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, 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
SUMMARY OF FUND EXPENSES CONTINGENT DEFERRED SALES CHARGE
1 21
ELIMINATION OF CONTINGENT
CLASS A SHARES 1
DEFERRED SALES CHARGE
SUMMARY OF FUND EXPENSES 2
22
CLASS B SHARES 2 ACCOUNT AND SHARE INFORMATION
SUMMARY OF FUND EXPENSES 3 23
CLASS C SHARES 3
SYNOPSIS 4
LIBERTY FAMILY OF FUNDS 5
INVESTMENT INFORMATION 6
INVESTMENT OBJECTIVE 6
INVESTMENT POLICIES 6
INVESTMENT LIMITATIONS 12
NET ASSET VALUE 13
INVESTING IN THE FUND 13
HOW TO PURCHASE SHARES 14
INVESTING IN CLASS A SHARES
14
INVESTING IN CLASS B SHARES
17
INVESTING IN CLASS C SHARES
17
SPECIAL PURCHASE FEATURES
18
EXCHANGE PRIVILEGE 18
HOW TO REDEEM SHARES 20
SPECIAL REDEMPTION FEATURES
21
Table of Contents
TRUST INFORMATION 23 PERSONAL PROPERTY TAXES
28
MANAGEMENT OF THE TRUST23
PERFORMANCE INFORMATION 29
DISTRIBUTION OF SHARES 25
ADMINISTRATION OF THE FUND APPENDIX 30
35
EXPENSES OF THE FUND AND CLASS A
SHARES, CLASS B SHARES, AND
CLASS C SHARES 27
BROKERAGE TRANSACTIONS 27
SHAREHOLDER INFORMATION 27
VOTING RIGHTS 27
MASSACHUSETTS PARTNERSHIP LAW
28
TAX INFORMATION 28
FEDERAL INCOME TAX 28
PENNSYLVANIA CORPORATE AND
II
SUMMARY OF FUND EXPENSES
FEDERATED CAPITAL APPRECIATION FUND
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%
(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.
EXAMPLE................................ 1 year 3 years
You would pay the following expenses on a
$1,000
investment, assuming (1) 5% annual return and
(2) redemption at the end of each time period. $ 71
................................$ 90
2
You would pay the following expenses on the
same
investment, assuming no redemption .. $ 66 $ 90
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.
SUMMARY OF FUND EXPENSES
FEDERATED CAPITAL APPRECIATION FUND
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
3
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%
(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.
4
*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.
EXAMPLE.................... 1 year 3 years
You would pay the following expenses on a
$1,000
investment, assuming (1) 5% annual return and
(2) redemption at the end of each time period. $ 76
...............................$ 104
5
You would pay the following expenses on the
same
investment, assuming no redemption .. $ 19 $ 60
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.
SUMMARY OF FUND EXPENSES
FEDERATED CAPITAL APPRECIATION FUND
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
6
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%
(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.
7
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.
EXAMPLE.................. 1 year 3 years
You would pay the following expenses on a
$1,000
investment, assuming (1) 5% annual return and
(2) redemption at the end of each time period. $30
.................................$60
You would pay the following expenses on the
same
8
investment, assuming no redemption .. $19 $60
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.
9
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."
11
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, foreign securities and
high yield corporate debt obligations. 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."
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:
12
o American Leaders Fund, Inc., providing growth of capital and income
through high-quality stocks;
o Capital Growth Fund, providing appreciation of capital primarily
through equity securities;
o 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;
o Federated Growth Strategies Fund, providing appreciation of capital
through equity securities of companies with prospects for above-average
growth in earnings and dividends;
o Federated Small Cap Strategies Fund, providing appreciation of capital
through common stocks of small and medium sized companies;
o Fund for U.S. Government Securities, Inc., providing current income
through long-term U.S. government securities;
o Federated International Equity Fund, providing long-term capital growth
and income through international securities;
o 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;
13
o Liberty Equity Income Fund, Inc., providing above-average income and
capital appreciation through income producing equity securities;
o Liberty High Income Bond Fund, Inc., providing high current income
through high-yielding, lower-rated, corporate bonds;
o Liberty Municipal Securities Fund, Inc., providing a high level of
current income exempt from federal regular income tax through municipal
bonds;
o Liberty U.S. Government Money Market Trust, providing current income
consistent with stability of principal through high-quality U.S.
government securities;
o Liberty Utility Fund, Inc., providing current income and long-term
growth of income, primarily through electric, gas, and communications
utilities;
o Limited Term Fund, providing a high level of current income consistent
with minimum fluctuation in principal through investment grade
securities;
o 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;
14
o 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;
o 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;
o Strategic Income Fund, providing a high level of current income,
primarily through domestic and foreign corporate debt obligations;
o 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
o 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.
15
The Liberty Family of Funds provides flexibility and diversification for an
investor's long-term investment planning. It enables an investor to meet
the challenges of changing market conditions by offering convenient
exchange privileges which give access to various investment vehicles and by
providing the investment services of proven, professional investment
advisers.
