FEDERATED CAPITAL APPRECIATION FUND
(A PORTFOLIO OF FEDERATED EQUITY FUNDS)
(FORMERLY, FEDERATED GROWTH TRUST)
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
COMBINED PROSPECTUS
The shares of Federated Capital Appreciation Fund (the "Fund") represent
interests in a diversified investment portfolio of Federated Equity Funds, an
open-end management investment company (a mutual fund). The Fund invests
primarily in equity securities that offer opportunities for capital
appreciation.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF ANY
BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISK,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in Class A Shares, Class B Shares, and Class C Shares of the Fund. Keep
this prospectus for future reference.
The Fund has also filed a Combined Statement of Additional Information for Class
A Shares, Class B Shares, and Class C Shares dated November 14, 1995, (revised,
November 17, 1995) with the Securities and Exchange Commission. The information
contained in the Combined Statement of Additional Information is incorporated by
reference into this prospectus. You may request a copy of the Combined Statement
of Additional Information or this prospectus free of charge by calling
1-800-235-4669. To obtain other information or to make inquiries about the Fund,
contact your financial institution.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated November 14, 1995
(Revised, November 17, 1995)
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TABLE OF CONTENTS
Summary of Fund Expenses.......................................................1
Synopsis.......................................................................4
Liberty Family of Funds........................................................5
Investment Information.........................................................7
Investment Objective.........................................................7
Investment Policies..........................................................7
Investment Limitations......................................................15
Net Asset Value...............................................................16
Investing in the Fund.........................................................16
How to Purchase Shares........................................................17
Investing in Class A Shares.................................................17
Investing in Class B Shares.................................................20
Investing in Class C Shares.................................................20
Special Purchase Features...................................................21
Exchange Privilege............................................................22
How to Redeem Shares..........................................................24
Special Redemption Features.................................................25
Contingent Deferred Sales Charge............................................26
Elimination of Contingent
Deferred Sales Charge....................................................27
Account and Share Information.................................................28
Trust Information.............................................................29
Management of the Trust.....................................................29
Distribution of Shares......................................................30
Administration of the Fund..................................................32
Expenses of the Fund and Class A
Shares, Class B Shares, and
Class C Shares...........................................................32
Brokerage Transactions......................................................33
Shareholder Information.......................................................34
Voting Rights...............................................................34
Massachusetts Partnership Law...............................................34
Tax Information...............................................................35
Federal Income Tax..........................................................35
State and Local Taxes.......................................................35
Performance Information.......................................................35
Appendix......................................................................36
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SUMMARY OF FUND EXPENSES
FEDERATED CAPITAL APPRECIATION FUND
<TABLE>
<S> <C> <C>
CLASS A SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)..................................... 5.50%
Maximum Sales Load Imposed on Reinvested Dividends (as a percentage of offering price).......................... None
Contingent Deferred Sales Charge (as a percentage of original purchase price or redemption
proceeds, as applicable) (1).................................................................................. 0.00%
Redemption Fee (as a percentage of amount redeemed, if applicable).............................................. None
Exchange Fee.................................................................................................... None
ANNUAL CLASS A SHARES OPERATING EXPENSES
(As a percentage of projected average net assets)*
Management Fee.................................................................................................. 0.75%
12b-1 Fee (2)................................................................................................... 0.00%
Total Other Expenses (after expense reimbursement).............................................................. 0.40%
Shareholder Services Fee......................................................................... 0.25%
Total Class A Shares Operating Expenses................................................................ 1.15%
</TABLE>
(1) Class A Shares purchased with the proceeds of a redemption of shares of an
unaffiliated investment company purchased or redeemed with a sales load and
not distributed by Federated Securities Corp. may be charged a contingent
deferred sales charge of 0.50 of 1% for redemptions made within one full
year of purchase. See "Contingent Deferred Sales Charge."
(2) The Class A Shares have no present intention of paying or accruing the 12b-1
fee during the fiscal year ending October 31, 1996. If the Class A Shares
were paying or accruing the 12b-1 fee, the Class A Shares would be able to
pay up to 0.25% of its average daily net assets for the 12b-1 fee. See
"Trust Information."
* Total Class A Shares Operating Expenses are estimated based on average
expenses expected to be incurred during the period ending October 31, 1996.
During the course of this period, expenses may be more or less than the
average amount shown.
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of Class A Shares will bear,
either directly or indirectly. For more complete descriptions of the various
costs and expenses, see "Investing in Class A Shares" and "Trust Information."
Wire-transferred redemptions of less than $5,000 may be subject to additional
fees.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
<S> <C> <C>
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end of each time period................. $71 $90
You would pay the following expenses on the same investment, assuming no redemption............... $66 $90
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS
EXAMPLE IS BASED ON ESTIMATED DATA FOR CLASS A SHARES' FISCAL YEAR ENDING
OCTOBER 31, 1996.
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SUMMARY OF FUND EXPENSES
FEDERATED CAPITAL APPRECIATION FUND
<TABLE>
<S> <C> <C>
CLASS B SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)..................................... None
Maximum Sales Load Imposed on Reinvested Dividends (as a percentage of offering price).......................... None
Contingent Deferred Sales Charge (as a percentage of original purchase price
or redemption proceeds, as applicable) (1).................................................................... 5.50%
Redemption Fee (as a percentage of amount redeemed, if applicable).............................................. None
Exchange Fee.................................................................................................... None
ANNUAL CLASS B SHARES OPERATING EXPENSES
(As a percentage of projected average net assets)*
Management Fee (after waiver)................................................................................... 0.75%
12b-1 Fee....................................................................................................... 0.75%
Total Other Expenses (after expense reimbursement).............................................................. 0.40%
Shareholder Services Fee......................................................................... 0.25%
Total Class B Shares Operating Expenses (2)............................................................ 1.90%
</TABLE>
(1) The contingent deferred sales charge is 5.50% in the first year declining to
1.00% in the sixth year and 0.00% thereafter. (See "Contingent Deferred
Sales Charge.")
(2) Class B Shares convert to Class A Shares (which pay lower ongoing expenses)
approximately eight years after purchase.
* Total Class B Shares Operating Expenses are estimated based on average
expenses expected to be incurred during the period ending October 31, 1996.
During the course of this period, expenses may be more or less than the
average amount shown.
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of Class B Shares will bear,
either directly or indirectly. For more complete descriptions of the various
costs and expenses, see "Investing in Class B Shares" and "Trust Information."
Wire-transferred redemptions of less than $5,000 may be subject to additional
fees.
Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted under the rules of the National
Association of Securities Dealers, Inc.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
<S> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period.......................... $76 $104
You would pay the following expenses on the same investment, assuming no redemption............... $19 $ 60
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS
EXAMPLE IS BASED ON ESTIMATED DATA FOR THE CLASS B SHARES" FISCAL YEAR ENDING
OCTOBER 31, 1996.
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SUMMARY OF FUND EXPENSES
FEDERATED CAPITAL APPRECIATION FUND
<TABLE>
<S> <C> <C>
CLASS C SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)..................................... None
Maximum Sales Load Imposed on Reinvested Dividends (as a percentage of offering price).......................... None
Contingent Deferred Sales Charge (as a percentage of original purchase price or redemption
proceeds, as applicable) (1).................................................................................. 1.00%
Redemption Fee (as a percentage of amount redeemed, if applicable).............................................. None
Exchange Fee.................................................................................................... None
ANNUAL CLASS C SHARES OPERATING EXPENSES
(As a percentage of projected average net assets)*
Management Fee (after waiver)................................................................................... 0.75%
12b-1 Fee....................................................................................................... 0.75%
Total Other Expenses (after expense reimbursement).............................................................. 0.40%
Shareholder Services Fee......................................................................... 0.25%
Total Class C Shares Operating Expenses................................................................ 1.90%
</TABLE>
(1) The contingent deferred sales charge assessed is 1.00% of the lesser of the
original purchase price or the net asset value of Shares redeemed within one
year of their purchase date. For a more complete description, see
"Contingent Deferred Sales Charge."
* Total Class C Shares Operating Expenses are estimated based on average
expenses expected to be incurred during the period ending October 31, 1996.
During the course of this period, expenses may be more or less than the
average amount shown.
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of Class C Shares will bear,
either directly or indirectly. For more complete descriptions of the various
costs and expenses, see "Investing in Class C Shares" and "Trust Information."
Wire-transferred redemptions of less than $5,000 may be subject to additional
fees.
Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted under the rules of the National
Association of Securities Dealers, Inc.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
<S> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period.......................... $30 $60
You would pay the following expenses on the same investment, assuming no redemption............... $19 $60
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS
EXAMPLE IS BASED ON ESTIMATED DATA FOR THE CLASS C SHARES' FISCAL YEAR ENDING
OCTOBER 31, 1996.
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SYNOPSIS
Federated Capital Appreciation Fund (the "Fund") is an investment portfolio of
Federated Equity Funds (the "Trust"). The Trust was established as a business
trust under the laws of the Commonwealth of Massachusetts pursuant to a
Declaration of Trust dated April 17, 1984, under the name "Federated Growth
Trust." The Trust later changed its name to "Federated Equity Funds." The Fund
was created for the purpose of soliciting the shareholders of Federated Exchange
Fund, Ltd., a California Limited Partnership, to exchange their partnership
interests for shares of beneficial interest in the Class A Shares of the Fund.
Until this transaction is completed, or until management of the Fund determines
that it will abandon its plan to acquire the assets of Federated Exchange Fund,
Ltd. in a reorganization transaction, shares of the Fund will not be available
for public investment. The Fund's address is Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779.
The Declaration of Trust permits the Trust to offer separate series of shares of
beneficial interest representing interests in separate portfolios of securities.
The shares in any one portfolio may be offered in separate classes. With respect
to this Fund, as of the date of this prospectus, the Board of Trustees (the
"Trustees") has established three classes of shares, known as Class A Shares,
Class B Shares, and Class C Shares (referred to as "Shares," individually and
collectively as the context requires).
Shares of the Fund are designed primarily for individuals and institutions
seeking capital appreciation through a professionally managed, diversified
portfolio consisting primarily of equity securities.
For information on how to purchase the Shares offered by this prospectus, please
refer to "How to Purchase Shares." The minimum initial investment for Class A
Shares is $500. The minimum initial investment for Class B Shares and Class C
Shares is $1,500. However, the minimum initial investment for a retirement
account in any class is $50. Subsequent investments in any class must be in
amounts of at least $100, except for retirement plans which must be in amounts
of at least $50.
Class A Shares are generally sold at net asset value plus an applicable sales
load and are redeemed at net asset value. However, a contingent deferred sales
charge is imposed under certain circumstances. For a more complete description,
see "How to Redeem Shares." Class A Shares are sold and redeemed at net asset
value for trust departments, investment advisers, and shareholders who receive
Shares in the reorganization of Federated Exchange Fund, Ltd., described above.
Class B Shares are sold at net asset value and are redeemed at net asset value.
However, a contingent deferred sales charge is imposed on certain Shares which
are redeemed within six full years of purchase. See "How to Redeem Shares."
Class C Shares are sold at net asset value. A contingent deferred sales charge
of 1.00% will be charged on assets redeemed within the first 12 months following
purchase. See "How to Redeem Shares."
Additionally, information regarding the exchange privilege offered with respect
to the Fund and certain other funds for which affiliates of Federated Investors
serve as investment adviser or principal underwriter ("Federated Funds") can be
found under "Exchange Privilege."
Federated Management is the investment adviser (the "Adviser") to the Fund and
receives compensation for its services. The Adviser's address is Federated
Investors Tower, Pittsburgh, Pennsylvania 15222-3779.
Investors should be aware of the following general observations. The Fund may
make certain investments and employ certain investment techniques that involve
risks, including investing in convertible securities and zero coupon convertible
securities, entering into repurchase agreements, investing in when-issued and
delayed delivery securities, lending portfolio securities, the purchasing or
writing of put and call options, the purchasing and selling of financial futures
and options on futures, and investing in restricted and illiquid securities and
foreign securities. These risks are described under "Investment Policies."
The Fund's current net asset value and offering price can be found in the mutual
funds section of local newspaper under "Federated Liberty Funds."
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LIBERTY FAMILY OF FUNDS
This Fund is a member of a family of mutual funds, collectively known as the
Liberty Family of Funds. The other funds in the Liberty Family of Funds are:
American Leaders Fund, Inc., providing growth of capital and income through
high-quality stocks;
Capital Growth Fund, providing appreciation of capital primarily through equity
securities;
Federated Bond Fund, providing as high a level of current income as is
consistent with the preservation of capital by investing primarily in a
portfolio of investment grade bonds;
Federated Growth Strategies Fund, providing appreciation of capital through
equity securities of companies with prospects for above-
average growth in earnings and dividends;
Federated Small Cap Strategies Fund, providing appreciation of capital through
common stocks of small and medium sized companies;
Fund for U.S. Government Securities, Inc., providing current income through
long-term U.S. government securities;
Federated International Equity Fund, providing long-term capital growth and
income through international securities;
Federated International Income Fund, providing a high level of current income
consistent with prudent investment risk through high-quality debt securities
denominated primarily in foreign currencies;
Liberty Equity Income Fund, Inc., providing above-average income and capital
appreciation through income producing equity securities;
Liberty High Income Bond Fund, Inc., providing high current income through
high-yielding, lower-rated, corporate bonds;
Liberty Municipal Securities Fund, Inc., providing a high level of current
income exempt from federal regular income tax through municipal bonds;
Liberty U.S. Government Money Market Trust, providing current income consistent
with stability of principal through high-quality U.S. government securities;
Liberty Utility Fund, Inc., providing current income and long-term growth of
income, primarily through electric, gas, and communications utilities;
Limited Term Fund, providing a high level of current income consistent with
minimum fluctuation in principal through investment grade securities;
Limited Term Municipal Fund, providing a high level of current income exempt
from federal regular income tax consistent with the preservation of principal,
primarily limited to municipal securities;
Michigan Intermediate Municipal Trust, providing current income exempt from
federal regular income tax and personal income taxes imposed by the state of
Michigan and Michigan municipalities, primarily through Michigan municipal
securities;
Pennsylvania Municipal Income Fund, providing current income exempt from
federal regular income tax and the personal income taxes imposed by the
Commonwealth of Pennsylvania, primarily through Pennsylvania municipal
securities;
Strategic Income Fund, providing a high level of current income, primarily
through domestic and foreign corporate debt obligations;
Tax-Free Instruments Trust, providing current income consistent with the
stability of principal and exempt from federal income tax, through
high-quality, short-term municipal securities; and
World Utility Fund, providing total return
primarily through securities issued by domestic and foreign companies in the
utilities industries.
Prospectuses for these funds are available by writing to Federated Securities
Corp.
Each of the funds may also invest in certain other types of securities as
described in each fund's prospectus.
The Liberty Family of Funds provides flexibility and diversification for an
investor's long-term investment planning. It enables an investor to meet the
challenges of changing market conditions by offering convenient exchange
privileges which give access to various investment vehicles and by providing the
investment services of proven, professional investment advisers.
Shareholders of Class A Shares who have been designated as Liberty Life Members
are exempt from sales loads on future purchases in and exchanges between the
Class A Shares of any funds in the Liberty Family of Funds, as long
as they maintain a $500 balance in one of the
Liberty Funds.
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INVESTMENT INFORMATION
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide capital appreciation. The
investment objective cannot be changed without approval of shareholders. While
there is no assurance that the Fund will achieve its investment objective, it
endeavors to do so by following the investment policies described in this
prospectus.
INVESTMENT POLICIES
The investment policies described below may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in these policies becomes effective.
ACCEPTABLE INVESTMENTS
The Fund attempts to achieve its objectives by investing at least 65% of its
assets in equity securities. Equity securities include common stocks, preferred
stocks, and investment grade securities (including debt securities) that are
convertible into common stocks. The portion of the Fund's total assets invested
in common stocks, preferred stocks, and convertible securities will vary
according to the Fund's assessment of market and economic conditions and
outlook.
The Fund's stock selection emphasizes those common stocks in each industry
sector that offer significant potential for capital appreciation based upon
factors such as price/cash flow, price/book value, and projected earnings
growth. The Fund may also invest in the securities of companies involved in
mergers or restructuring, and may invest up to 20% of its total assets in
foreign securities.
COMMON STOCK
As described above, the Fund invests primarily in equity securities. As with
other mutual funds that invest primarily in equity securities, the Fund is
subject to market risks. That is, the possibility exists that common stocks will
decline over short or even extended periods of time, and the United States
equity market tends to be cyclical, experiencing both periods when stock prices
generally increase and periods when stock prices generally decrease. However,
since the Fund invests in growth-oriented equity securities, there are some
additional risk factors associated with investment in the Fund. Growth-oriented
stocks may include issuers with smaller capitalization. Small and medium
capitalization stocks have historically been more volatile in price than larger
capitalization stocks, such as those included in the Standard & Poor's 500
Index. This is because, among other things, smaller companies have a lower
degree of liquidity in the equity market and tend to have a greater sensitivity
to changing economic conditions. That is, the stock of small and medium
capitalization companies may decline in price as the price of large company
stocks rise, or vice versa. Therefore, investors should expect that the Fund
will be more volatile than, and may fluctuate independently of, broad market
indices such as the Standard & Poor's 500 Index.
CORPORATE SECURITIES
The Fund may invest in preferred stocks, convertible securities, notes or
debentures rated investment grade, i.e., Baa or better by Moody's Investors
Service, Inc. ("Moody's"), or BBB or better by Standard & Poor's Ratings Group
("S&P") or Fitch Investors Service, Inc. ("Fitch") (or, if unrated, are deemed
to be of comparable quality by the Fund's Adviser), and warrants of these
companies. Corporate fixed income securities are subject to market and credit
risks. In addition, the prices of fixed income securities fluctuate inversely to
the direction of interest
rates. It should be noted that securities receiving the lowest investment grade
rating are considered to have some speculative characteristics. Changes in
economic conditions or other circumstances are more likely to lead to weakened
capacity to make principal and interest payments than higher rated securities.
In the event that a security which had an eligible rating when purchased is
downgraded below Baa or BBB, the Adviser will promptly reassess whether
continued holding of the security is consistent with the Fund's objective.
CONVERTIBLE SECURITIES
The Fund may invest up to, but not including, 35% of the value of its total
assets in convertible securities that are not investment grade bonds or are not
rated but are determined by the Adviser to be of comparable quality. Convertible
securities are fixed-income securities which may be exchanged or converted into
a predetermined number of the issuer's underlying common stock at the option of
the holder during a specified time period. Convertible securities may take the
form of convertible preferred stock, convertible bonds or debentures, units
consisting of "usable" bonds and warrants or a combination of the features of
several of these securities. The investment characteristics of each convertible
security vary widely, which allows convertible securities to be employed for
different investment objectives.
The Fund may invest in convertible securities rated Baa or lower by Moody's or
BBB or lower by S&P or Fitch, or if unrated, are deemed to be of comparable
quality by the Adviser.
Convertible bonds and convertible preferred stocks are fixed-income securities
that generally retain the investment characteristics of fixed-income securities
until they have been converted but also react to movements in the underlying
equity securities. The holder is entitled to receive the fixed-income of a bond
or the dividend preference of a preferred stock until the security is converted
into equity. Usable bonds are corporate bonds that can be used in whole or in
part, customarily at full face value, in lieu of cash to purchase the issuer's
common stock. When owned as part of a unit along with warrants, which are
options to buy the common stock, they function as convertible bonds, except that
the warrants generally will expire before the bond's maturity. Convertible
securities are senior to equity securities and, therefore, have a claim to
assets of the corporation prior to the holders of common stock in the case of
liquidation. However, convertible securities are generally subordinated to
similar nonconvertible securities of the same company. The interest income and
dividends from convertible bonds and preferred stocks provide a stable stream of
income with generally higher yields than common stocks, but lower than
non-convertible securities of similar quality.
