIPAL SECURITIES FUND, INC. By: /s/ John W. McGonigle Name: John W. McGonigle Title: Executive Vice President and Secretary Cusip 663038107 STATEMENT OF ADDITIONAL INFORMATION March 10, 2005 Acquisition of the Assets of NORTH TRACK TAX-EXEMPT FUND a mutual fund series of North Track Funds, Inc. 250 East Wisconsin Avenue Suite 2000 Milwaukee, Wisconsin 53202 Telephone No: 1-800-826-4600 By and in exchange for Class A Shares of FEDERATED MUNICIPAL SECURITIES FUND, INC. 5800 Corporate Drive Pittsburgh, PA 15237-7000 Telephone No: 1-800-341-7400 This Statement of Additional Information, dated March 10, 2005, is not a prospectus. A Proxy Statement and Prospectus, dated March 10, 2005, related to the above-referenced matter may be obtained from Federated Municipal Securities Fund, Inc. at 5800 Corporate Drive, Pittsburgh, PA 15237-7000. This Statement of Additional Information should be read in conjunction with such Proxy Statement and Prospectus. TABLE OF CONTENTS 1. Statement of Additional Information of Federated Municipal Securities Fund, Inc., dated May 31, 2004. 2. Statement of Additional Information of North Track Tax-Exempt Fund, a mutual fund series of North Track Funds, Inc., dated March 1, 2005. 3. Financial Statements of Federated Municipal Securities Fund, Inc., dated March 31, 2004. 4. Financial Statements of North Track Tax-Exempt Fund, a mutual fund series of North Track Funds, Inc., dated October 31, 2004. 5. Unaudited Financial Statements of Federated Municipal Securities Fund, Inc., dated September 30, 2004. Pursuant to Item 14(a) of Form N-14, the pro forma financial statements required by Rule 11-01 of Regulation S-K have not been prepared to reflect the proposed acquisition of the assets of North Track Tax-Exempt Fund by Federated Municipal Securities Fund, Inc. because the net assets of North Track Tax-Exempt Fund do not exceed ten percent of the Federated Municipal Securities Fund, Inc.'s net assets as of January 21, 2005. INFORMATION INCORPORATED BY REFERENCE 1. Statement of Additional Information of Federated Municipal Securities Fund, Inc., dated May 31, 2004. The Statement of Additional Information of Federated Municipal Securities Fund, Inc., is incorporated by reference to Post-Effective Amendment No. 59 on Form N-1A, which was filed with the Securities and Exchange Commission on or about June 1, 2004. 2. Statement of Additional Information of North Track Tax Exempt Fund, a mutual fund series of North Track Funds, Inc., dated March 1, 2005. The Statement of Additional Information of North Track Tax Exempt Fund, a mutual fund series of North Track Funds, Inc., is incorporated by reference to Post-Effective Amendment No. 74 on Form N-1A, which was filed with the Securities and Exchange Commission on or about February 9, 2005. 3. Financial Statements of Federated Municipal Securities Fund, Inc., dated March 31, 2004. The audited financial statements of Federated Municipal Securities Fund, Inc., dated March 31, 2004, including the Ernst & Young LLP Independent Auditors' Report dated May 10, 2004 related thereto, are incorporated by reference to the Annual Report to Shareholders of Federated Municipal Securities Fund, Inc., that was filed with the Securities and Exchange Commission on Form N-CSR on or about May 28, 2004. 4. Financial Statements of North Track Tax Exempt Fund, a mutual fund series of North Track Funds, Inc., dated October 31, 2004. The audited financial statements of North Track Tax Exempt Fund dated October 31, 2004, including the Deloitte & Touche LLP Independent Registered Public Accounting Firm's Report dated December 20, 2004 related thereto, are incorporated by reference to the Annual Report to Shareholders of North Track Tax Exempt Fund, a mutual fund series of North Track Funds, Inc., that was filed with the Securities and Exchange Commission on Form N-CSR on or about January 5, 2005. 