Shareholders of Class A Shares who have been designated as Liberty Life
Members are exempt from sales loads on future purchases in and exchanges
between the Class A Shares of any funds in the Liberty Family of Funds, as
long as they maintain a $500 balance in one of the Liberty Funds.
INVESTMENT INFORMATION
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide 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.
16
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 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
17
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.
CONVERTIBLE SECURITIES. 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
18
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 Fund invests in convertible bonds rated
"B" or higher by Standard & Poor's Rating Group ("Standard & Poor's"), or
Moody's Investors Service, Inc. ("Moody's") at the time of investment, or
if unrated, of comparable quality. If a convertible bond is rated below "B"
according to the characteristics set forth here after the Fund has
purchased it, the Fund is not required to drop the convertible bond from
the portfolio, but will consider appropriate action. The investment
characteristics of each convertible security vary widely, which allows
convertible securities to be employed for different investment objectives.
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 holder elects to exercise the conversion
privilege. 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,
19
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.
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,
20
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.
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
21
owns, and may have to sell portfolio securities (perhaps at disadvantageous
times) in order to generate cash to satisfy these distribution
requirements.
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
22
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;
23
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.
24
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.
HIGH-YIELD CORPORATE DEBT OBLIGATIONS AND RISK CONSIDERATIONS. The Fund
may invest up to, but not including, 35% of the value of its total assets
in corporate debt obligations that are not investment grade bonds or are
not rated but are determined by the Adviser to be of comparable quality.
Securities which are rated BBB or lower by Standard & Poor's or Baa or
25
lower by Moody's either have speculative characteristics or are speculative
with respect to capacity to pay interest and repay principal in accordance
with the terms of the obligations. A description of the rating categories
is contained in the Appendix to this Prospectus. There is no lower limit
with respect to rating categories for securities in which the Fund may
invest.
Corporate 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 high-rated, lower-yielding bonds. The Fund does not intend
to invest more than 5% of its assets in corporate debt obligations that are
not investment-grade bonds (excluding securities convertible into equity
securities) during the current fiscal year.
The Adviser attempts to reduce the risks described above through
diversification of the portfolio and by credit analysis of each issuer as
26
well as by monitoring broad economic trends and corporate and legislative
developments.
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
27
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.
28
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
29
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.
30
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:
o commercial paper and Europaper (dollar denominated commercial paper
issued outside the United States);
o instruments of domestic and foreign banks and savings associations
(such as certificates of deposit, demand and time deposits, savings
shares, and bankers' acceptances);
31
o obligations of the U.S. government or its agencies or
instrumentalities;
o repurchase agreements; and
o 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
32
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,
33
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
34
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:
o 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;
o 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;
o lend any of its assets except portfolio securities up to one-third of
the value of its total assets;
o 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
35
o 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:
o invest more than 5% of its total assets in securities of issuers that
have records of less than three years of continuous operations;
o commit more than 5% of the value of its total assets to premiums on
open put option positions; or
o invest more than 5% of its total assets in warrants.
36
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.
37
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
38
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.)
39
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:
Sales Load as Sales Load as
Dealer Concession as
a Percentage of a Percentage of
a Percentage of
Amount of Transaction Public Offering Price Net Amount Invested
Public Offering Price
Less than $50,000 5.50% 5.82% 5.00%
$50,000 but less than $100,000 4.50% 4.71%
4.00%
40
$100,000 but less than $250,000 3.75% 3.90%
3.25%
$250,000 but less than $500,000 2.50% 2.56%
2.25%
$500,000 but less than $1 million 2.00% 2.04%
1.80%
$1 million or greater 0.00% 0.00% 0.25%*
*See sub-section entitled "Dealer Concession."
No sales load is imposed for Class A Shares purchased through bank trust
departments, investment advisers registered under the Investment Advisers
Act of 1940, as amended, 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
41
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.
<//R>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.
42
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.
SUBACCOUNTING SERVICES. Institutions are encouraged to open single master
accounts. However, certain institutions may wish to use the transfer
agent's subaccounting system to minimize their internal recordkeeping
requirements. The transfer agent charges a fee based on the level of
subaccounting services rendered. Institutions holding Shares in a
fiduciary, agency, custodial, or similar capacity may charge or pass
through subaccounting fees as part of or in addition to normal trust or
agency account fees. These institutions may also charge fees for other
services provided which may be related to the ownership of Shares. This
prospectus should, therefore, be read together with any agreement between
the customer and the institution with regard to the services provided, the
fees charged for those services, and any restrictions and limitations
imposed.
REDUCING OR ELIMINATING THE SALES LOAD
The sales load can be reduced or eliminated on the purchase of Class A
Shares through:
43
o quantity discounts and accumulated purchases;
o concurrent purchases;
o signing a 13-month letter of intent;
o using the reinvestment privilege; or
o 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%.
44
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
45
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
46
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
47
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
48
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
49
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
50
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
51
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.
52
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
53
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.
54
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,
55
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.