In general, the market value of a convertible security is at least the higher of
its "investment value" (i.e., its value as a fixed-income security) or its
"conversion value" (i.e., its value upon conversion into its underlying common
stock). As a fixed-income security, a convertible security tends to increase in
market value when interest rates decline and tends to decrease in value when
interest rates rise. However, the price of a convertible security is also
influenced by the market value of the security's underlying common stock. The
price of a convertible security tends to increase as the market value of the
underlying stock rises, whereas it tends to decrease as the market value of the
underlying stock declines. While no securities investment is without some risk,
investments in convertible securities generally entail less risk than
investments in the common stock of the same issuer.
The Fund will exchange or convert the convertible securities held in its
portfolio into shares of the underlying common stock in instances in which, in
the Adviser's opinion, the investment characteristics of the underlying common
shares will assist the Fund in achieving its investment objectives. Otherwise,
the Fund will hold or trade the convertible securities. In selecting
convertible securities for the Fund, the Adviser evaluates the investment
characteristics of the convertible security as a fixed-income instrument, and
the investment potential of the underlying equity security for capital
appreciation. In evaluating these matters with respect to a particular
convertible security, the Adviser considers numerous factors, including the
economic and political outlook, the value of the security relative to other
investment alternatives, trends in the determinants of the issuer's profits,
and the issuer's management capability and practices.
SYNTHETIC CONVERTIBLES
A "synthetic convertible" is created by combining distinct securities that
possess the two principal characteristics of a true convertible: a fixed-income
component and a convertibility component. This combination is achieved by
investing in nonconvertible fixed-income securities (nonconvertible bonds,
preferred stocks, and money market instruments) and in warrants or call options
traded on U.S. or foreign exchanges or in the over-the-counter markets granting
the holder the right to purchase a specified quantity of securities within a
specified period of time at a specified price or to receive cash in the case of
stock index options.
Synthetic convertibles differ from true convertible securities in several
respects. Unlike a true convertible, which is a single security having a unitary
market value, a synthetic convertible is comprised of two distinct securities,
each with its own market value. Therefore, the "market value" of a synthetic
convertible is the sum of the values of its fixed-income component and its
separate convertibility component. For this reason, the values of a synthetic
convertible and a true convertible security will respond differently to market
fluctuations.
A synthetic convertible may be more flexible than a convertible security. For
example, a synthetic convertible may offer different issuers in the fixed-income
component than are offered in the stock underlying the convertibility component.
A synthetic convertible allows the Adviser to combine components representing
distinct issuers, or to combine a fixed-income security with a call option on a
stock index, when it determines that such a combination would better promote the
Fund's investment objective and diversification. A synthetic convertible may
also offer flexibility in that its two components may be purchased separately.
For example, the Adviser may purchase a listed call option for inclusion in a
synthetic convertible, but temporarily hold short-term investments while
postponing purchase of a corresponding bond pending development of more
favorable market conditions.
A holder of a synthetic convertible faces the risk that the price of the stock,
or the level of the market index underlying the convertibility component, will
decline, causing a decline in the value of the call option or warrant. Should
the price of the stock or the level of the index fall below the exercise price,
and remain there throughout the exercise period, the entire amount paid for the
call option or warrant would be lost. Since a synthetic convertible includes a
fixed-income component, the holder of a synthetic convertible also faces the
risk that interest rates will rise, causing a decline in the value of the
fixed-income instrument. Finally, a synthetic convertible can be expected to
have greater transaction costs than a true convertible security.
A combination of convertible securities and synthetic convertibles may offer
certain advantages over an investment policy that allows for only one of these
investment vehicles. Since convertible securities and synthetic convertibles may
respond differently to varying market conditions, the ability to invest in both
types of securities should afford greater flexibility in managing the Fund's
portfolio.
ZERO COUPON CONVERTIBLE SECURITIES
Zero coupon convertible securities are debt securities which are issued at a
discount to their face amount and do not entitle the holder to any periodic
payments of interest prior to maturity. Rather, interest earned on zero coupon
convertible securities accretes at a stated yield until the security reaches its
face amount at maturity. Zero coupon convertible securities are convertible into
a specific number of shares of the issuer's common stock. In addition, zero
coupon convertible securities usually have put features that provide the holder
with the opportunity to sell the bonds back to the issuer at a stated price
before maturity. Generally, the prices of zero coupon convertible securities may
be more sensitive to market interest rate fluctuations than conventional
convertible securities.
Federal income tax law requires the holder of a zero coupon convertible security
to recognize income from the security prior to the receipt of cash payments. To
maintain its qualification as a regulated investment company and avoid liability
of federal income taxes, the Fund will be required to distribute income accrued
from zero coupon convertible securities which it owns, and may have to sell
portfolio securities (perhaps at disadvantageous times) in order to generate
cash to satisfy these distribution requirements.
RISK FACTORS RELATING TO INVESTING IN HIGH YIELD SECURITIES
The convertible, synthetic, and zero convertible securities in which the Fund
invests are usually not in the three highest rating categories of a nationally
recognized statistical rating organization (AAA, AA, or A for S&P or Fitch and
Aaa, Aa, or A for Moody's), but are in the lower rating categories or are
unrated, but are of comparable quality and have speculative characteristics or
are speculative. Lower-rated bonds or unrated bonds are commonly referred to as
"junk bonds." There is no minimal acceptable rating for a security to be
purchased or held in the Fund's portfolio, and the Fund may, from time to time,
purchase or hold convertible and synthetic convertible securities rated in the
lowest rating category. A description of the rating categories is contained in
the Appendix to the prospectus.
Debt obligations that are not determined to be investment grade are high-yield,
high-risk bonds, typically subject to greater market fluctuations and greater
risk of loss of income and principal due to an issuer's default. To a greater
extent than investment-grade bonds, lower-rated bonds tend to reflect
short-term corporate, economic, and market developments, as well as investor
perceptions of the issuer's credit quality. In addition, lower-rated bonds may
be more difficult to dispose of or to value than higher-rated, lower-yielding
bonds.
The Adviser attempts to reduce the risks described above through diversification
of the portfolio and by credit analysis of each issuer as well as by monitoring
broad economic trends and corporate and legislative developments.
FOREIGN SECURITIES
The Fund reserves the right to invest up to 20% of its assets in foreign debt
and equity securities. These securities may be either dollar-denominated or
denominated in foreign currencies. Investments in foreign securities,
particularly those of non-governmental issuers, involve considerations which
are not ordinarily associated with investments in domestic issuers. These
considerations include the possibility of expropriation, confiscatory taxation,
currency fluctuations, the unavailability of financial information or the
difficulty of interpreting financial
information prepared under foreign accounting standards, less liquidity and more
volatility in foreign securities markets, the impact of political, social, or
diplomatic developments, and the difficulty of assessing economic trends in
foreign countries. It may also be more difficult to enforce contractual
obligations abroad than would be the case in the United States because of
differences in the legal systems. Transaction costs in foreign securities may be
higher. The Adviser will consider these and other factors before investing in
foreign securities and will not make such investments unless, in its opinion,
such investments will meet the Fund's standards and objectives.
FOREIGN CURRENCY TRANSACTIONS
The Fund may enter into foreign currency transactions to obtain the necessary
currencies to settle securities transactions. Currency transactions may be
conducted either on a spot or cash basis at prevailing rates or through forward
foreign currency exchange contracts.
The Fund may also enter into foreign currency transactions to protect Fund
assets against adverse changes in foreign currency exchange rates or exchange
control regulations. Such changes could unfavorably affect the value of Fund
assets which are denominated in foreign currencies, such as foreign securities
or funds deposited in foreign banks, as measured in U.S. dollars. Although
foreign currency exchanges may be used by the Fund to protect against a decline
in the value of one or more currencies, such efforts may also limit any
potential gain that might result from a relative increase in the value of such
currencies and might, in certain cases, result in losses to the Fund.
CURRENCY RISKS
To the extent that debt securities purchased by the Fund are denominated in
currencies other than the U.S. dollar, changes in foreign currency exchange
rates will affect the Fund's net asset value; the value of interest earned;
gains and losses realized on the sale of securities; and net investment income
and capital gain, if any, to be distributed to shareholders by the Fund. If the
value of a foreign currency rises against the U.S. dollar, the value of the
Fund's assets denominated in that currency will increase; correspondingly, if
the value of a foreign currency declines against the U.S. dollar, the value of
the Fund's assets denominated in that currency will decrease.
FORWARD FOREIGN CURRENCY
EXCHANGE CONTRACTS
A forward foreign currency exchange contract ("forward contract") is an
obligation to purchase or sell an amount of a particular currency at a specific
price and on a future date agreed upon by the parties.
Generally no commission charges or deposits are involved. At the time the Fund
enters into a forward contract, Fund assets with a value equal to the Fund's
obligation under the forward contract are segregated and are maintained until
the contract has been settled. The Fund will not enter into a forward contract
with a term of more than one year.
The Fund will generally enter into a forward contract to provide the proper
currency to settle a securities transaction at the time the transaction occurs
("trade date"). The period between trade date and settlement date will vary
between 24 hours and 30 days, depending upon local custom.
The Fund may also protect against the decline of a particular foreign currency
by entering into a forward contract to sell an amount of that currency
approximating the value of all or a portion of the Fund's assets denominated in
that currency ("hedging"). The success of this type of short-term hedging
strategy is highly uncertain due to the difficulties of predicting short-term
currency market movements and of precisely matching forward contract amounts
and the constantly changing value of the securities involved. Although the
adviser will consider the likelihood of changes in currency values when making
investment decisions, the adviser believes that it is important to be able to
enter into forward contracts when it believes the interests of the Fund will be
served. The Fund will not enter into forward contracts for hedging purposes in
a particular currency in an amount in excess of the Fund's assets denominated
in that currency. The Fund will not invest more than 20% of its total assets in
forward foreign currency exchange contracts.
PUT AND CALL OPTIONS
The Fund may purchase put options on its portfolio securities. These options
will be used as a hedge to attempt to protect securities which the Fund holds
against decreases in value. The Fund may also write call options on all or any
portion of its portfolio to generate income for the Fund. The Fund will write
call options on securities either held in its portfolio or for which it has the
right to obtain without payment of further consideration or for which it has
segregated cash in the amount of any additional consideration.
The Fund may generally purchase and write over-the-counter options on portfolio
securities in negotiated transactions with the buyers or writers of the options
since options on the portfolio securities held by the Fund are not traded on an
exchange. The Fund purchases and writes options only with investment dealers and
other financial institutions (such as commercial banks or savings associations)
deemed creditworthy by the Adviser.
Over-the-counter options are two party contracts with price and terms negotiated
between buyer and seller. In contrast, exchange-traded options are third party
contracts with standardized strike prices and expiration dates and are purchased
from a clearing corporation. Exchange-traded options have a continuous liquid
market while over-the-counter options may not. The Fund will not buy call
options or write put options without further notification to shareholders.
FINANCIAL FUTURES AND
OPTIONS ON FUTURES
The Fund may purchase and sell financial futures contracts to hedge all or a
portion of its portfolio against changes in interest rates. Financial futures
contracts call for the delivery of particular debt instruments at a certain time
in the future. The seller of the contract agrees to make delivery of the type of
instrument called for in the contract and the buyer agrees to take delivery of
the instrument at the specified future time.
The Fund may also write call options and purchase put options on financial
futures contracts as a hedge to attempt to protect securities in its portfolio
against decreases in value. When the Fund writes a call option on a futures
contract, it is undertaking the obligation of selling a futures contract at a
fixed price at any time during a specified period if the option is exercised.
Conversely, as purchaser of a put option on a futures contract, the Fund is
entitled (but not obligated) to sell a futures contract at the fixed price
during the life of the option.
The Fund may not purchase or sell futures contracts or related options if
immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets. When the Fund purchases futures
contracts, an amount of cash and U.S. Treasury securities, equal to the
underlying commodity value of the futures contracts (less any related margin
deposits), will be deposited in a segregated
account with the Fund's custodian (or the broker, if legally permitted) to
collateralize the position and thereby insure that the use of such futures
contract is unleveraged.
RISKS
When the Fund uses financial futures and options on financial futures as hedging
devices, much depends on the ability of the Adviser to predict market conditions
based upon certain economic analysis and factors. There is a risk that the
prices of the securities subject to the futures contracts may not correlate
perfectly with the prices of the securities in the Fund's portfolio. This may
cause the futures contract and any related options to react differently than the
portfolio securities to market changes. In addition, the Adviser could be
incorrect in its expectations about the direction or extent of market factors
such as interest rate movements. In these events, the Fund may lose money on the
futures contract or option.
It is not certain that a secondary market for positions in futures contracts or
for options will exist at all times. Although the Adviser will consider
liquidity before entering into options transactions, there is no assurance that
a liquid secondary market on an exchange or otherwise will exist for any
particular futures contract or option at any particular time. The Fund's ability
to establish and close out futures and options positions depends on this
secondary market.
RESTRICTED AND ILLIQUID SECURITIES
The Fund may invest up to 10% of its net assets in restricted securities. This
restriction is not applicable to commercial paper issued under Section 4(2) of
the Securities Act of 1933, as amended. Restricted securities are any securities
in which the Fund may otherwise invest pursuant to its investment objectives and
policies but which are subject to restriction on resale under federal securities
law. The Fund will limit investments in illiquid securities, including certain
restricted securities determined by the Trustees not to be liquid,
non-negotiable time deposits and repurchase agreements providing for settlement
in more than seven days after notice, to 15% of its net assets.
The Fund may invest in commercial paper issued in reliance on the exemption from
registration afforded by Section 4(2) of the Securities Act of 1933, as amended.
Section 4(2) commercial paper is restricted as to disposition under federal
securities law and is generally sold to institutional investors, such as the
Fund, who agree that they are purchasing the paper for investment purposes and
not with a view to public distribution. Any resale by the purchaser must be in
an exempt transaction. Section 4(2) commercial paper is normally resold to other
institutional investors like the Fund through or with the assistance of the
issuer or investment dealers who make a market in Section 4(2) commercial paper,
thus providing liquidity.
TEMPORARY INVESTMENTS
The Fund may also invest temporarily, in amounts of 35% or less of the Fund's
assets, in cash and cash items during times of unusual market conditions to
maintain liquidity. Cash items may include the following short-term obligations:
commercial paper and Europaper (dollar denominated commercial paper issued
outside the United States);
instruments of domestic and foreign banks and savings associations (such as
certificates of deposit, demand and time deposits, savings shares, and bankers'
acceptances);
obligations of the U.S. government or its agencies or instrumentalities;
repurchase agreements; and
other short-term instruments.
REPURCHASE AGREEMENTS
Repurchase agreements are arrangements in which banks, broker/dealers, and other
recognized financial institutions sell U.S. government or other securities to
the Fund and agree at the time of sale to repurchase them at a mutually agreed
upon time and price.
WHEN-ISSUED AND DELAYED
DELIVERY TRANSACTIONS
The Fund may purchase securities on a when-issued or delayed delivery basis.
These transactions are arrangements in which the Fund purchases securities with
payment and delivery scheduled for a future time. The seller's failure to
complete these transactions may cause the Fund to miss a price or yield
considered to be advantageous. Settlement dates may be a month or more after
entering into these transactions, and the market values of the securities
purchased may vary from the purchase prices. Accordingly, the Fund may pay
more/less than the market value of the securities on the settlement date.
The Fund may dispose of a commitment prior to settlement, if the Adviser deems
it appropriate to do so. In addition, the Fund may enter in transactions to sell
its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Fund may realize short-term profits or losses upon the sale of such
commitments.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, the Fund may lend portfolio securities,
on a short-term or a long-term basis, up to one-third of the value of its total
assets to broker/dealers, banks, or other institutional borrowers of securities.
The Fund will only enter into loan arrangements with broker/dealers, banks, or
other institutions which the Adviser has determined are creditworthy under
guidelines established by the Trustees and will receive collateral in the form
of cash or U.S. government securities equal to at least 100% of the value of the
securities loaned.
There is the risk that when lending portfolio securities, the securities may not
be available to the Fund on a timely basis and the Fund may, therefore, lose the
opportunity to sell the securities at a desirable price. In addition, in the
event that a borrower of securities would file for bankruptcy or become
insolvent, disposition of the securities may be delayed pending court action.
DERIVATIVE CONTRACTS
AND SECURITIES
The term "derivative" has traditionally been applied to certain contracts
(including futures, forward, option, and swap contracts) that "derive" their
value from changes in the value of an underlying security, currency, commodity,
or index. Certain types of securities that incorporate the performance
characteristics of these contracts are also referred to as "derivatives." The
term has also been applied to securities "derived" from the cash flows from
underlying securities, mortgages or other obligations.
Derivative contracts and securities can be used to reduce or increase the
volatility of an investment portfolio's total performance. While the response of
certain derivative contracts and securities to market changes may differ from
traditional investments, such as stock and bonds, derivatives do not necessarily
present greater market risks than traditional investments. The Fund will only
use derivative contracts for the purposes disclosed in the applicable prospectus
sections above. To the extent that the Fund invests in securities that could be
characterized as derivatives, it will only do so in a manner consistent with its
investment objectives, policies, and limitations.
PORTFOLIO TURNOVER
Securities in the Fund's portfolio will be sold whenever the Adviser believes it
is appropriate to do so in light of the Fund's investment objective, without
regard to the length of time a particular security may have been held. The
Adviser to the Fund does not anticipate that portfolio turnover will result in
adverse tax consequences. Any such trading will increase the Fund's portfolio
turnover rate and transaction costs.
INVESTMENT LIMITATIONS
The Fund will not:
borrow money directly or through reverse repurchase agreements (arrangements in
which the Fund sells a portfolio instrument for a percentage of its cash value
with an agreement to buy it back on a set date) or pledge securities except
that the Fund may borrow up to one-third of the value of its total assets and
pledge up to 10% of the value of those assets to secure such borrowings;
sell securities short except, under strict limitations, it may maintain open
short positions so long as not more than 10% of the value of its net assets is
held as collateral for those positions;
lend any of its assets except portfolio securities up to one-third of the value
of its total assets;
underwrite any issue of securities, except as it may be deemed to be an
underwriter under the Securities Act of 1933, as amended, in connection with
the sale of restricted securities which the Fund may purchase pursuant to its
investment objectives, policies, and limitations; or
with respect to 75% of its total assets, invest more than 5% of the value of
its total assets in securities of any one issuer (other than cash, cash items,
or securities issued or guaranteed by the U.S. government, its agencies, or
instrumentalities, and repurchase agreements collateralized by such securities)
or acquire more than 10% of any class of voting securities of any one issuer.
For these purposes, the Fund takes all common stock and all preferred stock of
an issuer each as a single class, regardless of priorities, series,
designations, or other differences.
The above investment limitations cannot be changed without shareholder approval.
The following limitations, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in these limitations becomes effective.
The Fund will not:
invest more than 5% of its total assets in securities of issuers that have
records of less than three years of continuous operations;
commit more than 5% of the value of its total assets to premiums on open put
option positions; or
invest more than 5% of its total assets in warrants.