5. Unaudited Financial Statements of Federated Municipal Securities Fund, Inc., dated September 30, 2004. The unaudited financial statements of Federated Municipal Securities Fund, Inc., dated September 30, 2004, are incorporated by reference to the Semi-Annual Report to Shareholders of the Federated Municipal Securities Fund, Inc., that was filed with the Securities and Exchange Commission on Form N-CSR on or about November 29, 2004. NORTH TRACK FUNDS, INC. North Track Tax-Exempt Fund Investment Adviser B. C. ZIEGLER AND COMPANY 250 East Wisconsin Avenue Suite 2000 Milwaukee, Wisconsin Distributor B. C. ZIEGLER AND COMPANY 250 East Wisconsin Avenue Suite 2000 Milwaukee, Wisconsin Administrator B. C. ZIEGLER AND COMPANY 250 East Wisconsin Avenue Suite 2000 Milwaukee, Wisconsin Exhibit 17 North Track Tax Exempt Fund (a mutual fund series of North Track Funds, Inc.) PROXY FOR THE SPECIAL MEETING OF SHAREHOLDERS April 28, 2005 This proxy is being solicited on behalf of the Board of Directors of North Track Funds, Inc. ("North Track") and relates to the proposal specifically relating to the North Track Tax-Exempt Fund, a mutual fund series of North Track. The undersigned appoints as proxies David G. Stoeffel and Franklin P. Ciano and each of them (with power of substitution), to vote all the undersigned's shares of the North Track Tax-Exempt Fund at the Special Meeting of Shareholders of the North Track Tax-Exempt Fund to be held on April 28, 2005 at 10:00 a.m., at the offices of B. C. Ziegler and Company, 250 East Wisconsin Avenue, Suite 2000, Milwaukee, Wisconsin, and any adjournment thereof (the "Meeting"), with all the power the undersigned would have if personally present. The shares represented by this proxy will be voted as instructed. Unless indicated to the contrary, this proxy shall be deemed to grant authority to vote "FOR" the proposal specified below. This proxy also grants discretionary power to vote upon such other business as may properly come before the Meeting. Your vote is important no matter how many shares you own. Please sign and date this proxy below and return it promptly in the enclosed envelope. In the alternative, you may vote your proxy either by calling 1-800-690-6903 or logging on to www.proxyweb.com, and following the simple instructions. THREE EASY WAYS TO VOTE YOUR PROXY: By Telephone 1. Read the Proxy Statement and have the proxy card at hand. 2. Call 1-800-690-6903 3. Follow the simple instructions. By Internet 1. Read the Proxy Statement and have the proxy card at hand. 2. Go to Website www.proxyweb.com 3. Follow the simple instructions. By Mail 1. Read the Proxy Statement. 2. Check the appropriate box on the proxy card. 3. Sign and date the proxy card. 4. Return the proxy card in the envelope provided. TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS: [X] DETACH AND RETURN THIS PORTION ONLY THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED. NORTH TRACK TAX EXEMPT FUND (a mutual fund series of North Track Funds, Inc.) Vote On Proposal FOR AGAINST ABSTAIN To approve a proposed Agreement and Plan of Reorganization pursuant to which Federated Municipal Securities Fund, Inc. (the "Federated Fund") would acquire all of the assets of the North Track Tax-Exempt Fund (less amounts sufficient to satisfy liabilities) in exchange solely for the issuance of Class A Shares of the Federated Fund, to be distributed pro rata by the North Track Tax-Exempt Fund to holders of its shares, in complete liquidation and termination of the North Track Tax-Exempt Fund. YOUR VOTE IS IMPORTANT NO MATTER HOW MANY SHARES YOU OWN. PLEASE SIGN AND DATE THIS PROXY BELOW AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE. IN THE ALTERNATIVE, YOU MAY VOTE YOUR PROXY BY CALLING 1-800-690-6903 AND FOLLOWING THE SIMPLE INSTRUCTIONS. Please sign exactly as name appears hereon. If shares are held in the name of joint owners, at least one owner must sign. Attorneys-in-fact, executors, administrators, etc. should so indicate. If shareholder is a corporation or partnership, please sign in full corporate or partnership name by authorized person. - ------------------------------------------------------------------------------- Signature (owner, trustee, custodian, etc.) Date -----END PRIVACY-ENHANCED MESSAGE-----