<?R>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
56
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
57
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
58
"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
59
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
60
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:
Year of Redemption Contingent Deferred
After Purchase Sales Charge
First......................................................................
........... 5.50%
Second.....................................................................
....... 4.75%
Third......................................................................
......... 4.00%
Fourth.....................................................................
........ 3.00%
61
Fifth......................................................................
........... 2.00%
Sixth......................................................................
.......... 1.00%
Seventh and thereafter.................................................
0.00%
CLASS C SHARES. Shareholders redeeming Class C Shares from their Fund
accounts within one full year of the purchase date of those Shares will be
charged a contingent deferred sales charge by the Fund's distributor of
1.00%. Any applicable contingent deferred sales charge will be imposed on
the lesser of the net asset value of the redeemed Shares at the time of
purchase or the net asset value of the redeemed Shares at the time of
redemption.
<?R>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
62
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
63
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
64
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.
65
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
66
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
67
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
68
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
69
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
70
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%
71
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
72
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
73
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
74
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
75
annual rate which relates to the average aggregate daily net assets of all
Federated Funds as specified below:
Average Aggregate Daily Net Assets
Maximum Administrative Fee of the Federated Funds
0.15 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.10 of 1% on the next $250 million
0.075 of 1% on assets in excess of $750 million
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of Shares.
Federated Administrative Services may choose voluntarily to waive a portion
of its fee.
CUSTODIAN. State Street Bank and Trust Company, P.O. Box 8600, Boston,
Massachusetts 02266-8600, is custodian for the securities and cash of the
Fund.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company,
P.O. Box 8600, Boston, Massachusetts 02266-8600, is transfer agent for the
Shares of the Fund, and dividend disbursing agent for the Fund.
INDEPENDENT AUDITORS. The independent auditors for the Fund are Ernst &
Young LLP, One Oxford Centre, Pittsburgh, Pennsylvania 15219.
76
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
77
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
78
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.
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
79
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.
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.
80
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.
PENNSYLVANIA CORPORATE AND PERSONAL PROPERTY TAXES
In the opinion of Houston, Houston & Donnelly, counsel to the Trust:
o the Trust is not subject to Pennsylvania corporate or personal
property taxes; and
o 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
81
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.
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.
82
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.
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.
83
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
84
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.
85
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
86
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
87
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.
88
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,
89
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.
90
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.
91
Combined Prospectus
An Open-End, Diversified
Management Investment Company
November 14, 1995
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Cusip 314172701
Cusip 314728800
Cusip 314172883
G01489-01 (11/95)
FEDERATED CAPITAL APPRECIATION FUND
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED INVESTORSPA
(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. 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
93
FEDERATED SECURITIES
DistribCORP.
A subsidiary of FEDERATED INVESTORS
GENERAL INFORMATION ABOUT THE OTHER RELATED SERVICES 14
FUND 1 ADMINISTRATIVE SERVICES 14
INVESTMENT OBJECTIVES AND POLICIES TRANSFER AGENT AND DIVIDEND
1 DISBURSING AGENT 14
CONVERTIBLE SECURITIES 1 BROKERAGE TRANSACTIONS 15
TEMPORARY INVESTMENTS 1
PURCHASING SHARES 15
WARRANTS 2
WHEN-ISSUED AND DELAYED DELIVERY DISTRIBUTION PLAN AND SHAREHOLDER
TRANSACTIONS 2 SERVICES AGREEMENT 15
REPURCHASE AGREEMENTS 2 CONVERSION TO FEDERAL FUNDS15
FUTURES AND OPTIONS TRANSACTIONS PURCHASES BY SALES
2 REPRESENTATIVES, TRUSTEES, AND
FOREIGN CURRENCY TRANSACTIONS EMPLOYEES 15
4 EXCHANGING SECURITIES FOR FUND
RESTRICTED AND ILLIQUID SHARES 16
SECURITIES 6
LENDING OF PORTFOLIO SECURITIES
6
REVERSE REPURCHASE AGREEMENTS
6
PORTFOLIO TURNOVER 6
INVESTMENT LIMITATIONS 7
FEDERATED EQUITY FUNDS MANAGEMENT
8
FUND OWNERSHIP 13
TRUSTEES COMPENSATION 13
TRUSTEE LIABILITY 14
INVESTMENT ADVISORY SERVICES14
ADVISER TO THE FUND 14
ADVISORY FEES 14
Table of Contents
DETERMINING NET ASSET VALUE 16 PERFORMANCE COMPARISONS 19
DETERMINING MARKET VALUE OF ABOUT FEDERATED INVESTORS20
SECURITIES 16
APPENDIX 22
REDEEMING SHARES 17
REDEMPTION IN KIND 17
EXCHANGING SECURITIES FOR SHARES
17
TAX CONSEQUENCES 17
TAX STATUS 18
THE FUND'S TAX STATUS 18
SHAREHOLDERS' TAX STATUS18
TOTAL RETURN 18
YIELD 18
CURRENT DISTRIBUTIONS 19
II
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
Cusip 314172800
Cusip 314172883