- -------------------------------------------------------------------------------
NET ASSET VALUE
The Fund's net asset value per share fluctuates. The net asset value for Shares
is determined by adding the interest of each class of Shares in the market value
of all securities and other assets of the Fund, subtracting the interest of each
class of Shares in the liabilities of the Fund and those attributable to each
class of Shares, and dividing the remainder by the total number of each class of
Shares outstanding. The net asset value for each class of Shares may differ due
to the variance in daily net income realized by each class. Such variance will
reflect only accrued net income to which the shareholders of a particular class
are entitled.
The net asset value of each class of Shares of the Fund is determined as of the
close of trading (normally 4:00 p.m., Eastern time) on the New York Stock
Exchange, Monday through Friday, except on: (i) days on which there are not
sufficient changes in the value of the Fund's portfolio securities that its net
asset value might be materially affected; (ii) days during which no Shares are
tendered for redemption and no orders to purchase Shares are received; or (iii)
the following holidays: New Year's Day, President's Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
- -------------------------------------------------------------------------------
INVESTING IN THE FUND
This prospectus offers investors three classes of Shares that carry sales loads
and contingent deferred sales charges in different forms and amounts and which
bear different levels of expenses.
CLASS A SHARES
An investor who purchases Class A Shares pays a maximum sales load of 5.50% at
the time of purchase. As a result, Class A Shares are not subject to any charges
when they are redeemed (except for special programs offered under "Purchases
with Proceeds From Redemptions of Unaffiliated Investment Companies"). Certain
purchases of Class A Shares are not subject to a sales load. See "Investing in
Class A Shares." Certain purchases of Class A Shares qualify for reduced sales
loads. See "Reducing or Eliminating the Sales Load." Class A Shares have no
conversion feature.
CLASS B SHARES
Class B Shares are sold without an initial sales load, but are subject to a
contingent deferred sales charge of up to 5.50% if redeemed within six full
years following purchase. Class B Shares also bear a higher 12b-1 fee than Class
A Shares. Class B Shares will automatically convert into Class A Shares, based
on relative net asset value, on or around the fifteenth of the month eight full
years after the purchase date. Class B Shares provide an investor the benefit of
putting all of the investor's dollars to work from the time the investment is
made, but (until conversion) will have a higher expense ratio and pay lower
dividends than Class A Shares due to the higher 12b-1 fee.
CLASS C SHARES
Class C Shares are sold without an initial sales load, but are subject to a
1.00% contingent deferred sales charge on assets redeemed within the first 12
months following purchase. Class C Shares provide an investor the benefit of
putting all of the investor's dollars to work from the time the investment is
made, but will have a higher expense ratio and pay lower dividends than Class A
Shares due to the higher 12b-1 fee. Class C Shares have no conversion feature.
- -------------------------------------------------------------------------------
HOW TO PURCHASE SHARES
Shares of the Fund are sold on days on which the New York Stock Exchange is
open. Shares of the Fund may be purchased, as described below, either through a
financial institution (such as a bank or broker/dealer which has a sales
agreement with the distributor) or by wire or by check directly to the Fund,
with a minimum initial investment of $500 for Class A Shares and $1,500 for
Class B Shares and Class C Shares. Additional investments can be made for as
little as $100. The minimum initial and subsequent investment for retirement
plans is only $50. (Financial institutions may impose different minimum
investment requirements on their customers.)
In connection with any sale, Federated Securities Corp. may, from time to time,
offer certain items of nominal value to any shareholder or investor. The Fund
reserves the right to reject any purchase request. An account must be
established at a financial institution or by completing, signing, and returning
the new account form available from the Fund before Shares can be purchased.
INVESTING IN CLASS A SHARES
Class A Shares are sold at their net asset value next determined after an order
is received, plus a sales load as follows:
<TABLE>
<CAPTION>
SALES LOAD AS DEALER
SALES LOAD AS A PERCENTAGE CONCESSION
A PERCENTAGE OF NET AS A PERCENTAGE
AMOUNT OF OF PUBLIC AMOUNT OF PUBLIC
TRANSACTION OFFERING PRICE INVESTED OFFERING PRICE
<S> <C> <C> <C>
Less than
$50,000 5.50% 5.82% 5.00%
$50,000 but
less than
$100,000 4.50% 4.71% 4.00%
$100,000 but
less than
$250,000 3.75% 3.90% 3.25%
$250,000 but
less than
$500,000 2.50% 2.56% 2.25%
$500,000 but
less than
$1 million 2.00% 2.04% 1.80%
$1 million
or
greater 0.00% 0.00% 0.25%*
</TABLE>
*See sub-section entitled "DEALER CONCESSION."
No sales load is imposed for Class A Shares purchased through bank trust
departments, investment advisers registered under the Investment Advisers Act of
1940, as amended, retirement plans where the third party administrator has
entered into certain arrangements with Federated Securities Corp. or its
affiliates, to "wrap accounts" or similar programs for the benefit of clients of
financial institutions under which clients pay fees to such financial
institutions, or to shareholders designated as Liberty Life Members. However,
investors who purchase Shares through a trust department, investment adviser,
wrap account, or retirement plan may be charged an additional service fee by
that institution. In addition, shareholders who received Class A Shares through
the exchange of interests in Federated Exchange Fund, Ltd. through the tax-free
reorganization of the partnership may purchase Class A Shares without the
imposition of a sales charge.
DEALER CONCESSION
For sales of Class A Shares, a dealer will normally receive up to 90% of the
applicable sales load. Any portion of the sales load which is not paid to a
dealer will be retained by the distributor. However, the distributor, may offer
to pay dealers up to 100% of the sales load retained by it. Such payments may
take the form of cash or promotional incentives, such as reimbursement of
certain expenses of qualified employees and their spouses to attend
informational meetings about the Fund or other special events at
recreational-type facilities, or items of material value. In some instances,
these incentives will be made available only to dealers whose employees have
sold or may sell a significant amount of Shares. On purchases of $1 million or
more, the investor pays no sales load; however, the distributor will make twelve
monthly payments to the dealer totaling 0.25% of the public offering price over
the first year following the purchase. Such payments are based on the original
purchase price of Shares outstanding at each month end.
The sales load for Shares sold other than through registered broker/dealers will
be retained by Federated Securities Corp. Federated Securities Corp. may pay
fees to banks out of the sales load in exchange for sales and/or administrative
services performed on behalf of the bank's customers in connection with the
initiation of customer accounts and purchases of Shares.
REDUCING OR ELIMINATING
THE SALES LOAD
The sales load can be reduced or eliminated on the purchase of Class A Shares
through:
quantity discounts and accumulated purchases;
concurrent purchases;
signing a 13-month letter of intent;
using the reinvestment privilege; or
purchases with proceeds from redemptions of unaffiliated investment company
shares.
QUANTITY DISCOUNTS AND
ACCUMULATED PURCHASES
As shown in the table above, larger purchases reduce the sales load paid. The
Fund will combine purchases of Class A Shares made on the same day by the
investor, the investor's spouse, and the investor's children under age 21 when
it calculates the sales load. In addition, the sales load, if applicable, is
reduced for purchases made at one time by a trustee or fiduciary for a single
trust estate or a single fiduciary account.
If an additional purchase of Class A Shares is made, the Fund will consider the
previous purchases still invested in the Fund. For example, if a shareholder
already owns Class A Shares having a current value at the public offering price
of $30,000 and he purchases $20,000 more at the current public offering price,
the sales load on the additional purchase according to the schedule now in
effect would be 4.50%, not 5.50%.
To receive the sales load reduction, Federated Securities Corp. must be notified
by the shareholder in writing or by his financial institution at the time the
purchase is made that Class A Shares are already owned or that purchases are
being combined. The Fund will reduce the sales load after it confirms the
purchases.
CONCURRENT PURCHASES
For purposes of qualifying for a sales load reduction, a shareholder has the
privilege of combining concurrent purchases of two or more funds in the Liberty
Family of Funds, the purchase price of which includes a sales load. For example,
if a shareholder concurrently invested $30,000 in one of the other funds in the
Liberty Family of Funds with a sales load, and $20,000 in this Fund, the sales
load would be reduced.
To receive this sales load reduction, Federated Securities Corp. must be
notified by the shareholder in writing or by his financial institution at the
time the concurrent purchases are made. The Fund will reduce the sales load
after it confirms the purchases.
LETTER OF INTENT
If a shareholder intends to purchase at least $50,000 of shares of the funds in
the Liberty Family of Funds (excluding money market funds) over the next 13
months, the sales load may be reduced by signing a letter of intent to that
effect. This letter of intent includes a provision for a sales load adjustment
depending on the amount actually purchased within the 13-month period and a
provision for the custodian to hold up to 5.50% of the total amount intended to
be purchased in escrow (in shares) until such purchase is completed.
The Shares held in escrow in the shareholder's account will be released upon
fulfillment of the letter of intent or the end of the 13-month period, whichever
comes first. If the amount specified in the letter of intent is not purchased,
an appropriate number of escrowed Shares may be redeemed in order to realize the
difference in the sales load.
While this letter of intent will not obligate the shareholder to purchase
Shares, each purchase during the period will be at the sales load applicable to
the total amount intended to be purchased. At the time a letter of intent is
established, current balances in accounts in any Class A Shares of any fund in
the Liberty Family of Funds, excluding money market accounts, will be aggregated
to provide a purchase credit towards fulfillment of the letter of intent. Prior
trade prices will not be adjusted.
REINVESTMENT PRIVILEGE
If Class A Shares in the Fund have been redeemed, the shareholder has the
privilege, within 120 days to reinvest the redemption proceeds at the
next-determined net asset value without any sales load. Federated Securities
Corp. must be notified by the shareholder in writing or by his financial
institution of the reinvestment in order to eliminate a sales load. If the
shareholder redeems his Class A Shares in the Fund, there may be tax
consequences.
PURCHASES WITH PROCEEDS FROM
REDEMPTIONS OF UNAFFILIATED
INVESTMENT COMPANIES
Investors may purchase Class A Shares at net asset value, without a sales load,
with the proceeds from the redemption of shares of an unaffiliated investment
company that were purchased or sold with a sales load or commission and were not
distributed by Federated Securities Corp. The purchase must be made within 60
days of the redemption, and Federated Securities Corp. must be notified by the
investor in writing, or by his financial institution, at the time the purchase
is made. From time to time, the Fund may offer dealers a payment of .50 of 1.00%
for Shares purchased under this program. If Shares are purchased in this manner,
Fund purchases will be subject to a contingent deferred sales charge for one
year from the date of purchase. Shareholders will be notified prior to the
implementation of any special offering, as described above.
INVESTING IN CLASS B SHARES
Class B Shares are sold at their net asset value next determined after an order
is received. While Class B Shares are sold without an initial sales load, under
certain circumstances described under "Contingent Deferred Sales Charge--Class B
Shares," a contingent deferred sales charge may be applied by the distributor at
the time Class B Shares are redeemed.
CONVERSION OF CLASS B SHARES
Class B Shares will automatically convert into Class A Shares on or around the
end of the month eight full years after the purchase date, except as noted
below, and will no longer be subject to a distribution services fee (see
"Distribution of Shares"). Such conversion will be on the basis of the relative
net asset values per share, without the imposition of any sales load, fee or
other charge. Class B Shares acquired by exchange from Class B Shares of another
fund in the Liberty Family of Funds will convert into Class A Shares based on
the time of the initial purchase. For purposes of conversion to Class A Shares,
Shares purchased through the reinvestment of dividends and distributions paid on
Class B Shares will be considered to be held in a separate sub-account. Each
time any Class B Shares in the shareholder's account (other than those in the
sub-account) convert to Class A Shares, an equal pro rata portion of the Class B
Shares in the sub-account will also convert to Class A Shares. The conversion of
Class B Shares to Class A Shares is subject to the continuing availability of a
ruling from the Internal Revenue Service or an opinion of counsel that such
conversions will not constitute taxable events for federal tax purposes. There
can be no assurance that such ruling or opinion will be available, and the
conversion of Class B Shares to Class A Shares will not occur if such ruling or
opinion is not available. In such event, Class B Shares would continue to be
subject to higher expenses than Class A Shares for an indefinite period.
Orders for $250,000 or more of Class B Shares will automatically be invested in
Class A Shares.
INVESTING IN CLASS C SHARES
Class C Shares are sold at net asset value next determined after an order is
received. A contingent deferred sales charge of 1.00% will be charged on assets
redeemed within the first full 12 months following purchase. For a complete
description of this charge see, "Contingent Deferred Sales Charge--Class C
Shares."
PURCHASING SHARES THROUGH A
FINANCIAL INSTITUTION
An investor may call his financial institution (such as a bank or an investment
dealer) to place an order to purchase Shares. Orders placed through a financial
institution are considered received when the Fund is notified of the purchase
order or when payment is converted into federal funds. Purchase orders through a
registered broker/dealer must be received by the broker before 4:00 p.m.
(Eastern time) and must be transmitted by the broker to the Fund before 5:00
p.m. (Eastern time) in order for Shares to be purchased at that day's price.
Purchase orders through other financial institutions must be received by the
financial institution and transmitted to the Fund before 4:00 p.m. (Eastern
time) in order for Shares to be purchased at that day's price. It is the
financial institution's responsibility to transmit orders promptly. Financial
institutions may charge additional fees for their services.
The financial institution which maintains investor accounts in Class B Shares or
Class C Shares with the Fund must do so on a fully disclosed basis unless it
accounts for share ownership periods used in calculating the contingent deferred
sales charge (see "Contingent Deferred Sales Charge"). In addition, advance
payments made to financial institutions may be subject to reclaim by the
distributor for accounts transferred to financial institutions which do not
maintain investor accounts on a fully disclosed basis and do not account for
share ownership periods.
PURCHASING SHARES BY WIRE
Once an account has been established, Shares may be purchased by wire by calling
the Fund. All information needed will be taken over the telephone, and the order
is considered received immediately. Payment for purchases which are subject to a
sales load must be received within three business days following the order.
Payment for purchases on which no sales load is imposed must be received before
3:00 p.m. (Eastern time) on the next business day following the order. Federal
funds should be wired as follows: State Street Bank and Trust Company, Boston,
Massachusetts; Attention: EDGEWIRE; For Credit to: (Fund Name) (Fund Class);
(Fund Number); Account Number; Trade Date and Order Number; Group Number or
Dealer Number; Nominee or Institution Name; and ABA Number 011000028. Shares
cannot be purchased by wire on holidays when wire transfers are restricted.
PURCHASING SHARES BY CHECK
Once an account has been established, Shares may be purchased by sending a check
made payable to the name of the Fund (designate class of Shares and account
number) to: Federated Services Company, P.O. Box 8600, Boston, Massachusetts
02266-8600. Orders by mail are considered received when payment by check is
converted into federal funds (normally the business day after the check is
received).
SPECIAL PURCHASE FEATURES
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their investment on
a regular basis in a minimum amount of $100. Under this program, funds may be
automatically withdrawn periodically from the shareholder's checking account at
an Automated Clearing House ("ACH") member and invested in the Fund at the net
asset value next determined after an order is received by the Fund, plus the
sales load, if applicable. Shareholders should contact their financial
institution or the Fund to participate in this program.
RETIREMENT PLANS
Fund Shares can be purchased as an investment for retirement plans or IRA
accounts. For further details, contact the Fund and consult a tax adviser.
- -------------------------------------------------------------------------------
EXCHANGE PRIVILEGE
CLASS A SHARES
Class A shareholders may exchange all or some of their Shares for Class A Shares
of other funds in the Liberty Family of Funds at net asset value. Shareholders
of Class A Shares may also exchange into certain other Federated Funds (as
defined in the "Synopsis" of this prospectus) which are sold with a sales load
different from that of the Fund's or with no sales load, and which are advised
by subsidiaries or affiliates of Federated Investors. These exchanges are made
at net asset value plus the difference between the Fund's sales load already
paid and any sales load of the Federated Fund into which the Shares are to be
exchanged, if higher. Neither the Fund nor any of the funds in the Liberty
Family of Funds imposes any additional fees on exchanges. Shareholders in
certain other Federated Funds may exchange their shares in the Federated Funds
for Class A Shares.
CLASS B SHARES
Class B shareholders may exchange all or some of their Shares for Class B Shares
of other funds in the Liberty Family of Funds. (Not all funds in the Liberty
Family of Funds currently offer Class B Shares. Contact your financial
institution regarding the availability of other Class B Shares in the Liberty
Family of Funds). Exchanges are made at net asset value without being assessed a
contingent deferred sales charge on the exchanged Shares. To the extent that a
shareholder exchanges Shares for Class B Shares in other funds in the Liberty
Family of Funds, the time for which the exchanged-for Shares are to be held will
be added to the time for which exchanged-from Shares were held for purposes of
satisfying the applicable holding period. For more information, see "Contingent
Deferred Sales Charge."
CLASS C SHARES
Class C shareholders may exchange all or some of their Shares for Class C Shares
in other funds in the Liberty Family of Funds at net asset value without a
contingent deferred sales charge. (Not all funds in the Liberty Family of Funds
currently offer Class C Shares. Contact your financial institution regarding the
availability of other Class C Shares in the Liberty Family of Funds.) To the
extent that a shareholder exchanges Shares for Class C Shares in other funds in
the Liberty Family of Funds, the time for which the exchanged-for Shares are to
be held will be added to the time for which exchanged-from Shares were held for
purposes of satisfying the applicable holding period. For more information, see
"Contingent Deferred Sales Charge."
REQUIREMENTS FOR EXCHANGE
Shareholders using this privilege must exchange Shares having a net asset value
equal to the minimum investment requirements of the fund into which the exchange
is being made. Before the exchange, the shareholder must receive a prospectus of
the fund for which the exchange is being made.
This privilege is available to shareholders resident in any state in which the
Shares being acquired may be sold. Upon receipt of proper instructions and
required supporting documents, Shares submitted for exchange are redeemed and
proceeds invested in the same class of Shares of the other fund. The exchange
privilege may be modified or terminated at any time. Shareholders will be
notified of the modification or termination of the exchange privilege.
Further information on the exchange privilege and prospectuses for the Liberty
Family of Funds are available by contacting the Fund.
TAX CONSEQUENCES
An exercise of the exchange privilege is treated as a sale for federal income
tax purposes. Depending upon the circumstances, a capital gain or loss may be
realized.
MAKING AN EXCHANGE
Instructions for exchanges for the Liberty Family of Funds or certain Federated
Funds (where applicable) may be given in writing or by telephone. Written
instructions may require a signature guarantee. Shareholders of the Fund may
have difficulty in making exchanges by telephone through brokers and other
financial institutions during times of drastic economic or market changes. If a
shareholder cannot contact his broker or financial institution by telephone, it
is recommended that an exchange request be made in writing and sent by overnight
mail to Federated Services Company, 500 Victory Road--2nd Floor, North Quincy,
Massachusetts 02171.
TELEPHONE INSTRUCTIONS
Telephone instructions made by the investor may be carried out only if a
telephone authorization form completed by the investor is on file with the Fund.
If the instructions are given by a broker, a telephone authorization form
completed by the broker must be on file with the Fund. If reasonable procedures
are not followed by the Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions. Shares may be exchanged between two funds by
telephone only if the two funds have identical shareholder registrations.
Any Shares held in certificate form cannot be exchanged by telephone but must be
forwarded to Federated Services Company, P.O. Box 8000, Boston, Massachusetts
02266-8000 and deposited to the shareholder's account before being exchanged.
Telephone exchange instructions are recorded and will be binding upon the
shareholder. Such instructions will be processed as of 4:00 p.m. (Eastern time)
and must be received by the Fund before that time for Shares to be
exchanged the same day. Shareholders exchanging into a Fund will begin receiving
dividends the following business day. This privilege may be modified or
terminated at any time.
- -------------------------------------------------------------------------------
HOW TO REDEEM SHARES
Shares are redeemed at their net asset value, less any applicable contingent
deferred sales charge, next determined after the Fund receives the redemption
request. Redemptions will be made on days on which the Fund computes its net
asset value. Redemption requests must be received in proper form and can be made
as described below.
REDEEMING SHARES THROUGH
A FINANCIAL INSTITUTION
Shares of the Fund may be redeemed by calling your financial institution to
request the redemption. Shares will be redeemed at the net asset value, less any
applicable contingent deferred sales charge next determined after the Fund
receives the redemption request from the financial institution. Redemption
requests through a registered broker/dealer must be received by the broker
before 4:00 p.m. (Eastern time) and must be transmitted by the broker to the
Fund before 5:00 p.m. (Eastern time) in order for Shares to be redeemed at that
day's net asset value. Redemption requests through other financial institutions
(such as banks) must be received by the financial institution and transmitted to
the Fund before 4:00 p.m. (Eastern time) in order for Shares to be redeemed at
that day's net asset value. The financial institution is responsible for
promptly submitting redemption requests and providing proper written redemption
instructions. Customary fees and commissions may be charged by the financial
institution for this service.
REDEEMING SHARES BY TELEPHONE
Shares may be redeemed in any amount by calling the Fund provided the Fund has a
properly completed authorization form. These forms can be obtained from
Federated Securities Corp.
Proceeds will be mailed in the form of a check, to the shareholder's address of
record or by wire transfer to the shareholder's account at a domestic commercial
bank that is a member of the Federal Reserve System. The minimum amount for a
wire transfer is $1,000. Proceeds from redeemed Shares purchased by check or
through ACH will not be wired until that method of payment has cleared.
Telephone instructions will be recorded. If reasonable procedures are not
followed by the Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions. In the event of drastic economic or market
changes, a shareholder may experience difficulty in redeeming by telephone. If
this occurs, "Redeeming Shares By Mail" should be considered. If at any time the
Fund shall determine it necessary to terminate or modify the telephone
redemption privilege, shareholders would be promptly notified.
REDEEMING SHARES BY MAIL
Shares may be redeemed in any amount by mailing a written request to: Federated
Services Company, Fund Name, Fund Class, P.O. Box 8600, Boston, Massachusetts
02266-8600.
The written request should state: Fund Name and the Class designation; the
account name as registered with the Fund; the account number; and the number of
Shares to be redeemed or the dollar amount requested. All owners of the account
must sign the request exactly as the Shares are registered. It is recommended
that any share certificates be sent by insured mail with the written request to:
Federated Services Company, 500 Victory Road-2nd Floor, North Quincy,
Massachusetts.
Shareholders requesting a redemption of any amount to be sent to an address
other than that on record with the Fund, or a redemption payable other than to
the shareholder of record, must have their signatures guaranteed by a bank which
is a member of the Federal Deposit Insurance Corporation, a trust company, a
member firm of a domestic stock exchange, or any other "eligible guarantor
institution," as defined by the Securities and Exchange Act of 1934, as amended.
The Fund does not accept signatures guaranteed by a notary public.
The Fund and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Fund may elect in the future to
limit eligible signature guarantors to institutions that are members of a
signature guarantee program. The Fund and its transfer agent reserve the right
to amend these standards at any time without notice.
Normally, a check for the proceeds is mailed within one business day, but in no
event more than seven days, after receipt of a proper written redemption
request.
SPECIAL REDEMPTION FEATURES
SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders who desire to receive payments of a predetermined amount not less
than $100 may take advantage of the Systematic Withdrawal Program. Under this
program, Shares are redeemed to provide for periodic withdrawal payments in an
amount directed by the shareholder.
Depending upon the amount of the withdrawal payments, the amount of dividends
paid and capital gains distributions with respect to Shares, and the fluctuation
of the net asset value of Shares redeemed under this program, redemptions may
reduce, and eventually deplete, the shareholder's investment in the Fund. For
this reason, payments under this program should not be considered as yield or
income on the shareholder's investment in the Fund. To be eligible to
participate in this program, a shareholder must have an account value of at
least $10,000. A shareholder may apply for
participation in this program through his financial institution. Due to the fact
that Class A Shares are sold with a sales load, it is not advisable for
shareholders to continue to purchase Class A Shares while participating in this
program. A contingent deferred sales charge may be imposed on Class B Shares and
Class C Shares.
CONTINGENT DEFERRED SALES CHARGE
Shareholders may be subject to a contingent deferred sales charge upon
redemption of their Shares under the following circumstances:
CLASS A SHARES
Class A Shares purchased under a periodic special offering with the proceeds of
a redemption of Shares of an unaffiliated investment company purchased or
redeemed with a sales load and not distributed by Federated Securities Corp. may
be charged a contingent deferred sales charge of .50 of 1.00% for redemptions
made within one full year of purchase. Any applicable contingent deferred sales
charge will be imposed on the lesser of the net asset value of the redeemed
Shares at the time of purchase or the net asset value of the redeemed Shares at
the time of redemption.
CLASS B SHARES
Shareholders redeeming Class B Shares from their Fund accounts within six full
years of the purchase date of those Shares will be charged a contingent deferred
sales charge by the Fund's distributor. Any applicable contingent deferred sales
charge will be imposed on the lesser of the net asset value of the redeemed
Shares at the time of purchase or the net asset value of the redeemed Shares at
the time of redemption in accordance with the following schedule:
<TABLE>
<CAPTION>
CONTINGENT
]YEAR OF REDEMPTION DEFERRED
AFTER PURCHASE SALES CHARGE
<S> <C>
First 5.50%
Second 4.75%
Third 4.00%
Fourth 3.00%
Fifth 2.00%
Sixth 1.00%
Seventh and thereafter 0.00%
</TABLE>
CLASS C SHARES
Shareholders redeeming Class C Shares from their Fund accounts within one full
year of the purchase date of those Shares will be charged a contingent deferred
sales charge by the Fund's distributor of 1.00%. Any applicable contingent
deferred sales charge will be imposed on the lesser of the net asset value of
the redeemed Shares at the time of purchase or the net asset value of the
redeemed Shares at the time of redemption.
CLASS A SHARES, CLASS B SHARES,
AND CLASS C SHARES
The contingent deferred sales charge will be deducted from the redemption
proceeds otherwise payable to the shareholder and will be retained by the
distributor. The contingent deferred sales charge will not be imposed with
respect to: (1) Shares acquired through the reinvestment of dividends or
distributions of long-term capital gains; and (2) Shares held for more than six
full years from the date of purchase with respect to Class B Shares and one
full year from the date of purchase with respect to Class C Shares and
applicable Class A Shares. Redemptions will be processed in a manner intended
to maximize the amount of redemption which will not be subject to a contingent
deferred sales charge. In computing the amount of the applicable contingent
deferred sales charge, redemptions are deemed to have occurred in the following
order: (1) Shares acquired through the reinvestment of dividends and long-term
capital gains; (2) Shares held for more than six full years from the date of
purchase with respect to Class B Shares and one full year from the date of
purchase with respect to Class C Shares and applicable Class A Shares; (3)
Shares held for fewer than six years with respect to Class B Shares and one
full year from the date of purchase with respect to Class C Shares and
applicable Class A Shares on a first-in, first-out basis. A contingent deferred
sales charge is not assessed in connection with an exchange of Fund Shares for
Shares of other funds in the Liberty Family of Funds in the same class (see
"Exchange Privilege"). Any contingent deferred sales charge imposed at the time
the exchanged for Shares are redeemed is calculated as if the shareholder had
held the Shares from the date on which he became a shareholder of the
exchanged-from Shares. Moreover, the contingent deferred sales charge will be
eliminated with respect to certain redemptions (see "Elimination of Contingent
Deferred Sales Charge").
ELIMINATION OF CONTINGENT
DEFERRED SALES CHARGE
A contingent deferred sales charge will not be charged in connection with
exchanges of Shares for shares within the same share class in other Liberty
Family Funds.
The contingent deferred sales charge will be eliminated with respect to the
following redemptions: (1) redemptions following the death or disability, as
defined in Section 72(m)(7) of the Internal Revenue Code of 1986, as amended, of
a shareholder; (2) redemptions representing minimum required distributions from
an Individual Retirement Account or other retirement plan to a shareholder who
has attained the age of 70-1/2; and (3) involuntary redemptions by the Fund of
Shares in shareholder accounts that do not comply with the minimum balance
requirements. No contingent deferred sales charge will be imposed on redemptions
of Shares held by Trustees, employees and sales representatives of the Fund, the
distributor, or affiliates of the Fund or distributor; employees of any
financial institution that sells Shares of the Fund pursuant to a sales
agreement with the distributor; and spouses and children under the age of 21 of
the aforementioned persons. Finally, no contingent deferred sales charge will be
imposed on the redemption of Shares originally purchased through a bank trust
department, an investment adviser registered under the Investment Advisers Act
of 1940, as amended, or retirement plans where the third party administrator has
entered into certain arrangements with Federated Securities Corp. or its
affiliates, or any other financial institution, to the extent that no payments
were advanced for purchases made through such entities. The Trustees reserve the
right to discontinue elimination of the contingent deferred sales charge.
Shareholders will be notified of such elimination. Any Shares purchased prior to
the termination of such waiver would have the contingent deferred sales charge
eliminated as provided in the Fund's prospectus at the time of the purchase of
the Shares. If a shareholder making a redemption qualifies for an elimination of
the contingent deferred sales charge, the shareholder must notify Federated
Securities Corp. or the transfer agent in writing that he is entitled to such
elimination.
- -------------------------------------------------------------------------------
ACCOUNT AND SHARE
INFORMATION
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Services Company maintains a share
account for each shareholder. Share certificates are not issued unless requested
in writing to Federated Services Company.
Detailed confirmations of each purchase and redemption are sent to each
shareholder. Confirmations are sent to report dividends paid.
DIVIDENDS
Dividends are declared and paid quarterly to all shareholders invested in the
Fund on the record date. Dividends and distributions are automatically
reinvested in additional Shares of the Fund on payment dates at the ex-dividend
date net asset value without a sales load, unless shareholders request cash
payments on the new account form or by contacting the transfer agent. All
shareholders on the record date are entitled to the dividend. If Shares are
redeemed or exchanged prior to the record date or purchased after the record
date, those Shares are not entitled to that quarter's dividend.
CAPITAL GAINS
Net long-term capital gains realized by the Fund, if any, will be distributed at
least once every twelve months.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account, except retirement plans, and pay the proceeds to
the shareholder if the account balance falls below the Class A Share required
minimum value of $500 or the required minimum value of $1,500 for Class B Shares
and Class C Shares. This requirement does not apply, however, if the balance
falls below the required minimum value because of changes in the net asset value
of the respective Share Class. Before Shares are redeemed to close an account,
the shareholder is notified in writing and allowed 30 days to purchase
additional Shares to meet the minimum requirement.
- -------------------------------------------------------------------------------
TRUST INFORMATION
MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES
The Trust is managed by a Board of Trustees. The Trustees are responsible for
managing the Trust's business affairs and for exercising all the Trust's powers
except those reserved for the shareholders. An Executive Committee of the Board
of Trustees handles the Board's responsibilities between meetings of the Board.
INVESTMENT ADVISER
Investment decisions for the Fund are made by Federated Management, the Fund's
investment adviser, subject to direction by the Trustees. The Adviser
continually conducts investment research and supervision for the Fund and is
responsible for the purchase or sale of portfolio instruments, for which it
receives an annual fee from the Fund.
ADVISORY FEES
The Adviser receives an annual investment advisory fee equal to .75 of 1% of the
Fund's average daily net assets. The fee paid by the Fund, while higher than the
advisory fees paid by other mutual funds in general, is comparable to fees paid
by other mutual funds with similar objectives and policies. The Adviser may
voluntarily waive a portion of its fee or reimburse the Fund for certain
operating expenses. The Adviser can terminate this voluntary waiver at any time
at its sole discretion. The Adviser has also undertaken to reimburse the Fund
for operating expenses in excess of limitations established by certain states.
ADVISER'S BACKGROUND
Federated Management, a Delaware business trust organized on April 11, 1989, is
a registered investment adviser under the Investment Advisers Act of 1940, as
amended. It is a subsidiary of Federated Investors. All of the Class A (voting)
shares of Federated Investors are owned by a trust, the trustees of which are
John F. Donahue, Chairman and Trustee of Federated Investors, Mr. Donahue's
wife, and Mr. Donahue's son, J. Christopher Donahue, who is President and
Trustee of Federated Investors.
Federated Management and other subsidiaries of Federated Investors serve as
investment advisers to a number of investment companies and private accounts.
Certain other subsidiaries also provide administrative services to a number of
investment companies. With over $72 billion invested across more than 260 funds
under management and/or administration by its subsidiaries, as of December 31,
1994, Federated Investors is one of the largest investment managers in the
United States. With more than 1,750 employees, Federated continues to be led by
the management who founded the company in 1955. Federated funds are presently at
work in and through 4,000 financial institutions nationwide. More than 100,000
investment professionals have selected Federated funds for their clients.
J. Thomas Madden has been the Fund's portfolio manager since the Fund inception
date. Mr. Madden joined Federated Investors in 1977, and is an Executive Vice
President of the Adviser. Mr. Madden oversees portfolio management for the
Adviser in the domestic equity, high yield, and asset allocation areas, and
contributes to the formation of investment strategy at Federated. Mr. Madden is
a Chartered Financial Analyst and received his M.B.A. in Finance from the Darden
School, University of Virginia.
Peter R. Anderson has been the Fund's portfolio manager since the Fund inception
date. Mr. Anderson joined Federated Investors in 1972 as,
and is presently, a Senior Vice President of the Fund's investment adviser. Mr.
Anderson is a Chartered Financial Analyst and received his M.B.A. in Finance
from the University of Wisconsin.
Timothy E. Keefe has been the Fund's portfolio manager since the Fund inception
date. Mr. Keefe joined Federated Investors in 1987, and has been an Assistant
Vice President of the Adviser since 1993. Mr. Keefe served as an Investment
Analyst of the Adviser from 1991 until 1993, and from 1987 until 1991, he acted
as a Marketing Representative. Mr. Keefe is a Chartered Financial Analyst and
received his M.B.A. in Business Administration from the University of
Pittsburgh.
Both the Trust and the Adviser have adopted strict codes of ethics governing the
conduct of all employees who manage the Fund and its portfolio securities. These
codes recognize that such persons owe a fiduciary duty to the Fund's
shareholders and must place the interests of shareholders ahead of the
employees' own interest. Among other things, the codes: require preclearance and
periodic reporting of personal securities transactions; prohibit personal
transactions in securities being purchased or sold, or being considered for
purchase or sale, by the Fund; prohibit purchasing securities in initial public
offerings; and prohibit taking profits on securities held for less than sixty
days. Violations of the codes are subject to review by the Board of Trustees,
and could result in severe penalties.
DISTRIBUTION OF SHARES
Federated Securities Corp. is the principal distributor for Shares of the Fund.
Federated Securities Corp. is located at Federated Investors Tower, Pittsburgh,
Pennsylvania 15222-3779. It is a Pennsylvania corporation organized on November
14, 1969, and is the principal distributor for a number of investment companies.
Federated Securities Corp. is a subsidiary of Federated Investors.
The distributor will pay dealers an amount equal to 5.5% of the net asset value
of Class B Shares purchased by their clients or customers. These payments will
be made directly by the distributor from its assets, and will not be made from
the assets of the Fund. Dealers may voluntarily waive receipt of all or any
portion of these payments. The distributor may pay a portion of the distribution
fee discussed below to financial institutions that waive all or any portion of
the advance payments.
The distributor may offer to pay financial institutions an amount equal to 1% of
the net asset value of Class C Shares purchased by their clients or customers at
the time of purchase. These payments will be made directly by the distributor
from its assets, and will not be made from assets of the Fund. Financial
institutions may elect to waive the initial payment described above; such waiver
will result in the waiver by the Fund of the otherwise applicable contingent
deferred sales charge.
DISTRIBUTION PLAN AND
SHAREHOLDER SERVICES
Under a distribution plan adopted in accordance with Investment Company Act Rule
12b-1 (the "Distribution Plan"), the distributor may be paid a fee in an amount
computed at an annual rate of up to .25% for Class A Shares and up to .75% for
Class B Shares and Class C Shares of the average daily net assets of each class
of Shares to finance any activity which is principally intended to result in the
sale of Shares subject to the Distribution Plan. The Fund does not currently
make payments to the distributor or charge a fee under the Distribution Plan for
Class A Shares, and shareholders of Class A Shares will be notified if the Fund
intends to charge a fee under the Distribution Plan. For Class A Shares and
Class C Shares, the distributor may select financial institutions such as
banks, fiduciaries, custodians for public funds, investment advisers, and
broker/dealers to provide sales services or distribution-related support
services as agents for their clients or customers. With respect to Class B
Shares, because distribution fees to be paid by the Fund to the distributor may
not exceed an annual rate of .75% of each class of Shares' average daily net
assets, it will take the distributor a number of years to recoup the expenses it
has incurred for its sales services and distribution-related services pursuant
to the Distribution Plan.
The Distribution Plan is a compensation type plan. As such, the Fund makes no
payments to the distributor except as described above. Therefore, the Fund does
not pay for unreimbursed expenses of the distributor, including amounts expended
by the distributor in excess of amounts received by it from the Fund, interest,
carrying, or other financing charges in connection with excess amounts expended,
or the distributor's overhead expenses. However, the distributor may be able to
recover such amounts or may earn a profit from future payments made by Shares
under the Distribution Plan.
In addition, the Fund has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, under which
the Fund may make payments of up to 0.25 of 1% of the average daily net asset
value of Class A Shares, Class B Shares, and Class C Shares to obtain certain
personal services for shareholders and for the maintenance of shareholder
accounts ("Shareholder Services"). Under the Shareholder Services Agreement,
Federated Shareholder Services will either perform shareholder services directly
or will select financial institutions to perform shareholder services. Financial
institutions will receive fees based upon Shares owned by their clients or
customers. The schedules of such fees and the basis upon which such fees will be
paid will be determined from time to time by the Fund and Federated Shareholder
Services.
In addition to payments made pursuant to the Distribution Plan and the
Shareholder Services Agreement, Federated Securities Corp. and Federated
Shareholder Services, from their own assets, may pay financial institutions
supplemental fees for the performance of sales services, distribution-related
support services, or shareholder services.
The Glass-Steagall Act prohibits a depository institution (such as a commercial
bank or savings association) from being an underwriter or distributor of most
securities. In the event the Glass-Steagall Act is deemed to prohibit depository
institutions from acting in the capacities described above or should Congress
relax current restrictions on depository institutions, the Trustees will
consider appropriate changes in the services.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state laws.
OTHER PAYMENTS TO
FINANCIAL INSTITUTIONS
Federated Securities Corp. will pay financial institutions, at the time of
purchase of Class A Shares, an amount equal to .50 of 1% of the net asset value
of Class A Shares purchased by their clients or customers under certain
qualified retirement plans as approved by Federated Securities Corp. (Such
payments are subject to a reclaim from the financial institution should the
assets leave the program within 12 months after purchase.)
Furthermore, with respect to Class A Shares, Class B Shares, and Class C Shares,
in addition to payments made pursuant to the Distribution
Plan and Shareholder Services Agreement, Federated Securities Corp. and
Federated Shareholder Services, from their own assets, may pay financial
institutions supplemental fees for the performance of substantial sales
services, distribution-related support services, or shareholder services. The
support may include sponsoring sales, educational and training seminars for
their employees, providing sales literature, and engineering computer software
programs that emphasize the attributes of the Fund. Such assistance will be
predicated upon the amount of Shares the financial institution sells or may
sell, and/or upon the type and nature of sales or marketing support furnished by
the financial institution. Any payments made by the distributor may be
reimbursed by the Adviser or its affiliates.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES
Federated Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services (including certain legal and financial
reporting services) necessary to operate the Fund. Federated Administrative
Services provides these at an annual rate which relates to the average aggregate
daily net assets of all Federated Funds as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE
ADMINISTRATIVE DAILY NET ASSETS
FEE OF THE FEDERATED FUNDS
<C> <S>
0.15 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.10 of 1% on the next $250 million
0.075 of 1% on assets in excess of
$750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of Shares.
Federated Administrative Services may choose voluntarily to waive a portion of
its fee.
CUSTODIAN
State Street Bank and Trust Company, P.O. Box 8600, Boston, Massachusetts
02266-8600, is custodian for the securities and cash of the Fund.
TRANSFER AGENT AND DIVIDEND
DISBURSING AGENT
Federated Services Company, P.O. Box 8600, Boston, Massachusetts 02266-8600, is
transfer agent for the Shares of the Fund, and dividend disbursing agent for the
Fund.
INDEPENDENT AUDITORS
The independent auditors for the Fund are Ernst & Young LLP, One Oxford Centre,
Pittsburgh, Pennsylvania 15219.
EXPENSES OF THE FUND AND
CLASS A SHARES, CLASS B SHARES,
AND CLASS C SHARES
Holders of Class A Shares, Class B Shares, and Class C Shares pay their
allocable portion of Trust and Fund expenses.
The Trust expenses for which holders of Class A Shares, Class B Shares, and
Class C Shares pay their allocable portion include, but are not limited to: the
cost of organizing the Trust and continuing its existence; registering the Trust
with federal and state securities authorities; Trustees fees; auditors' fees,
the cost of meetings of the Trustees; legal fees of the Trust; association
membership dues; and such non-recurring and extraordinary items as may arise
from time to time.
The Fund expenses for which holders of Class A Shares, Class B Shares, and Class
C Shares pay their allocable portion include, but are not limited to:
registering the Fund and shares of the Fund; investment advisory services; taxes
and commissions; custodian fees; insurance premiums; auditors' fees; and such
non-recurring and extraordinary items as may arise from time to time.
At present, the only expenses which are allocable specifically to Class A
Shares, Class B Shares, and Class C Shares as classes are expenses under the
Trust's Distribution Plan and fees for Shareholder Services. However, the
Trustees reserve the right to allocate certain other expenses to holders of
Class A Shares, Class B Shares, and Class C Shares as they deem appropriate (the
"Class Expenses"). In any case, the Class Expenses would be limited to:
distribution fees; transfer agent fees as identified by the transfer agent as
attributable to holders of Class A Shares, Class B Shares, or Class C Shares;
printing and postage expenses related to preparing and distributing materials
such as shareholder reports, prospectuses, and proxies to current shareholders;
registration fees paid to the Securities and Exchange Commission and to state
securities commissions; expenses related to administrative personnel and
services as required to support holders of Class A Shares, Class B Shares, or
Class C Shares; legal fees relating solely to Class A Shares, Class B Shares, or
Class C Shares; and Trustees fees incurred as a result of issues relating solely
to Class A Shares, Class B Shares, or Class C Shares.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally utilize those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. In selecting among firms
believed to meet these criteria, the Adviser may give consideration to those
firms which have sold or are selling Shares of the Fund and other funds
distributed by Federated Securities Corp. The Adviser makes decisions on
portfolio transactions and selects brokers and dealers subject to review by the
Trustees.
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SHAREHOLDER INFORMATION
VOTING RIGHTS
Each share of the Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All Shares of each Fund or
class in the Trust have equal voting rights, except that in matters affecting
only a particular Fund or class, only Shares of that Fund or class are entitled
to vote.
As a Massachusetts business trust, the Trust is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Trust's or the Fund's operation and for the election of Trustees
under certain circumstances.
Trustees may be removed by the Trustees or by shareholders at a special meeting.
A special meeting of shareholders shall be called by the Trustees upon the
written request of shareholders owning at least 10% of the Trust's outstanding
shares of all series entitled to vote.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for obligations of the Trust. To protect its
shareholders, the Trust has filed legal documents with Massachusetts that
expressly disclaim the liability of its shareholders for acts or obligations of
the Trust. These documents require notice of this disclaimer to be given in each
agreement, obligation, or instrument the Trust or its Trustees enter into or
sign.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required to use its property to protect or compensate
the shareholder. On request, the Trust will defend any claim made and pay any
judgment against a shareholder for any act or obligation of the Trust.
Therefore, financial loss resulting from liability as a shareholder will occur
only if the Trust itself cannot meet its obligations to indemnify shareholders
and pay judgments against them.
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TAX INFORMATION
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code of 1986, as amended, applicable to regulated
investment companies and to receive the special tax treatment afforded to such
companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
Trust's other portfolios will not be combined for tax purposes with those
realized by the Fund.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions, including capital gains distributions,
received. This applies whether dividends and distributions are received in cash
or as additional Shares. Distributions representing long-term capital gains, if
any, will be taxable to shareholders as long-term capital gains no matter how
long the shareholders have held the Shares. No federal income tax is due on any
dividends earned in an IRA or qualified retirement plan until distributed.
STATE AND LOCAL TAXES
In the opinion of Houston, Houston & Donnelly, counsel to the Trust, Trust
shares may be subject to personal property taxes imposed by counties,
municipalities, and school districts in Pennsylvania to the extent that the
portfolio securities in the Trust would be subject to such taxes if owned
directly by residents of those jurisdictions.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
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PERFORMANCE INFORMATION
From time to time, the Fund advertises its total return and yield for each class
of Shares.
Total return represents the change, over a specific period of time, in the value
of an investment in each class of Shares after reinvesting all income and
capital gains distributions. It is calculated by dividing that change by the
initial investment and is expressed as a percentage.
The yield of each class of Shares is calculated by dividing the net investment
income per share (as defined by the Securities and Exchange Commission) earned
by each class of Shares over a thirty-day period by the maximum offering price
per share of each class on the last day of the period. This number is then
annualized using semi-annual compounding. The yield does not necessarily reflect
income actually earned by each class of Shares and, therefore, may not correlate
to the dividends or other distributions paid to shareholders.
The performance information reflects the effect of non-recurring charges, such
as the maximum sales load or contingent deferred sales charges, which, if
excluded, would increase the total return and yield.
Total return and yield will be calculated separately for Class A Shares, Class B
Shares, and Class C Shares. Expense differences among Class A Shares, Class B
Shares, and Class C Shares may affect the performance of each class.
From time to time, advertisements for Class A Shares, Class B Shares, and Class
C Shares of the Fund may refer to ratings, rankings, and other information in
certain financial publications and/or compare the performance of Class A Shares,
Class B Shares, and Class C Shares to certain indices.
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APPENDIX
DESCRIPTION OF BOND RATINGS
A rating by a rating service represents the service's opinion as to the credit
quality of the security being rated. However, the ratings are general and are
not absolute standards of quality or guarantees as to the creditworthiness of an
issuer.
Consequently, the Adviser believes that the quality of fixed income securities
in which the Fund invests should be continuously reviewed and that individual
analysts give different weightings to the various factors involved in credit
analysis. A rating is not a recommendation to purchase, sell, or hold a
security, because it does not take into account market value or suitability for
a particular investor. When a security has received a rating from more than one
service, each rating is evaluated independently. Ratings are based on current
information furnished by the issuer or obtained by the rating services from
other sources that they consider reliable. Ratings may be changed, suspended, or
withdrawn as a result of changes in or unavailability of such information, or
for other reasons.
STANDARD AND POOR'S RATINGS
GROUP CORPORATE BOND RATINGS
AAA--Debt rated "AAA" has the highest rating assigned by Standard & Poor's
Ratings Group. Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A--Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effect of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Debt rated "BBB" is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB--Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
B--Debt rated "B" has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The 'B' rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied "BB" or "BB-"
rating.
CCC--Debt rated "CCC" has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "CCC" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"B" or "B-" rating.
CC--The rating "CC" typically is applied to debt subordinated to senior debt
that is assigned an actual or implied "CCC" debt rating.
C--The rating "C" typically is applied to debt subordinated to senior debt which
is assigned an actual or implied "CCC-" debt rating. The "C" rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI--The rating "CI" is reserved for income bonds on which no interest is being
paid.
D--Debt rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The "D" rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
MOODY'S INVESTORS SERVICE, INC.,
CORPORATE BOND RATINGS
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in AAA securities.
A--Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba--Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa--Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca--Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
FITCH INVESTORS SERVICE, INC.,
LONG-TERM DEBT RATINGS
AAA--Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated "AAA." Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated "F-1+."
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered strong, but
may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB--Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B--Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC--Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC--Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C--Bonds are in imminent default in payment of interest or principal.
DDD, DD, AND D--Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. "DDD"
represents the highest potential for recovery on these bonds, and "D" represents
the lowest potential for recovery.
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FEDERATED CAPITAL
APPRECIATION FUND
(A PORTFOLIO OF FEDERATED EQUITY FUNDS)
(FORMERLY, FEDERATED GROWTH TRUST)
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
COMBINED PROSPECTUS
An Open-End, Diversified
Management Investment Company
November 14, 1995
(Revised, November 17, 1995)
[LOGO] FEDERATED SECURITIES CORP.
---------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Cusip 314172701
Cusip 314172800
Cusip 314172883
G01489-01 (11/95)
FEDERATED CAPITAL APPRECIATION FUND
(A PORTFOLIO OF FEDERATED EQUITY FUNDS)
(FORMERLY, FEDERATED GROWTH TRUST)
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
COMBINED STATEMENT OF ADDITIONAL INFORMATION
This Combined Statement of Additional Information should be read with the
combined prospectus for Class A Shares, Class B Shares, and Class C Shares
of Federated Capital Appreciation Fund (the "Fund"), dated November 14,
------------
1995 (Revised, November 17, 1995). This Statement is not a prospectus
itself. To receive a copy of the prospectus or the Combined Statement of
-----------------------------
Additional Information, write or call the Fund.
------------
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Statement dated November 14, 1995
-----------
(Revised, November 17, 1995)
FEDERATED SECURITIES
CORP.
Distributor
A subsidiary of
FEDERATED INVESTORS
GENERAL INFORMATION ABOUT THE FUND 1 TRANSFER AGENT AND DIVIDEND DISBURSING
AGENT 14
INVESTMENT OBJECTIVES AND POLICIES 1
BROKERAGE TRANSACTIONS 15
CONVERTIBLE SECURITIES 1
TEMPORARY INVESTMENTS 1 PURCHASING SHARES 15
WARRANTS 2
DISTRIBUTION PLAN AND SHAREHOLDER
WHEN-ISSUED AND DELAYED DELIVERY
SERVICES AGREEMENT 15
TRANSACTIONS 2
CONVERSION TO FEDERAL FUNDS 15
REPURCHASE AGREEMENTS 2
PURCHASES BY SALES REPRESENTATIVES,
FUTURES AND OPTIONS TRANSACTIONS2
TRUSTEES, AND EMPLOYEES 15
FOREIGN CURRENCY TRANSACTIONS 4
EXCHANGING SECURITIES FOR FUND SHARES
RESTRICTED AND ILLIQUID SECURITIES
16
6
LENDING OF PORTFOLIO SECURITIES6
REVERSE REPURCHASE AGREEMENTS 6
PORTFOLIO TURNOVER 6
INVESTMENT LIMITATIONS 7
FEDERATED EQUITY FUNDS MANAGEMENT8
FUND OWNERSHIP 13
TRUSTEES COMPENSATION 13
TRUSTEE LIABILITY 14
INVESTMENT ADVISORY SERVICES 14
ADVISER TO THE FUND 14
ADVISORY FEES 14
OTHER RELATED SERVICES 14
ADMINISTRATIVE SERVICES 14
DETERMINING NET ASSET VALUE 16
DETERMINING MARKET VALUE OF
SECURITIES 16
REDEEMING SHARES 17
REDEMPTION IN KIND 17
EXCHANGING SECURITIES FOR SHARES17
TAX CONSEQUENCES 17
TAX STATUS 18
THE FUND'S TAX STATUS 18
SHAREHOLDERS' TAX STATUS 18
TOTAL RETURN 18
YIELD 18
CURRENT DISTRIBUTIONS 19
PERFORMANCE COMPARISONS 19
ABOUT FEDERATED INVESTORS 20
APPENDIX 22
GENERAL INFORMATION ABOUT THE FUND
Federated Capital Appreciation Fund (the "Fund") is an investment portfolio of
Federated Equity Funds (the "Trust"). The Trust was established as a business
trust under the laws of the Commonwealth of Massachusetts pursuant to a
Declaration of Trust dated April 17, 1984, under the name "Federated Growth
--------------- ----------------
Trust." The Trust later changed its name to "Federated Equity Funds." The
- ------ ------------------------------------- ---------------------- ----
Declaration of Trust permits the Trust to offer separate series and classes of
- ------------------------------------------------------------------------------
shares. The Fund was created for the purpose of soliciting the shareholders of
- -------
Federated Exchange Fund, Ltd., a California Limited Partnership, to exchange
their partnership interests for shares of beneficial interest in the Class A
Shares of the Fund. Until this transaction is completed, or until management of
the Fund determines that it will abandon its plan to acquire the assets of
Federated Exchange Fund, Ltd. in a reorganization transaction, shares of the
Fund will not be available for public investment. The Fund's address is Liberty
Center, Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779.
Shares of the Fund are offered in three classes known as Class A Shares, Class B
Shares, and Class C Shares (individually and collectively referred to as
"Shares," as the context may require). This Combined Statement of Additional
Information relates to all classes of Shares of the Fund.
INVESTMENT OBJECTIVES AND POLICIES
The Fund's investment objective is to provide capital appreciation. The
investment objective cannot be changed without approval of shareholders.
CONVERTIBLE SECURITIES
As with all fixed-income securities, various market forces influence the market
value of convertible securities, including changes in the level of interest
rates. As the level of interest rates increases, the market value of convertible
securities may decline and, conversely, as interest rates decline, the market
value of convertible securities may increase. The unique investment
characteristic of convertible securities, the right to be exchanged for the
issuer's common stock, causes the market value of convertible securities to
increase when the underlying common stock increases. However, since securities
prices fluctuate, there can be no assurance of capital appreciation, and most
convertible securities will not reflect quite as much capital appreciation as
their underlying common stocks. When the underlying common stock is experiencing
a decline, the value of the convertible security tends to decline to a level
approximating the yield-to-maturity basis of straight nonconvertible debt of
similar quality, often called "investment value," and may not experience the
same decline as the underlying common stock.
Many convertible securities sell at a premium over their conversion values
(i.e., the number of shares of common stock to be received upon conversion
multiplied by the current market price of the stock). This premium represents
the price investors are willing to pay for the privilege of purchasing a fixed-
income security with a possibility of capital appreciation due to the conversion
privilege. If this appreciation potential is not realized, the premium may not
be recovered.
TEMPORARY INVESTMENTS
The temporary investments in which the Fund may invest include, but are not
limited to:
o commercial paper rated A-1 or A-2 by Standard & Poor's Ratings Group,
Prime-1 or Prime-2 by Moody's Investors Service, Inc., or F-1 or F-2 by
Fitch Investors Service, Inc., and Europaper rated A-1, A-2, Prime-1, or
Prime-2. In the case where commercial paper or Europaper has received
different ratings from different rating services, such commercial paper or
Europaper is an acceptable temporary investment so long as at least one
rating is one of the preceding high-quality ratings and provided the Fund's
investment adviser, Federated Management (the "Adviser"), has determined
that such investment presents minimal credit risks;
o instruments of domestic and foreign banks and savings and loans if they
have capital, surplus, and undivided profits of over $100,000,000, or if
the principal amount of the instrument is insured by the Federal Deposit
Insurance Corporation. These instruments may include Eurodollar
Certificates of Deposits ("ECDs"), Yankee Certificates of Deposit ("Yankee
CDs"), and Eurodollar Time Deposits ("ETDs");
o obligations of the U.S. government or its agencies or instrumentalities;
o repurchase agreements; and
o other short-term instruments which are not rated but are determined by the
Adviser to be of comparable quality to the other temporary obligations in
which the Fund may invest.
INVESTMENT RISKS
ECDs, ETDs, Yankee CDs, and Europaper are subject to different risks than
domestic obligations of domestic banks or corporations. Examples of these
risks include international economic and political developments, foreign
governmental restrictions that may adversely affect the payment of
principal or interest, foreign withholding or other taxes on interest
income, difficulties in obtaining or enforcing a judgment against the
issuing entity, and the possible impact of interruptions in the flow of
international currency transactions. Different risks may also exist for
ECDs, ETDs, and Yankee CDs because the banks issuing these instruments, or
their domestic or foreign branches, are not necessarily subject to the same
regulatory requirements that apply to domestic banks, such as reserve
requirements, loan limitations, examinations, accounting, auditing,
recordkeeping, and the public availability of information. These factors
will be carefully considered by the Adviser in selecting investments for
the Fund.
WARRANTS
Warrants basically are options to purchase common stock at a specific price
(usually at a premium above the market value of the optioned common stock at
issuance) valid for a specific period of time. Warrants may have a life ranging
from less than a year to twenty years or may be perpetual. However, warrants
have expiration dates after which they are worthless. In addition, if the market
price of the common stock does not exceed the warrant's exercise price during
the life of the warrant, the warrant will expire as worthless. Warrants have no
voting rights, pay no dividends, and have no rights with respect to the assets
of the corporation issuing them. The percentage increase or decrease in the
market price of the warrant may tend to be greater than the percentage increase
or decrease in the market price of the optioned common stock.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an advantageous
price or yield for the Fund. No fees or other expenses, other than normal
transaction costs, are incurred. However, liquid assets of the Fund sufficient
to make payment for the securities to be purchased are segregated on the Fund's
records at the trade date. These assets are marked to market daily and are
maintained until the transaction has been settled. The Fund does not intend to
engage in when-issued and delayed delivery transactions to an extent that would
cause the segregation of more than 20% of the total value of its assets.
REPURCHASE AGREEMENTS
The Fund or its custodian will take possession of the securities subject to
repurchase agreements, and these securities will be marked to market daily. To
the extent that the original seller does not repurchase the securities from the
Fund, the Fund could receive less than the repurchase price on any sale of such
securities. In the event that such a defaulting seller filed for bankruptcy or
became insolvent, disposition of such securities by the Fund might be delayed
pending court action. The Fund believes that under the regular procedures
normally in effect for custody of the Fund's portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in favor of
the Fund and allow retention or disposition of such securities. The Fund will
only enter into repurchase agreements with banks and other recognized financial
institutions, such as broker/dealers, which are deemed by the Adviser to be
creditworthy pursuant to guidelines established by the Board of Trustees (the
"Trustees").
FUTURES AND OPTIONS TRANSACTIONS
The Fund may attempt to hedge all or a portion of its portfolio by buying and
selling financial futures contracts, buying put options on portfolio securities
and listed put options on futures contracts, and writing call options on futures
contracts. The Fund may also write covered call options on portfolio securities
to attempt to increase its current income.
FINANCIAL FUTURES CONTRACTS
A futures contract is a firm commitment by two parties: the seller who
agrees to make delivery of the specific type of security called for in the
contract ("going short") and the buyer who agrees to take delivery of the
security ("going long") at a certain time in the future.
In the fixed-income securities market, price moves inversely to interest
rates. A rise in rates means a drop in price. Conversely, a drop in rates
means a rise in price. In order to hedge its holdings of fixed-income
securities against a rise in market interest rates, the Fund could enter
into contracts to deliver securities at a predetermined price (i.e., "go
short") to protect itself against the possibility that the prices of its
fixed-income securities may decline during the Fund's anticipated holding
period. The Fund would "go long" (agree to purchase securities in the
future at a predetermined price) to hedge against a decline in market
interest rates.
PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may purchase listed put options on financial futures contracts.
Unlike entering directly into a futures contract, which requires the
purchaser to buy a financial instrument on a set date at a specified price,
the purchase of a put option on a futures contract entitles (but does not
obligate) its purchaser to decide on or before a future date whether to
assume a short position at the specified price.
The Fund would purchase put options on futures contracts to protect
portfolio securities against decreases in value resulting from an
anticipated increase in market interest rates. Generally, if the hedged
portfolio securities decrease in value during the term of an option, the
related futures contracts will also decrease in value and the option will
increase in value. In such an event, the Fund will normally close out its
option by selling an identical option. If the hedge is successful, the
proceeds received by the Fund upon the sale of the second option will be
large enough to offset both the premium paid by the Fund for the original
option plus the decrease in value of the hedged securities.
Alternatively, the Fund may exercise its put option. To do so, it would
simultaneously enter into a futures contract of the type underlying the
option (for a price less than the strike price of the option) and exercise
the option. The Fund would then deliver the futures contract in return for
payment of the strike price. If the Fund neither closes out nor exercises
an option, the option will expire on the date provided in the option
contract, and the premium paid for the contract will be lost.
CALL OPTIONS ON FINANCIAL FUTURES CONTRACTS
In addition to purchasing put options on futures, the Fund may write listed
call options on futures contracts to hedge its portfolio against an
increase in market interest rates. When the Fund writes a call option on a
futures contract, it is undertaking the obligation of assuming a short
futures position (selling a futures contract) at the fixed strike price at
any time during the life of the option if the option is exercised. As
market interest rates rise, causing the prices of futures to go down, the
Fund's obligation under a call option on a future (to sell a futures
contract) costs less to fulfill, causing the value of the Fund's call
option position to increase.
In other words, as the underlying futures price goes down below the strike
price, the buyer of the option has no reason to exercise the call, so that
the Fund keeps the premium received for the option. This premium can offset
the drop in value of the Fund's fixed-income portfolio which is occurring
as interest rates rise.
Prior to the expiration of a call written by the Fund, or exercise of it by
the buyer, the Fund may close out the option by buying an identical option.
If the hedge is successful, the cost of the second option will be less than
the premium received by the Fund for the initial option. The net premium
income of the Fund will then offset the decrease in value of the hedged
securities.
The Fund will not maintain open positions in futures contracts it has sold
or call options it has written on futures contracts if, in the aggregate,
the value of the open positions (marked to market) exceeds the current
market value of its securities portfolio plus or minus the unrealized gain
or loss on those open positions, adjusted for the correlation of volatility
between the hedged securities and the futures contracts. If this limitation
is exceeded at any time, the Fund will take prompt action to close out a
sufficient number of open contracts to bring its open futures and options
positions within this limitation.
"MARGIN" IN FUTURES TRANSACTIONS
Unlike the purchase or sale of a security, the Fund does not pay or receive
money upon the purchase or sale of a futures contract. Rather, the Fund is
required to deposit an amount of "initial margin" in cash or U.S. Treasury
bills with its custodian (or the broker, if legally permitted). The nature
of initial margin in futures transactions is different from that of margin
in securities transactions in that futures contract initial margin does not
involve the borrowing of funds by the Fund to finance the transactions.
Initial margin is in the nature of a performance bond or good-faith deposit
on the contract which is returned to the Fund upon termination of the
futures contract, assuming all contractual obligations have been satisfied.
A futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund
pays or receives cash, called "variation margin," equal to the daily change
in value of the futures contract. This process is known as "marking to
market." Variation margin does not represent a borrowing or loan by the
Fund but is instead settlement between the Fund and the broker of the
amount one would owe the other if the futures contract expired. In
computing its daily net asset value, the Fund will mark to market its open
futures positions.
The Fund is also required to deposit and maintain margin when it writes
call options on futures contracts.
PURCHASING PUT OPTIONS ON PORTFOLIO SECURITIES
The Fund may purchase put options on portfolio securities to protect
against price movements in particular securities in its portfolio. A put
option gives the Fund, in return for a premium, the right to sell the
underlying security to the writer (seller) at a specified price during the
term of the option.
WRITING COVERED CALL OPTIONS ON PORTFOLIO SECURITIES
The Fund may also write covered call options to generate income. As writer
of a call option, the Fund has the obligation upon exercise of the option
during the option period to deliver the underlying security upon payment of
the exercise price. The Fund may only sell call options either on
securities held in its portfolio or on securities which it has the right to
obtain without payment of further consideration (or has segregated cash in
the amount of any additional consideration).
FOREIGN CURRENCY TRANSACTIONS
CURRENCY RISKS
The exchange rates between the U.S. dollar and foreign currencies are a
function of such factors as supply and demand in the currency exchange
markets, international balances of payments, governmental intervention,
speculation and other economic and political conditions. Although the Fund
values its assets daily in U.S. dollars, the Fund may not convert its
holdings of foreign currencies to U.S. dollars daily. The Fund may incur
conversion costs when its converts its holdings to another currency.
Foreign exchange dealers may realize a profit on the difference between the
price at which the Fund buy and sell currencies.
The Fund will engage in foreign currency exchange transactions in
connection with their investments in the securities. The Fund will conduct
their foreign currency exchange transactions either on a spot (i.e., cash)
basis at the spot rate prevailing in the foreign currency exchange market
or through forward contracts to purchase or sell foreign currencies.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The Fund may enter into forward foreign currency exchange contracts in
order to protect themselves against a possible loss resulting from an
adverse change in the relationship between the U.S. dollar and a foreign
currency involved in an underlying transaction. However, forward foreign
currency exchange contracts may limit potential gains which could result
from a positive change in such currency relationships. The Fund's
investment adviser believes that it is important to have the flexibility to
enter into forward foreign currency exchange contracts whenever it
determines that it is in the Fund's best interest to do so. The Fund will
not speculate in foreign currency exchange.
The Fund will not enter into forward foreign currency exchange contracts or
maintain a net exposure in such contracts when they would be obligated to
deliver an amount of foreign currency in excess of the value of their
portfolio securities or other assets denominated in that currency or, in
the case of a "cross-hedge" denominated in a currency or currencies that
the Fund's investment adviser believes will tend to be closely correlated
with that currency with regard to price movements. Generally, the Fund will
not enter into a forward foreign currency exchange contract with a term
longer than one year.
FOREIGN CURRENCY OPTIONS
A foreign currency option provides the option buyer with the right to buy
or sell a stated amount of foreign currency at the exercise price on a
specified date or during the option period. The owner of a call option has
the right, but not the obligation, to buy the currency. Conversely, the
owner of a put option has the right, but not the obligation, to sell the
currency.
When the option is exercised, the seller (i.e., writer) of the option is
obligated to fulfill the terms of the sold option. However, either the
seller or the buyer may, in the secondary market, close its position during
the option period at any time prior to expiration.
A call option on foreign currency generally rises in value if the
underlying currency appreciates in value, and a put option on foreign
currency generally falls in value if the underlying currency depreciates in
value. Although purchasing a foreign currency option can protect the Fund
against an adverse movement in the value of a foreign currency, the option
will not limit the movement in the value of such currency. For example, if
the Fund were holding securities denominated in a foreign currency that was
appreciating and had purchased a foreign currency put to hedge against a
decline in the value of the currency, the Fund would not have to exercise
their put option. Likewise, if the Fund were to enter into a contract to
purchase a security denominated in foreign currency and, in conjunction
with that purchase, were to purchase a foreign currency call options to
hedge against a rise in value of the currency, and if the value of the
currency instead depreciated between the date of purchase and the
settlement date, the Fund would not have to exercise its call. Instead, the
Fund could acquire in the spot market the amount of foreign currency needed
for settlement.
SPECIAL RISKS ASSOCIATED WITH FOREIGN CURRENCY OPTIONS
Buyers and sellers of foreign currency options are subject to the same
risks that apply to options generally. In addition, there are certain
additional risks associated with foreign currency options. The markets in
foreign currency options are relatively new, and the Fund's ability to
establish and close out positions on such options is subject to the
maintenance of a liquid secondary market. Although the Fund will not
purchase or write such options unless and until, in the opinion of the
Fund's investment adviser, the market for them has developed sufficiently
to ensure that the risks in connection with such options are not greater
than the risks in connection with the underlying currency, there can be no
assurance that a liquid secondary market will exist for a particular option
at any specific time.
In addition, options on foreign currencies are affected by all of those
factors that influence foreign exchange rates and investments generally.
The value of a foreign currency option depends upon the value of the
underlying currency relative to the U.S. dollar. As a result, the price of
the option position may vary with changes in the value of either or both
currencies and may have no relationship to the investment merits of a
foreign security. Because foreign currency transactions occurring in the
interbank market involve substantially larger amounts than those that may
be involved in the use of foreign currency options, investors may be
disadvantaged by having to deal in an odd lot market (generally consisting
of transactions of less than $1 million) for the underlying foreign
currencies at prices that are less favorable than for round lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis.
Available quotation information is generally representative of very large
transactions in the interbank market and thus may not reflect relatively
smaller transactions (i.e., less than $1 million) where rates may be less
favorable. The interbank market in foreign currencies is a global, around-
the-clock market. To the extent that the U.S. option markets are closed
while the markets for the underlying currencies remain open, significant
price and rate movements may take place in the underlying markets that
cannot be reflected in the options markets until they reopen.
FOREIGN CURRENCY FUTURES TRANSACTIONS
By using foreign currency futures contracts and options on such contracts,
the Fund may be able to achieve many of the same objectives as they would
through the use of forward foreign currency exchange contracts. The Fund
may be able to achieve these objectives possibly more effectively and at a
lower cost by using futures transactions instead of forward foreign
currency exchange contracts.
SPECIAL RISKS ASSOCIATED WITH FOREIGN CURRENCY FUTURES CONTRACTS AND RELATED
OPTIONS
Buyers and sellers of foreign currency futures contracts are subject to the
same risks that apply to the use of futures generally. In addition, there
are risks associated with foreign currency futures contracts and their use
as a hedging device similar to those associated with options on futures
currencies, as described above.
Options on foreign currency futures contracts may involve certain
additional risks. Trading options on foreign currency futures contracts is
relatively new. The ability to establish and close out positions on such
options is subject to the maintenance of a liquid secondary market. To
reduce this risk, the Fund will not purchase or write options on foreign
currency futures contracts unless and until, in the opinion of the Fund's
investment adviser, the market for such options has developed sufficiently
that the risks in connection with such options are not greater than the
risks in connection with transactions in the underlying foreign currency
futures contracts. Compared to the purchase or sale of foreign currency
futures contracts, the purchase of call or put options on futures contracts
involves less potential risk to the Fund because the maximum amount at risk
is the premium paid for the option (plus transaction costs). However, there
may be circumstances when the purchase of a call or put option on a futures
contract would result in a loss, such as when there is no movement in the
price of the underlying currency or futures contract.
RESTRICTED AND ILLIQUID SECURITIES
The ability of the Trustees to determine the liquidity of certain restricted
securities is permitted under an Securities and Exchange Commission's Staff
position set forth in the adopting release for Rule 144A under the Securities
Act of 1933, as amended, (the "Rule"). The Rule is a non-exclusive, safe harbor
for certain secondary market transactions involving securities subject to
restrictions on resale under federal securities laws. The Rule provides an
exemption from registration for resales of otherwise restricted securities to
qualified institutional buyers. The Rule was expected to further enhance the
liquidity of the secondary market for securities eligible for resale under Rule
144A. The Fund believes that the Staff of the Securities and Exchange Commission
has left the question of determining the liquidity of all restricted securities
(eligible for resale under Rule 144A) for determination of the Trustees. The
Trustees consider the following criteria in determining the liquidity of certain
restricted securities:
o the frequency of trades and quotes for the security;
o the number of dealers willing to purchase or sell the security and the
number of other potential buyers;
o dealer undertakings to make a market in the security; and
o the nature of the security and the nature of the marketplace trades.
LENDING OF PORTFOLIO SECURITIES
The collateral received when the Fund lends portfolio securities must be valued
daily and, should the market value of the loaned securities increase, the
borrower must furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays the Fund any dividends or
interest paid on such securities. Loans are subject to termination at the option
of the Fund or the borrower. The Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or equivalent collateral to the borrower or placing
broker. The Fund does not have the right to vote securities on loan, but would
terminate the loan and regain the right to vote if that were considered
important with respect to the investment.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements. These transactions
------ -
are similar to borrowing cash. In a reverse repurchase agreement the Fund
- ---
transfers possession of a portfolio instrument to another person, such as a
financial institution, broker, or dealer, in return for a percentage of the
instrument's market value in cash, and agrees that on a stipulated date in the
future the Fund will repurchase the portfolio instrument by remitting the
original consideration plus interest at an agreed upon rate. The use of reverse
repurchase agreements may enable the Fund to avoid selling portfolio instruments
at a time when a sale may be deemed to be disadvantageous, but the ability to
enter into reverse repurchase agreements does not ensure that the Fund will be
able to avoid selling portfolio instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. These securities are marked to market daily
and maintained until the transaction is settled.
PORTFOLIO TURNOVER
The Fund will not attempt to set or meet a portfolio turnover rate since any
turnover would be incidental to transactions undertaken in an attempt to achieve
the Fund's investment objective. Securities in the Fund's portfolio will be sold
whenever the Adviser believes it is appropriate to do so in light of the Fund's
investment objective, without regard to the length of time a particular security
may have been held. The Adviser does not anticipate that portfolio turnover will
result in adverse tax consequences. Any such trading will increase the Fund's
portfolio turnover rate and transaction costs. It is not anticipated that the
-------------------------------
portfolio trading engaged in by the Fund will result in its annual rate of
- --------------------------------------------------------------------------
portfolio turnover exceeding 100%.
- ----------------------------------
INVESTMENT LIMITATIONS
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities except that the Fund may borrow
money and engage in reverse repurchase agreements in amounts up to one-
third of the value of its total assets, including the amounts borrowed.
The Fund will not borrow money or engage in reverse repurchase agreements
for investment leverage, but rather as a temporary, extraordinary, or
emergency measure or to facilitate management of the portfolio by enabling
the Fund to meet redemption requests when the liquidation of portfolio
securities is deemed to be inconvenient or disadvantageous. The Fund will
not purchase any securities while any borrowings are outstanding.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. In those cases, it may pledge assets having a
market value not exceeding the lesser of the dollar amounts borrowed or 10%
of the value of total assets at the time of the borrowing. Margin deposits
for the purchase and sale of financial futures contracts and related
options are not deemed to be a pledge.
UNDERWRITING
The Fund will not underwrite any issue of securities, except as it may be
deemed to be an underwriter under the Securities Act of 1933, as amended,
in connection with the sale of restricted securities which the Fund may
purchase pursuant to its investment objectives, policies, and limitations.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets except portfolio securities up to
one-third of the value of its total assets. This shall not prevent the
purchase or holding of corporate bonds, debentures, notes, certificates of
indebtedness or other debt securities of an issuer, repurchase agreements,
or other transactions which are permitted by the Fund's investment
objectives and policies.
DIVERSIFICATION OF INVESTMENTS
With respect to securities comprising 75% of the value of its total assets,
the Fund will not invest more than 5% of the value of its total assets in
securities of any one issuer (other than cash, cash items, or securities
issued or guaranteed by the U.S. government, its agencies, or
instrumentalities, and repurchase agreements collateralized by such
securities) or acquire more than 10% of any class of voting securities of
any one issuer. For these purposes, the Fund takes all common stock and all
preferred stock of an issuer each as a single class, regardless of
priorities, series, designations, or other differences.
INVESTING IN REAL ESTATE
------------------------
The Fund will not buy or sell real estate, including limited partnership
------------------------------------------------------------------------
interests, although it may invest in the securities of companies whose
----------------------------------------------------------------------
business involves the purchase or sale of real estate or in securities
----------------------------------------------------------------------
which are secured by real estate or interests in real estate.
-------------------------------------------------------------
The above investment limitations cannot be changed without shareholder approval.
The following limitations, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in these limitations becomes effective.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of the value of its total assets in
portfolio instruments of unseasoned issuers, including their predecessors,
that have been in operation for less than three years.
PURCHASING PUT OPTIONS
The Fund will not commit more than 5% of the value of its total assets to
premiums on open option positions.
INVESTING IN MINERALS
---------------------
The Fund will not purchase interests in oil, gas, or other mineral
--------------------------- ------------------------------
exploration or development programs or leases, although it may invest in
------------------------------------------------------------------------
the securities of issuers which invest in or sponsor such programs.
-------------------------------------------------------------------
INVESTING IN WARRANTS
The Fund will not invest more than 5% of its net assets in warrants. No
-----------------------------------------------------------------------
more than 2% of the Fund's net assets, to be included within the overall 5%
---------------------------------------------------------------------------
limit on investments in warrants, may be warrants which are not listed on
-------------------------------------------------------------------------
the New York Stock Exchange or the American Stock Exchange.
--------------------------------------------------
Except with respect to borrowing money, if a percentage limitation is adhered to
at the time of investment, a later increase or decrease in percentage resulting
from any change in value or net assets will not result in a violation of such
restriction.
For purposes of its policies and limitations, the Fund considers certificates of
deposit and demand and time deposits issued by a U.S. branch of a domestic bank
or savings and loan association having capital, surplus, and undivided profits
in excess of $100,000,000 at the time of investment to be "cash items."
The Fund has no present intent to borrow money or sell securities short in
- --------------------------------------------------------------------------
excess of 5% of the value of its total assets in the coming fiscal year.
- ------------------------------------------------------------------------
To comply with registration requirements in certain states, the Fund will not
invest in real estate limited partnerships or oil, gas, or other mineral leases.
FEDERATED EQUITY FUNDS MANAGEMENT
- ----------------------------------
Officers and Trustees are listed with their addresses, birthdates, present
- --------------------------------------------------------------------------
positions with Federated Equity Funds, and principal occupations.
- ------------------------------------------------------------------
John F. Donahue@*
- -----------------
Federated Investors Tower
- -------------------------
Pittsburgh, Pennsylvania
- -------------
Birthdate: July 28, 1924
- -------------------------
Chairman and Trustee
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
- ------------------------------------------------------------------------
Management, and Federated Research; Chairman and Director, Federated Research
- -----------------------------------------------------------------------------
Corp. and Federated Global Research Corp.; Chairman, Passport Research, Ltd.;
- -----------------------------------------------------------------------------
Chief Executive Officer and Director, Trustee, or Managing General Partner of
- -----------------------------------------------------------------------------
the Funds. Mr. Donahue is the father of J. Christopher Donahue, Executive Vice
- ------------------------------------------------------------------------------
President of the Trust .
- ------------------------
Thomas G. Bigley
- ----------------
28th Floor, One Oxford Centre
- -----------------------------
Pittsburgh, Pennsylvania
- -------------
Birthdate: February 3, 1934
- ----------------------------
Trustee
- -------
Director, Oberg Manufacturing Co.; Chairman of the Board, Children's Hospital of
- --------------------------------------------------------------------------------
Pittsburgh; Director, Trustee, or Managing General Partner of the Funds;
- ------------------------------------------------------------------------
formerly, Senior Partner, Ernst & Young LLP.
- --------------------------------------------
John T. Conroy, Jr.
- -------------------
Wood/IPC Commercial Department
- ------------------------------
John R. Wood and Associates, Inc., Realtors
- -------------------------------------------
3255 Tamiami Trail North
- ------------------------
Naples, Florida
- ---------
Birthdate: June 23, 1937
- -------------------------
Trustee
- -------
President, Investment Properties Corporation; Senior Vice-President, John R.
- ----------------------------------------------------------------------------
Wood and Associates, Inc., Realtors; President, Northgate Village Development
- -----------------------------------------------------------------------------
Corporation; Partner or Trustee in private real estate ventures in Southwest
- ----------------------------------------------------------------------------
Florida; Director, Trustee, or Managing General Partner of the Funds; formerly,
- -------------------------------------------------------------------------------
President, Naples Property Management, Inc.
- -------------------------------------------
William J. Copeland
- -------------------
One PNC Plaza - 23rd Floor
- --------------------------
Pittsburgh, Pennsylvania
- -------------
Birthdate: July 4, 1918
- ------------------------
Trustee
- -------
Director and Member of the Executive Committee, Michael Baker, Inc.; Director,
- ------------------------------------------------------------------------------
Trustee, or Managing General Partner of the Funds; formerly, Vice Chairman and
- ------------------------------------------------------------------------------
Director, PNC Bank, N.A., and PNC Bank Corp. and Director, Ryan Homes, Inc.
- ---------------------------------------------------------------------------
J. Christopher Donahue *
- ------------------------
Federated Investors Tower
- -------------------------
Pittsburgh, Pennsylvania
- -------------
Birthdate: April 11, 1949
- --------------------------
Executive Vice President
- ------------------------
President and Trustee, Federated Investors, Federated Advisers, Federated
- -------------------------------------------------------------------------
Management, and Federated Research; President and Director, Federated Research
- ------------------------------------------------------------------------------
Corp. and Federated Global Research Corp.; President, Passport Research, Ltd.;
- ------------------------------------------------------------------------------
Trustee, Federated Administrative Services, Federated Services Company, and
- ---------------------------------------------------------------------------
Federated Shareholder Services; President or Vice President of the Funds;
- -------------------------------------------------------------------------
Director, Trustee, or Managing General Partner of some of the Funds. Mr. Donahue
- --------------------------------------------------------------------------------
is the son of John F. Donahue, Chairman and Trustee of the Company.
- -------------------------------------------------------------------
James E. Dowd
- -------------
571 Hayward Mill Road
- ---------------------
Concord, Massachusetts
- ----------
Birthdate: May 18, 1922
- ------------------------
Trustee
- -------
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director, Trustee,
- ------------------------------------------------------------------------------
or Managing General Partner of the Funds.
- -----------------------------------------
Lawrence D. Ellis, M.D.*
- ------------------------
3471 Fifth Avenue, Suite 1111
- -----------------------------
Pittsburgh, Pennsylvania
- -------------
Birthdate: October 11, 1932
- ----------------------------
Trustee
- -------
Professor of Medicine and Member, Board of Trustees, University of Pittsburgh;
- ------------------------------------------------------------------------------
Medical Director, University of Pittsburgh Medical Center - Downtown; Member,
- ---------------------------------------------------------- ------------------
Board of Directors, University of Pittsburgh Medical Center; formerly,
- ----------------------------------------------------------------------
Hematologist, Oncologist, and Internist, Presbyterian and Montefiore Hospitals;
- -------------------------------------------------------------------------------
Director, Trustee, or Managing General Partner of the Funds.
- ------------------------------------------------------------
Edward L. Flaherty, Jr.@
- ------------------------
Henny, Kochuba, Meyer and Flaherty
- ----------------------------------
Two Gateway Center - Suite 674
- ------------------- ----------
Pittsburgh, Pennsylvania
- -------------
Birthdate: June 18, 1924
- -------------------------
Trustee
- -------
Attorney-at-law; Shareholder, Henny, Kochuba, Meyer and Flaherty; Director,
- ---------------------------------------------------------------------------
Eat'N Park Restaurants, Inc., and Statewide Settlement Agency, Inc.; Director,
- ------------------------------------------------------------------------------
Trustee, or Managing General Partner of the Funds; formerly, Counsel, Horizon
- -----------------------------------------------------------------------------
Financial, F.A., Western Region.
- --------------------------------
Peter E. Madden
- ---------------
Seacliff
- --------
562 Bellevue Avenue
- -------------------
Newport, Rhode Island
- ----------
Birthdate: March 16, 1942
- --------------------------
Trustee
- -------
Consultant; State Representative, Commonwealth of Massachusetts; Director,
- --------------------------------------------------------------------------
Trustee, or Managing General Partner of the Funds; formerly, President, State
- -----------------------------------------------------------------------------
Street Bank and Trust Company and State Street Boston Corporation.
- ------------------------------------------------------------------
Gregor F. Meyer
- ---------------
Henny, Kochuba, Meyer and Flaherty
- ----------------------------------
Two Gateway Center - Suite 674
- ------------------- ----------
Pittsburgh, Pennsylvania
- -------------
Birthdate: October 6, 1926
- ---------------------------
Trustee
- -------
Attorney-at-law; Shareholder, Henny, Kochuba, Meyer and Flaherty; Chairman,
- ---------------------------------------------------------------------------
Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.; Director, Trustee, or
- ------------------------------------------------------------------------------
Managing General Partner of the Funds.
- --------------------------------------
John E. Murray, Jr., J.D., S.J.D.
- ---------------------------------
President, Duquesne University
- ------------------------------
Pittsburgh, Pennsylvania
- -------------
Birthdate: December 20, 1932
- -----------------------------
Trustee
- -------
President, Law Professor, Duquesne University; Consulting Partner, Mollica,
- ---------------------------------------------------------------------------
Murray and Hogue; Director, Trustee or Managing General Partner of the Funds.
- -----------------------------------------------------------------------------
Wesley W. Posvar
- ----------------
1202 Cathedral of Learning
- --------------------------
University of Pittsburgh
- ------------------------
Pittsburgh, Pennsylvania
- -------------
Birthdate: September 14, 1925
- ------------------------------
Trustee
- -------
Professor, International Politics and Management Consultant; Trustee, Carnegie
- ------------------------------------------------------------------------------
Endowment for International Peace, RAND Corporation, Online Computer Library
- ----------------------------------------------------------------------------
Center, Inc., and U.S. Space Foundation; Chairman, Czecho Management Center;
- ----------------------------------------------------------------------------
Director, Trustee, or Managing General Partner of the Funds; President Emeritus,
- --------------------------------------------------------------------------------
University of Pittsburgh; founding Chairman, National Advisory Council for
- --------------------------------------------------------------------------
Environmental Policy and Technology and Federal Emergency Management Advisory
- -----------------------------------------------------------------------------
Board.
- ------
Marjorie P. Smuts
- -----------------
4905 Bayard Street
- ------------------
Pittsburgh, Pennsylvania
- -------------
Birthdate: June 21, 1935
- -------------------------
Trustee
- -------
Public relations/marketing consultant; Conference Coordinator, Non-profit
- -------------------------------------------------------------------------
entities; Director, Trustee, or Managing General Partner of the Funds.
- ----------------------------------------------------------------------
Glen R. Johnson
- ---------------
Federated Investors Tower
- -------------------------
Pittsburgh, Pennsylvania
- -------------
Birthdate: May 2, 1929
- -----------------------
President
- ---------
Trustee, Federated Investors; President and/or Trustee of some of the Funds;
- ----------------------------------------------------------------------------
staff member, Federated Securities Corp. and Federated Administrative Services.
- -------------------------------------------------------------------------------
Edward C. Gonzales
- ------------------
Federated Investors Tower
- -------------------------
Pittsburgh, Pennslyvania
- -------------
Birthdate: October 22, 1930
- ----------------------------
Executive Vice President
- ------------------------
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
- ---------------------------------------------------------------------------
Federated Advisers, Federated Management, Federated Research, Federated Research
- --------------------------------------------------------------------------------
Corp., Federated Global Research Corp. and Passport Research, Ltd.; Executive
- -----------------------------------------------------------------------------
Vice President and Director, Federated Securities Corp.; Trustee, Federated
- ---------------------------------------------------------------------------
Services Company; Chairman, Treasurer, and Trustee, Federated Administrative
- ----------------------------------------------------------------------------
Services; Trustee or Director of some of the Funds; President, Executive Vice
- -----------------------------------------------------------------------------
President and Treasurer of some of the Funds.
- ---------------------------------------------
John W. McGonigle
- -----------------
Federated Investors Tower
- -------------------------
Pittsburgh, Pennsylvania
- -------------
Birthdate: October 26, 1938
- ----------------------------
Executive Vice President and Secretary
- --------------------------------------
Executive Vice President, Secretary, General Counsel, and Trustee, Federated
- ----------------------------------------------------------------------------
Investors; Trustee, Federated Advisers, Federated Management, and Federated
- ---------------------------------------------------------------------------
Research; Director, Federated Research Corp. and Federated Global Research
- --------------------------------------------------------------------------
Corp.; Trustee, Federated Services Company; Executive Vice President, Secretary,
- --------------------------------------------------------------------------------
and Trustee, Federated Administrative Services; President and Trustee, Federated
- --------------------------------------------------------------------------------
Shareholder Services; Director, Federated Securities Corp.; Executive Vice
- --------------------------------------------------------------------------
President and Secretary of the Funds.
- -------------------------------------
Richard B. Fisher
- -----------------
Federated Investors Tower
- -------------------------
Pittsburgh, Pennsylvania
- -------------
Birthdate: May 17, 1923
- ------------------------
Vice President
- --------------
Executive Vice President and Trustee, Federated Investors; Chairman and
- -----------------------------------------------------------------------
Director, Federated Securities Corp.; President or Vice President of some of the
- --------------------------------------------------------------------------------
Funds; Director or Trustee of some of the Funds.
- ------------------------------------------------
David M. Taylor
- ---------------
Federated Investors Tower
- -------------------------
Pittsburgh, Pennsylvania
- -------------
Treasurer
- ---------
Senior Vice President, Controller, and Trustee, Federated Investors; Controller,
- --------------------------------------------------------------------------------
Federated Advisers, Federated Management, Federated Research, Federated Research
- --------------------------------------------------------------------------------
Corp., and Passport Research, Ltd.; Senior Vice President, Federated
- ---------------------------------------------------------------------
Shareholder Services; Vice President, Federated Administrative Services;
- ------------------------------------------------------------------------
Treasurer of some of the Funds.
- -------------------------------
* This Trustee is deemed to be an "interested person" as defined in the
- -----------------------------------------------------------------------
Investment Company Act of 1940, as amended.
- -------------------------------------------
@ Member of the Executive Committee. The Executive Committee of the Board of
- ----------------------------------------------------------------------------
Trustees handles the responsibilities of the Board of Trustees between meetings
- -------------------------------------------------------------------------------
of the Board.
- -------------
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: American Leaders Fund, Inc.; Annuity Management Series;
Arrow Funds; Automated Government Money Trust; Blanchard Funds; Blanchard
Precious Metals, Inc.; Cash Trust Series II; Cash Trust Series, Inc.; DG
Investor Series; Edward D. Jones & Co. Daily Passport Cash Trust; Federated ARMs
Fund; Federated Equity Funds; Federated Exchange Fund, Ltd.; Federated GNMA
Trust; Federated Government Trust; Federated High Yield Trust; Federated Income
Securities Trust; Federated Income Trust; Federated Index Trust; Federated
Institutional Trust; Federated Master Trust; Federated Municipal Trust;
Federated Short-Term Municipal Trust; Federated Short-Term U.S. Government
Trust; Federated Stock Trust; Federated Tax-Free Trust; Federated Total Return
Series, Inc.; Federated U.S. Government Bond Fund; Federated U.S. Government
Securities Fund: 1-3 Years; Federated U.S. Government Securities Fund: 3-5
Years; First Priority Funds; Fixed Income Securities, Inc.; Fortress Adjustable
Rate U.S. Government Fund, Inc.; Fortress Municipal Income Fund, Inc.; Fortress
Utility Fund, Inc.; Fund for U.S. Government Securities, Inc.; Government Income
Securities, Inc.; High Yield Cash Trust; Insurance Management Series;
Intermediate Municipal Trust; International Series, Inc.; Investment Series
Funds, Inc.; Investment Series Trust; Liberty Equity Income Fund, Inc.; Liberty
High Income Bond Fund, Inc.; Liberty Municipal Securities Fund, Inc.; Liberty
U.S. Government Money Market Trust; Liberty Term Trust, Inc. - 1999; Liberty
Utility Fund, Inc.; Liquid Cash Trust; Managed Series Trust; Money Market
Management, Inc.; Money Market Obligations Trust; Money Market Trust; Municipal
Securities Income Trust; Newpoint Funds; 111 Corcoran Funds; Peachtree Funds;
The Planters Funds; RIMCO Monument Funds; The Shawmut Funds; Star Funds; The
Starburst Funds; The Starburst Funds II; Stock and Bond Fund, Inc.; Sunburst
Funds; Targeted Duration Trust; Tax-Free Instruments Trust; Trademark Funds;
Trust for Financial Institutions; Trust For Government Cash Reserves; Trust for
Short-Term U.S. Government Securities; Trust for U.S. Treasury Obligations; The
Virtus Funds; World Investment Series, Inc.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding shares.
TRUSTEES COMPENSATION
AGGREGATE
NAME , COMPENSATION
POSITION WITH FROM TOTAL COMPENSATION PAID
TRUST TRUST* FROM FUND COMPLEX +
John F. Donahue $ 0 $0 for the Trust and
Chairman and Trustee 68 other investment companies in the Fund Complex
Thomas G. Bigley $0 $20,288 for the Trust and
- --------------------------- ------------------------
Trustee 49 other investment companies in the Fund Complex
- ----------------------------------------------------------------------------
John T. Conroy, Jr. $1,566 $117,202 for the Trust and
Trustee 64 other investment companies in the Fund Complex
William J. Copeland $1,566 $117,202 for the Trust and
Trustee 64 other investment companies in the Fund Complex
James E. Dowd $1,566 $117,202 for the Trust and
Trustee 64 other investment companies in the Fund Complex
Lawrence D. Ellis, M.D. $1,419 $106,460 for the Trust and
Trustee 64 other investment companies in the Fund Complex
Edward L. Flaherty, Jr. $1,566 $117,202 for the Trust and
Trustee 64 other investment companies in the Fund Complex
Peter E. Madden $1,419 $90,563 for the Trust and
Trustee 64 other investment companies in the Fund Complex
Gregor F. Meyer $1,419 $106,460 for the Trust and
Trustee 64 other investment companies in the Fund Complex
John E. Murray, Jr. $ 0 $0 for the Trust and
Trustee 69 other investment companies in the Fund Complex
Wesley W. Posvar $1,419 $106,460 for the Trust and
Trustee 64 other investment companies in the Fund Complex
Marjorie P. Smuts$1,419 $106,460 for the Trust and
Trustee 64 other investment companies in the Fund Complex
*Information is furnished for the fiscal year ended October 31, 1994.
+The information is provided for the last calendar year.
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that the Trustees will not be liable
for errors of judgment or mistakes of fact or law. However, they are not
protected against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICES
ADVISER TO THE FUND
The Fund's investment adviser is Federated Management (the "Adviser"). It is a
subsidiary of Federated Investors. All the voting securities of Federated
Investors are owned by a trust, the trustees of which are John F. Donahue, his
wife, and his son, J. Christopher Donahue.
The Adviser shall not be liable to the Trust, the Fund, or any shareholder of
----------- ---
the Fund for any losses that may be sustained in the purchase, holding, or sale
- --------
of any security or for anything done or omitted by it, except acts or omissions
involving willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties imposed upon it by its contract with the Trust.
-----
ADVISORY FEES
For its advisory services, the Adviser receives an annual investment advisory
fee as described in the prospectus.
STATE EXPENSE LIMITATIONS
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are
registered for sale in those states. If the Fund's normal operating
expenses (including the investment advisory fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses) exceed
2-1/2% per year of the first $30 million of average net assets, 2% per year
of the next $70 million of average net assets, and 1-1/2% per year of the
----
remaining average net assets, the Adviser will reimburse the Fund for its
expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this limitation,
the investment advisory fee paid will be reduced by the amount of the
excess, subject to an annual adjustment. If the expense limitation is
exceeded, the amount to be reimbursed by the Adviser will be limited, in
any single fiscal year, by the amount of the investment advisory fee.
This arrangement is not part of the advisory contract and may be amended or
rescinded in the future.
OTHER RELATED SERVICES
Affiliates of the Adviser may, from time to time, provide certain electronic
equipment and software to institutional customers in order to facilitate the
purchase of shares of funds offered by Federated Securities Corp.
ADMINISTRATIVE SERVICES
Federated Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for a fee as described in the
prospectus. Dr. Henry J. Gailliot, an officer of Federated Management, the
Fund's investment adviser, holds approximately 20% of the outstanding common
stock and serves as a director of Commercial Data Services, Inc., a company
which provides computer processing services to Federated Administrative
Services.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Federated Services Company serves as transfer agent and dividend disbursing
agent for the Fund. The fee paid to the transfer agent is based upon the size,
type, and number of accounts and transactions made by shareholders.
Federated Services Company also maintains the Fund's accounting records. The fee
paid for this service is based upon the level of the Fund's average net assets
for the period plus out-of-pocket expenses.
BROKERAGE TRANSACTIONS
The Adviser may select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to the Fund or to the Adviser
and may include:
o advice as to the advisability of investing in securities;
o security analysis and reports;
o economic studies;
o industry studies;
o receipt of quotations for portfolio evaluations; and
o similar services.
The Adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions charged
by such persons are reasonable in relationship to the value of the brokerage and
research services provided.
Research services provided by brokers may be used by the Adviser or by
affiliates of Federated Investors in advising certain other accounts. To the
extent that receipt of these services may supplant services for which the
Adviser or its affiliates might otherwise have paid, it would tend to reduce
their expenses.
PURCHASING SHARES
Except under certain circumstances described in the prospectus, Shares are sold
at their net asset value (plus a sales load on Class A Shares only) on days the
New York Stock Exchange is open for business. The procedure for purchasing
Shares of the Fund is explained in the prospectus under "How to Purchase
Shares."
DISTRIBUTION PLAN AND SHAREHOLDER SERVICES AGREEMENT
These arrangements permit the payment of fees to financial institutions, the
distributor, and Federated Shareholder Services, as appropriate, to stimulate
distribution activities and to cause services to be provided to shareholders by
a representative who has knowledge of the shareholder's particular circumstances
and goals. These activities and services may include, but are not limited to:
marketing efforts; providing office space, equipment, telephone facilities, and
various clerical, supervisory, computer, and other personnel as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries; and assisting
clients in changing dividend options, account designations, and addresses.
By adopting the Distribution Plan, the Trustees expects that the Class A Shares,
Class B Shares, and Class C Shares of the Fund will be able to achieve a more
predictable flow of cash for investment purposes and to meet redemptions. This
will facilitate more efficient portfolio management and assist the Fund in
pursuing its investment objectives. By identifying potential investors whose
needs are served by the Fund's objectives, and properly servicing these
accounts, it may be possible to curb sharp fluctuations in rates of redemptions
and sales.
Other benefits, which may be realized under either arrangement, may include: (1)
providing personal services to shareholders; (2) investing shareholder assets
with a minimum of delay and administrative detail; (3) enhancing shareholder
recordkeeping systems; and (4) responding promptly to shareholders' requests and
inquiries concerning their accounts.
CONVERSION TO FEDERAL FUNDS
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be in
federal funds or be converted into federal funds before shareholders begin to
earn dividends. Federated Services Company acts as the shareholder's agent in
depositing checks and converting them to federal funds.
PURCHASES BY SALES REPRESENTATIVES, TRUSTEES, AND EMPLOYEES
Trustees, employees, and sales representatives of the Fund, the Adviser, and
Federated Securities Corp., or their affiliates, or any investment dealer who
has a sales agreement with Federated Securities Corp., and their spouses and
children under 21, may buy Class A Shares at net asset value without a sales
load. Shares may also be sold without a sales load to trusts or pension or
profit-sharing plans for these persons.
These sales are made with the purchaser's written assurance that the purchase is
for investment purposes and that the securities will not be resold except
through redemption by the Fund.
EXCHANGING SECURITIES FOR FUND SHARES
Investors may exchange convertible securities they already own for Shares, or
they may exchange a combination of convertible securities and cash for Shares.
Any securities to be exchanged must meet the investment objective and policies
of the Fund, must have a readily ascertainable market value, must be liquid, and
must not be subject to restrictions on resale.
The Fund will prepare a list of securities which are eligible for acceptance and
furnish this list to brokers upon request. The Fund reserves the right to reject
any security, even though it appears on the list, and the right to amend the
list of acceptable securities at any time without notice to brokers or
investors.
An investment broker acting for an investor should forward the securities in
negotiable form with an authorized letter of transmittal to Federated Securities
Corp.. Federated Securities Corp. will determine that the transmittal papers are
- ----
in good order and will then forward them to the Fund's custodian, State Street
-----
Bank and Trust Company. The Fund will notify the broker of its acceptance and
valuation of the securities within five business days of their receipt by State
Street Bank and Trust Company.
The Fund values such securities in the same manner as the Fund values its
portfolio securities. The basis of the exchange will depend upon the net asset
value of Shares on the day the securities are valued. One Share will be issued
for each equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be considered
in valuing the securities. All interest, dividends, subscription, conversion, or
other rights attached to the securities become the property of the Fund, along
with the securities.
TAX CONSEQUENCES
Exercise of this exchange privilege is treated as a sale for federal income
tax purposes. Depending upon the cost basis of the securities exchanged for
Shares, a gain or loss may be realized by the investor.
DETERMINING NET ASSET VALUE
Net asset value generally changes each day. The days on which net asset value is
calculated by the Fund are described in the prospectus.
DETERMINING MARKET VALUE OF SECURITIES
Market values of the Fund's portfolio securities are determined as follows:
o according to the last sale price on a national securities exchange, if
available, or on the basis of prices provided by an independent pricing
service;
o for most short-term obligations, according to the average of the last offer
to buy and the last offer to sell the security, as provided by independent
pricing services;
o for options traded in the over-the-counter market, according to the mean
between the last bid and the last asked price for the option as provided by
an investment dealer or other financial institution that deals in the
option;
o for short-term obligations with remaining maturities of 60 days or less at
the time of purchase, at amortized cost; or
o at fair value as determined in good faith by the Trustees.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices. Pricing services may consider:
o yield;
o quality;
o coupon rate;
o maturity;
o type of issue;
o trading characteristics; and
o other market data.
REDEEMING SHARES
The Fund redeems Shares at the next computed net asset value, less any
----------
applicable contingent deferred sales charge, after the Fund receives the
- --------------------------------------------
redemption request. Redemption procedures are explained in the prospectus under
"How to Redeem Shares." Although the transfer agent does not charge for
telephone redemptions, it reserves the right to charge a fee for the cost of
wire-transferred redemptions of less than $5,000.
Class B Shares redeemed within one to six years of purchase and Class C Shares
and applicable Class A Shares redeemed within one year of purchase may be
subject to a contingent deferred sales charge. The amount of the contingent
deferred sales charge is based upon the amount of the administrative fee paid at
the time of purchase by the distributor to the financial institution for
services rendered, and the length of time the investor remains a shareholder in
the Fund. Should financial institutions elect to receive an amount less than the
administrative fee that is stated in the prospectus for servicing a particular
shareholder, the contingent deferred sales charge and/or holding period for that
particular shareholder will be reduced accordingly.
REDEMPTION IN KIND
Although the Fund intends to redeem Shares in cash, it reserves the right under
- ------------- --------------------------------------------------------------
certain circumstances to pay the redemption price in whole or in part by a
- --------------------------------------------------------------------------
distribution of securities from the Fund's portfolio. To the extent available,
- ------------------------------------------- --------------------------
such securities will be readily marketable.
- -------------------------------------------
The Trust has elected to be governed by Rule 18f-1 of the Investment Company Act
of 1940, as amended, under which the Fund is obligated to redeem Shares for any
one shareholder in cash only up to the lesser of $250,000 or 1% of the
respective class's net asset value during any 90-day period.
Any redemption beyond this amount will also be in cash unless the Trustees
determine that payments should be in kind. In such a case, the Fund will pay all
or a portion of the remainder of the redemption in portfolio instruments, valued
in the same way as the Fund determines net asset value. The portfolio
instruments will be selected in a manner that the Trustees deem fair and
equitable.
Redemption in kind is not as liquid as a cash redemption. If redemption is made
in kind, shareholders receiving their securities and selling them before their
maturity could receive less than the redemption value of their securities and
could incur certain transaction costs.
EXCHANGING SECURITIES FOR SHARES
Investors may exchange securities they already own for Shares, or they may
exchange a combination of securities and cash for Shares. An investor should
forward the securities in negotiable form with an authorized letter of
transmittal to Federated Securities Corp. The Fund will notify the investor of
its acceptance and valuation of the securities within five business days of
their receipt by State Street Bank.
The Fund values securities in the same manner as the Fund values its assets. The
basis of the exchange will depend upon the net asset value of Shares on the day
the securities are valued. One Share of the Fund will be issued for each
equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be considered
in valuing the securities. All interest, dividends, subscription, or other
rights attached to the securities become the property of the Fund, along with
the securities.
TAX CONSEQUENCES
Exercise of this exchange privilege is treated as a sale for federal income tax
purposes. Depending upon the cost basis of the securities exchanged for Shares,
a gain or loss may be realized by the investor.
TAX STATUS
THE FUND'S TAX STATUS
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code of 1986, as amended,
--------
applicable to regulated investment companies and to receive the special tax
treatment afforded to such companies. To qualify for this treatment, the Fund
must, among other requirements:
o derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;
o derive less than 30% of its gross income from the sale of securities held
less than three months;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income earned during
the year.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends and capital gains
received as cash or additional Shares. The dividends received deduction for
corporations will apply to ordinary income distributions to the extent the
distribution represents amounts that would qualify for the dividends received
deduction to the Fund if the Fund were a regular corporation and to the extent
designated by the Fund as so qualifying. These dividends, and any short-term
capital gains, are taxable as ordinary income.
CAPITAL GAINS
Capital gains or losses may be realized on the sale of portfolio securities
and as a result of discounts from par value on securities held to maturity.
Sales would generally be made because of:
othe availability of higher relative yields;
odifferentials in market values;
onew investment opportunities;
ochanges in creditworthiness of an issuer; or
oan attempt to preserve gains or limit losses.
Distributions of long-term capital gains are taxed as such, whether they
are taken in cash or reinvested, and regardless of the length of time the
shareholder has owned the Shares. Any loss by a shareholder on Shares held
for less than six months and sold after a capital gains distribution will
be treated as a long-term capital loss to the extent of the capital gains
distribution.
TOTAL RETURN
The average annual total returns for shares of Federated Exchange Fund, Ltd.,
the predecessor to Class A Shares, for the one-year, five-year, and ten-year
- --------------
periods ended October 31, 1995, were 23.32%, 18.03%, and 13.17%, respectively.
---------- ------ ------ ------
The average annual total return since inception was 13.68% for Federated
- ------------------------------------------------------------------------
Exchange Fund, Ltd.
- -------------------
The average annual total return for all classes of Shares of the Fund is the
average compounded rate of return for a given period that would equate a $1,000
initial investment to the ending redeemable value of that investment. The ending
redeemable value is computed by multiplying the number of Shares owned at the
end of the period by the offering price per Share at the end of the period. The
number of Shares owned at the end of the period is based on the number of Shares
purchased at the beginning of the period with $1,000, less any applicable sales
load, adjusted over the period by any additional Shares, assuming a quarterly
reinvestment of all dividends and distributions. Any applicable contingent
deferred sales charge is deducted from the ending value of the investments based
on the lesser of the original purchase price or the offering price of Shares
redeemed.
YIELD
The yield for shares of Federated Exchange Fund, Ltd., the predecessor to Class
A Shares, was 1.02% for the thirty-day period ended October 31, 1995.
---- ----------
The yield for all classes of Shares of the Fund is determined by dividing the
net investment income per Share (as defined by the Securities and Exchange
Commission) earned by any class of Shares over a thirty-day period by the
maximum offering price per Share of any class of Shares on the last day of the
period. This value is then annualized using semi-annual compounding. This means
that the amount of income generated during the thirty-day period is assumed to
be generated each month over a twelve-month period and is reinvested every six
months. The yield does not necessarily reflect income actually earned by any
class of Shares because of certain adjustments required by the Securities and
Exchange Commission and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in any class
of Shares, the performance will be reduced for those shareholders paying those
fees.
CURRENT DISTRIBUTIONS
The average net annualized investment distribution rate for shares of
----------------------------------------------------------
Federated Exchange Fund, Ltd., the predecessor to Class A Shares, for the thirty
day period ended October 31, 1995, was 1.76%.
------- ----------
Each class of Shares calculates its current distributions daily based upon its
past twelve months' income dividends and short-term capital gains distributions
per Share divided by its offering price per Share on that day. Each class of
Shares may reduce the time period upon which it bases its calculation of current
distributions if the Adviser believes a shortened period would be more
representative in light of current market conditions.
PERFORMANCE COMPARISONS
The Fund's performance of each class of Shares depends upon such variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio securities;
o changes in the Fund's or a class of Shares' expenses; and
o various other factors.
The Fund's performance fluctuates on a daily basis largely because net earnings
and offering price per Share fluctuate daily. Both net earnings and offering
price per Share are factors in the computation of yield and total return.
The Fund may compare the performance of equity income funds to other types of
stock funds and indices.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute offering price. The financial
publications and/or indices which the Fund uses in advertising may include:
o LIPPER ANALYTICAL SERVICES, INC., ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes
the reinvestment of all capital gains distributions and income dividends
and takes into account any change in net asset value over a specified
--
period of time. From time to time, the Fund will quote its Lipper ranking
in the "convertible securities" and "fixed income funds" categories in
advertising and sales literature.
o DOW JONES INDUSTRIAL AVERAGE ("DJIA") represents share prices of selected
blue-chip industrial corporations as well as public utility and
transportation companies. The DJIA indicates daily changes in the average
price of stocks in any of its categories. It also reports total sales for
each group of industries. Because it represents the top corporations of
America, the DJIA index is a leading economic indicator for the stock
market as a whole.
o STANDARD & POOR'S RATINGS GROUP DAILY STOCK PRICE INDEX OF 500 COMMON
STOCKS (S&P 500), is a composite index of common stocks in industry,
------------
transportation, and financial and public utility companies which compares
total returns of funds whose portfolios are invested primarily in common
stocks. In addition, the S&P 500 assumes reinvestment of all dividends paid
----
by stocks listed on the index. Taxes due on any of these distributions are
not included, nor are brokerage or other fees calculated, in the Standard &
Poor's figures.
o LIPPER GROWTH FUND AVERAGE is an average of the total returns for 580
---
growth funds tracked by Lipper Analytical Services, Inc., an independent
mutual fund rating service.
o LIPPER GROWTH FUND INDEX is an average of the net asset-valuated total
returns for the top 30 growth funds tracked by Lipper Analytical Services,
Inc., an independent mutual fund rating service.
o STRATEGIC INSIGHT GROWTH FUNDS INDEX consists of mutual funds that invest
in well-established companies primarily for long-term capital gains rather
than current income.
o MORNINGSTAR, INC., an independent rating service, is the publisher of the
bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000
-
NASDAQ-listed mutual funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and ratings are effective for
two weeks.
o VALUE LINE COMPOSITE INDEX consists of approximately 1,700 common equity
securities. It is based on a geometric average of relative price changes of
the component stocks and does not include income.
o VALUE LINE MUTUAL FUND SURVEY, published by Value Line Publishing, Inc.,
analyzes price, yield, risk, and total return for equity and fixed income
mutual funds. The highest rating is One, and ratings are effective for two
weeks.
o MUTUAL FUND SOURCE BOOK, published by Morningstar, Inc., analyzes price,
yield, risk, and total return for equity and fixed income funds.
o FINANCIAL PUBLICATIONS: The Wall Street Journal, Business Week, Changing
Times, Financial World, Forbes, Fortune, and Money Magazines, among others-
-provide performance statistics over specified time periods.
o CDA MUTUAL FUND REPORT, published by CDA Investment Technologies, Inc.,
analyzes price, current yield, risk, total return, and average rate of
return (average annual compounded growth rate) over specified time periods
for the mutual fund industry.
o STRATEGIC INSIGHT MUTUAL FUND RESEARCH AND CONSULTING, ranks funds in
various fund categories by making comparative calculations using total
return. Total return assumes the reinvestment of all capital gains
distributions and income dividends and takes into account any change in net
asset value over a specified period of time. From time to time, the Fund
will quote its Strategic Insight ranking in advertising and sales
literature.
In addition, the Fund will, from time to time, use the following standard
convertible securities indices against which it will compare its performance:
Goldman Sachs Convertible 100; Kidder Peabody Convertible Bond Index; Value Line
Convertible Bond Index; and Dow Jones Utility Index.
The Fund may compare the performance of equity funds to other types of stock
funds and indices.
Advertisements and other sales literature for any class of Shares may quote
total returns which are calculated on nonstandardized base periods. These total
returns also represent the historic change in the value of an investment in any
class of Shares based on quarterly reinvestment of dividends over a specified
period of time.
From time to time, the Fund may advertise the performance of any class of Shares
using charts, graphs, and descriptions, compared to federally insured bank
products, including certificates of deposit and time deposits, and to money
market funds using the Lipper Analytical Services money market instruments
average. In addition, advertising and sales literature for the Fund may use
charts and graphs to illustrate the principals of dollar-cost averaging and may
disclose the amount of dividends paid by the Fund over certain periods of time.
Advertisements may quote performance information which does not reflect the
effect of a sales load or contingent deferred sales charge, as applicable.
ABOUT FEDERATED INVESTORS
Federated Investors ("Federated") is dedicated to meeting investor needs which
is reflected in its investment decision making-structured, straightforward, and
consistent. This has resulted in a history of competitive performance with a
range of competitive investment products that have gained the confidence of
thousands of clients and their customers.
The company's disciplined security selection process is firmly rooted in sound
methodologies backed by fundamental and technical research. Investment decisions
are made and executed by teams of portfolio managers, analysts, and traders
dedicated to specific market sectors.
In the equity sector, Federated has more than 25 years' experience. As of
December 31, 1994, Federated managed 15 equity funds totaling approximately $4
billion in assets across growth, value, equity income, international, index, and
sector (i.e. utility) styles. Federated's value-oriented management style
combines quantitative and qualitative analysis and features a structured,
computer-assisted composite modeling system that was developed in the 1970s.
In the corporate bond sector, as of December 31, 1994, Federated managed 8 money
market funds, 5 investment grade, and 4 high yield bond funds with assets
approximating $7.4 billion, $.9 billion and $.8 billion, respectively.
Federated's corporate bond decision making--based on intensive, diligent credit
analysis--is backed by over 20 years of experience in the corporate bond sector.
In 1972, Federated introduced one of the first high-yield bond funds in the
industry. In 17 years ending December 1994, Federated's high-yield portfolios
experienced a default rate of just 1.86%, versus 3.10% for the market as a
whole. In 1983, Federated was one of the first fund managers to participate in
the asset-backed securities market, a market totaling more than $200 billion.
J. Thomas Madden, Executive Vice President, oversees Federated's equity and high
yield corporate bond management while William D. Dawson, Executive Vice
President, oversees Federated's domestic fixed income management. Henry A.
Frantzen, Executive Vice President, oversees the management of Federated's
international portfolios.
MUTUAL FUND MARKET
Twenty-seven percent of American households are pursuing their financial goals
through mutual funds. These investors, as well as businesses and institutions,
have entrusted over $2 trillion to the more than 5,500 funds available.*
Federated Investors, through its subsidiaries, distributes mutual funds for a
variety of investment applications. Specific markets include:
INSTITUTIONAL
Federated meets the needs of more than 4,000 institutional clients nationwide by
managing and servicing separate accounts and mutual funds for a variety of
applications, including defined benefit and defined contribution programs, cash
management, and asset/liability management. Institutional clients include
corporations, pension funds, tax-exempt entities, foundations/endowments,
insurance companies, and investment and financial advisors. The marketing effort
to these institutional clients is headed by John B. Fisher, President,
Institutional Sales Division.
TRUST ORGANIZATIONS
Other institutional clients include close relationships with more than 1,500
banks and trust organizations. Virtually all of the trust divisions of the top
100 bank holding companies use Federated funds in their clients' portfolios. The
marketing effort to trust clients is headed by Mark R. Gensheimer, Executive
Vice President, Bank Marketing & Sales.
BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES
Federated mutual funds are available to consumers through major brokerage firms
nationwide--including 200 New York Stock Exchange firms--supported by more
wholesalers than any other mutual fund distributor. The marketing effort to
these firms is headed by James F. Getz, President, Broker/Dealer Division.
*source: Investment Company Institute
APPENDIX
STANDARD AND POOR'S RATINGS GROUP COMMERCIAL PAPER RATINGS
A-1--This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
A-2--Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
A-1.
MOODY'S INVESTORS SERVICE, INC., COMMERCIAL PAPER RATINGS
P-1--Issuers rated PRIME-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. PRIME-1 repayment
capacity will normally be evidenced by the following characteristics: leading
market positions in well-established industries; high rates of return on funds
employed; conservative capitalization structure with moderate reliance on debt
and ample asset protection; broad margins in earning coverage of fixed financial
charges and high internal cash generation; and well-established access to a
range of financial markets and assured sources of alternate liquidity.
P-2--Issuers rated PRIME-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
FITCH INVESTORS SERVICE, INC., SHORT-TERM DEBT RATINGS
F-1+--Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1--Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated F-1+.
F-2--Good Credit Quality. Issues carrying this rating have a satisfactory degree
of assurance for timely payment.
Cusip 314172701
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Cusip 314172800
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Cusip 314172883
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